Stimulus Bill - Spending vs Tax Cuts

Many conservatives have criticized the approximately $800 billion economic stimulus bill, charging that it is merely a spending bill. Their remedy for the current situation is tax cuts. To many conservatives, tax cuts are the answer for everything. We are currently in a severe economic downturn. The economy contracted by a 6.2% annualized pace during the fourth quarter of 2008. Generally, one would like to see the economy stimulated by the private sector. However, this is not happening, and with job losses (measured by initial jobless claims released by the Department of Labor) running at a rate of over 600,000 per week, the likelihood of this is lessening. The government can attempt to fill in for the private sector by increasing spending, reducing taxes or a combination of both.

The table above shows the dollar increase in economic activity per one dollar of a given activity. It is noteworthy that this table was put together by an economist for Moody's who was an advisor to the McCain presidential campaign. A key conclusion from this table is that, generally, the spending items listed have a greater impact than the tax cut items. The biggest impact to the economy, according to the economist, is an increase in food stamps. For every $1 increase in food stamps, the economy grows by $1.73. Extending unemployment (UI) benefits is a close second, with an impact of $1.64 for every $1 spent. This makes sense to anyone who has had basic economics; an economically poor person with an extra $1 will on average spend more of that dollar than a wealthy person, out of necessity. Much of the extra dollar going to the wealthier person is likely to end up in savings (not necessarily bad, just not immediately stimulative). Notice the least stimulative item, making the Bush tax cuts permanent; followed closely by a cut in corporate taxes and making dividend and capital gains taxes permanent. There are some stimulative tax cut items, such as the payroll tax holiday, since it benefits a wide economic spectrum, not just the wealthy.

To criticize the stimulus bill by saying it is just a spending bill is silly. Government spending is the more efficient method for the government to stimulate the economy. And, if the spending goes towards areas that benefit the country in the long run but have been neglected (infrastructure, alternative energy), even better.