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Slash and Burn

Mises Daily: Tuesday, November 18, 2008 by

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There is more talk about another stimulus package to help save the economy. Word from Washington predicts that a package that includes extended unemployment benefits, food stamps, and another tax rebate check will pass in a forthcoming lame-duck session of Congress. All of these remedies actually make the patient sicker, but there is a way for Washington to really stimulate the economy.

Paying people not to work increases unemployment and every study has confirmed that extending unemployment benefits also extends unemployment. The first tax rebates did not work and a second check is not going to cure our problem of overconsumption. Of course the stimulus package will increase the deficit and debt for the world’s largest debtor nation. More food stamps are certainly not the cure-all for a country whose most pressing problem in low-income groups is obesity!

Slash

Government can stimulate the economy by doing three things. The key is to make available tangible resources and profitable production opportunities. First, slash spending. Second, slash taxes. Third, slash open production alternatives for labor and capital in the economy.

Spending can be “slashed” by simply making the current federal budget subject to proration so that the federal budget must be balanced by spending cuts (i.e., no deficit). States have to do this every year, so we have plenty of experience with the concept. I know this is not much of a reduction, but it does send an important message and it does release real resources from the clutches of the federal government and places them back into the productive economy.

Taxes can be slashed in any number of ways, but it would be best to emphasize taxes on saving and production. My favorite would be to eliminate taxes on interest, dividends, and capital gains, but I would also be open to a systemwide reduction on all taxes. Reducing taxes makes production more profitable.

Slashes for category three involve the federal government turning over existing resources to the private sector and opening up other profitable production processes that are currently restricted by government. An example of the first type would involve the government auctioning off oil in the Strategic Oil Reserve fund. The result would be more oil and lower prices in the economy. The government has plenty of land, natural resources, and real estate that could be auctioned off.

A simple example of the second type would be the minimum-wage law that prevents workers with low productivity from obtaining a job. There are tons of labor regulations at the federal and state level which prevent job creation and slashing them would be a beneficial antidote for the crisis. Simply allowing midwifes to go into business creates jobs and cuts the cost of giving birth by up to 90%. The same goes for capital. Regulation and antitrust policies are a tremendous roadblock for companies that are trying to survive this crisis. The federal government expends tons of taxpayer money preventing mergers and takeovers in the auto and airline industries only to later provide bailouts and merger-aid packages.

We can even combine the slashing approaches. For example, the federal government could auction away the rights to build electrical power plants, mini electric grids, oil refineries, port facilities, roads and airports on federal properties. All five (and probably many more) are currently underproduced due to regulatory strangleholds at the state level.

In this manner federal properties could become free-market, tax-free areas providing increased energy and enhanced transportation facilities throughout the country. Plus, it would mean turning over productive resources to the private economy, so it’s a win-win proposition that addresses both the recovery from the crisis and some of the daunting longer-term needs of the American economy.

Burn

The question is, what is to be done with all the money from these auctions? I would imagine that some airline would be willing to pay big for the rights to convert the military airport in North Atlanta into a commercial facility (by the way: private airports would solve many problems that are currently associated with airlines rather than airports). I would also imagine that an oil-producing country would be willing to pay big bucks for the right to build a port facility, oil-refinery, and a pipeline distribution network on federal property in a state like Florida.

Some people would want to use all this money to help the poor or to bailout business. Others would want to pay down the national debt, to pay for increased regulation of business, or to subsidize something like stem cell research. However, the best use of the money would be to burn it. That’s right. Burn it. The problem of the housing bubble and credit crisis stems from too much money, and it would be a good public demonstration that more money is not the answer.

For the most part people would see no impact (positive or negative) from burning the money. However, it would do some good in two respects. First, it would keep the government from doing more harm with the money because everything they offer does not work and only makes the problem worse. Second, by decreasing the money supply, it would make all existing money in people’s pockets have greater purchasing power.

So a truly effective stimulus package would be to slash and burn.