Clowns to the Left of Me, Jokers to the Right

With apologies to Bob Dylan, I am struck by the lyrics of his song, Stuck In the Middle with You, when evaluating our politicians' and Federal Reserve's responses to our current economic predicament. An excerpt of the lyrics includes:

Clowns to the left of me!
Jokers to the right!
Here I am stuck in the middle with you.

Yes I'm stuck in the middle with you,
and I'm wondering what it is I should do.
Its so hard to keep this smile from my face.
Losing control yeah I'm all over the place.

Clowns to the left of me!
Jokers to the right!
Here I am stuck in the middle with you.

On the left, Hillary Clinton has proposed a $70B self-described stimulus package. I say "self-described" because is a proposal that has no stimulus and in fact may have the opposite effect. It includes $30B of money for people in danger of foreclosure, $20B to pay for people's heating bills, and $10B for additional unemployment benefits. These may or may not be good things things to do, but there is nothing stimulative about them. When you take money away from people that are productive and from people who have the ability to create jobs, and give it to people that are not productive and do not create jobs, it is the opposite of stimulative. The non-producers are enabled and the producers are disincented.

I expect these types of policy oxymorons from the left. But what is even more frustrating is that President Bush and other Republicans are talking up some of the same type of demand side Keynesian nonsense. President Bush is discussing a tax "pre-bate" which would give money to to middle and lower income families. None of this is stimulative. It is just the government writing checks to redistribute income.

Let's extend the liberal demand side argument to its ultimate conclusion. What would happen if the government took all the money from the entrepreneurs, investors, capital creators, and producers and gave it to everyone else? Well, then there would be no economy. Stimulus incentivizes capital creation, investments, risk-taking and therefore productivity and job creation.

For starters the Federal Reserve needs to quit treating this an academic exercise and aggressively cut the target federal funds rate. Continuing to insist on a target rate that is inverted to the T-Bill rates is nuts. This effectively imposes a tax on member banks. The bond market is telling the Fed the correct target rate.

In contrast to Hillary's non-stimulus stimulus proposal the government can quickly add true stimulus to the economy. One simple way is to allow companies to temporarily accelerate depreciation. This will increase the velocity of new investments and will stimulate the economy. On a longer term structural basis the Congress needs to cut the corporate income tax rate so that the United States is more competitive with the rest of the world. This could also be done quickly and would be hugely stimulative to the economy.

Incentives matter. Risk taking and entrepreneurship matters. The continuing worldwide economic boom is a direct result of countries throughout the world adopting capitalist and supply side principles. Almost all of Eastern Europe has now adopted a flat tax. Growth in India, China and Eastern Europe is exploding as a result of these reforms. Meanwhile both the clowns to the left and the jokers to the right drift toward a Keynesian demand side funk that ignores incentives and will not stimulate the economy.