RELIEF THAT WORKS

January 18, 2008

The problem with an economic "stimulus" plan is that it's usually too little, too late.  And it merely takes money from one taxpayer's pocket and puts it in another's.  It adds a flurry of short-term activity, but doesn't boost output, says Investor's Business Daily (IBD).

Consider:

  • In 2001, President Bush agreed with Democrats on a stimulus package, giving some small tax breaks, extending jobless benefits and adding a $600 rebate. 
  • But it didn't really stimulate much; true enough, the economy pulled out of recession, but growth for two years was anemic, business investment actually fell and job growth was also weak.

Conversely, in 2003, Bush went back at it, asking for and getting much larger across-the-board tax cuts -- including significant reductions in both capital gains and personal taxes. Those worked remarkably well, says IBD:

  • In the 18 months following the 2003 tax-rate reductions business investment surged, the stock market leapt 32 percent and the economy created 5.23 million new jobs; overall economic growth doubled.
  • As an added bonus, the budget deficit was slashed by two-thirds, from 3.6 percent of gross domestic product (GDP) in 2004 to 1.2 percent in 2007, as revenues surged 46 percent in just four years.

Today, with imploding home prices and $100-a-barrel oil, we face a situation similar to the one Bush faced in 2001, says IBD.  The best response would be to make sure the tax cuts put in place by Bush in 2003 don't expire in 2010.  To get this, if Republicans must, they should trade off the short-term stimulus that Democrats want for the long-term stimulus America really needs.

Making Bush's cuts permanent, according to economists Tracy Foersch and Ralph Rector, will add $76 billion each year to GDP, create 709,000 jobs and lift personal incomes by $200 billion.  Sounds like genuine stimulus -- stimulus for the long haul, says IBD.

Source: Editorial, "Relief That Works," Investor's Business Daily, January 17, 2008.

 

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