Dan

Calabrese

Read Dan's bio and previous columns here

January 21, 2008

Coming Recession? No Need For a ‘Stimulus Package’ to Tinker With the Cycle

The U.S. economy has been in constant growth mode since 2004, which amounts to a very admirable economic record for the presidency of George W. Bush. No matter what happens in the next 12 months, the major tax cuts he enacted in 2001 and 2003 have spurred the creation of wealth and kept unemployment low.

He has not, however, repealed economic cycles. And cycles being what they are, the economy cannot grow forever without some period of correction. This is normal, and is no reason to deviate from sound overall policy. But America’s political atmosphere is such that any correction or recession is viewed as a catastrophe to be prevented at all costs.

So Bush is planning to tinker with the economy by sending tax rebate checks, with the blessing of the Federal Reserve Board, to the tune of $150 billion. Already, others are calling for even more so-called stimulus. Mitt Romney wants to up the ante to $223 billion.

And all this because cycles are what they are. Well. I know about cycles, and about what happens when you endlessly tinker with them.

Last spring, I bought a kickin’ cool bike. The only thing I didn’t like about the bike was that they put the brake levers underneath the handlebars, and my knees hit them as I pedaled. No problem, I figured. I simply adjusted the levers to the front, and that problem was solved. But the adjustment put stress on the brakes, which no longer worked like I wanted them to. So I tinkered with that.

Long story short: By the end of the summer, the front wheel brakes didn’t work at all, I couldn’t shift into seventh gear and, for reasons I can’t quite explain in a column of this length, my handlebars were completely backwards.

I could ride the bike, but it didn’t work the way it was supposed to. Hey. I am not mechanically inclined. I can figure out ways to make things function, but as my dad once told me, “You don’t fix things. You jerryrig things.”

True. So after six months of jerryrigging my bike, I paid the bike shop $35 to fix it properly, and my bike was like new again. Its original construction was fundamentally sound, but all my tinkering had turned its few imperfections into major problems.

No cycle is perfect, including a fundamentally sound economic cycle. Ever since the Bush economic expansion began, the media and economic doomsayers have been predicting a recession right around the corner. This is what they do. Now that it appears one may finally be in the offing, Bush feels the need to tinker to try to prevent it. His $150 billion “stimulus package” is the jerryrigging of a fundamentally sound economy that, if left alone, will generally continue on an upward trend with the occasional correction.

To be sure, our nation’s economic policies are not perfect. The federal government spends too much money, which causes us to have to borrow too much and spend too much on debt service. This compromises the value of our currency. Americans spend too much on health care because we funnel too much of the spending through third-party bureaucracies who inflate the costs. We’re spending more than we should have to on energy because we refuse to tap domestic oil sources, thus making us completely dependent on $100-a-barrel oil from overseas.

Tax rates are lower as a result of Bush’s policies, and that’s good, but they could be lower still, and the tax code could and should be far less complicated.

Fixing all this would be a good idea, but it would not be an action designed to head off the low end of an inevitable economic cycle, although it would probably make future low ends less severe. Economic corrections are part of life. They happen on Wall Street all the time, but most traders understand that the general trend is upward, so while the media goes bananas every time the market goes down a bit, traders recognize it as an unremarkable fact of life.

The same is true of the broader economy. We don’t have to take heroic measures every time we think a recession may be coming. We need to adopt, and maintain, sound economic policies that promote more robust ongoing growth. Then the occasional recession will be no big deal.

Since Bush’s presidency began with the economy in recession, I suspect it is important to him not to see it end in one as well. That may add to his temptation to “stimulate” the economy and keep it growing for at least another 12 months. And I’m sure he doesn’t want a recession to give Hillary Clinton or Barack Obama an issue in the presidential campaign.

But short-term tinkering is no substitute for sound, long-term fiscal policies. Politicians always try to jerryrig the economy to prevent economic cycles from producing a recession on their watch. But I can tell you, nothing good happens when you try to jerryrig your cycle. And it would be a shame if such jerryrigging renders us incapable of shifting into high gear.

This is Column # DC145.  Request permission to publish here.