Even before the Inauguration of President Obama, there was much talk of an economic stimulus package. President Obama’s stimulus package will entail 1 trillion dollars in additional government spending. This spending will primarily be focused on improvements in the nation’s infrastructure. In other words, it is designed to create jobs building roads, and bridges. The question the commonsense economist must ask is will this actually stimulate the economy or lead to higher taxes and inflation in the future.
Capital is the fuel that runs an economy. To stimulate the economy requires the infusion of additional capital into the economy. There are two differing theories on how to infuse capital into the economy and in this posting we will be looking at these two theories and the pros and cons of each.
President Obama’s proposals follow the theory that it is the government’s responsibility to infuse capital into a struggling economy. This explains why he favors such programs as bailouts for companies that are deemed “too big to fail” such as the automakers. State and local governments are also deemed to big to fail and are granted bailouts under this theory. Economists adopting this theory also favor stimulus checks to individuals such as the checks issued in early 2008.
Proponents of this theory also favor refundable tax credits such as the earned income credit and additional child tax credit that are currently a major part of the tax code for The United States. Refundable tax credits are credits given to taxpayers regardless of whether they paid tax or not. They are usually means tested which means individuals earning over a set income level will not qualify for the credit. Economists adopting the theory of government intervention believe this infusion of cash for lower income individuals will stimulate the economy. However, we must ask who pays for these credits.
The reason these credits are means tested is to insure there are taxpayers to pay for the credits. In other words these tax credits are not tax credits at all but transfers of capital from higher income individuals to lower income individuals using the tax code. However, it is these higher income individuals who own the businesses necessary for the creation of new jobs and increased economic activity. Taxing these individuals more will only slow new job creation and stifle economic activity which will prolong the duration of the recession.
The pros and cons of this theory are that it provides quick results since the government can simply change its monetary policy and create the cash it will need to stimulate the economy. However, this creation of cash through liberal monetary policy results in long-term pain due to higher taxes to pay back debt the government incurs and inflation caused by the sudden influx of large sums of cash into the economy.
The other theory of economic stimulation involves government retraction. Economists following this theory favor cutting taxes, reducing spending, and reducing regulations on private business. President Ronald Reagan favored this theory and used it to lift the country from the recession of 1980. Proponents of this theory believe that when the government spends less there is more capital available that business can use for investment and business expansion. This additional investment and expansion will result in more jobs in the private sector creating additional taxpayers and business revenue that will actually result in additional tax revenue coming into the government.
The pros and cons of this theory is that the results take longer to happen but the results are long-term. The economic stimulus started by Ronald Reagan in 1980 actually continued until the dot com bubble burst in 2000. However, the results of his policies were not felt until after 1982. This is why many politicians who are primarily motivated by earning votes hesitate to adopt this theory due to its slow results. They are more interested in short-term results but these often lead to pain in later years. However, politicians often do not care about this since they will be term limited out of office leaving the problem for someone else to solve.
I am a common sense economist and believe in long-term economic growth not some gimmick that produces quick results but causes long-term pain. I believe it is best to endure some short-term pain now while we adopt long-term policies of government retraction in order to experience long-term growth. I invite your comments expressing your opinions on this matter. You can also contact me at dalewsr34@gmail.com
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