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Tuesday, February 10, 2009

How well has more spending worked up until now?

The Morning Call's John Micek makes a joke on his blog about the effectiveness of tax cuts in stimulating the economy:

Hardcore GOPers, asked for their alternative, muttered something about tax cuts -- because those have worked so well up 'til now.
Micek could be both funny, and factually accurate, if instead he made a joke about how well government spending has worked up until now. All previous efforts to stimulate the economy with government spending have failed, including the New Deal, which prolonged the Great Depression.

Under President Bush, government spending (federal, state, and local) increased from 30% of GDP to 35%. Did that work? Economists find that when government spending exceeds 25% of GDP, it hampers economic growth. So we should spend more?

Pennsylvania should be case in point #1 why government spending won't stimulate the economy. Pennsylvania has increased spending by 36% under Governor Rendell, and ranks second in "economic development" spending to Ohio, yet lags behind the nation in economic growth (as does Ohio). So how well did Rendell's stimulus work? State and local governments are facing budget shortfalls because of overspending, not because they didn't spend enough to stimulate the economy. When has government spending ever worked as a stimulus?

On tax cuts, all the evidence indicates tax cuts do more to stimulate the economy. Kennedy's tax cuts worked to end the recession in the early 60s, and Reagan's cuts led to extended economic growth following the early 80's recession. The 2003 tax cuts also worked to stimulate the economy (with caveats)

Yet, despite these cuts the US tax burden is higher than it was in 2002. Pennsylvania's state and local tax burden is 5% higher than it was in 1991.

Furthermore these tax cuts are due to expire - i.e. taxes are already scheduled to increase - in two years, and corporate taxes have not been cut. So yes, proposals to extend the current tax rates and cut taxes - not to mention simplify the tax code, at least so Obama's cabinet appointees can figure out how much they need to pay in taxes - would absolutely stimulate the economy.

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