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American Exceptionalism in Economic Policy

by Colin Gustafson
Fri, 8 Feb 2008 at 10:28 AM

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As the possibility of a recession looms, foreign economists are criticizing American policymakers for adhering to the belief that they must avoid a recession at all costs — be it through tax rebates, as proposed in the $145 billion economic stimulus package, or cuts to the Federal Reserve's key interest rate.

Some critics are even urging America to heed the advice of policymakers from developing nations who have sidestepped similar financial woes through fiscal restraint rather than stimulus packages.

An economist at the University of Oregon, Mark Thoma, could not disagree more.

He writes (Economist's View) that the nation's policymakers are wise to resort to fiscal and monetary measures to forestall the problems currently threatening financial markets.

The goal is not to keep troubled financial institutions, such as subprime lenders, from facing the consequences of their bad decisions, but rather to prevent the turmoil they cause from dragging down the rest of the economy.

"Why risk a severe downturn?" he asks. "We should certainly do all we can to maximize the effectiveness of policy."

Another blogger, Yves Smith, contends (Naked Capitalism) that Americans could learn a lesson from foreign economists who say America should wean itself off its "debt habit" and not rely on bailouts.

"Prideful inability to recognize how rapidly our standing is slipping," Mr. Smith writes, "will almost certainly prevent us from learning invaluable lessons from those who have been down the painful path we are on."

AN ALTERNATIVE TO THE STIMULUS PLAN
Since the president first proposed a fiscal stimulus package last month, an economist at George Mason University, Alex Tabarrok, has opposed it. Now the professor writes (Marginal Revolution) that he has come up with a better, more cost-effective plan to spur America's ailing economy: cutting in marginal tax rates.

Rather than writing rebate checks to taxpayers, Mr. Tabarrok suggests that the government should decrease people's marginal tax rates based on the income they earned last year. By doing so, the government not only would incentivize productivity, but also would generate more tax revenues.

Supporters of the stimulus legislation currently moving through Congress contend that rebate checks for taxpayers will spur consumer spending while boosting investor confidence.

But critics say the rebate checks will be too small and arrive too late to be effective. And at a cost of billions of dollars, these critics say the checks will only deepen the budget deficit.

"Note that [my] plan increases the incentive to work and it doesn't increase the deficit," Mr. Tabarrok writes. "In fact, the 'Tabarrok plan' increases tax revenues!"

For more insight from the country's leading economics blogs, go to nysun.com/blogs.php.

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