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The Independent Institute
Commentary

Do We Need Another Stimulus?
Tax-and-spend didn’t work before and won’t now


OXFORD, Miss.—During the Great Depression, economist John Maynard Keynes recommended increasing federal government spending, financed by borrowing, to boost the U.S. economy. It didn’t matter how the new money was spent. If no better use could be found, Keynes suggested building pyramids.

Keynes’ theory that increased public spending would offset declines in consumer and business spending proved wrong. The unemployment rate remained in double digits until the “Greatest Generation” was called upon to sacrifice its blood and treasure to defeat the Axis powers in WWII.

The failure of Keynesian pump-priming seems to be lost on recent White House occupants. George W. Bush twice tried to stimulate the economy, once after 9/11 and again in the early days of the recent financial crisis.

His efforts show up as little more than a blip on U.S. gross domestic product growth.

President Barack Obama has tried more of the same—with no greater success. He claimed the American Recovery and Reinvestment Act would boost the economy and “save or create” millions of jobs. The chairwoman of his Council of Economic Advisers promised the unemployment rate would never rise above 8 percent.

President Bush’s stimulus initiatives cost about $200 billion each; the Obama administration’s first attempt to turn the economy around cost $868 billion. Now there’s foolish talk of more.

Although the president tries to put the best face possible on the current economic mess, he surely realizes that, besides new green signs along highways and at construction sites advertising projects funded by the American people, there is little or no evidence his stimulus has made much difference.

Economic activity remains moribund, as it did during the Great Depression, because President Obama’s policies, like those of President Franklin D. Roosevelt before him, are working at cross-purposes.

While FDR was pumping huge amounts of money into government to finance the New Deal, he was increasing federal income tax rates, adding new payroll taxes to fund Social Security, enacting minimum-wage laws, and saddling the economy with other measures that raised the cost of doing business for those who otherwise might have employed the unemployed.

Today, President Obama also is combining “stimulus” with tax increases: putting one foot on an out-of-control government accelerator and the other on the brake. Allowing the so-called Bush tax cuts to expire alone would amount to one of the largest tax increases in history.

On top of this are the costs of the new national health care regime, the recently enacted financial market “reforms,” and talk of a new value-added tax, similar to a national sales tax.

His six-month ban on deepwater drilling has destroyed at least 27,000 jobs.

It’s not surprising that private businesses are reluctant to hire.

The problem is not that the previous stimulus was too meager, as Paul Krugman and other commentators argue, but that it was the wrong policy prescription. Anybody who studies economic history would know that government spending doesn’t produce long-term, sustainable growth and jobs.

The only sure way to perk up the job market is to cut taxes permanently and rein in public spending and excessive regulation.


William F. Shughart II is a Research Director and Senior Fellow at The Independent Institute, J. Fish Smith Professor in Public Choice in the Jon M. Huntsman School of Business at Utah State University, and editor of the Independent Institute book, Taxing Choice: The Predatory Politics of Fiscal Discrimination.


From William F. Shughart II
TAXING CHOICE: The Predatory Politics of Fiscal Discrimination
So-called “sin taxes”—the taxing of certain products, like alcohol and tobacco, that are deemed to be “politically incorrect”—have long been a favorite way for politicians to fund programs benefiting special interest groups. But this concept has been applied to such “sinful” products as soft drinks, margarine, telephone calls, airline tickets, and even fishing gear. What is the true record of this selective, often punitive, approach to taxation?