Thursday, February 25, 2010

More Stimulus and Sustained Loose Money

Many leading economists, businessmen, and politicians want more stimulus (jobs) spending and sustained easy money on the grounds that the economy is operating below potential and that inflation poses no near-term risk. They contend that inflation won’t pose a risk until hundreds of thousands of new jobs are created every month and the unemployment rate falls back to its previous lower level of 5-6 percent.

There are many reasons why the economy operates below potential. Among them are distortions due to the federal tax code, the burden of complying with thousands of federal regulations, government subsidies that misallocate capital, failing public schools and students in central cities, which total over a trillion dollars of costs imposed on the economy’s operating potential. Why are these issues largely absent from the economic policy debate? Evidently, it is easier to create and spend more money than reform the tax code, eliminate harmful regulations, improve public schools, and say no to subsidies for special interests.

Instead of fixing the big problems and others (I’m sure readers can add others to my brief list), we are going down the path of more and more debt, as if we can borrow our way to prosperity.

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