After a delightful day of Spitzenfreude, abetted by a Fed attempt to cushion the landing for overstretched lenders, the stock market has wandered back to its downward track. It ought by now to be obvious to the meanest intellect that pushing on the money supply string will not alleviate what may be a recession and is unquestionably a slowdown. Nor is there much hope that the $600 stimulus handout will have more than a slight ripple of impact. What, then, is to be done?
First let’s ask, what’s wrong? Why have animal spirits so conspicuously deserted our country’s entrepreneurial class? The economy doesn’t run on subprime mortgages, and the rising prices of oil and other commodities are less a cause of economic ills than an effect of Dr. Bernanke’s remedies. Maybe the reason for the developing malaise is the one in plain sight: that next year threatens to bring huge increases in taxes and government spending. That’s what both Democratic Presidential candidates advocate and the House Democratic budget proposal would lock into place. The Heritage Foundation has put together a chart of the costs. Liberals won’t mind the tax hikes and will doubt Heritage’s projections of job and income losses, but the folks who invest and create jobs have good reason to be worried, and very, very cautious.
The great macroeconomic lesson of the past three decades is that lowering taxes, as under Presidents Reagan and Bush fils, or keeping government spending under control, as resulted from the Clinton-GOP standoff, promotes prosperity. Doing neither (Carter, Bush père and the first two Clinton years) has the opposite effect. The Democratic Party is now committed to neither-squared.
The present moment, before recession takes hold, is the ideal time for tax cuts. It is a just a bit earlier in the cycle than the 2001 cuts that lifted the economy out of the late-term Clinton recession; there’s no reason to think that waiting a few months will be beneficial. Unhappily, as the Wall Street Journal gloomily opined last week,
Those jobs numbers suggest that first quarter economic growth will be meager, if not negative. We’d like to offer some policy remedy, but the politicians already think they’ve done their part with their “stimulus” rebates set to land in voter pockets this summer. But at best this will provide a temporary fillip to consumer spending. A tax cut aimed at lifting incentives to invest has no major backers -- which is another reason to worry.
That means everyone is putting all of their hopes on the Fed and easier money. This is a dangerous way to live. This expectation is weakening the dollar and thus lifting dollar-denominated prices, especially in commodities. Rising food and energy prices, in turn, are stealing much of the discretionary income from the very consumers the rebate checks are supposed to motivate to spend more.
But I have a hopeful thought. If the impediment to economic activity is the prospect of a tax and spending avalanche, whatever makes that prospect more remote will have the effect of a dose of real economic stimulus. Therefore, an unambiguous Republican commitment to making the 2001 tax cuts permanent and reducing nondefense spending growth to no more than the rate of increase of the GDP (preferably a little less) can, all by itself, reduce the chances of a long or painful contraction. Naturally, this strategy will work only if businessmen think that the commitment is sincere, a matter than Senator McCain and other Republican candidates must attend to. Nonetheless, as an instance of combining personal and public interest, it has few peers and offers a hope of limiting the damage that the Reid-Pelosi duo can inflict on the rest of us.
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