Gimme Shelter

In our heads, we all know that there is no such as the Tooth Fairy as Arthur Laffer reminds us in today's WSJ in a piece called That Stimulus Nonsense (free for all):

In this world of ours, those resources going to the rebate recipients don't come from the Tooth Fairy. They have to come from workers and producers. If the resources come from workers and producers who thereby receive less for their work than they otherwise would have received, won't they in turn spend less? Of course they'll spend less, and the people who now supply them with less will also spend less, and so on down the line.

As my former colleague and friend Milton Friedman liked to say, "There's no such thing as a free lunch," and this rebate is exactly what he meant. The net effect is that the reduction in demand from those who pay the real resources will be exactly the same size as the increase in demand from the rebate recipients. It's sad but true. Income effects always net to zero in a closed system.

But at the same time in our hearts we all want to know what we're going to find under the pillow. Another piece in today's WSJ by Tom Herman provides The Skinny on the Stimulus Plan (sub req):

What's in it for me?

That's the question millions of taxpayers are asking after Congress approved an economic-stimulus package last week that includes one-time payments to more than 131 million households. President Bush is planning to sign the package into law today, and a Treasury Department spokesman says the payments are expected to begin flowing in May.

Under the legislation, most people who pay federal income taxes will get up to $600 for individuals, or as much as $1,200 for married couples, with an additional $300 per child.

Which will likely lead to a short-term stimulus for sellers of plasma TVs. Unless of course you happen to be among the wealthiest of Americans:

The amounts begin to phase out for incomes above $75,000 for individuals and $150,000 for married couples who file jointly.

Some of you greedy "wealthy" folks out there probably want to know why you're being left out in the cold:

Q: Why did Congress impose income limits?

A: Lawmakers wanted to get the money into the hands of people most likely to spend it quickly and help reinvigorate the economy. "The rebates will go to middle-income Americans and those aspiring to it," says a statement from House Speaker Nancy Pelosi, a California Democrat. "The wealthiest taxpayers are not eligible for this relief."

Feel better now? Don't worry about people who don't pay incomes taxes either, for they will be taken care of:

Many low-income Americans who pay little or no federal income tax will get something, too.

So those who pay the majority of all taxes will get nothing, while those who pay nothing will get something? Seems fair. Nothing like a little good old fashioned income redistribution to stimulate the economy, is there?

Laffer concludes his piece by reminding us of the dangers we face when politicians unite in a spirit of bipartisanship:

But there's also collateral damage. Few in Congress understand or care. They think their actions either don't matter or that they would see a positive impact from their actions if only they did more. If the economy worsens and when their political sensors become alarmed, they'll up the dose, and goodness knows just how far this vicious cycle will take us. A quick glance back at the 16 years of presidencies of Lyndon Johnson, Richard Nixon, Gerald Ford and Jimmy Carter should give you pause. Whenever you observe bipartisan cooperation, hold on to your wallet and run to the basement.

With it appearing increasingly likely that we're going to have a choice between President McCain or President Obama come November, you better make sure your basement is well-stocked for a long stay.