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January 8, 2009

How to Stimulate the Economy

Quote of the Day: “The permanent income hypothesis (PIH) is a theory of consumption that was developed by the American economist Milton Friedman. In its simplest form, PIH states that the choices made by consumers regarding their consumption patterns are determined not by current income but by their longer-term income expectations.” — from Wikipedia

Subject: How to stimulate the economy

The President-elect wants the proposed stimulus bill to be 40% tax cuts. That’s good. But he wants those cuts to be one-time reductions. That’s bad.

The politicians want to prop up businesses by stimulating consumer spending. One-time tax cuts will not accomplish this.

Milton Friedman won the Nobel Prize for showing that consumers don’t spend based on short terms gains, but only on expectations of what their long-term income will be. This fact was validated yet again by the fate of the recent “stimulus” checks the government mailed to everyone. Most people did not spend this money, they saved it or used it to pay down debt.

If the politicians really want to stimulate spending they should pass permanent tax reductions.

The politicians claim this would add too much to the deficit. They could solve this problem by cutting spending — by Downsizing DC. But the politicians claim we need increased government spending to substitute for reduced consumer spending. Several recent studies indicate that there’s little evidence to support this theory.

The politicians promise that this stimulus program will be different. They’re going to focus on building productive new infrastructure that will aid economic growth. But how do politicians know what will be productive and what will not? And why should we believe that this massive spending won’t be junked up with pork and corporate welfare?

Daniel J Mitchell of Cato Institute makes the following points . . .

* The jobs the stimulus package is supposed to create will cost about $280,000 each, assuming the jobs materialize (this is according to the calculations of Greg Mankiw at Harvard)
* The true cost of these jobs will be even higher because we must also include the “opportunity costs” of what could have been done with the money instead
* To the extent the new jobs are government jobs the cost could be even higher. The Bureau of Economic Analysis calculates that federal employees earn nearly twice as much as private sector workers.

In addition, the money for the stimulus package must be borrowed, which will add long-term interest costs. 

All of these concerns disappear if the government doesn’t spend the money, and instead leaves it in the private sector.

The politicians could stimulate businesses to use this money to create new goods and services, and consumers to feel confident about being able to afford these goods and services, by cutting regressive forms of taxation permanently. The politicians should immediately eliminate the . . .

* Capital gains tax (which discourages investment),
* Corporate tax (which is merely passed on to consumers),
* And reduce the regressive payroll tax, which does not need to be so high in order to pay for current entitlement expenses

Permanent tax reductions would . . .

* Make new investments and businesses profitable
* Convince consumers that their incomes will be higher for the long run
* Increase investment, job creation, and consumer confidence

Please send Congress the following messages . . .

Ask them to oppose so-called stimulus spending. Use your personal comments to point out the lack of evidence that government spending stimulates the economy.

Then, please also ask for permanent tax reductions. Use your personal comments to point out Milton Friedman’s findings that only permanent changes in income stimulate consumer spending. Ask Congress to repeal the capital gains tax and the corporate tax in order to boost employment, and to reduce the payroll tax so as to increase consumer confidence.

After you’ve sent these messages please think of at least two people who would really like and agree with this message. Forward it to them, one at a time (instead of to your entire address book), with a personal note telling them why you thought of them when you read this message. Encourage each of them to join you in sending a message to their representatives in Congress. If everyone reading this list did that, we could wake up to find our Downsize DC army doubled in size!

Thank you for being a part of the growing Downsize DC Army.

Perry Willis
Communications Director, Inc.

P.S.  Not all new office holders have Internet contact pages yet. We are updating our system as the new contact pages come on line. Your message will go through to any of your representatives that remain the same, or for which we’ve received new information. Don’t let this transition slow you down. Your message will get through to someone. It will make a difference. Take action!

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