Published: March 10, 2008 03:51 pm         

STUMPTALK: I’m from the government and I’m here to help

Although tax rebates, which won’t reach mailboxes until May, and other payments may “feel good,” they do little to stimulate the economy. Stimulating the economy is JOB1. In 2001 rebates again proved their ineffectiveness as a long-term economic stimulus because most rebate checks either went into savings or were used to pay down debts. On the other hand, tax cuts of 2001 and 2003 provided a lasting stimulus to the economy immediately. One only needs to look at the economic statistics from any source to understand this.

Rebates do little more than move money gathered through taxation or borrowing from Peter to Paul. No wealth is created. Any form of wealth redistribution such as housing subsidies fare no better for the same reason. Apparently unemployment benefit extensions are not going to happen. Any study done on the matter arrives at the conclusion that with unemployment benefits extended, workers tend not to look for jobs as quickly and employers tend not to rehire laid off workers quickly. With government running a deficit – when have they not – funds for new spending must be borrowed from domestic savers, which reduces investment spending, or from foreigners, which reduces export gains. There is little reason to trust politicians whose only goal in life is re-election to make correct public investments. As is the case with our congress as this bill works its way through both houses for fine tuning, political expediency will come to the fore and the costs are liable to rise dramatically.

In contrast, permanently cutting taxes presents economic stimulus providing entrepreneurs with incentive to invest in business, new and old, thereby providing lasting jobs and creating wealth. Business investment was flat in the second quarter of 2003, but grew by 3 percent in the third quarter and 5 percent in the fourth quarter reversing the previous declining trends. In the quarter immediately following the 2003 tax cuts the economy began to add jobs and that job growth has continued every month until just recently. This is how prosperity is created. Reducing taxes, whether individual or corporate, encourages business in the long term to invest in new equipment, plants, technology and hiring of employees, and also motivates entrepreneurs to work more, create more and take more chances on new ideas.

So far the best element of the stimulus package seems to be business tax cuts. Likewise, so far both sides have avoided all sorts of riders being added to the package. Provisions allowing government mortgage companies to buy more expensive houses is wrong partly because those very companies are in trouble themselves and adding debt will do nothing to alleviate the economic situation. Bailing out greedy bankers for encouraging risky loans in order to make a quick buck and borrowers who thought they might get something for nothing would be a very big mistake. Allow both entities to profit from their mistakes and not burden the responsible taxpayers for acting responsibly.