Wednesday, January 16, 2008

Ineffective ways to stimulate the economy

The economy has been strong, but there are signs of weakness. Won't the politicians do something? Just do something! Don Luskin at Poor and Stupid: Politicians seem to be agreed that we're in a recession -- but then again they always see the worst when it gives them an opportunity to be the heroes with a "solution." The problem is that most of the "stimulus" proposals we've heard are worse than worthless. Here's our friend Brian Riedl at Heritage, with some important warnings about that.
President Bush may offer a stimulus package, and congressional leaders are discussing a proposal centered around tax rebates. Tax rebates, however, don't stimulate the economy... ... tax rebates fail because they don't encourage productivity or wealth creation. No one has to work, save, invest or create any new wealth to receive a rebate. Critics contend that rebates "inject" new money into the economy, increasing demand and therefore production. But every dollar that government rebates "inject" into the economy must first be taxed or borrowed out of the economy (and even money borrowed from foreigners brings a reduction in net exports). No new spending power is created. It is merely redistributed from one group of people to another.
What works: Measures that give people incentive to work more or work harder or to invest more. Just getting people to spend more is of fleeting benefit. The incentives listed have longer effects.

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