Stimulus and Confidence

The big question in economic crises is Confidence. When the stock market is going south and banks are going broke and everyone is worrying about a "double dip" they are looking for the magic bullet that will turn the whole thing around and restore Confidence.

In the liberal world-view, you restore Confidence with a stimulus program that keeps money in consumers' pockets and gives them Confidence in the economy's future.

In the conservative world-view, you restore Confidence with tax cuts that give businessmen Confidence that the future will allow them to make profitable investments and keep a good chunk of what they make.

James Glassman has a useful analysis of the current crisis of Confidence in "The Failure of the Liberal Economic Experiment?" in Commentary.

He argues that the stimulus hasn't worked because people are looking past the stimulus to the higher taxes and spending and heavier regulation that the Obama administration has so diligently been working on for the last 18 months.

If government spending is short-term or one-time-only, which is what the stimulus was supposed to be, then individuals might be expected to take a more benign view. But the 2009 stimulus did not take place in a vacuum. It was soon accompanied by other economic policies and proposals of the Obama administration and the Democratic Congress: health-care reform extending public coverage to 30 million new people, cap-and-trade energy proposals featuring vastly higher taxes, and the imminent expiration of the Bush tax cuts at the end of 2010.

American business leaders and consumers are not fools. They can see what is coming. They see that the Confidence-building stimulus was a bridge to nowhere.

Americans judged that the party in power intends the radical expansion of the size of government in perpetuity. That expansion will have to be paid for. There is no reason to expect very much good from the future if you are the sort of person who generates income and creates jobs. Your “permanent income” is going to decline, and your gut response will be to husband your resources.

Democrats have had this coming to them for a long time. They were lucky in the 1937-38 downturn resulting from increased taxes and higher union wages rates that World War II came along before they got pitched out on their ears. They were lucky in 1965-68 when their inflationary economic policies were drowned out by the Vietnam War. They were lucky in 1994 when Republicans gained control of Congress and reduced spending. They were lucky that the crazed credit subsidies at Fannie and Freddie crashed on Bush's watch.

But it is starting to look as if the American people are going to blame the Democrats for the current lack of progress on the economy. It is starting to look as if their luck is running out.

My guess is that the only thing President Obama needs to do to save his presidency is to extend the Bush tax cuts and lower corporate income tax in stages to 20 percent. Because that will restore Confidence in the future.

My guess is that he won't do it.