Happy news! The economic summit this week rejected President Obama’s idea for a global stimulus. But the notion that a second stimulus in the U. S. will work better than the first is alive and well among the president’s advisors. Treasury Secretary Timothy Geithner and others have compared our current economy with that of the Great Depression in this way: In 1937, they argue, the U. S. cut back spending and a recession ensued. Therefore, we need to pump more federal dollars into the current economy to keep us from experiencing another recession on top of the one we are supposedly getting through. Liberal economist Paul Krugman says the “real problem is inadequate spending.” Therefore, the U. S. economy needs another stimulus.
We should bear in mind that George Washington died when the expert physicians of his day continued to bleed him as a cure for his internal ailments. If we had let poor George alone, his body might have defeated the cold he was experiencing. Our economy might do better as well if we refuse to bleed the capital out of our economic system. Better yet, let’s cut tax rates and federal spending.
That’s what we tried in 1921 when we had 12 percent unemployment in the aftermath of World War I. Presidents Harding and Coolidge refused to accept the recommended stimulus package and instead cut tax rates to a top marginal rate of 25 percent and then they cut federal spending almost in half. By 1923, as these changes were going into effect, the economy recovered and unemployment went from almost 12 percent to 2.4 percent. We had annual budget surpluses, not deficits, and American credit reigned supreme in the world.
We have no such proven historical record in the U. S. for stimulus spending. When President Carter tried a small stimulus package in the late 1970s, unemployment and inflation both got worse. When President Bush tried a stimulus in early 2008 unemployment went up. President Obama’s economic stimulus of 2009 suffered the same fate.
Tax cuts and reduced federal spending work better than federal spending because people spend money better than central planners do. When we give people more of their own money to spend, instead of forcing them to send it to Washington, we find that people buy and invest in ways that create jobs and create new capital projects. Entrepreneurs compete for business, and new inventions arise and improve American lives. When government spends other peoples’ money, however, it tends to become politicized and goes to waste on pork projects in key congressional districts and in the hiring of more bureaucrats in Washington. That kind of spending steadily bleeds more capital out of the economy and leads to recession.
Maybe this is one time the U. S. needs to join the rest of the world: Stop the spending on inefficient stimulus packages.