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Saturday, February 7, 2009

A Libertarian (Sane) Alternative: The Stimulus Package They Should Be Passing

The Problem With Washington's Stimulus Package

The belief that government infusions of cash during an economic downturn will bring relief and lower unemployment is based on older, flawed, and now widely discredited theories of economics. We should know better now, but as it goes with many other important truths, our society and leaders are slow to learn. For a detailed critique of the stimulus package, I will refer you to my article: "Economic Folly: 7 Reasons Why The Stimulus Package Will Be Very Bad For America."

In summary, the problem with the stimulus package is that it doesn't really stimulate anything (except the government!). Though it makes sense that putting money into the economy would help stimulate it, the so-called stimulus package doesn't put money into the economy. That money doesn't come from some external place and infuse the economy with new cash- it comes from the economy. It's already in the economy, and the package just moves this money to other places within the economy (usually less productive places).

Here is an alternative that would actually create real stimulus for the economy and help to pull us out of this economic downturn. This is a sane, reasonable, common-sensical, and very helpful set of policies that would actually work as a solution to our problems instead of exacerbating them with the same old thinking that has failed for decades now.

1. Cut Spending

The American Recovery and Reinvestment Act, while billed as a stimulus package, fails to do the one thing that would actually create stimulus for the economy, and that is cut government spending and inject the economy with the savings. As with many "controversies" in America, the argument over the stimulus is framed as one between the Democrats who want to spend more on infrastructure, renewable energy, and other projects, and the Republicans who want to spend more on tax cuts and creating more jobs right now. No one even stops to consider that a real debate would be over whether or not the government should be spending more in the first place. Less government spending would create real stimulus for the economy. Here's why:

The government siphons off trillions of dollars from the economy in order to fund its operations, most of which are non-productive, which is to say that they don't create wealth. It's no wonder that our economy experiences busts like the one we're in. Instead of just siphoning off even more money, only to put it back in the economy in less productive places, why not cut government spending and put that money into the economy? That would be real stimulus, it would infuse the economy with cash that would otherwise not be there because the government would be using it. We have a wealth of historical and comparative data that we can look at that proves this works. We can just look at the states: states that keep tax rates low and restrain spending growth have the best economic performance.

What we should do:

2. Auction Government Assets

The government should also sell off a lot of assets for fast cash to pump into the economy. Two lawmakers in Minnesota had this brilliant idea to help bridge budget deficits in their state (Hat Tip to Humble Libertarian reader Steve for pointing this out to me):

Two Minnesota lawmakers are asking the state's legislature to consider a proposal that would sell to private firms the Minneapolis-St. Paul International Airport, along with other state property and programs, in an effort to bring in roughly $6 billion or more.

It's a brilliant idea. The Federal government should sell off its mismanaged assets that lose money and don't create value for the American people. This will give it an instant shot of cash to pump back into the economy while creating value for the private companies that purchase these assets. It will also save on the future yearly costs of maintaining these assets.

What we should do:
  • Sell the U.S. Postal Service. "Mail service is becoming slower, more expensive, and less reliable. The United States Postal Service (U.S.P.S.) is probably the worst managed and one of the least honest corporations in America." These words were written in a Cato Institute policy analysis in 1985(!). How much truer do these words ring in the Internet age as the USPS continues to lose market share to FedEx, UPS, and e-mail?
  • In order to provide us an increasingly low-quality, poorly-managed, inefficient, and unneeded service, Americans pay billions every year to fuel and maintain the USPS fleet of over 250,000 vehicles, its huge staff (it's the third largest employer in the US), infrastructure, and operations costs.
  • The government could save in these yearly costs as well as generate an instant revenue influx by selling off all of these assets to companies that would use them more productively. It would create value for them and for taxpayers.

3. Repeal The Payroll Tax

Now if we take all the money saved by cutting back on government spending and plow that back into the economy in the form of permanent tax reductions, that is real stimulus! That's money that the economy would not have had because it's being used up by wasteful government programs that don't create wealth like the productive centers of the economy. For the reasons I mentioned above and elsewhere, if we don't match tax cuts with reduced spending, they aren't really tax cuts. In a phenomenal editorial on, Russell Roberts writes:

The payroll tax is a regressive tax that falls harshly on the poor. And it is deceptive, an unacceptable characteristic of a tax in a democracy.

Half of the payroll tax appears to be paid by employers. In fact, studies of the payroll tax show that the employer merely lowers worker compensation in response to the tax burden. So workers pay virtually the entire 15%.

Unlike a temporary rebate of payroll taxes, eliminating the payroll tax will change incentives facing firms and workers. The result will be job creation and increased worker compensation. The permanence of the change raises the effectiveness of that encouragement, again in contrast to a temporary rebate.

What we should do:

  • Repeal it and let the healing begin!

4. Reform Social Security and Medicare/Medicaid

Social Security and Medicare/Medicaid are welfare programs that have swelled beyond all sense of reasonable proportion because they are poorly defined and mismanaged. They should be reduced to their essential role as a safety net for the truly needy, saving the government and future generations untold billions. There is no reason why a poor worker should be contributing his hard-earned money to pay for a wealthy person's retirement. The wealthy retiree can and should take care of himself and the poor worker should be allowed to save his money in a private account that cannot be spent by the government.

The net present value of privatizing Social Security is estimated to be as much as $20,000,000,000,000. The historical data on countries that have privatized their government run pension-systems promises us great reward if we follow their example. When Chile made this revolutionary reform to its own government pension system in 1980, the results after 15 years were exemplary:

Pensions in the new private system already are 50 to 100 percent higher--depending on whether they are old-age, disability, or survivor pensions--than they were in the pay-as-you-go system. The resources administered by the private pension funds amount to $25 billion, or around 40 percent of GNP as of 1995. By improving the functioning of both the capital and the labor markets, pension privatization has been one of the key reforms that has pushed the growth rate of the economy upwards from the historical 3 percent a year to 6.5 percent on average during the last 12 years. It is also a fact that the Chilean savings rate has increased to 27 percent of GNP and the unemployment rate has decreased to 5.0 percent since the reform was undertaken.

More important, still, pensions have ceased to be a government issue, thus depoliticizing a huge sector of the economy and giving individuals more control over their own lives. The structural flaw has been eliminated and the future of pensions depends on individual behavior and market developments.

What we should do:

  • Make Social Security optional. The wealthy can take care of themselves and shouldn't be forced to participate, and it makes no sense for workers in lower income brackets to make contributions to wealthy retirees.
  • Give workers the option to put their money in their own, personal, private account. They'll have the assurance that the government can't spend their money. They'll also have the opportunity to grow their savings by investing it and they'll be fuelling economic growth in the process, injecting productive capital into the economy.
  • Reduce the size and scope of all three programs (Social Security, Medicare, and Medicaid) so that only the truly needy are eligible for benefits.

5. Repeal Sarbanes-Oxley and Other Regulations

Federal regulations have put businesses under a stranglehold for decades and cost them billions each year in compliance costs. If we really want to stimulate the economy, removing these unnecessary, ineffective, and stifling regulations is a great step forward. Sarbanes-Oxley in particular has got to go. It costs millions in compliance costs, purports to do what the new listing standards of American stock exchanges already do, discourages companies from listing on the stock exchanges, and increases the premiums for corporate liability insurance (source).

What we should do:
  • Repealing Sarbanes-Oxley is a great start.

6. Abolish the Fed

America existed for nearly a century without a central bank. During this time economic downturns were relatively short-lived and quickly corrected themselves. It was after the creation of the Fed in 1914 that we experienced the long, drawn-out and painful economic downturns of the 20th century such as the Great Depression, the stagflation of the 70's, the stock market crash of the 80's, and our current economic debacle. A quick review of its historical record is enough to see that the Fed doesn't really do anything to keep our economy and banking system secure. If you are an adherent to the Austrian school of economic theory, you'd even be inclined to think that the Fed does a lot of harm.

What we should do:
  • Abolish the Fed and sell off its assets.

7. Pass a balanced budget amendment

So we can never, ever, ever spend our way into this kind of mess again. When your financial situation is out of control, professional financial advisers make you cut up your credit cards. Our government is addicted to deficit spending and needs to kick the habit now. Not only will this prevent it from swelling to disproportionate and harmful sizes, it will free up credit markets and allow them to function more naturally without the disturbances of a giant government hogging up debt.

What we should do:
  • Amend the Constitution to require a balanced Federal budget. And NO exception clause in the case of open war. That's just going to incentivize the waging of pointless and destructive wars. People will be willing to fork up if their lives are truly in danger. If they aren't willing to fork up then and there, our nation's defense isn't really on the line, and we don't really need to fight the war.

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  1. Why dont they just give every one in the country a check for $2600 on the condition we must spend it within 30 days? That will stimulate the economy way more than the bailouts.

  2. It would be pretty tough to enforce that condition. They would have to monitor everyone's financial transactions (which is scary to a libertarian like me!) to make sure that we were all really spending it all within a month.

    Just as importantly, that check for $2,600 won't magically appear out of nowhere and stimulate each individual and household's budget. The government has to get that money from somewhere in order to give it to us. Guess where it gets it? It has to take it from us first (or it can run deficits and take it from us later)!

    Another option is just monetizing those deficits (just printing more cash) which causes inflation, weakening the value of the money we'd be getting and the money we already have, with the net result of stifling the economy rather than stimulating it.

    The best thing they can do is permanently lower taxes by reducing spending and trim away cost-incurring regulations that strangle businesses.

  3. Hi!

    I'm your reader from Croatia who has only recently came upon this excellent blog of yours. Although I don't necessarily agree with all of your attitudes expressed here, this blog has been my recommended reading for all who are interested how to change situation in Croatia.

    Actions in this article are prescription for Croatian politics and economy almost as much as for the US!

    Paragraph 4 also addresses very frequent objections about supposed "pro-wealthy, against average Joe" libertarian attitude.

    Entire libertarian philosphy also emphasizes personal responsibility for own well-being - deciding for yourself to whom and how to invest for own pension and medical care, for example - but unfortunately, many otherwise intelligent people are so brainwashed by "government knows best" propaganda that it's hard to make them think different.

    However, there's a hope and me thinks that people will begin to see through all of that mumbo-jumbo.

  4. Hey thanks for such an excellent comment! I appreciate your kind words and active promotion very much. I am certainly encouraged to know these ideas are reaching people in Eastern Europe and showing the power of liberty to create a flourishing society. And I agree... people are definitely beginning to see through all the mumbo-jumbo.