Steve Chapman

What's wrong with those elements? For one thing, there is no compelling evidence that they function as intended. Tax cuts are supposed to induce consumers to spend more, but past experience indicates that people use most of the windfall to increase their savings or pay down debts -- neither of which puts people back to work.

A recent study for the National Bureau of Economic Research, by Joel Slemrod and Matthew Shapiro of the University of Michigan and Claudia Sahm of the Federal Reserve Board, says that's exactly what happened with Obama's tax cut. The effect on spending, they concluded, was "modest at best."

Giving money to states and municipalities to spare them from firing teachers and slashing social programs undoubtedly achieves that simple purpose. But when it comes to generating economic activity, it's flying on a wing and a prayer.

Economists William Gale and Benjamin Harris of the Brookings Institution and Alan Auerbach of the University of California, Berkeley, note in a new paper that "while the argument for transfers to states being stimulative is plausible, there is surprisingly little evidence on the countercyclical effects of federal transfers to states."

It is safe to say, though, that they have a destructive impact on taxpayers. During good times, states and cities tend to enlarge their budgets, rather than put money away for a rainy day. Economic downturns serve as a corrective by forcing these governments to eliminate low-value programs to live within their new constraints.

When the federal government bails them out during a recession, it spares them this unpleasant obligation. It invites them to keep spending more than they can really afford.

Of course, the use of deficit spending as a cure for recession has the same effect at the federal level -- reinforcing our leaders' habit of loading debt onto future generations.

As a way of expanding the economy, it's a proven failure. But as a way of expanding government, it's definitely a keeper.


Steve Chapman

Steve Chapman is a columnist and editorial writer for the Chicago Tribune.
 

 
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