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Smith
Faculty Opinion Article
The 30
Seconds Outlook
March 1, 2009
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“There’s a big difference between tax rate changes and things that just look
like throwing money at people. Tax rate changes have actual incentive
effects. And we have some experience with those actually working [1963, ’64,
’81. ’83, ‘86].”
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—Robert Barro, Macro-economist, Harvard University, Wall
Street Journal, February 11, 2009.
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On February 11, the DJIA fell 5% in locksteps coinciding with the timing of
statements by Geither, Obama, and Bernanke on the bank rescue plan and stimulus
bill. In this one day, the market was acting as a Benjamin Graham “voting
machine,” anticipating the success of these plans. The market acted as a “poll”
on the likely success of the spending, and said, “not likely.”
The market poll agrees with February 12 news polling that found a 12% drop in
support of the stimulus bill over just the past month. Other polls found: (1)
62% say tax cuts would be more effective than government spending, and (2) 60%
say the government will spend too much. Polls indicate that the more people
learn about the stimulus package, they less they like it.
Obama’s stimulus plan is based on a paper by two advisors. They estimate that
the “multiplier effect” of government spending will increase GDP, and, using a
rule of thumb, for each 1% increase in GDP 1 million jobs will be created. Have
they read Professor Barro’s research on this topic?
Obama’s “rosy scenario of the effectiveness of his stimulus plan also differs
importantly from analysis by the Congressional Budget Office. CBO analysis finds
that it is difficult to design an effective stimulus plan on such a large
scale---that the plan will have a negligible impact on jobs creation and will
reduce economic growth and prosperity over the next decade.
The promise of the stimulus plan is thus far from a “slam dunk”---it may be
the largest peacetime spending bill in history, but with continuing recession,
increases in regulation, huge deficits, high inflation, and large tax increases.
If this is correct, will we be waiting in line for gas again—the 70s revisited
with a vengeance?
John A. Haslem
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