Everyone is pretty much convinced the economy is, if not in the toilet, pretty close to the porcelain rim.
So presidential candidates (and one President) are touting stimulus plans.
As AP reports:
[T]he White House and Congress raced toward emergency steps Thursday to rescue the national economy from a possible recession, including tax rebates of at least $300 a person — and maybe as much as $800. Federal Reserve Chairman Ben Bernanke endorsed the idea of putting money into the hands of those who would spend it quickly and boost the flagging economy.
Oh, goody, I can buy a PS3.
Problem is, as Brian M. Riedl explains in the Washington Post today, rebates don't work:
Reducing marginal income tax rates has been shown to motivate workers to work more. Lower corporate and investment taxes encourage the savings and investment vital to producing more plants and equipment, as well as better technology.
By contrast, tax rebates fail because they don't encourage productivity or wealth creation. No one has to work, save, invest or create any new wealth to receive a rebate.
All rebates do is shuffle wealth around, they don't create it. Like Mrs. Clinton's make-work stimulus plan, it takes tax dollars and moves them around. It does not encourage wealth creation:
Take the 2001 tax rebates. Washington borrowed billions from the capital markets, and then mailed it to families in the form of $600 checks. Predictably, consumer spending temporarily rose, and capital/investment spending temporarily fell by a corresponding amount. This simple transfer of existing wealth did not encourage productive behavior. The economy remained stagnant through 2001 and much of 2002.
Only when taxes were cut did the economy recover:
It was not until the 2003 tax cuts — which instead cut tax rates for workers and investors — that the economy finally and immediately recovered. In the previous 18 months, businesses investment had plummeted, the stock market had dropped 18 percent, and the economy had lost 616,000 jobs. In the 18 months after the 2003 tax rate reductions, business investment surged, the stock market leaped 32 percent, and the economy created 5.3 million new jobs. Overall economic growth doubled.
The rage among Democrats is how to raise taxes, not cut them. But that, and regulatory reform, are what is needed to help a flagging economy. Wealth creation, not wealth shuffling, is what that economy needs.
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