The Libertarian Stimulus: First Do No Harm

Jeffery Miron, Harvard Senior Lecturer in economics at Harvard University, on the stimulus package,

CAMBRIDGE, Massachusetts (CNN) — When libertarians question the merit of President Obama’s stimulus package, a frequent rejoinder is, “Well, we have to do something.” This is hardly a persuasive response. If the cure is worse than the disease, it is better to live with the disease.

[…]

Repeal the Corporate Income Tax: Repeal would spur investment, improve the transparency of corporate accounting, slash compliance costs, and avoid the distortions caused by the special-interest provisions in the tax code. Repeal can work fast, by raising companies’ share prices, increasing cash flow, and allowing corporations to lessen their need for bank lending.

Thus repeal provides short-run stimulus and enhances long-run efficiency. Recent estimates suggest that tax cuts are at least as effective as spending increases in raising GDP. The adverse impact on the deficit is likely to be less than the $300-$350 billion in revenue the corporate tax takes in per year, since repeal spurs growth and therefore the revenue from other taxes.

Increase Carbon Taxes While Lowering Marginal Tax Rates: Reasonable people disagree about how much the U.S. should reduce its use of fossil fuels, but crowded highways, air pollution, and global warming all suggest that some reduction is desirable.

The effective way to accomplish this is higher gasoline or other carbon taxes, not the messy, complicated green spending in the Obama plan that will morph into pork in many cases. If higher carbon taxes are combined with lower marginal tax rates, the private sector faces better incentives on both counts. This approach avoids the higher deficits implied by Obama’s green initiatives.

Moderate the Growth of Entitlements: The elephant in the room amidst the stimulus debate is the impending imbalance in Social Security and Medicare as the baby boom generation moves into retirement. Without reductions in benefits, taxes will have to increase substantially, generating a major drag on the U.S. economy.

A reasonable response is to raise the age of eligibility for Social Security and Medicare, consistent with the increases in life expectancy and health that have occurred in past decades.

Eliminate Wasteful Spending: Most discussion of the stimulus focuses on areas where, according to proponents, government spending should be higher. Much current expenditure, however, is wasteful.

Examples include agricultural subsidies, bloated transportation projects like the Big Dig in Boston, misguided infrastructure projects like the New Orleans levees (why encourage people to live below sea level?), ineffective weapons systems, pork barrel spending, and subsidies for Amtrak and the Post Office (buses are more efficient than railways, and Fedex is more efficient than the Post Office).

Withdraw from Iraq and Afghanistan: President Obama plans to withdraw U.S. forces from Iraq over the next eighteen months, while expanding U.S. involvement in Afghanistan. It is hard to see, however, that any good arises from dragging out our Iraq exit or from staying in Afghanistan. The government should move toward faster withdrawal, and from both countries. The U.S. can redeploy these troops where useful, or release the resources to civilian uses.

Limit Union Power: Later this year, Congress is likely to vote on the card check bill, a new law that facilitates unionization. The law eliminates the presumption of a secret ballot, which means union organizers can pressure employees into accepting representation.

Renew the U.S. Commitment to Free Trade: One crucial danger in the current environment is that the U.S. and other countries will embrace protectionist policies. The U.S. enacted prohibitive tariffs during the Great Depression, and many trading partners retaliated. World trade plummeted, contributing to the economic misery.

Expand Legal Immigration: Radical changes in immigration policy seem unlikely in the near future, but one specific change is compelling: an increased quota for H-1B visas, which go to workers with technical skills seeking employment in U.S. industry. The annual quota for such visas was 195,000 as recently as 2000, but it now stands at only 65,000.

Stop Bailing out Businesses that Took on Too Much Risk: Popular opinion blames deregulation and private sector greed for the financial meltdown, but the reality is more subtle.

Existing regulation was ineffective at preventing excessive risk-taking, and the private sector did its best to profit from the incentives that were in place. The extreme increase in risk-taking, however, would not have occurred absent policies that encouraged such risk (e.g., Fannie Mae or the Fed’s reassurances about housing bubbles) or past bailouts that cushioned the losses from private risk-taking.

One crucial response to any crisis is learning to avoid the next one. The lesson this time is that rewarding risk generates more risk. The U.S. should therefore stop bailing out banks, automakers, homeowners, or anyone else.

I’m not an expert on military matters so I don’t feel really comfortable commenting on the Iraq/Afghanistan portion of the recommendation. My only thought was that our rapid exit from Afghanistan shortly after the Soviet Union left may have created more problems for us, so I’m a bit wary of rapid withdrawal.

I think one of the most important aspects of this kind of stimulus is the moderation to Social Security and Medicare. Upping the age at which one can qualify for benefits is absolutely necessary. It is also likely to be a highly unpopular position so I don’t think Obama would even consider it (did I mention I think politicians are cowards?). Unfortunately this problem will likely fester and get worse and when we finally do get around to dealing with it the solution will constitute a major drag on the economy as payroll taxes are increased. Both in terms of the limit in income and the tax rates themselves.

I don’t think nearly enough attention is being paid to the issue of incentives here. All the focus is on spending lots of money in FDR style. Problem is the evidence for this solution is not all that great, IMO. Hoover was not the do-nothing free market president people like to make him out to be. So in reality we had quite a bit of government intervention in the economy during the early years of the Great Depression and while things got better the economy was still well below potential. Further, by bailing out institutions that take on risk you essentially remove a significant portion of the costs associated with risks. A good rule of thumb to take away from any study of economics is that when you reduce the cost of something you get more of it. By reducing the downsides to risk you encourage risk taking behavior. And the kind of risk taking is going to be imprudent. After all, the prudent risk taking was prudent even without the bailouts. All that is left is risk that was not prudent absent the bailouts. Bailout bad decision making in regards to risk will simply set us up for the next round. As harsh as it may sound, it is time for some serious regulation…the regulation of the market place where firms that make bad decisions often fail. The same goes for individuals and households that made imprudent decisions on home purchases. Bailing them out to try an prop up inflated housing prices and to pander to voters is a losing strategy for the long term, and we already have enough long term problems (see the paragraph on social security).

And I can’t believe that there was a “Buy American” provision in the stimulus bill. Wait, sorry these are politicians cravena and cowardly individuals. Yes I can believe it. Never mind that protectionism contributed to the severity of the recession during the 1930’s.

And the carbon tax is a very good idea. First off it is an actual real solution to whatever problems global warming entails. The idea of promoting green technologies is, in theory, not bad, but in practice it becomes nothing more than political favoritism, pork spending, and even counter productive. The counter productive part is that the government could end up funding projects that are nowhere near ready for implementation over programs that are due to lobbying and special interest group politics. By raising the costs of fossil fuels, namely gasoline, it makes the other solutions relatively more cost effective and puts the innovative power of the market to work in looking for a solution while at the same time reducing carbon output.

Overall the proposal isn’t a bad one and I’d like to see more like this in the stimulus bills, but instead we are going to get a stupid bill written by cowardly men where a significant portion of the “stimulus spending” will likely take effect when it is no longer really needed.

FILED UNDER: Economics and Business, Government, , , , , , ,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. Steve says:

    And the carbon tax is a very good idea. First off it is an actual real solution to whatever problems global warming entails.

    Do you think it is a good idea because you think that if you raise the price of gasoline people will buy less of it and therefore auto induced global warming will decrease? IMHO this economic theory, if you raise the price of a product people will buy less of it, works well only for non essential products.

    Just last year we saw $4.00+ prices for regular here in California and I do not think we slowed our consumption by much. When it went from $2.00 to $4.00 it certainly didn’t drop by 1/2. Cab drivers, delivery drivers, soccer moms and myself will continue to use our vehicles as we did before. I’ll drive to work, I’ll drive to the grocery store, I’ll drive to school and I’ll drive to the hardware store, sometimes twice because I messed up on my project and I need to replace the material I wasted. I may not go out to dinner as often but that savings will just allow me to buy the same amount of gas for my other trips. It may mean that non-essential jobs, like food service workers, will be cut. There certainly are consequences to raising carbon fuel costs but they may not be the ones you wanted.

    Recently Pres. Obama signed into law a cigarette tax increase of 60 cents per pack. I’m sure the sale of Nicolette will soon sky rocket as smokers try to reduce their tobacco consumption. lol

    If I misunderstood your reasoning then forget the above and explain it fuller, please.

  2. Dave Schuler says:

    It’s nice to play “Let’s Pretend”, isn’t it? So many of the items in the list are simply non-starters. For example, whatever the case for it we’re not going to repeal the corporate income tax. Most of the “wasteful spending” category involves things that have strong constituencies and, politically, they’re nearly impossible to eliminate because they’re vitally important to those constituencies while not particularly interesting to most people. Unfortunately, there’s no line item in the budget for waste, fraud, and abuse or they’d be easier to get rid of.

    Carbon taxes are a non-starter, too. Democrats appear to be completely committed to cap-and-trade while Republicans are opposed to anything that has the word “tax” in it.

    I’m jake with upping the Social Security retirement age as long as we adjust the definition of disability while we’re at it. There are lots of folks who’ve worked a lifetime doing physical work who are just worn out at 65. That could be dealt with by revising the criteria for disability. And taking the stigma out of it.

    I opposed invading both Iraq and Afghanistan but I think we need to understand that withdrawing from either before they’re stable will probably cost more than staying on. I’d be jake with withdrawing 20,000 or 30,000 troops from Iraq to see how things go. Characterizing doing either as fiscal stimulus is fatuous.

    “Limiting union power” will have a lot of people crossing their eyes and turning blue. If it’s limited to voting down card check, it’s just barely achievable.

    Frankly, while I’m in favor of greatly expanding work visas for Mexican workers I’m skeptical about expanding H1-B visas. I think they’re mostly devices for pushing wages down here. I think we need to decide whether we want to have native-born technicians or not. If we do, expanding H1-B visas (not to mention L1) is probably not the way to do that.

  3. Wayne says:

    The key to the economy is to have readable available and cheap energy resources. Increasing the cost of energy will hurt the economy. The “man-made global theory” is falling apart. Why ruin our economy on faulty science?

    We need to reverse regulations requiring banks to give loans to people who can’t afford them. The socialist regulations have ruined the banking industries. We need to cut most government spending not increase them. The only areas that I can think of which are exceptions is the military and Intelligence communities.

  4. Dave Schuler says:

    IMHO this economic theory, if you raise the price of a product people will buy less of it, works well only for non essential products.

    It certainly worked that way with the increases last spring and summer. Check James Hamilton’s posts on this subject.

  5. Dave Schuler says:

    We need to reverse regulations requiring banks to give loans to people who can’t afford them.

    Despite the folklore that’s only a small part of the banks’ problems.

  6. Wayne says:

    The gas station owners I have talk to have said they saw drops in gas sales when the price was high especially from long distance travelers. I believe there was a government report saying pretty much the same thing. Not to mention the electricity the manufacture use to produce products.

  7. Wayne says:

    “Despite the folklore that’s only a small part of the banks’ problems.”

    True there are more regulation that hurt them and bad practices. However what is wrong with starting with the one’s that people know about? It would be silly not to.

  8. Dave Schuler says:

    I don’t disagree with that, Wayne.

  9. Greg Megara says:

    I read that article and thought: Get that man a spot on the Obama administration!

    Yeah, it might appear to be pie in the sky at this point, but consider how much further we were away from the possibilities a year ago. It appears we’re going to fail a few more times at this stimulus thing (as we had last year) before some new options are going to be viable politically.

    All these items deserve some further discussion and it’s great that Steve is bringing it already with noting how social security and medicare really should raise the threshhold ages and how protectionism is very dangerous.

    One thing to note:
    “Reasonable people disagree about how much the U.S. should reduce its use of fossil fuels, but crowded highways, air pollution, and global warming all suggest that some reduction is desirable.”

    I think the biggest issue at hand there is where we’re getting our energy in the first place. Whatever fence you’re on, making more of our energy local (and provides real jobs) is the best idea. And the best way to do that is through technologies that reduce carbon footprints as a bonus: hydro/nuclear/ wind/ tidal/ geo/ solar.

    And wayne, stop driving your SUV so much, you’re melting my polar ice caps and ruining my favorite snorkelling spot! 😀

  10. PD Shaw says:

    I don’t see how raising the retirement age for SS and Medicare can be seen as a stimulas proposal. This falls in the category of policy preferences simply being labeled as stimuli.

  11. Steve Verdon says:

    Steve,

    The data suggest otherwise, that yes, higher prices induced people to drive less, or drive more efficiently (i.e. not taking out the RV with 6.5 miles to the gallon).

    Dave,

    It’s nice to play “Let’s Pretend”, isn’t it? So many of the items in the list are simply non-starters.

    Yes I know, but the problem is that many of the actual “start ideas” they, well to use a technical term, suck. You yourself have agreed that about $350 billion of the House stimulus package takes effect too late for it to be considered stimulus.

    In this list I see four main ideas and the rest as negotiating points (unions, immigration, etc.). I’d say the big/main ideas are,

    1. Cutting the corporate income tax,
    2. Reducing marginal taxes and replacing them with a higher carbon tax.
    3. Upping the age of eligibility for entitlement programs.
    4. Free trade.

    All the rest can be negotiated away, IMO.

    For example Dave, did you read the NY Times article I linked too on stimulus spending in Japan. They’ve practically paved that entire damned country and their economy still sucks. Their public debt to GDP ratio is 180%. Interestingly, the economy in Japan tanked after a bursting real estate bubble.

    PD,

    I don’t see how raising the retirement age for SS and Medicare can be seen as a stimulas proposal. This falls in the category of policy preferences simply being labeled as stimuli.

    Everybody has their panties in knots over the loss of something around $14 trillion from the economy (IIRC). However, Medicare alone will make that look like nothing. Think $50 to 60 trillion or more. That means there is a point where we simply wont be able to keep borrowing to pay for current stimulus. If we reach a point where people stop lending to us, the U.S., then that will be quite bad.

    By upping the eligibility age for Medicare/Social Security it says to potential buyers of U.S. debt that the U.S. is aware of the problem and is taking at least some noticable steps towards addressing it. That is, it can help keep interest rates the U.S. borrows at right now, or in the near future low. And the U.S. is likely to increase its national debt to GDP by very, very large amounts if work of Kenneth Rogoff is any indicator. Close to 100% of GDP.

    So you are right in that it wont be stimulus in a direct sense, but it does improve the U.S.’s ability to borrow money for some stimulus that might make sense. For example, extending unemployment benefits or investment tax credits.

  12. angellight says:

    The GOP should stop Hijacking the Stimulus Package and holding it Hostage because the way George Bush and the GOP spent our money will be characterized by an Era of Irresponsibility and Neglect, while Obama wants to spend our money wisely and on rebuillding Americsa, if the GOP lets him. The awful truth is that One Party has destroyed America while the other Party the Democratic Party wants to restore it.

    For instance: If you have a home in which you used your money to spend on alcohol, good times and neglected your roof, your bills, and now your roof is in danger of collapsing because you used your money on good times instead of the upkeep of your home and now the Argument is you are unable to borrow money to fix your roof before it caves in because you used your money foolishly in the past is also recklesslness and neglect on the part of the lender, so they let the roof collapse.

    In the Bush years 30 billion was spent in Afghanistan — 50 billion in Iraq and now Congress wants to say we cannot spend necessary money at home which has so long been neglected? States were given no money in the Bush years and now they still want to keep money out of the States on a fraudulent theory.

    It is now time to for Congress to put money back in to the United States and to spend money wisely and not fraudulently, irresponsibly and in the dark as in the Bush years. Obama believes in transparancey, hence you can find the Stimulus package on line for all to see.

    GOP say this money will be more of the same. It will not be more of the same. This money will be used for Americans, for jobs, to rebuild for improvement and innovations to improve life not on wars and countries which have nothing to do with American people or on big business who do not need the money.

    Bush and the Republicans inherited a Surplus from the Democrats and yet the GOP has created the worst economic crisis ever. The GOP should stop hijacking the Stimulus and do the right thing and let money flow back into America again, instead of holding the Democrats hostage from their quest of bringing help to the people and restoring American again. When will average Americans wake up and realize that the GOP does not care for YOU!

  13. Dave Schuler says:

    You yourself have agreed that about $350 billion of the House stimulus package takes effect too late for it to be considered stimulus.

    Yeah. I’m concerned that the stuff that happens after 2010 will actually crowd out private investment and growth.

    Re: Japan. Japan’s problems are structural. They know it. They just don’t want to change. So they’re stuck on the brink. I have no reason to believe that our problems aren’t structural as well.

    But it certainly is remarkable how confident the supports of fiscal stimulus in the form of spending are that it will work considering the prominent counter-example.

  14. ap says:

    my particular favorite non-sensical statement the last few weeks has been the rant ‘angellight’ invoked above…

    just so many contradictions and logical short comings that it boggles the mind.

  15. Drew says:

    “Despite the folklore that’s only a small part of the banks’ problems.”

    Folklore? Yes, these issues are only a small part of bank’s problems today, a decade down the road. But they were the prime movers when the bad credit train got going. That’s an easily demonstrable fact.

    Funny how markets work, though. I hardly think credit to uncreditworthy people is a big issue as we sit here today.

  16. Franklin says:

    Wayne said:

    The “man-made global theory” is falling apart.

    Are you a climate scientist? If not, then sorry if I take your opinion with a grain of salt.

    I think it’s fair to be skeptical of the Al Gore type sky-is-falling pronouncements, but a recent study showed that 97% of climate scientists believe that man is contributing to warming. I’m not talking about the average scientist, or weatherpeople, or Glenn Beck or Lou Dobbs here, I’m talking about the people who ACTUALLY study the climate for a living, and look at the ACTUAL data.

    Please excuse me if I trust these people slightly more than some anonymous Internet poster.

  17. Rick Almeida says:

    Not to ruin another good stimulus thread with a more philosophical question, but…

    I never understood the libertarian opposition to labor unions. I mean, I get that they don’t like unions, but I guess I can’t see why laborers’ freedom to associate and bargain collectively should be limited much.

    I actually like quite a few of Miron’s solutions, and others I think deserve a serious hearing, but beyond political necessity, what drives libertarian opposition to labor unions?

  18. Dave Schuler says:

    I never understood the libertarian opposition to labor unions. I mean, I get that they don’t like unions, but I guess I can’t see why laborers’ freedom to associate and bargain collectively should be limited much.

    I can only speculate on why libertarians might object to unions but I’ll offer one idea. They might object to the closed shop.

  19. PD Shaw says:

    Effective labor organization generally requires government involvement; it’s not simply a matter of private individuals choosing to associate. As Dave said, there is compulsory joinder in closed shops. The government also permits pattern bargaining by exempting unions from anti-trust regulation.

  20. Steve Verdon says:

    I never understood the libertarian opposition to labor unions. I mean, I get that they don’t like unions, but I guess I can’t see why laborers’ freedom to associate and bargain collectively should be limited much.

    Probably for the same reason they oppose monopolies. Whenever you see a monopoly you will more often than not see the State at work.

  21. Wayne says:

    Dave
    “I have no reason to believe that our problems aren’t structural as well.”

    A statement I agree with.

    Franklin

    “but a recent study showed that 97% of climate scientists believe that man is contributing to warming”

    What you leave out is how many think man-made contribution is significant or if global warming (man-made or not) is more harmful than helpful. Most honest ones say that man-made contribution is a very small %. Just another example of cherry picking numbers to support your agenda while ignoring the rest.

    There have been plenty of threads on this subject already so I won’t spend a great deal of time explaining it.

    Many events have happen in recent time to counter many of previous held theories including Clinton\Gore appointee to NASA being caught doctoring data, Ocean temperatures dropping instead of increasing like many theorist were predicting, methane level change being pretty much consistent instead of localize like most computer models, Russian and Canadian Scientist predicting a new ice age and the list goes on.

  22. odograph says:

    The plan looks pretty good to me. The carbon tax works as a “tax what we don’t like” thing, allowing us to “reduce tax on things we do like” such as employment. That, even if, it is set “too low.”

    AGW is real, but we probably don’t have the global will to really tax carbon sufficient to mitigate it. So it’s another case where, since humans aren’t prefect decision-makers, we’ll get what we get.

  23. Not to sure if it is just coincidental at this time but Middlesex County sold prices have gone up in January.
    They did go up for Edison, Piscataway, Woodbridge… and in general Middlesex County.
    For Middlesex County:
    +6.7% from December 08 to January 09
    -6.9% from January 08 to Jan 09

    Cathy C.