Expert Comment: Economic Stimulus Proposal Is Flawed

Published January 21, 2008

(Chicago, Illinois – January 21, 2008) — President George W. Bush, other federal lawmakers, and some government agency officials have begun calling for an economic “stimulus” package. Ideas remain sketchy but have included tax rebates, tax breaks for small businesses, an expanded food stamp program, and greater unemployment insurance benefits.

The following is a statement from Steve Stanek, managing editor of Budget & Tax News and research fellow at The Heartland Institute. You may quote from this statement or contact Stanek directly at 815/385-5602, [email protected].

“There’s a saying: ‘If it ain’t broke, don’t fix it.’ After listening to President Bush, government officials, and various members of Congress call for a short-term ‘economic stimulus,’ I suggest an addendum: ‘If it might be broke, don’t break it for sure.’

“That could happen to the economy if the federal government heeds one or more of the calls for an economic stimulus.

“President Bush on Friday announced a proposal (without much detail) for about $150 billion in tax incentives for businesses and individuals. Candidates hoping to win their party’s nomination for president later this year, and congressional leaders of both major political parties, also have been calling for government action ranging from tax rebates to increased food stamp and unemployment insurance benefits.

“Problems with all these stimulus proposals include:

  • Disagreement among economists and government officials over the true state of the economy. No one can say for sure if the economy is in recession or will soon slide into recession, or how deep the recession, which might not occur, might be or might last.
  • “The impossibility of quickly enacting anything. A stimulus could not possibly be approved until this spring at the earliest. The impact of any tax cuts would take months more to work their way into the economy. If the economy is in recession or soon slips into one, it could be pulling itself out of recession by the time the effects of the stimulus are felt. This could result in inflation, which carries its own set of economic problems.
  • “The temporary nature of short-term stimuli. Tax cuts are the one sure way to stimulate the economy, but serious cuts paired with corresponding reductions in the bloated federal spending budget are the only reliable way to do it. One-time tax breaks and rebates soon expire, sending tax burdens back up, which could dampen economic activity as things get rolling if the stimulus actually works and is timed correctly.
  • “The insignificant size of the proposals. Any tax cut is better than none, but even if President Bush gets his full stimulus package, it amounts to just 1 percent of gross domestic product (the value of all goods and services produced each year). That’s like saying we’ll get $1 for every $100 we spend. Is that likely to make people run out and spend lots more money? Only real cuts in federal taxes and spending will help.
  • “Lack of fiscal discipline. Because virtually no one in power has seriously talked about cutting government spending to provide stimulus funds, the government will need to borrow the money. That means we will pay the bill later, with interest.

“Rather than a temporary short-term stimulus, lawmakers should rein in federal spending and approve long-term tax reductions that apply to everyone, not just to people in certain income brackets as some have proposed. In this way, businesses and individuals could plan with confidence how to earn, spend, save, and invest their funds. The last thing any investor wants is uncertainty, and this applies to the middle-income worker who’s thinking of buying or selling a car or house as much as it applies to the manager of a multibillion-dollar corporation considering opening a new office or expanding an existing facility.

“The more certainty businesses and individuals have, the more willing they will be to handle their money in ways that keep the economy growing.

“Enacting tiny, temporary tax cuts and thinking we’ve solved our economic problems is not a smart solution. It’s the economic equivalent of fool’s gold.”

For more information about The Heartland Institute, please contact Harriette Johnson, media relations manager, at [email protected] or 312/377-4000.