Friday, October 31, 2008

Fiscal stimulus options

A study by the Economic Policy Institute (EPI) shows that tax cuts are among the least effective and most economically inefficient of fiscal stimulus strategies. Food stamps deliver the greatest bang for the stimulus buck, followed by unemployment insurance (UI), infrastructure spending, and assistance to states. The crucial determinant for the success of any fiscal stimulus is that it should be spent immediately and not saved. This means that the benefits should be targetted at those people who are most likely to spend it fully. Unlike taxes, which are more likely to be saved or repay off old debts, the other aforementioned stimulus reach the most in need and therefore involve immediate consumption spending.

The first round of fiscal stimulus in the US, worth $145 bn announced in January 2008, focussed on tax rebates for families and incentives for businesses, and was therefore relatively ineffectual in benefitting the economy. I have posted previously on these issues in detail here and here.

(HT: Economix)

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