The foolishness of economic 'stimulus'

Do we really want to risk prolonging a bad economy?

from the January 24, 2008 edition

Page 2 of 2

Page 1 | 2

The good news: These fundamentals really are fundamental. President Bush can take action tomorrow. The bad news: All of these steps require a lame duck to swim against the political current.

First, Mr. Bush should call for a substantial and permanent cut in both capital-gains and personal-income tax rates.

Next, he should insist on a large reduction in federal spending, including elimination of all agricultural subsidies. While he's showing such courage, he might as well unconditionally endorse free trade.

Cutting taxes is, of course, a good thing, but it's important to know why. The goal would not be to increase consumer spending. Instead, it would be to raise the returns on investment and work.

By letting investors and workers keep more of the fruits of their risk-taking, creativity, and efforts, the economy will enjoy more risk-taking, creativity, and effort. Businesses that would otherwise not be started would be created. Likewise with machinery and training that increases worker productivity. Investors worldwide would flock to take advantage of these lower tax rates, further increasing productive investments.

Cutting government spending would result in more of the economy's resources being used by wealth-creating businesses rather than being siphoned away to special-interest groups and boondoggles such as bridges-to-nowhere and Woodstock museums.

Committing to free trade would assure global investors that Americans refuse to turn inward – that producers in America will not be stymied in their efforts to buy inputs from low-cost foreign suppliers and that investments and entrepreneurial ideas from abroad will continue to be welcomed.

Finally, Bush should assure the Board of Governors of the Federal Reserve that he neither expects nor wants them to use monetary policy politically. Reminding them of the wisdom of Milton Friedman, he should strongly urge them to keep a tight rein on the money supply.

Sound money, low taxes, and free trade might not "stimulate" the economy today, but this combination will surely increase its vigor over the long-run.

• Donald J. Boudreaux is chairman of the economics department at George Mason University.

1 | Page 2