Democratic 'Stimulus' Mired in Fallacies

During a conference of Senate Democrats criticizing the president’s tax plans, New Jersey Sen. Jon Corzine explained that his party wanted to "put the money into the hands of people who will spend it." A neighbor of mine opined that this standard must surely include his wife.

Unfortunately, however, she has a college degree and a job. Allowing two-earner couples to keep a larger slice of future paychecks was definitely not what these top Democrats were talking about. They were talking about extending unemployment benefits for an extra 26 weeks, bailing out spendthrift governors with federal IOUs and keeping tax rates high, while mailing everyone a single $300 Treasury check whether they paid taxes or not.

The only excuse for labeling this spending scheme a "stimulus package" was the claim that non-taxpayers will spend every dollar they can get from taxpayers, while two-earner couples with children might do something truly awful with lower tax rates and a larger child credit-like investing in the stock market.

On this same crank theory, New York Times columnist Paul Krugman claimed a bigger flow of tax-free dividends to investors offers no stimulus at all, presumably because he imagines investors are misers. Former Labor Secretary Robert Reich has likewise remarked that all the economy needs is to "get people back into the malls." Yet December retail sales were up 4.9% from a year earlier-the fastest since 1999-and most of that gain was in real sales volume because inflation has been negligible.

Consumer spending depends on business prosperity, not the other way around. We have to earn more before we can spend more, or we just get deeper and deeper in debt. The odd notion that prosperity begins with consumer spending suggests that the only reason some countries are desperately poor is that their consumers do not go shopping often enough.

It is not difficult to get Americans to spend money if they have some. The personal savings rate has been below 3% since 1999, so people have been spending more than 97 cents of every dollar they have, after taxes.

But people look ahead, which is why one-year "rebates" are worse than useless. Any so-called "rebate" that provides the same number of dollars regardless of the amount of taxes paid is really a transfer payment from those who pay taxes to those who do not. It makes the tax system more progressive, and therefore more discouraging. It does not even "stimulate demand" because ephemeral windfalls, as we should have learned in 2001, are used to pay down debt or add to savings.

Suppose that is all wrong, and people really would rush out and spend the Democrats’ extra unemployment checks and $300 rebates at the shopping malls. What good would that do? The economy’s sudden setback since the fall of 2000 has been heavily concentrated in business equipment-particularly equipment used in Internet commerce and broadband telecommunications.

Corzine spoke of "excess capacity" in these same industries as a justification for his party’s plans to "put money into the hands of those who will spend it" (and vote correctly). Regardless how many former telecom workers flock to the malls with their unemployment checks, however, they are going to have a hard time finding anything to buy from Cisco Systems, Sun Microsystems and JDS Uniphase, or even from Bethlehem Steel and Goldman Sachs.

Indeed, all we normally find in shopping malls is imported clothing and gadgets. U.S. manufacturing is not going to perk up just because consumers buy a few more groceries or Chinese athletic shoes with jobless benefits or a little one-time "rebate" check. Retailers wouldn’t even respond to this unlikely dream of a one-time shopping spree by stocking up for the future.

Sales of new homes, new cars, new computers and new appliances are indeed important. But few consumers are foolish enough to make big-ticket investments because of a single $300 check from the Treasury, much less because of an extra batch of unemployment checks. Just imagine some husband coming home and saying, "The bad news is that I can’t find a job, but the good news is that I bought a new car!"

On the other hand, if the 94% of workers with jobs can expect to keep a larger fraction of any raises over the next few years-because marginal tax rates come down instantly under the new Bush plan-the prospective durability of such good news would really make a difference to the incentive and ability to earn more and therefore spend more.

Krugman gripes that the president is not doing what he wants: "Weren’t we supposed to be talking about emergency economic stimulus?" Of course not. Where’s the emergency?

The president’s goal, as he said, is to improve the economy’s "momentum." In the eight postwar recoveries that lasted more than a year, economic growth averaged 5.8% over the first eight quarters. This time, we’re growing at half that pace-not quick enough to bring down the relatively low unemployment rate because productivity growth has been so strong.

The economy’s soft spots-weak profit growth and sluggish business investment-do not constitute a short-term "emergency," and no short-term contrivance to buy votes with borrowed money will be of any help at all.

The Democratic Party’s curious fascination with consumers’ short-term shopping habits is often blamed on Keynesian economics, but Lord Keynes himself taught that "employment can only increase . . . with an increase in investment." Business investment adds to business output and therefore to employment opportunities, stock market values and personal income. When income and wealth rises, both consumer spending and savings can also rise.

The whole notion that government spending sprees provide short-term "fiscal stimulus" to "jump start" consumer spending is a hoary myth, and one that helped make Japan what it is today-a nearly insolvent basket case.