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.
If we are headed into a recession, these proposed stimulus packages will make little difference. Previous experiences have shown that (1) it takes a long time to enact tax law, making it too late to prevent a recession, and (2) many people save a large portion of any tax rebate. A far more important measure that Congress can take towards a healthy economy is to insure that the 2003 tax cuts don't expire in 2010 as scheduled. If not, there are 15 separate taxes scheduled to rise in 2010, costing Americans $200 billion a year in increased taxes. Adding to the economic effects of that tax increase are the disincentive effects of the measures that Americans will take between now and then in anticipation of those tax increases. According to economists Tracy Foertsch and Ralph Rector, making the 2003 tax cuts permanent will annually add $76 billion to the GDP, create 709,000 jobs and add $200 billion to personal income.