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Townhall Finance... 
Boneheaded Stimulus Never Works
By Larry Kudlow
 
With a flamboyant downgrade of the outlook for economic growth, jobs, and profits, Wednesday’s 280 point Dow plunge to launch the so-called June stock swoon is a warning shot across the bow.

The Dow tanked alongside a batch of dismal economic data. The ISM manufacturing index, ADP employment, Case-Shiller home prices, and consumer confidence are all pointing to 2 percent growth or less, rather than the kind of 5 percent growth we ought to be getting coming out of a deep recession.

The economy now looks like a Government Motors engine that’s stalling out. Or perhaps, with energy and food inflation, and housing deflation at the same time, the economy is acting like a pinball machine on permanent tilt.

There’s a key message here: Big-government stimulus never works.

First there was the massive Obama stimulus spending. Then QE1. And now QE2 is winding down. And what did we get for all this? Slower growth overall, paltry job creation, more energy and commodities inflation, continued housing deflation, and virtually no new business start-up entrepreneurship.

We know the Obama spending package failed to create a 7 to 8 percent unemployment rate, as advertised. And now we’re learning that the Fed’s QE2 has actually done more harm than good.

All that money-printing stimulus worked to depreciate the dollar and jack-up commodity prices, especially oil and gasoline, but also food. So both companies and consumers have been punished.

Some demand-side boneheads on Wall Street want the Fed to move to QE3, allegedly to fight a stalling economy. But if the central bank prints another $600 billion or so, all that will do is sink the greenback another 10 percent and drive oil and gasoline prices higher and higher. And that, in turn, will slow business and consumers even more.

The Japanese disaster is undoubtedly playing a role in the manufacturing slump -- probably a bigger role than most economists predicted. Production supplies are scarce or non-existent, especially for autos and electronics, but also for many other sectors of the economy.

Then, of course, there’s all the bad weather: Hurricanes, tornadoes, and floods have depressed all kinds of economic activity here at home.

There also are jitters about the ongoing saga in Greece. The potential for a Greek bond default and various credit-agency downgrades are taking a toll on stock markets around the world.

But this whole boom-and-bust monetary policy, with its blatant disregard for King Dollar, is a snare and a delusion. Stabilize the greenback by linking it to gold. Then move to the supply-side: Slash individual and business tax burdens, roll back enormous regulatory costs, and stop the merciless threat of higher future taxes.

If there was a serious pro-growth movement in Washington to accelerate tax-reform overhaul and pin-back regulatory barriers like the NLRB war with Boeing, the EPA war against energy, and the Obamacare threats that are too numerous to count, that just might revive the animal spirits. But what we know for sure is that small businesses are barely hiring today, and that brand new startups are few and far between.

What’s lacking here is confidence.

No, we’re not going into a double-dip recession. The most important indicator is the Treasury yield curve, which is still very steeply sloped. And businesses are profitable. Those profits have been the backbone of what little growth we’ve had in the last two years. And they’re the mother’s milk of the stock market.

But the point is, without real growth policies, there’s not much to cheer about in the market or the economy. We’re muddling along. It could even be called a growth recession.

Wednesday’s 280-point Dow drop is cry for help. Is anybody listening?

Read it at Townhall Finance


 
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