Fareed Zakaria argues along lines similar to the points I made yesterday. Tax cuts are just about played out as a means of fiscal stimulus and founding an economic policy based on them is just handwaving:
In the wake of a financial crisis caused by excessive debt, tax cuts are highly unlikely to lead to increased economic activity. People use the money to pay down their debts rather than shop for cars, houses and appliances. As for the idea that job creators are not creating jobs because their taxes are too high, think about it: Would Mitt Romney invest more of his money in American factories if only he had paid less than the 13.9 percent rate he paid last year?
However, as we’ve learned over the last several years there are no shovel-ready projects. This morning I heard Larry Summers being interviewed, making his case for borrowing money at today’s low interest rates and bringing forward maintenance projects which would otherwise be necessarily performed some time in the future, say, rebuilding Kennedy Airport.
The reason that’s not done is that there are no plans in place for doing it, it will take years to put together such plans, approve them, and let the contract, and the bidder to whom the contract would ultimately be let is a large, established company with a proven track record and incentives to perform the contract, now five or ten years from today, with the equipment and labor it has on hand rather than purchasing new equipment or hiring new workers. Construction projects aren’t performed the way they were during the Depression of the 1930s any more than banks operate the way they did in the 1830s.
This is not to say that there aren’t substantial, worthwhile infrastructure projects that would contribute materially to our productivity in the future. However, those projects would not do much for our economy now. Congress does not possess that kind of foresight; its vision extend mostly to the next election.
So, fiscal policy is just about tapped out as a means of boosting our economy out of the doldrums. Federal Reserve Chairman Bernanke has made it pretty clear that he is disinclined to use monetary policy to goose the economy, either. That leaves what we dread most: changing our behavior. Our behavior must change in such a way as to produce more economic activity rather than less.
Today 70% of the economy depends on personal consumption. That’s more than any other OECD country and higher than it was here not all that long ago. 70% personal consumption expenditures is not a law of nature.