Economists Gary Becker and Kevin Murphy of the University of Chicago largely have the right idea when it comes to fiscal stimulus in a very insightful February 10 editorial in the Wall Street Journal, entitled "There's No Stimulus Free Lunch." Both are senior fellows at the the Hoover Institution, a distinguished free-market think tank.Messrs. Becker and Murphy make a number of interesting points worth mentioning:
- While in theory, government stimulus will put unproductive resources to work in a recession, "much of the proposed spending would be in sectors and on programs where the government would mainly have to draw resources away from other uses." In other words, much of the spending is in areas which are already at full capacity. Capital and labor are thus not being underutilized and the net economic stimulus will be minimal and perhaps even negative.
- Though supposedly temporary, such dramatic expansions of government are likely to remain permanent. "Once created they [new spending programs] tend to survive and grow over time, even when the increases initially were said to be temporary. The underlying reason for this is that interest groups develop around new and expanded programs, and they lobby to keep and expand those programs."
- There simply is no government spending free lunch. "The increased federal debt caused by this stimulus package has to be paid for eventually by higher taxes on households and businesses. Higher income and business taxes generally discourage effort and investments, and result in a larger social burden than the actual level of the tax revenue needed to finance the greater debt. The burden from higher taxes down the road has to be deducted both from any short-term stimulus provided by the spending program, and from its long-run effects on the economy."
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