Fiscal policy

Anti-recessionary policies borrow from the future to ease present pain. The key is to make sure that fighting this recession doesn’t do too much long-term harm. It is appropriate to spend hundreds of billions of dollars to get credit flowing again, but not every bank needs to be saved. The Treasury Department is too afraid of bankruptcy and receivership, which means that too much taxpayer money is going to help bank owners and creditors.

The stimulus package had three core elements: tax cuts, aid to states, and direct federal spending.

Reducing taxes, especially the payroll tax on poorer Americans, is a relatively straightforward and sensible way to encourage more economic activity. Aid to states is a reasonable response to balanced budget rules that would otherwise cause states to massively cut spending during a recession.  The most worrisome aspect of the stimulus package is the vast increase in direct public spending. Public projects are better judged on their own merits, not as parts of a use-it-or-lose-it recovery plan.

The most worrisome developments are the creeping abandonment of some key pillars of sound policy: free trade, private ownership, and rule of law. The “Buy American” clause in the stimulus package was an embarrassing moment of neoprotectionism.  Public management of General Motors is misguided.  The punitive 90 percent bonus tax was egregious expropriation. The United States is going to leave this recession with a massive public debt, and it shouldn’t also lose the basic ingredients of economic success.