To Spend or to Cut

As governments around the world struggle to deal with a global recession, a pressing decision must be made. It's not the decision to intervene or not that I'm speaking about -- if governments completely ignore serious crises, I don't know why they even need to exist. Even the most laissez-faire of elected governments are reluctant to play their fiddles while Rome burns, and authoritarian governments must fear popular uprisings when economic times grow difficult. From the Netherlands to the United States to China, governments are trying their best to rescue their economies from the hell of recession. Their most troubling decision is how to go about "fixing" economies normally (even in China) powered by a more or less free market. One way to go about this is to embark on ambitious stimulus spending programs designed to create short-term jobs, boost struggling economic sectors, and spur economic growth; another way is to cut taxes to put more money in people's pockets so that they may spend, save, start businesses, and invest on their own. While it is certainly possible to both spend and cut, there is a great deal of disagreement as to which policy is better for the economy.

Spending has the most positive immediate impact but also the most negative long-term impact. It is a double-edged sword that should be used carefully; I personally tend to think the stimulus bill being debated in the U.S. Congress has a little too much spending in its present form. While a well-run stimulus program can immediately put people back to work especially in areas like construction, the bigger it is the bigger the deficit that future governments will have to heal with either inflation or higher taxes. The money that flows freely today from government coffers comes with a price tag. On the other hand, it is irresponsible and cruel to ignore the sufferings of the people. To not spend in the name of fiscal conservatism as unemployment rises higher and higher would deservedly destroy confidence in government. Confidence is actually a key factor when we talk about stimulus spending. It's not like the government is going to permanently employ all the people it plans to put back to work in the short-term via stimulus spending; to do that, it would need to start nationalizing businesses and move away from a free market economy. Rather, what capitalist governments hope to do through stimulus packages is to give their economies a nudge so that private industry can ultimately take over again. Government just needs to get the ball rolling so that banks will feel more confident about lending, capitalists will feel more comfortable starting businesses, existing businesses will feel reassured enough to start rehiring and expanding, the labor force will not grow hopeless, and savers and investors will not utterly forsake the financial system. The danger here is that government will try to push rather than nudge. It's practically impossible to draw the line on "too much stimulus spending"; there's always someone else who needs a job, someone else whose living conditions could be improved, some other business that needs to be propped up, someone else who needs a loan or needs help making payments on one. Still, that line must be drawn somewhere, and it should be drawn at a point where the costs of the stimulus can be borne without unreasonable hardships being placed on future generations and administrations...I suspect even the current generation and administration will have to deal with inflation. On the flip side, the government could spend so little that there is no increase in confidence and no cascading effect, but I think it's wiser to err on the side of caution and start out small. If one conservative stimulus plan fails to have the desired effect, then pass another one that incorporates what worked from the first plan and expands it. Although the situation is dire, rushing to push a plan "too huge to fail" doesn't seem wise to me.

Republicans in both houses of Congress have opted to rally around the banner of cutting taxes to encourage growth. Though Democrats overwhelmingly support stimulus spending as well, there is also some bipartisan agreement that tax cuts and credits could be desireable as well. Much like spending, cutting taxes can be done in rather targeted ways. For instance, senators Boxer and Ensign want to cut corporate taxes on American businesses who are willing to reinvest their earnings "back home", an idea that President Obama also voiced support for during his presidential campaign. Mikulski and Brownback (yes, the former presidential candidate) want to give American buyers of new cars in 2009 a one-time tax deduction on their purchases -- a blatant attempt to prop up a struggling industry that is vital to the American economy. I kind of like both these ideas, but Boxer and Ensign's plan provides a good example of one advantage of the tax cutting strategy. Ultimately, private businesses are going to lead us out of recession -- encouraging companies to start reinvesting in their businesses now can create permanent jobs as opposed to the temporary jobs created by infrastructure stimulus spending. Another nice thing I like about tax cuts is that they can always be reversed back to their previous level; for instance, Mikulski and Brownback's plan specifies up front that the new car deduction is a one-time only deal. With stimulus spending, the government takes on a mountain of debt instantly and must carry it around indefinitely, dealing with it only at some unspecified moment in the future. That said, not all tax cut proposals are nearly so targeted as the two I just mentioned. Reducing taxes on individuals is also a popular idea at the moment, but it puts the onus on the public to stimulate the economy on their own. They have to spend more to encourage businesses to hire more, they have to save more to encourage banks to lend more, and they have to buy homes and stocks to reverse the deflation that has been evaporating wealth so rapidly of late. It's a more indirect way of doing things, and, although I approve of the government empowering individuals to make their own decisions with their own money, I think it's a slower approach that won't provide the same confidence boost that stimulus spending will.

It's easy to be seduced into thinking the differences between spending and tax cutting are more profound than they really are. Both can easily lead to huge deficits because tax cuts can reduce future government revenues. It's probably more important to use both tools wisely than to favor one tool over the other. I personally think some stimulus spending is definitely needed but that targeted tax cuts should probably be emphasized more. Obviously, the global economy is scary right now and I think the governments of the world have an obligation to at least try to do something. I have a feeling I'm going to think the stimulus plan that will ultimately be enacted in the U.S. isn't cautious enough, but I'll be as happy as anyone if it really truly does help the situation. The mountain of debt we are likely to have to deal with in the future will be a lot easier to handle if the future economy is prosperous.