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Argument: Spending provides more economic stimulus than tax cuts

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Supporting quotations

"In need of more Band-Aids". Economist. September 4th, 2008 - In theory, government spending gives more bang for the buck than tax cuts because less is saved; Macroeconomic Advisers estimates that consumers spent only 30% of their rebates.

"Filling the hole". Economist. Dec 11th 2008 - Tax rebates or tax cuts will get more money into consumers’ hands quickly, but in today’s environment much of that boost will simply be saved, as people plug the holes in their finances left by the collapsing values of their houses and retirement portfolios, or just pay off debts. If consumers are unwilling to spend, the best way for a government to boost demand is to spend more itself. One approach is to send large dollops of federal cash directly to America’s struggling states: unlike the federal governments, these are not allowed to run deficits, so when their revenues decline, they are forced to lay off workers and cut back on services. This reinforces the downswing in the economic cycle rather than countering it. By increasing its share of joint spending schemes, such as Medicaid, the federal government can counter that decline. But the scale of stimulus that is required calls for more.

Lawrence Mishel, president of the Economic Policy Institute - "Personal tax cuts are much less effective than spending, and business tax cuts are much less effective than personal tax cuts"[1]

Steven Pearlstein. "Wanted: Personal Economic Trainers. Apply at Capitol." Washington Post. February 6, 2009 - What really irks so many Republicans, of course, is that all the stimulus money isn't being used to cut individual and business taxes, their cure-all for economic ailments, even though all the credible evidence is that tax cuts are only about half as stimulative as direct government spending.

Many, including John McCain, lined up this week to support a proposal to make the sales tax and interest payments on any new car purchased over the next two years tax-deductible, along with a $15,000 tax credit on a home purchase. These tax credits make for great sound-bites and are music to the ears of politically active car salesmen and real estate brokers. Most economists, however, have warned that such credits will have limited impact at a time when house prices are still falling sharply and consumers are worried about their jobs and their shrinking retirement accounts. Even worse, they wind up wasting a lot of money because they give windfalls to millions of people who would have bought cars and houses anyway.

"Food Stamps Will Stimulate the Economy More than Tax Cuts, Pelosi Says". CNS News. January 28, 2009 - Food stamps and unemployment insurance will provide more economic stimulus than tax cuts, House Speaker Nancy Pelosi said Tuesday during a telephone press conference.

“(F)ood stamps and unemployment insurance, which affect the people in the states, are necessary at this time when funds are short and the economy is down, (and) actually have the most stimulative effect on the economy,” Pelosi said. “Food stamps first, unemployment insurance next, infrastructure after that, and it goes on from there.”

“Actually, those investments bring a bigger return than the tax cuts,” she said, adding: “but tax cuts where we have them – to the middle class – we think will give us our biggest return.”

Louis Uchitelle. "Economists Warm to Government Spending but Debate Its Form". New York Times. January 6, 2009 - Hundreds of economists who gathered here for the annual meeting of the American Economic Association seemed to acknowledge that a profound shift had occurred.

At their last annual meeting, ideas about using public spending as a way to get out of a recession or about government taking a role to enhance a market system were relegated to progressives. The mainstream was skeptical or downright hostile to such suggestions. This time, virtually everyone voiced their support, returning to a way of thinking that had gone out of fashion in the 1970s.

[...] Nearly every economist who spoke here agreed that a dollar invested in, say, a new transit system or in bridge repair is spent and respent more efficiently than a dollar that comes to a household in a tax cut. A bigger percentage of the latter is saved, they said. There was concern, however, that the nation lacked enough “shovel ready” projects that could be ramped up quickly, generating jobs.

"The US needs its stimulus now". Financial Times (Editorial). February 1, 2009 - All complained that the administration’s proposal contains too many spending increases and too few tax cuts. They saw an attempt to increase the size of government permanently, and partly by stealth.

They may be correct in that suspicion. Nonetheless, regardless of the Democrats’ motives or longer-term aims, an effective short-term stimulus needs a heavy dose of public spending. It needs tax cuts as well. The administration’s plan rightly has both.

Spending promotes employment more powerfully than tax cuts, according to most studies, though it can take longer to kick in. One can make a good case for simplifying the package, and for tilting it somewhat further in the direction of tax cuts (cutting the payroll tax is especially attractive) in order to shove more of the stimulus to the front. But the aggregate mix of tax cuts and spending increases in the current proposal is not unreasonable. It certainly does not justify an effort to stall the bill.

Louis Uchitelle. "Economists Warm to Government Spending but Debate Its Form". New York Times. January 6, 2009 - Martin Feldstein, a Harvard economist and a well-known conservative who served for a time as a top economic adviser to President Reagan. In a paper, Mr. Feldstein noted that the usual method of reviving the economy — lower interest rates — was failing to work because of “a dysfunctional credit market.”

That left fiscal stimulus to offset what he described as a decline of $400 billion a year in consumer spending. “While good tax policy can contribute to ending the recession, the heavy lifting will have to be done by increased government spending,” Mr. Feldstein said.

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