NCPA - National Center for Policy Analysis

Spending, Monetary Policy or Tax Cuts

October 10, 2001

Spending on new public works or rebate checks isn't the best way to stimulate the economy -- even in the short run, says former Treasury official Bruce Bartlett. So what's the government to do?

Historically, economists favored public spending for short-run stimulus. Public works, public service jobs programs and the like were thought to affect growth more quickly than changes in tax policy, and theoretically could be better targeted.

  • Actually, spending on public works requires far more lead time than people anticipate for planning, environmental impact statements and so forth.
  • Targeting is a problem because the places where public works projects are needed are seldom the same places where unemployment is high.
  • Any spending program enacted now probably won't be effective until long after the economy has recovered, when the stimulus may be viewed as inflationary, leading the Federal Reserve to raise interest rates.
  • The failure of countercyclical public works programs in the 1970s led most economists to conclude that fiscal "fine-tuning" just doesn't work.

Tax rebates don't work because they don't change incentives for work, saving or investment, and because most people save them rather than spend them.

However, if businesses could write off new investments more quickly, through shorter depreciation schedules, they would act the minute they were certain the legislation would pass. And because the benefits only accrue to businesses making new investments, it would stimulate growth in both the long-run and the short-run.

Cutting taxes for businesses is probably the ONLY thing the government can do that actually will stimulate economic growth in the near term.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, October 10, 2001.

 

Browse more articles on Tax and Spending Issues