Forget short-term bail-outs and short-term stimulus packages; there is little, if any, evidence that they have much effect. Instead, says an unattributed column in the European WSJ, it is better to concentrate on policies that at the very least will not inhibit future growth [h/t to Eva]:
The contraction is expected to continue at least until the middle of next year. No doubt, pressure will mount on governments "to do something" and the G-20 already vowed to use "fiscal measures" to shore up the global economy. The danger is that the euro zone may repeat the mistakes of so many others past and present: Fiscal pump-priming that may "spread the wealth" but won't create any wealth. Instead, taxpayers would be saddled with higher government debt.
Over the past few weeks, Japan and China have taken the lead, unveiling massive fiscal packages. President-elect Barack Obama has also called for another stimulus (on the heels of a failed one) as the current U.S. Administration, as well as Berlin, consider bailing out the auto industry. In Britain, Prime Minister Gordon Brown appears within days of announcing his own package of fiscal measures. Details are still sketchy.
If Europeans, or anyone, really want to stimulate their economies, they will be wasting time and money with tax rebates or public works programs. The stimulus with the proven track record at jump-starting economies is the one least often contemplated: a simple, visible marginal tax or payroll cut that would boost long-term incentives to work and invest. Lower payroll taxes, for example, would reduce labor costs, thus helping to preserve some jobs now while ensuring that any future recovery will be stronger.
Yes, but this leads us back to the labor supply elasticity debate, so I'm not sure if it's any better...
Posted by: Gabriel | November 19, 2008 at 11:19 AM