Some Democratic and Republican presidential hopefuls are preaching economic doom and gloom, disappearing middle class, and failing health care industry. What's their solution? The short answer is give them more control over our lives. Baltimore's political satirist, the late H.L. Mencken, explained this strategy, saying, "The whole aim of practical politics is to keep the populace alarmed, and hence clamorous to be led to safety, by menacing it with an endless series of hobgoblins, all of them imaginary."
The imaginary hobgoblin this time is the threat of an oncoming recession, even though it is by no means clear that the U.S. economy is in a recession. To head off a recession, politicians, including President Bush, are calling for a stimulus package.
Before we talk about stimulus packages, let's get one question out of the way: Is there any evidence for the existence of a Santa Claus or Tooth Fairy? Most grown-ups would probably answer no and ask, "Williams, this is a serious issue. Why are you talking about silly things like Santas and Tooth Fairies?" The reason is quite simple. Let's look at it.
The White House proposal is to give individuals and households tax rebates ranging from $800 to $1,600 respectively. Congressional Democrats, in addition to tax rebates, want a stimulus package that targets the poor through increases in food stamps and greater unemployment benefits. The details of different stimulus packages aren't as important as where the money is coming from. You can bet the rent money it won't come from Santa or the Tooth Fairy.
There are three ways government can get the money for a stimulus package. It can tax, borrow or inflate the currency by printing money. If government taxes to hand out money, one person is stimulated at the expense of another who pays the tax, who is unstimulated and has less money to spend. If government borrows the money, it's the same story. This time the unstimulated person is the lender who has less money to spend. If government prints money, creditors, and then everyone else, are unstimulated. As my colleague Russell Roberts said in a NPR broadcast, "It's like taking a bucket of water from the deep end of a pool and dumping it into the shallow end. Funny thing -- the water in the shallow end doesn't get any deeper."