Fiscal stimulus, just say no

July 31, 2012

Free Market Foundation

One of President Bush’s most lasting economic legacies will be his use of temporary, Keynesian, fiscal stimulus measures in an attempt to manage the economy and offset recessions, says the Chicago Daily Observer.

Below is a brief summary of the Bush tax cuts:

In 2001, the first round of Bush tax cuts included a $300 rebate per taxpaying adult, which was distributed in checks sent out from July through September that year.

The rebates were designed to give the economy a temporary boost in the face of recession.

In 2003, middle-income taxpayers were given an “advance” payment of $400 per child for the increase in the child tax credit; this time, the idea was to “jump start” the economy into faster growth.

Next came the rebates passed out earlier this year: $600 per taxpaying adult plus $300 per child.

But the stimulus measures didn’t work, says the Observer. In fact, the 2001 rebates, because they increased the short-term cost of reducing taxes, caused President Bush to phase-in cuts to marginal tax rates. This slowed the economy as investors and businesses postponed activity and income recognition, waiting until tax rate cuts were fully phased-in.

Yet, there is nothing wrong with boosting infrastructure spending, where needed, adds the Observer. But that policy change should be directed at efficiently meeting long-term building goals, not just timed to boost the economy when policymakers think it needs boosting.

Further, another short-term stimulus will just leave the US deeper in debt with no change in the incentive to work, save or invest. If the new president wants to quickly send a positive message to the markets, he should announce that the era of short-term management of fiscal policy is over, suggests the Observer.

Source: Brian S. Wesbury, Fiscal Stimulus, Just Say No, Chicago Daily Observer, November 3, 2008.

For text: http://www.cdobs.com/archive/our-columns/fiscal-stimulus-just-say-no%2C2012/

For more on Economic Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=17

FMF Policy Bulletin/ 11 November 2008