I continue to wait for the conservative chorus to rise in protest against President Bush's proposed "stimulus package" -- a.k.a. the government handing people checks and telling them to spend that free money as fast as they can. Surely these "stimulus package" handouts will destroy any sense of personal responsibility, not to mention"reduce incentives to work, save and invest."
These stimulus package handouts also may not actually have any effect on the recession we may or may not be in. Harvard economics professor Greg Mankiw blogs about all things economic. Yesterday, asking "What ends recessions?" he cited a study by David and Cristina Romer on economic recovery efforts. They looked at postwar recessions and what governments have done to help their economies fire up again.
Remember that governments have two main tools for tinkering with the economy: monetary policy and fiscal policy. Monetary policy is what the Federal Reserve does, adjusting interest rates to encourage (or discourage) borrowing. Lower interest rates make it easier for people to borrow more money, which means there will be more money flowing in the economy and thus (we hope) increased economic activity.
Fiscal policy is what Congress and the president do, usually either cutting taxes to leave more money in the economy or increasing spending to pump more money into the economy. For instance, Congress could vote to buy the Army more boots, which would create a lot more business and jobs for folks making leather, laces, and boots (if only most of those jobs weren't in China). Or, as the President is currently proposing, the government could just cut everyone a check for $800 and say, "Have fun at Wal-mart!"
So what works better at fighting recessions, monetary or fiscal policy? You can sift through the academic language of the Romer study if you like, but the short version: the Romers find that interest rate cuts account for "nearly all of the above average growth that occurs early in recoveries."
Mankiw cites another paper from Princeton's Alan Blinder that similarly concludes that monetary policy is a much better tool than fiscal policy for fighting recession. Blinder doesn't rule out using fiscal policy, but he would reserve that tool for "occasional abnormal circumstances... such as when recessions are extremely long and/or extremely deep, when nominal interest rates approach zero, or when significant weakness in aggregate demand arises abruptly." Mankiw questions whether the current economy, with historically mild 5% unemployment and "a consensus near-term growth forecast of about 1 percent" meets Blinder's criteria for resorting to fiscal stimulus.
Perhaps we should question these handouts as well. Is it coincidence that Republicans and Democrats alike can so quickly agree on an unbudgeted $145 billion dollar expenditure in an election year?
And you know, maybe a little recession every now and then isn't such a bad thing. After all, the mere fear of recession has oil prices dropping (below $89 this morning, an 11% drop from the start of the month). Maybe Bush should hold off on that stimulus package until gas gets back down to $2 a gallon. Tough it out until then, and people might be able to save enough money on their own to spend in other sectors without any government intervention.
But don't get me wrong: you'll find me waiting by my mailbox as eagerly as the next guy for my check from President Bush. But then I'm a raving tax-and-spend liberal who believes in government handouts. I have my excuse. Fiscal conservatives, I await your hue and cry.
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