The Liberty Papers

It hasn’t been made official yet, but it looks like the Bush Administration and Congress have reached a deal on an economic stimulus package, the major component of which will include tax rebates of up to $ 600 per person:

WASHINGTON (CNN) — American taxpayers would get checks of several hundred dollars from the federal government under a plan to stimulate the economy, sources said Thursday.

Congressional leaders of both parties were talking with their membership to sell the plan, sources said.

Sources on Capitol Hill and at the Treasury Department said congressional and White House negotiators agreed upon checks of $600 per individual and $1,200 per couple who paid income tax and who filed jointly.

People who did not pay federal income taxes but who had earned income of more than $3,000 would get checks of $300 per individual or $600 per couple.

A Democratic aide and Republican aide said there will be an additional amount per child, which could be in the neighborhood of $300.

Concidentally, Don Boureaux points out in today’s Christian Science Monitor why such “tax rebate” plans won’t do anything to stimulate the economy:

Government cannot create genuine spending power; the most it can do is to transfer it from Smith to Jones. If the Treasury sends a stimulus check to Jones, the money comes from taxes, from borrowing, or is newly created.

If it comes from taxes, the value of Jones’s stimulus check is offset by the greater taxes paid by Smith, who will then have fewer dollars to spend or invest. If Uncle Sam borrows to pay for the stimulus checks, this borrowing takes money out of the private sector. Any dollars borrowed – whether from foreigners or fellow Americans – for purposes of stimulus would have been spent or invested in other ways were they not loaned to the government.

The only other means of paying for such stimulus is for the Federal Reserve to create new money. Unfortunately, this option leads inevitably to inflation.

All Americans wind up with more dollars in their wallets but also paying higher prices in the stores. Prosperity is not created by raining down upon the populace more monochrome pictures of dead statesmen.

Stimulus funded with newly created money is especially harmful. Most obviously, the inflation it causes prompts investors to flee the dollar. But because inflation can take time to show up, injecting new money into the economy can create a temporary sense that consumers and investors are wealthier than they really are. Such a false sense dangerously delays the necessary pruning of unfruitful investments. A bad economy is prolonged.

Creating a “temporary sense” that the economy isn’t really that bad is, of course, exactly what the politicians are aiming for here. They’re not aiming to actually fix what’s wrong, they’re aiming to make it seem like they fixed it in time for the upcoming elections. Which is why both political parties, Republican and Democrat, are behind the idea and why it’s taken less than a week from when President Bush first spoke about a stimulus package for Congress and the White House to reach an agreement. It’s in both their interests to make people think that they’re doing something that will help, even if it won’t.

Instead of the temporary fixes that Washington is concentrating on, Boudreaux says that politicians should focus on fixing the fundamentals and stop engaging in policies that discourage investment and growth:

First, Mr. Bush should call for a substantial and permanent cut in both capital-gains and personal-income tax rates.

Next, he should insist on a large reduction in federal spending, including elimination of all agricultural subsidies. While he’s showing such courage, he might as well unconditionally endorse free trade.

Cutting taxes is, of course, a good thing, but it’s important to know why. The goal would not be to increase consumer spending. Instead, it would be to raise the returns on investment and work.

By letting investors and workers keep more of the fruits of their risk-taking, creativity, and efforts, the economy will enjoy more risk-taking, creativity, and effort. Businesses that would otherwise not be started would be created. Likewise with machinery and training that increases worker productivity. Investors worldwide would flock to take advantage of these lower tax rates, further increasing productive investments.

(…)

Finally, Bush should assure the Board of Governors of the Federal Reserve that he neither expects nor wants them to use monetary policy politically. Reminding them of the wisdom of Milton Friedman, he should strongly urge them to keep a tight rein on the money supply.

Of course, as Boudreaux notes, none of these policies will have the immediate impact that politicians desire, and none of them will be as readily apparent to voters as a $ 1,200 check in their mailbox, which is exactly why thery won’t be adopted.