Tuesday, July 21, 2009

Economy stimulus plans amount to quackery

Published in the Tennessean, July 21, 2009

Economy stimulus plans amount to quackery

By Richard J. Grant

Politicians have two talents: 1) ignoring or hiding the full costs of their projects, and 2) pretending that their stated intentions are as good as results, even when their projects can't possibly succeed. The so-called "stimulus" plans of the current and previous administrations exhibited both of these characteristics. They cost far more than we were told, and provided stimulus in name only. Worse than that, their net effect is de-stimulus.

Belief in "stimulus plans" is to economics what bloodletting was to medicine. Such economic quackery persists because it serves political interests. As the signs of recession, such as job losses and mortgage defaults, began to show up in the economy, politicians at all levels came under pressure to "do something." So they did. The result was one of the biggest agglomerations of pork-barrel projects in history. In other words, political supporters were rewarded at the expense of everyone else -- with a net loss to the economy.

Politicians rarely have the time or sophistication to explain why "doing nothing"is better. A good economist will explain that the current recession was caused by the government trying to be the sugar daddy to all people. To encourage business investment and homeownership, in 2001 the Federal Reserve pushed interest rates down to unsustainable levels. Two other government creations, Fannie Mae and Freddie Mac, encouraged risky behavior by guaranteeing mortgages. Nice though it sounds it helped set us up for a fall.

The resulting boom was artificially enhanced and misdirected. The recession simply revealed the truth. That is why people hate it and try to cover it up. Rather than accept that house prices were too high, that businesses made unsuitable investments, and that difficult changes would be necessary, the government tried to stop the consequences.

When people accept the truth, a recession is a time of healing, a correction of past errors. But when the government tries to stop a recession, it slows the healing, or causes a longer-term deformity. Right now, the government is prolonging the suffering.

The fake stimulus plan is only part of the problem. Through broader intervention, the current government is putting us on a permanent, long-term path of lower real economic growth. That will be its legacy as it seeks to expand its power over the medical, energy, transportation, financial, and insurance industries.

These, and other, industries are already overregulated. That is why we are having problems with them. As they come increasingly under government control, and are converted from profit centers to cost centers, it will change the whole incentive and innovation structures of these industries. Where once we saw no limits to our potential to create, produce, and serve, we will see more arbitrary constraints imposed upon us by force.

We should be moving in the other direction. Real stimulus would come from substantial cuts in government spending matched by commensurate reductions in income-tax rates. Also, a systematic program of real deregulation would allow us to develop a less intrusive and more natural legal structure.

Richard J. Grant is Professor of Finance and Economics at Lipscomb University and a Scholar at the Tennessee Center for Policy Research.

Copyright © Richard J Grant 2009