NCPA - National Center for Policy Analysis


January 22, 2008

Alan Auerbach of the University of California at Berkeley surveyed the effectiveness of U.S. fiscal policy in 2002, concluding that "discretionary policy has had a weak overall effect on output" and that there is "little evidence these effects have provided a significant contribution to economic stabilization, if in fact they have worked in the right direction at all."

That conclusion became slightly more controversial after the 2001 tax rebate, which turned out to be well-timed as a matter of luck.  But the 2001 rebate, unlike today's proposals, was not temporary, explains says Alan Reynolds, a senior fellow with the Cato Institute.

For example:

  • It was an advance on tax refunds resulting from the reduction of the lowest tax rate to 10 percent from 15 percent on the first few thousand of taxable income -- a reduction which still cuts every taxpaying couple's tax bill by $600.
  • We can't conclude that temporary rebates will "work" (temporarily boost sales of consumer staples) on the basis of evidence from a tax cut that was not temporary.
  • And we can't conclude that rebates confined to those with modest incomes will work on the basis of a tax cut that was granted equally to every taxpayer -- including the top 20 percent who account for 40 percent of total consumption.

If it is really a good idea to "stimulate demand," there is no reasonable doubt the Federal Reserve can do that.  By contrast, it is unlikely that doling out subsidies and transfer payments to favored political constituencies will be temporary, timely or effective.  It is also unlikely that one-year tax rebates and investment incentives could accomplish more than to make the pre-election statistics look a little better at the expense of 2009.  That's the next president's problem, says Reynolds.

Source: Alan Reynolds, "Bush's Stimulus Flop," Wall Street Journal, January 22, 2008.

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