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124 IRET Congressional Advisory 1 (2002)

handle is hein.taxfoundation/iretcgadv0121 and id is 1 raw text is: IRTO January 29, 2002 No. 124 WILL SENATOR DASCHLE'S STIMULUS PLAN WORK? IS CHAIRMAN GREENSPAN RIGHT THAT WE DON'T NEED ONE? The Senate is considering a four part economic package urged by Senator Daschle. It contains 13 weeks of extended unemployment benefits for people whose ordinary benefits have been exhausted, a new round of $300 to $600 rebates for those who did not receive them in last year's tax cut, an increase in the federal match for state spending on Medicaid, and 30% bonus depreciation for investment in equipment for one year. Meanwhile, Federal Reserve Chairman Alan Greenspan says the economy is poised for recovery without any further stimulus, and suggests that we do not need another package. Senator Daschle describes his plan as non- controversial economic recovery provisions and urges that the Congress immediately pass what we agree on. Unfortunately, the package is not so much a common approach to growth as it is the lowest common denominator of the various items in various stimulus packages recommended over the last few weeks. Three of the four pieces would have no effect on growth, and the fourth would have so little as to be nearly worthless. If this is the best the Senate can do, it would be better to do nothing, save the money and the added future debt service, and wait for the chance to use the money for real, fundamental pro-growth tax reform. How taxes and transfers do and don't work Federal tax cuts or transfer programs do not work by pumping up demand or giving people more money to spend. The same money would otherwise have been available to pay down more federal debt (or result in less federal borrowing), in which case the federal bondholders would have had the funds to spend themselves or to lend to others to spend. There is no demand effect unless the Federal Reserve buys the added debt, thereby increasing the money supply faster than otherwise. Tax cuts only work to stimulate the economy if they increase, at the margin, the after-tax rewards to work, saving, or investing. Such tax cuts encourage more labor and capital to be supplied and employed to produce more output; the workers and capital owners are paid for their trouble, and they then buy their added product. Supply and demand rise together, or not at all. Transfer payments generally reduce incentives for those who receive them and for those who are taxed to pay them; they reduce output by attacking supply at both ends. The provisions in the package Extended unemployment benefits. The extended unemployment benefits in the Senate package would be a humanitarian gesture to those hurt by the downturn, but they would not stimulate employment or growth. Indeed, extended benefits would enable some workers to remain unemployed longer than they otherwise would. Such payments would not boost demand in the economy by giving them money to spend, as the outlays would come at the expense of other uses of the same money. Rebate checks. Ditto for the rebate checks. The government will have to borrow more to cover these outlays, which takes as much money from Institute for Research on the Economics of Taxation IRET is anon-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote economic growth and efficient operation of the free market economy. 1730 K Street, N.W., Suite 910, Washington, D.C. 20006 Voice 202-463-1400 9 Fax 202-463-6199 0 Internet www.iret.org

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