- The Washington Times - Friday, August 26, 2011

A quick check of congressional voting records confirms the obvious. When it comes to economic matters, members for the most part have no idea what they’re doing. They approve hundreds of billions in new spending year after year and call massive increases “cuts.” They seem confused when the only outcome is the predictable piling up of trillions more in debt.

The questions facing Congress on their return from recess include the possibility of another expensive stimulus, an extension in the payroll tax cut, and the three regional trading agreements with Colombia, Panama and South Korea. Since it’s unlikely many legislators toted along copies of great economists like Milton Friedman, Friedrich Hayek and David Ricardo to read while relaxing during the break, going over the basic principles of fiscal and monetary policy would help explain the consequences of their upcoming choices.

People - whether they act as consumers, investors or employers - are basically rational. They will not change long-term behavior in response to what they recognize as a short-term change. Resources are limited; our wants are not. Short-term fixes won’t cure long-term problems.

These common-sense ideas apply to the legislation that could put our children and grandchildren further into debt. Stanford University economist John Taylor’s lucid study on the impact of the first stimulus, which put us into debt to the tune of $825 billion, shows that the market’s response to the stimulus was entirely rational. According to the Obama administration, the stimulus was supposed to jump-start the economy by increasing spending by the federal government directly in infrastructure and other expensive projects, by consumers through a one-time payment via a tax credit, and through the state governments through various giveaways.


Turns out, there were almost no “shovel-ready” projects for the federal government to spend its borrowed funds on. Consumers, very sensibly, saved their little windfall. State governments, equally sensibly, either paid down debt or saved their federal funds. The entire stimulus was a bust. There is no reason to repeat that insanity.

There is talk of further “quantitative easing,” which basically means printing up a lot of currency and buying bonds in the hope the economy will be stimulated by the influx of cash. But interest rates are at historic lows. The interbank rate is 0.08 percent; the one-year Treasury yield is 0.11 percent. The excess reserves of banks have been growing steadily and are around $1.6 trillion right now. There is plenty of liquidity in the market. In fact, the more money there is in the system, the greater the risk of inflation. Inflation hurts the thrifty, the savers, whose money in the bank becomes worth less and who are already being hurt by the low interest rates, and it rewards the profligate who borrow too much. Are these the incentives we want?

Short-term fixes, like extending the payroll tax cut for another year, won’t fix long-term problems, including the uncertainty that businesses face. Corporations have cash but are reluctant to undertake long-term investment in an environment of regulatory uncertainty. A big chunk of this treasure is sitting and being invested overseas thanks to onerous U.S. corporate tax rates. The key to getting this money back into the system is a long-term strategy that involves serious tax and regulatory reform.

Nita Ghei is a contributing Opinion writer for The Washington Times.