Sunday, August 29, 2010

Stimulus packages failed to ignite the economy

Published in The Tennessean, Sunday, August 29, 2010

Stimulus packages failed to ignite the economy

by Richard J. Grant

Perhaps the worst effect of the recent recession and financial crisis is the political response and the establishment of new precedents for government intervention. Although the crisis was itself a political creation, this is not yet widely understood. And as long as the most important lessons remain unlearned, we are in danger of prolonged stagnation and future repetitions.

More optimistically, and perhaps naively, we might believe that the severity of the crisis and the almost unambiguous failure of the Keynesian-style “stimulus” packages would make most people skeptical of the value of government interventions. Clearly, the government’s response has failed to remove the symptoms of recession. The various stimulus tricks did little more than to give the economic equivalent of a sugar buzz. Now, we see signs of the economy slumping again.

The Federal Reserve continues to hold interest rates down, thereby depriving the market of honest information about savings and the demand for loans. Just out of uncertainty and fear, people are saving more and borrowing less; so interest rates would be low anyway. But the Fed has pushed rates lower still and is thereby discouraging saving and encouraging borrowing. This is the opposite of what people need; and it thwarts recovery.

The low interest rate policy interferes with businesses’ decisions about capital and production structures. When interest rates are held artificially low, businesses are led to use capital as if it is less scarce than it really is. This is what made the Fed a major culprit in causing the financial crisis. Now it is using even more drastic measures in a futile attempt to make the symptoms go away.

The wide discretionary powers exercised by the Fed are just one more illustration of the broader constitutional failure that has allowed government powers to grow and disrupt the economic order. It is not just a failure of particular economic theories, but a failure to enforce the limits on governmental power that were embedded in the US Constitution from the beginning. These limits reflect values of a much deeper nature than mere administrative rules.

Perhaps it is too much to hope that a growing awareness of this failure will lead to a restoration of an appropriate constitutional attitude. It is the attitude that the fundamental laws, as preserved in the founding documents, place real limits on what can be done under their authority.

A steadfast respect for constitutional restrictions would have saved us from the mushrooming welfare state and the pretensions of state capitalism. We would have been spared the fights over the recent health-care bill, the financial regulation bill, and the cap-and-trade fiasco. We would also have been spared the spectacle of congressmen voting for bills, the effects of which they could not possibly understand.

Constitutional respect would also have prevented the political class from acquiring a taste for, and a dependency on, big helpings of tax revenue. We would not now be facing an imminent increase in tax rates on income, dividends, capital gains, and estates. Such an increase would not be called for at the best of times and is foolish at a time of economic sluggishness and high unemployment. It is particularly foolish in combination with increased regulations and deficit spending.

A renewed constitutional attitude would not remove all economic uncertainty from our lives, but it would restrain the government from creating new uncertainties, as it is now. An overly ambitious government with excessive discretionary powers can, and does now, cause businesses to delay decisions and to delay hiring. The wealth that is lost is lost forever. We can never get that time back.

The longer we go without strict enforcement of the Constitution, the greater the danger that we will lose the habit altogether. The value-laden rules that have worked so well for us will give way to the new precedents that we allow to slide in on the crest of the next crisis.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail:

Copyright © Richard J Grant 2007-2010