Stimulus, for Sure, But What Stimulus?

We’re at the point of the business cycle where governments enact bold stimulus programs.

Yes, but what stimulus? What package of economic measures will get us out of the present economic malaise most effectively?

We’ve already done the monetary thing, and how. The Federal Reserve System is pumping liquidity into the world like there was no tomorrow.

But what about fiscal stimulus? It is over fiscal stimulus that the two political parties disagree, as Michael J. Boskin, a McCain adviser, makes clear. The Democrats believe in helicopter money, and the Republicans believe in changing the rules, principally by manipulation of marginal tax rates.

The big risks are higher taxes, protectionism, regulatory micromanagement, vast new spending, subsidies and mandates. Recall that the stock market crash of 1929, and the ensuing recession, were turned into the Great Depression by tax increases and protectionism (and bad monetary policy).

It doesn’t take a genius to see that Democrats would find it very hard to resist a program of vast new spending, subsidies, and mandates. After all wasn’t that what FDR did to beat the Great Depression?

Yes, he did, and conservatives believe that it was the spending and the subsidies, and the new mandates in labor law that prolonged the Great Depression.

Capitalism, wrote Joseph Schumpeter, is a process of creative destruction. It is continually creating new businesses out of the ruins of old businesses. As such it is anathema to the politician, who creates new programs to last, he imagines, for all eternity, and to the homeowner, who builds a house to last for a lifetime.

We are going to see a lot of creative destruction in the next year or so. But it’s the only way. The malinvestments must be liquidated in a bonfire of the vanities, and out of the ashes will rise a new economy.

What the government can do is help people in the painful transition from today to tomorrow. It is human and compassionate to give people a hand as they pick their way over the rubble. But the heavy lifting will come from intrepid businessmen starting new businesses and expanding old ones in the teeth of the present panic. What does the government propose to help them?