Uh-oh, the Administration Is Contemplating Further Stimulus

Despite all of the smiley faces that journalists for the mainstream news media continue to paste on their reports about recent economic developments, the official unemployment rate now verges on 10 percent, and various economic indicators signal a discouraging prospect for the near-term future. Republican partisans, willing to grasp and exploit any passing news that seems to discredit the ruling Democrats, trumpet the conclusion that “the stimulus has failed.” I don’t dispute that it has failed and that it will continue to do so, but my reasons for this judgment have nothing to do with partisanship, inasmuch as I loathe both parties equally — indeed, I don’t regard them as two parties at all, but only as two wings of a predatory one-party state. In any event, though, there’s trouble in River City, and the politicians have naturally decided that “something must be done,”  lest the peasants grow dangerously restive.

Whence cometh a good deal of talk about “more stimulus,” although administration spokespersons such as Larry Summers are quick to distance themselves from this phraseology, if not from the substance it denotes.  So, what exactly do our glorious rulers have in mind? According to the Wall Street Journal,

Obama administration economists said they would like the enhanced unemployment-insurance program to extend beyond its Dec. 31 expiration date. They also want to maintain a program that offers tax credits to pay 65% of the cost of health insurance policies under the COBRA program, which allows laid-off workers to purchase the health plans they had through their previous employer.

White House officials said they also are examining whether to extend a soon-to-expire tax credit for first-time homebuyers, but that provision faces a stiffer headwind.

If these ideas are the best ones that the administration’s economic geniuses can come up with, the economy is heading for even rougher waters.

To understand why, recall that lesson one in public-policy economics is this:  if you want less of something, tax it; if you want more of something, subsidize it. Extending the term of unemployment-insurance benefits and offering tax credits to cover 65 percent of the cost of maintaining health-insurance coverage for the jobless in effect subsize unemployment: these measures lower the cost of remaining unemployed by reducing the employment benefits the unemployed forgo. Hence, unemployed people will search for new jobs less actively, and they will be more likely to turn down a job offer that does not provide the same compensation they received in their previous jobs. Thus, these measures will keep the unemployment rate higher than it otherwise would have been, magnifying and prolonging the recession.

Political realists might also note that the continuation of high unemployment will increase the demand for government rescues of various sorts. In this way, the government gets, as it were, just what it (which is to say, the taxpayers) pays for, namely, continued excuses for its bulked-up spending (i.e., vote buying). So, before you accuse administration officials of contemplating the adoption of crazy policies, consider that these politicians may actually be crazy like a fox.

Extension of the tax-credit for first-time homebuyers is a looney idea for somewhat different reasons. To understand this measure’s perniciousness, recall that our present economic difficulties spring in large part from the de facto subsidies that various public policies created during the earlier years of this decade for home purchases by people who, absent those subsidies, could not afford to repay the requisite mortgage loans. Now, while the economy is still deep in the quicksand of millions of mortgages in delinquency or default, with many others likely to be in such trouble soon, the government is considering the extension of a measure that — strange to say — again tempts people who cannot afford the mortgage payments on a home purchase to go ahead and purchase it nevertheless. By such “caring” policies, the government lures people who cannot swim into waters much too deep for them to stand in, with predictable results looming not far in the future.

Again, however, the government may simply be seeking to keep the economy in trouble as long as it can do so, because as long as the troubles continue, the demand for the government’s salvation will remain at its present elevated level. Think of the policies the administration is now contemplating as parts of a perpetual-motion machine for government spending and the willful distortion of market pricing and resource allocation. And who can possibly object, unless it be a taxpayer or someone with an interest in the creation of wealth in this country? In politics, of course, such old-fashioned naysayers count for practically nothing.

Robert Higgs is Senior Fellow in Political Economy at the Independent Institute, author or editor of over fourteen Independent books, and Editor at Large of Independent’s quarterly journal The Independent Review.
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