Stimulus Must Go Towards Those Who Need It -- Or Else Congress Shouldn't Even Bother


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A recent paper from the Center on Budget and Policy Priorities explains that stimulus legislation must be "temporary, timely and targeted." Tax breaks or spending should be temporary because if they are permanent, they could actually harm the economy, particularly if they result in ongoing increases in the federal budget deficit. The point is to stimulate demand and utilize excess productive capacity in the economy, but this is not needed after demand picks up again and the recession ends.
 
The stimulus should also be timely. Legislation that is passed when a recession is starting to abate, or that does not lead to an immediate increase in consumer spending or other immediate economic activity, is probably useless.

Any stimulus also must be targeted to those who are likely to spend whatever money is given to them. Low-income people are far more likely to immediately spend any extra money they receive in the form of a tax rebate or extended unemployment insurance, for example, whereas higher-income people may be more inclined to save or invest any extra money they receive, meaning it will be a long time before it has any palpable effect on the economy. Targeting the tax cuts or spending might be particularly difficult for members of Congress, who naturally want as many voters and contributors as possible to get benefits.


The Center on Budget paper explains that certain measures have a much higher stimulative impact on the economy because they benefit those who will immediately spend any money they receive. For example, extended unemployment benefits provide $1.73 worth of increased demand for every dollar spent. On the other hand, a tax break for capital gains and dividends provides only 9 cents of increased demand for every dollar of revenue reduced.

Immediate, one-time tax rebates are on the list of measures favored by the experts at the Brookings forum earlier this month, but they may have to be targeted to low-income families to be truly effective. A
survey done in 2001 found that less than a quarter of taxpayers planned on actually spending their rebate checks. The rest would save it, which provides no immediate boost for the economy overall.
 
The Congressional Budget Office issued a paper on Wednesday that also argued that any stimulus should be timely and targeted to those most likely to spend any money given to them. It cites some studies suggesting that people would spend the majority of a rebate check, especially those with low incomes. Other types of stimulus -- particularly tax breaks for business -- are argued by the CBO to be unlikely to provide any immediate boost to the economy. Tax breaks for investment, for example, are not immediately effective because business investment usually requires a lot of lead time. Lowering the corporate tax rate might actually encourage corporations to delay investment since their deductions will be larger when rates go back up. Several Republicans have mentioned accelerated depreciation, but the CBO finds that the same measure in 2002 and 2003 had a small effect on output compared to other possible measures.
  
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