Reject political stimulus, embrace “Deregulatory Stimulus.” And do it FAST.

Facing an economic downturn and an election, politicians of both parties sought to stimulate consumer demand—and some business investment—through political action. They promised that if the early 2008 “Stimulus Package” didn’t succeed, there would be “more to come.”

It didn’t work, and a stimulus is now the number one Obama priority. His “Big Bang” agenda has to wait its turn.

As in recent stimulus campaigns—for example, during the first terms of presidents Bill Clinton and George W. Bush—almost all today’s politicians accept the legitimacy of government stimulus and rarely ponder the future economic harm such intervention may cause.

Genuine stimulus would entail liberalization of the economy from excessive interventions, regulations, and spending, and from political inflation of the money supply. It would maintain the conditions—legal order, minimal regulations and stable institutions—within which wealth can be created. It would recognize that governments do not themselves create wealth.

“Say’s Law” (as I discussed in the report Still Stimulating Like It’s 1999) holds that supply creates its own demand. A relative overproduction of certain goods may occur, implying that too many scarce inputs have gone into the production of unwanted items relative to inputs for desired goods. But general overproduction to which demand stimulus would (presumably) provide relief is not the core economic problem confronting societies. The leading pre-requisite for economic well being—along with negligible political interference—is low tolerance for special-interest pleadings that transfer resources. This means no political maintenance of wages or prices at above market levels, and a rejection of government-granted monopolistic abuses. It means no “Bailouts to Nowhere” and no “Bailouts on Wheels.”

Indeed, economies tend toward recession if government does not perform these “classical” functions of preventing the interest group manipulation that distorts smooth economic enterprise.

Unfortunately today, the opposite of Say’s Law—demand creates supply—dominates macroeconomics and politics generally. Political expediency induces policymakers to overlook the long run, and to support demand stimulus packages that further artificially distort the freely determined distribution between consumer and producer goods. Political stimulus sends resources in the wrong direction, and the true adjustment that the market actually needs is further postponed.

Downturns and recessions can be effectively addressed through voluntary, market means. But our political framework does not permit non-governmental resolution as an option (We rarely open the newspaper to read the headline, “Government Decides to Do Nothing about Economic Downturn.”) Policy prescriptions like the 2008 election-year World Series of Stimulus may foster political ends that have little to do with actual economic recovery.

Real “change” requires a clampdown on what representatives in government are able—constitutionally—to do in the name of “public service.” The instant government moves beyond performing its “classical” functions of maintaining order and thwarting contrived scarcity, government becomes a transfer mechanism. It can add little, and subtract much, from the real economy.

One immediate “stimulus” is to cut marginal tax rates to facilitate economic activity via increased supply. With returns to enterprise increased and workers and investors certain that present efforts will be penalized less, the economy will begin expanding owing to reduced “tariffs” on the creation of supply. Similarly, a sustained program of reducing governmental regulatory interventions in the economy, and re-establishment of prescriptions and philosophies to keep future interventions minimal and impossible, point the way toward sustained prosperity and wealth creation, and to an economy that can finally reject damaging appeals to political stimulus.