[StBernard] Wanted: A Non-Keynsian President

[Westley Annis]

Wanted: A Non-Keynsian President
Brian S. Wesbury and Robert Stein 11.04.08, 12:01 AM ET


One of President Bush's most lasting economic legacies will be his use of
temporary, Keynesian-type, fiscal stimulus in an attempt to manage the
economy and offset recessions.

Back in 2001, Treasury Secretary Paul O'Neill got the ball rolling by
insisting that the first round of Bush tax cuts include a $300 rebate per
taxpaying adult, which was distributed in checks sent out from July through
September that year. The rebates were designed to give the economy a
temporary boost in the face of recession.

Then, in 2003, middle-income taxpayers were given an "advance" payment of
$400 per child for the increase in the child tax credit made law that year.
Otherwise they would have had to wait until early 2004. This time, the idea
was to "jump start" the economy into faster growth. Next, came the rebates
passed out earlier this year: $600 for most taxpaying adults, and many who
do not pay income taxes, plus $300 per child. Like 2001, the checks were
designed to avert or diminish a recession.

Monetary policy has not missed the stimulus party, either. Alan Greenspan
cut interest rates to 1% in the early 2000s in order to boost the economy,
while Ben Bernanke has done the same this year.

Policymakers have been way too focused on the short term so far this decade,
which stands in marked contrast to the thrust of policy from 1981 through
2000, when policies coming from the White House, both Republican and
Democrat, were more focused on the long-term health of the U.S. economy. 

What's worse is that the stimulus measures didn't work. In fact, the 2001
rebates, because they increased the short-term cost of reducing taxes,
caused President Bush to phase in cuts to marginal income tax rates. This
slowed the economy, as investors and businesses postponed activity and
income recognition, waiting until tax rate cuts were fully phased in. And
easy monetary policy not only helped create the housing bubble, but has
pushed the U.S. back to its first fight with inflation since the 1970s.

We are concerned that whoever wins Tuesday's presidential election, they
will attempt to use this same short-term, Keynesian-type stimulus. Sen.
McCain has argued for $300 billion in short-term spending to help people
with troubled mortgages. Sen. Obama has signaled his support for House
Speaker Pelosi's quest for yet another short-term stimulus package. The
Speaker's plan is focused on a combination of tax rebates, extended jobless
benefits, expanded food stamps, aid to state spenders and infrastructure.

There is nothing wrong with boosting infrastructure spending, where needed.
But that policy change should be directed at efficiently meeting long-term
building goals, not just timed to boost the economy when policymakers think
it needs boosting.

As a whole, another short-term stimulus will just leave the U.S. deeper in
debt with no change in the incentive to work, save or invest, meaning
workers and investors have to pay higher taxes in the future. If the new
president wants to quickly send a positive message to the markets, he should
announce that the era of short-term management of fiscal policy is over.

The model to follow would be President Reagan in early 1981. Soon after
taking office, President Reagan met with Federal Reserve Chairman Paul
Volcker at the White House. The message was clear: The White House was
giving the Fed carte blanche to bring down inflation. If the economy needed
a stimulus, it would come from lower tax rates, not lower interest rates.

While previous presidents of both parties--LBJ, Nixon and Carter--saw
monetary policy as a way to boost the economy in the short term, Reagan knew
that the economy's long-term health required stable prices. We're hoping
that no matter what has been said on the campaign trail this year, the next
president realizes it's time to focus on the government's long-term fiscal
health. This means keeping burdens on entrepreneurs at a minimum, while
fighting as hard as possible to keep prices stable.

Brian S. Wesbury is chief economist, and Bob Stein senior economist, at
First Trust Advisors in Lisle, Ill. They write a weekly column for
Forbes.com.