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248 IRET Congressional Advisory 1 (2008)

handle is hein.taxfoundation/iretcgadv0245 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote growth and efficient operation of the market economy. December 23, 2008 Advisory No. 248 FISCAL STIMULUS: WHY WE DON'T NEED FORD AND CARTER ECONOMICS President Elect Obama is developing an economic stimulus plan that is rumored to be about $850 billion dollars. The plan would increase government spending and lending at all levels. It would include federal building programs, support for green industries, support for state and local infrastructure spending, loans to the auto industry, and more. Many others are lining up for federal help, including property developers and state governments. Other governments around the world are pursuing similar Keynesian pump-priming steps. The United States adopted a more modest stimulus plan last winter, the biggest portion of which was a tax rebate handed out in the spring and summer. The rebate notably failed to spur consumption and jump-start the private sector of the economy. Will the new spending stimulus plan work any better? Almost certainly not. Economic theory has grown up a lot since the 1930s, 1950s, and 1970s. People who have been paying attention to the historical evidence now know that government spending and tax cuts do not work by boosting aggregate demand, and do not jump start the economy by handing people money to spend. Tax reductions can boost the economy if they improve private sector incentives to produce additional output by working harder, longer, and more efficiently, and by encouraging additional capital formation. Only those tax changes that are designed to increase the reward to labor and capital have any beneficial impact on output, income, and employment. Government spending displaces private economic activity. It seldom adds to GDP, and can do so only insofar as it adds more value than the private activities it displaces. The government should focus on removing tax and regulatory barriers to economic output, and on cutting spending to reduce the tax burden on the private sector. It should not try to resolve the current crisis by expanding its share of the economy and its control over production and resources. The charts and text on the following pages are based on a presentation given on Capitol Hill in December 2008 that provided an economic analysis of these issues.* Stephen J. Entin President and Executive Director Stephen J. Entin, Presentation, at CATO Institute, Capitol Hill Policy Briefing, Do Government Spending and Tax Rebates Stimulate Growth? December 18, 2008.

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