Saturday, January 31, 2009


Best Stimulus: Tax Cuts or Work Programs?

There's a big argument these days about the stimulus package that is finding its way through Congress. Republicans and a few Democrats don't like the version the House just passed because, in their view, it doesn't provide big enough tax cuts to business people and investors. Some Democrats, myself included, don't think that tax cuts are of much use in stimulating the economy at present. We think that people should be provided with more money so that they can buy more things, thereby causing business to expand and hire more people.

It is argued that both approaches have a slow effect. New public works programs will indeed put a lot of people to work, but it will take time to get them started. The existence of more employed workers with money to spend won't have an immediate effect on the economy. Similarly, changing the tax code or even giving tax rebates now won't have an immediate effect, either. The people who receive the tax benefits already have some money and are being more thrifty with it because the future is uncertain. With more money in their pockets, they will pay down credit card debts and build up their savings accounts first before committing to buying new cars, new houses, new washers, new anything.

For the most rapid effect, I think the government should put money in the hands of those people who will spend it right away. Those people are the ones living below the poverty line. Many of them don't earn enough to pay any taxes and wouldn't benefit from any tax reduction. Give them additional money and they will spend it on additional food, medicine, clothing, liquor, personal services, etc.

The Republican approach is based on a belief in supply-side economics. Give entrepreneurs more money and they will produce more products and people will buy them.

The Democratic approach is based on a belief in demand-side economics. Give potential buyers more money or create more potential buyers and the entrepreneurs will produce more as needed to meet the demand.


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