NCPA - National Center for Policy Analysis

Economic Stimulus Package Could Have Negative Effects

October 3, 2001

Some of the ideas for an economic stimulus package are likely to be ineffective or counterproductive, says Bruce Bartlett.

  • For example, proposals have been floated to cut the capital gains tax, the corporate tax rate and payroll taxes.
  • Of course, on the spending side, every industry looking for special favors is touting its connection to national defense.
  • A reduction in the cost of capital through either a cut in corporate taxes or the capital gains tax will unquestionably promote higher long term growth, but it is doubtful that encouraging the sale of appreciated assets or cutting taxes on corporate profits will provide any short-run stimulus.

Like it or not, says Bartlett, Keynesian economic theories are better suited to short-run stimulus; however they do nothing to encourage long-term growth and can even depress it by raising inflation. And in the current situation there is no need for additional stimulus.

Increasing consumer demand, through tax rebates or temporary cuts in the payroll tax might help if consumers lacked purchasing power. But consumers as a whole are generally well off. They are not refusing to spend because they lack funds, but because they lack confidence.

The proposals being bandied about appear ill-targeted to the economy's real problem, probably won't have any impact until the economy has recovered on its own, and may have a negative impact in the longer run.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, October 3, 2001.

 

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