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.