Last week the House of Representatives voted to pass the $819 billion stimulus package. According to an article in the Wall Street Journal, this package would cost more than the entire Iraq War. The plan includes many different spending agendas - some of them making you wonder what they actually have to do with economic stimulus. Items such as $335 million for combating STDs and $50 million for the arts come to mind, but the plan has a few good projects along with a lot of bad projects. The real question is, is fiscal stimulus really the answer to our economic problems?
First, let's take a step back and look at what fiscal policy actually is. There are two ways the government attempts to regulate the economy - monetary and fiscal policy. Monetary policy is conducted by the Federal Reserve Bank and our friend Ben Bernanke, the chairman of the Fed.
Fiscal policy on the other hand attempts to change aggregate demand through taxes and government spending. In general, changes in government spending affect the aggregate (the macro economy), which means any changes in government spending can take a long to time to be seen on the micro level, if ever seen at all. From my economics classes I've heard two analogies to describe working with fiscal policy: 1) it's like fine tuning an ice sculpture with a sledgehammer, or 2) it's like performing brain surgery with a saw, hammer and screwdriver.
There is a lot of debate among economists on the usefulness of fiscal policy. Paul Heyne wrote in his textbook, "The Economic Way of Thinking", "The more in a hurry Congress and the president are, the more likely they are to produce fiscal policy actions that few competent and impartial observers will be able to defend. ... But due deliberation, the careful assessment of alternatives, and the weighing of the probable short- and long-term outcomes may require so much time that the moment for action passes before any action is taken."
This paragraph explains so much going on in Washington D.C. that I think everyone in Congress should be required to read it before debating how much money each one gets to spend. Washington D.C. is attempting to pass an almost $1 trillion stimulus package with only a few weeks' debate. Clearly all alternatives are not being examined.
The "Hold Out Problem" explains how things like $50 million to the arts get thrown in the pot. The real problem is not the millions being thrown to wasteful projects - its billions, and for many projects, it's hundreds of billions.
Probably the scariest thing about this package is not that we're going to waste a trillion+ dollars while mortgaging our future generations - it's the fact that the general consensus in the population is that the government SHOULD be regulating the economy, and that the government is justified in all the market interventions we've seen in the past six months. A year ago economists would have laughed (and called you crazy) if you were to describe all the things the Fed was doing now. Now it's not a question of should, but of what else can be done. We're on a very slippery slope.
But there is hope. In response to Barack Obama's claim, "There is no disagreement that we need action by our government, a recovery plan that will help to jump-start the economy," the Cato Institute issued the following statement signed by more than 200 economists, including Ball State's very own Cecil Bohanon and Norman Van Cott:
"With all due respect Mr. President, that is not true. Notwithstanding reports that all economists are now Keynesians and that we all support a big increase in the burden of government, we do not believe that more government spending is a way to improve economic performance. More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s. More government spending did not solve Japan's "lost decade" in the 1990s. As such, it is a triumph of hope over experience to believe that more government spending will help the U.S. today. To improve the economy, policy makers should focus on reforms that remove impediments to work, saving, investment and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth."
I couldn't have said it better myself.
The Congress's proposed stimulus package is exactly what we don't need. Not only is Congress about to perform brain surgery on the economy, it's using suped up Tim "The Toolman" Taylor power tools. Personally, I think Congress would be better off loading a bunch of helicopters with $1 trillion and dumping it across the country. At least then the money would be more fairly distributed and still have the same net effect, a crap ton of inflation.
Derek Wilson is a junior double majoring in economics and finance writes 'Making Cents' for the Daily News. His views do not necessarily agree with those of the newspaper.
Write to Derek at dawilson2@bsu.edu
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