The Do’s and Don’ts of an Economic Stimulus

Rob Bluey /

President Bush and congressional Democrats appear ready to put their partisan differences behind them and strike a deal on an economic stimulus package. However, before lawmakers and the White House get too cozy, conservatives are reminding Bush to consider the consequences of issuing tax rebates — repeating a mistake his administration made in 2001 when it sent $300 to individuals and $600 to married couples.

Contrary to what liberals and the mainstream media will have you believe, the tax rebates of 2001 didn’t help stimulate the economy. Consumer spending rose, but investments dropped significantly. It wasn’t until the tax rate cuts of 2003 that the economy really turned the corner.

That hasn’t stopped some “experts” from making the argument, however. Martin Crutsinger’s article for the Associated Press reads like it was written by a liberal economist:

Democrats would like to tilt the relief to the poor and lower income taxpayers by adding an increase in unemployment benefits, doubling the normal 26 weeks that a jobless worker can collect benefits, and by also boosting food stamp payments.

Those proposals make economic sense because the more relief that is provided to lower income households, the more money that will get spent quickly, meaning a faster and bigger boost for consumer spending, which accounts for two-thirds of economic activity.

Crutsinger gets it wrong. In fact, few studies support the idea that extending unemployment benefits significantly stimulates the economy. Heritage’s James Sherk and Patrick Tyrrell note that such a maneuver would actually encourage unemployed workers to stay out of work longer to collect benefits; discourage employers to rehire laid-off workers; and do little to increase consumption.

As the debate plays out on Capitol Hill and politicians attempt to turn their rhetoric into reality, they should remember these important points:

1. Investment spending works to stimulate the economy. In 2003 these incentives resulted in immediately lower unemployment.

2. Household consumption spending, like tax rebates, does not work to stimulate the economy. Research shows that most taxpayers use the rebates to pay down their debt and increase their saving.

3. Tax rebates did not work in 2001 to stimulate the economy. Unemployment continued to rise after the rebates and economic growth remained anemic until 2003 when investment incentives turned the economy around.

4. Stimulus packages should not be used to increase spending. Too often this kind of legislation becomes a Christmas tree of special interest earmarks. Specific tax breaks and subsidies should be avoided.

5. Tax rebates do not inject new money into the economy. Every dollar government “injects” into the economy must first be taxed or borrowed out of the economy. Even money borrowed from foreigners reduces net exports. Shifting money from savings to consumption reduces investment.

Free money is always a draw for Americans. But in this case, it wouldn’t do much good if the White House and Congress are serious about staving off a recession.