Torch, Spring/Summer 2009

Spring–Summer 2009 | TORCH 15 What is the best way to stimulate an economy? Economists hold to two schools of thought with regard to stimulating the economy. One school would say that we should increase total demand for the country’s goods and services. We might call these advocates “demand-siders.” This is often done through increasing government purchases of private-sector goods. In a recession, private spending is down, so demand-siders would advocate substituting government demand for depressed private spending, often by using borrowed funds. The other school of thought would argue that the primary means of stimulus should be through the private sector. This would be accomplished by encouraging increased productivity, which would produce and supply more goods and services to the market in order to create jobs and incentives to motivate growth. Thus, these advocates have been called “supply-siders.” A primary tool used by the supply-siders is reduced marginal tax rates. In comparing stimulus plans available to the government, which options — consumer rebates, new jobs, or tax breaks — would provide the greatest benefit? Although consumers always enjoy getting a rebate, recent economic conditions indicate they are more likely to save it or use it to pay off debt rather than spend it. While saving and paying off debt are good for the individual, they do little to stimulate the economy. Likewise, new jobs are critical, but they cannot be created out of thin air. Since companies are ultimately responsible for creating jobs and producing resources, tax breaks for corporations would be one of the best techniques for stimulating the economy. Our corporate tax rates are among the highest in the industrialized world. Lowering tax rates will allow companies to regain profitability and, therefore, add new jobs to the economy. At what point does government intervention disrupt the free- market system, and at what point is involvement necessary? Government does play a very important role in the functioning of a free-market economy. With that in mind, government must ensure as stable an environment as possible for businesses to flourish by providing a legal environment that encourages fulfillment of contracts and protects against fraud. The “rule of law” must be enforced as a check on the power of government against citizens. When an economic choice is made, we need to be able to accurately predict the outcome of the choice; the governmental response cannot be arbitrary. The financial environment must be such that inflation is minimal and consistent. When the people perceive that the government is taking wealth against their will for a use they do not agree with, government intervention will begin to harm economic growth. A government that equally applies regulations is both consistent with and necessary for a free-market economic system. What historical situations can be evaluated as precedents for solving today’s economic problems? This recession has no perfect historical precedent. In terms of depth, today’s recession resembles the one of 1981–82. But that recession was triggered by contractionary monetary policy on the part of the Federal Reserve after