Real stimulus

Our congressmen are bickering about whether the stimulus bill should be $879 billion or $921 billion (or something like that). Does it really matter? The whole thing is completely insane. It is a futile attempt to treat the symptom of a much deeper disease, like taking an aspirin to treat cancer.

But nobody wants to talk about the cancer. We have to "do something", as if "something" is always better than nothing. In fact, the somethings that are done hurriedly in emergency situations are often much worse than nothing, because people tend not to make rational decisions in a panic.

Let me summarize my objections to the stimulus plan:

1. There is considerable evidence that Keynesian style stimulus doesn't work, and very little evidence that it does work. It didn’t work for Japan. Bush’s stimulus did a big fat nothing.

2. It will cost almost a trillion dollars. It is immoral to spend money you don’t have and then force someone else to pay for it later.

3. This money has to come from somewhere. It will be taken out of the economy by selling government bonds. The money would probably do more good if it was left in the hands of investors and consumers, to spend invest more prudently in productive enterprise. Taking money from one pocket and putting it in the other pocket doesn’t really get us anywhere.

4. The bill is full of pork and spending that would have been quite controversial and heavily debated if it were not part of the “emergency stimulus”. The democrats are just throwing all their pet projects in a pile and calling it an emergency bill that must be passed or else.

5. Related to #3 and #4, government spending is inherently less efficient and less beneficial to the economy than private spending. There are several reasons for this. One always makes more careful decisions about spending one’s own money than someone else’s. Government has almost no incentive to conserve or spend wisely and put resources where they will be most useful, while individuals and businesses do. Politicians almost always rewarded (with votes) for handing out the goodies, not for being stingy.

So what else can we do to help the economy? A lot! Cutting taxes has been proven over and over as one of the most effective ways to stimulate economic growth. The tax cuts must be permanent to be effective; studies show that short term cuts have little impact because people and business plan their spending based on future earnings. To get the most impact, we should permanently eliminate corporate income tax. I can hear the gasping and groaning already. “But we need the money.” “We should stick it greedy corporations even harder.” Wrong. Here’s what’s wrong with corporate income taxes:

1. The US has the second highest corporate income tax in the world (Japan’s is slightly higher). This makes our companies less competitive both at home and abroad. This costs jobs and hurts our economy.

2. Corporations don’t pay taxes, people do. 100% of corporate income tax is passed on to consumers as higher cost of goods, or to shareholders as reduced return on investment. The idea that a corporation is or should be a taxpayer is misguided.

3. Corporate profits go to the shareholders. Contrary to public perception, most corporations are owned by the mutual funds making up grandma’s pension plan and dad’s 401(k) retirement account, not by some greedy fat cat. Taxing corporations is taxing grandma.

4. Corporate taxation is double taxation. First the corporation’s income is taxed, then what’s left is distributed to the shareholders and taxed again as income tax. This makes no sense.

5. Corporations spend hundreds of billions of dollars every year complying with tens of thousands of pages of complex tax law. This is wasted time and money which could be better spent growing business and creating jobs.

6. Corporations organize themselves and their business in convoluted contortionist ways and perform absurd gyrations in order to minimize the taxes they pay. This is a drag on efficiency and productivity. I know, I’ve been through it several times.

The bottom line: corporate income tax creates friction and sucks money out of the system, which hurts economic growth and costs jobs. Eliminating it would likely create more jobs and growth than Obama's stimulus plan.

“But we need the money!” Not exactly. Eliminating corporate income tax would only reduce the government’s take by around $350 billion per year; 1/3 of the stimulus bill. Yet the tax cuts would lead increased economic activity. This in turn would generate more tax revenue for the government (increased personal income tax revenue). It might even generate enough increased revenue to pay for itself. And it would stimulate economic growth more than any government spending plan. But even if no additional tax revenue were generated by the increased economic activity, we would still be better off eliminating corporate taxes and increasing personal taxes to compensate.

So why is nobody talking about this? Because sticking it to corporations is politically popular; because most people (including most politicians) have never run a business or studied economics and really don’t understand this stuff.

This article explains the argument better than I have: http://www.reason.com/news/show/131556.html

The democrats have been claiming that economists all agree that we need this stimulus bill. That's a lie. The Cato institute recently published an ad in the NYT and Washington Post, signed by 200 prominent economists including 3 Nobel laureates, who disagree. http://www.cato.org/special/stimulus09/cato_stimulus.pdf

So there’s a real stimulus. But why do we need one in the first place? What about the cancer? The cancer is the fundamental structure of our monetary and banking system. Fractional reserve banking (which is inherently fraudulent but rarely questioned), fiat money, and inflationary monetary policy are what got us into that mess. I’ve written a bit about that before here, but I’ll save the rest of that rant for another day.