There seems to be a lot of agreement that the positive GDP report for Q3 was in retrospect not as positive as the headline number might lead one to assume. Coupled with the disappointing personal income data on Friday as well as the sales numbers and many seem to have concluded that we’re still deeper in the woods than we think.
Henry Blodget has a nice short post on this subject with some good links that I recommend. Other than that, I don’t want to spend much time merely echoing points of view with which I find myself in agreement, rather let me offer another observation.
Recall if you will that when the shape that any fiscal stimulus plan should take was being debated there was a sharp divide as to whether it should be accomplished via tax policy or direct government spending. A lot of the discussion was centered around multiplier effects with many arguing that government spending represented a better bang for the buck.
The tax advocates argued for broad based tax relief and some of the proposals suggested a suspension of the payroll tax, tax credits for businesses that increased employment, accelerated depreciation for new equipment purchases as well as a cut in personal and corporate taxes. Of course, those in favor of government spending won the debate.
We may now be seeing the fruits of that decision. The problem isn’t so much that direct fiscal stimulus is better or worse than a tax reduction approach as it is that the former allows the political class to get their hands on the money as it flows through the government coffers and direct it those whom they support or perhaps it would be more correct to say those that support the politicians.
To be sure, tax policy can be narrowly focused as well and in fact it was tax policy — the new homebuyer tax credit — that drove the increase in residential investment. That doesn’t necessarily mean that a tax focused approach to stimulus would result in the same distortions, just that the denizens of Capitol Hill are capable of corrupting just about anything if given the chance.
One of the more vexing problems that afflicts the human race seems to be its inability to learn anything from past lessons. We spent the better part of the Twentieth Century proving that centrally planned economies don’t work. It seemed pretty clear by the ’90s that generally speaking letting people and the market make their own choices resulted in an optimal economic outcome and the best application of scarce resources. Did we learn the lesson? Of course not.
The upshot has been that we now have a “recovery” that’s so far been driven by improved performance in the residential real estate and auto sectors based on extraordinary stimulus directed towards those areas. More to the point, much of the improvement may well be illusory. It isn’t so much a testament to good government policy as it is an example of Americans jumping on a temporary sales promotion. Like 0% loans, the showrooms get flooded so long as the deal lasts and when it ends, the buyers stay home and play a game of chicken with the sellers, daring them not to bring it back.
Would we have been further towards real recovery if the stimulus had been more tax oriented? Who knows. I think it is fair to say, however, that any progress might have well been more substantial had it relied on broad based tax reduction. I doubt that we would be having discussions about auto sales cratering and the real estate market falling once more once the props are removed from them. Rather, we would most likely be seeing upticks throughout the economy and had tax cuts been used to promote employment we might well be witnessing much better numbers on that front.
The enduring lesson is that no matter how dire the situation, politicians will see to their interests first and those of the nation thereafter. Any stimulus program will involve a great deal of waste. A stimulus program that relies on significant control of expenditures by the ruling class will result in maximum waste and inefficiency.
Or to put it another way, politicians will eviscerate any multiplier effect if you let them get their hands on the money.