Over coffee at Big Boy this morning, my wife and I mocked the economic stimulus package. We're going to do what most American are going to do, pay down a credit card. That means we're not going to do any extra spending, so we're not going to help the economy.
And that's the way it always is with these tax rebates, temporary tax cuts, or temporary reductions in tax collection. They have nearly zero economic effect. And yet at the Republican debate last night, each of the candidates praised the rebate while saying "it didn't go far enough." Yeah, double it. Please. Then I can get that credit card completely paid off. But it still won't boost the economy.
As Milton Friedman figured out, people don't change their spending behavior very much in response to temporary tax cuts or rebates. Even if we all did go out and spend our checks, it's a one time thing. No business is going to invest in new equipment or hire new people as a result. Nor is the business tax credit going to help, because it's also a temporary thing. Businesses will welcome it, just as much as I'll be happy to get my check, but it won't stimulate the economy.
Congress is working on a $150 billion tax rebate. The U.S. has a $13 trillion economy. The stimulus package is only 1% of the economy. Some stimulus. And the checks won't arrive for about 3 months! By that time we could have had a brief recession and already be moving out of it!
And since government is not going to offset the decreased tax expenditures with reduced spending, the deficit (hence borrowing) will increase, putting a little more pressure on interest rates, which will offset any possible stimulus by making business borrowing more costly.
This is just classic Keynseian fiscal policy, and it just doesn't work, for three reaasons. (1) The government is not putting money into the economy, it's just trading taxing for borrowing. (3) People won't increase their spending and businesses won't increase investment as a consequence. (3) Even if it could work, the long delay until the checks are cut means the effects will not be felt in a timely manner.
Monetary policy has proved much more effective in combating recessions, and the Fed has made a drastic rate cut to 4%. That reduces businesses cost of borrowing money, making it cheaper for them to invest. That's likely to have us pulling out of a recession before I ever endorse my check.