Thursday, February 18, 2010

If Congress and Obama were serious about 'stimulating' the economy, they should agree to do nothing...

Again, if Washington were inclined to do something to 'stimulate' the economy, they would concentrate their efforts on doing things to make consumers and businesses more optimistic about the future... and not, as they seem to be doing, passing a bill that has lots of spending and tax cuts that will do little if anything to improve spirits.

Getting a tax credit for hiring a currently unemployed worker? It's nice for employers who were going to hire, but I can't see a single employer hiring someone if they don't think their revenues are going to go up by more than the (net) cost of the employee. And neither do I see consumers becoming more confident because of this, this program isn't going to make people who have jobs any more comfortable about their personal finances and certainly not enough to where they're going to increase their spending.

Increasing small business depreciation? Again, it is nice to have if you were already planning on buying some new equipment. But I don't see why a business that was hoarding cash because of economic uncertainty is going to dip into their reserves to buy equipment without being more confident that their future revenues will hold constant, and this isn't going to do so.

Unfortunately for the economy, both Congress and Obama don't understand basic economic theory... and by that I don't mean the theory practiced by Nobel Prize winners, but rather the deliberations that every consumer and every business goes through in deciding what actions to take at a given time. Consumers who think their job prospects are solid and who aren't afraid that the value of their house and 401(k) is going to crash are consumers who are willing to spend. Businesses who aren't afraid that next quarter's revenues are going to be less than they are now are businesses who are willing to hire and buy equipment to go after new business.

Thus, the best economic stimulus are those things that make people less worried about the future and more confident that the future is brighter. Unfortunately, pretty much everything Washington is doing only makes people nervous. Congress and Obama need to stop scaring people with talk about higher taxes, more regulation and more spending.

As long as the public has a negative opinion of Congress and Obama, the more the public thinks that Congress and Obama just screw up whatever they touch, the more the public hears of Congress and Obama wanting to do X or Y, the more nervous the public is going to be.

Given this, what Congress and Obama need to do is to do nothing. That is what the doctor ordered. And that is exactly what they won't do.