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Economic stimulus misguided

Observer Viewpoint | Tuesday, February 12, 2008

Last Thursday, Congress passed an “economic stimulus package” worth $167 billion. Under the plan, Americans earning between $3,000 and $75,000 would get $300 to $600 plus $300 per child. Those earning between $75,000 and $150,000 would get a $1,200 rebate. The IRS will have the checks out by the end of the summer. Congress hopes that the plan will ward off the recession clearly emerging, despite the Republican front-runner’s statements that the American economy is fundamentally solid.

Listening to the triumphant and self-congratulating tone of the major players in both parties, one would think that Congress might have found a cure for cancer, or at least have done something useful for a change. “There were no winners or losers in this except the American people, who saw us rise above any differences we might have had and work to agreement on what is the No. 1 issue, and that is our slowing economy,” said Senate Minority Leader Mitch McConnell. Senate majority leader Harry Reid hailed the plan as an “example of how government is supposed to work.” Unfortunately, this is an example of how government does work.

Neither party seems willing to talk about where this $167 billion rebate is going to come from. In 2007, the U.S. federal budget was approximately $2.8 trillion. However, the U.S. government only collected $2.4 trillion. Total expenditures exceeded revenues by an incredible $400 billion. The U.S. government simply doesn’t have the money to afford such a rebate, but Congress really just doesn’t care. What’s another $167 billion, anyways?

Government doesn’t produce any wealth of its own. Nearly everything it gets, it takes from the private sector. It can only get wealth in three ways. First, it can forcefully take it from individuals in the form of a tax whether they like it or not. Second, it can inflate the currency, essentially printing money out of thin air, which leads to poor investment decisions, inflation and eventually a bust as the American public is now witnessing. Finally, it can borrow by selling bonds to investors.

Usually when there is a deficit, the Treasury sells government bonds to investors. The Treasury uses this money to meet the shortfall between what it wants to spend (always too much) and what it collected in the form of taxes (also too much, but not enough to cover expenditures). The U.S. government promises to pay interest on these bonds to the bondholders over the life of the bond, finally paying back the face value of the bond at the maturity date. Last year, the U.S. government paid $243 billion just on the interest on its debt.

Supporters of the stimulus bill hail it as a plan to partially remove the heavy burden of taxation off the back of the American taxpayer. The fact is that the bill merely shifts the burden rather than remove it. When a government reduces taxes without reducing spending, it leads to even larger deficits, more government borrowing, increased future expenditure in the form of interest on the debt and therefore saddling future generations with higher future taxes.

Supporters also claim it will stimulate the economy because more money in the pockets of taxpayers will lead to higher spending and thus, more jobs. This completely ignores what the bondholders would have done with their dollars had they not bought the government bonds. The investors would have either invested in the American economy, saved the money in a bank which the bank could then loan out to others, or spent it, all of which are good things.

The most amusing part of this whole episode is that both parties agree on the need for lower taxes in order to improve the American economy. The largely bipartisan stimulus package is indeed an admission taxes do act as a drag on the American economy, however fiscally irresponsible it is. For once, it seems that Congress is correct. But what is puzzling is that if taxes are bad for the economy, then why should Congress wait until a recession hits to cut taxes? If letting Americans keep what is rightfully theirs is a good thing, then why doesn’t Congress make this a permanent policy? It’s too bad that Congress lacks the courage to cut both taxes and spending.

Mark Poyar is a senior finance major and vice president of the College Libertarians. Their Web site is http://ndlibertarians.blogspot.com. He can be contacted at mpoyar@nd.edu

The views expressed in this column are those of the author and not

necessarily those of The Observer.