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February 27, 2009

Increased spending versus tax cuts

There's a major battle that's erupted over the federal stimulus program between those who favor more direct government spending and those who want more tax cuts. There are many political facets to this debate, but let's focus on the economic elements. Can economics say which approach is better? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well first, let me say that both increased government spending and tax cuts are stimulants. Some people focus on simply the spending and say that's a stimulus. Actually, tax cuts are a stimulus too. So when we look at comparing these, we can compare them economically on many elements. We can look, number one, at how quickly the money gets into the spending stream. Many studies give the nod here actually to increased government spending. Secondly, we can look at the overall positive impact on the economy. Now there's lots of disagreement here, but many of the more recent detailed studies actually put tax cuts ahead of government spending here. And then thirdly, we can look at how easy it will be for the government to change these programs. That is to say if this stimulus bill that is being discussed is for temporary relief during the recession presumably we want to turn it off later when the recession's over. Probably it's easier to turn off that additional government spending than it is to turn off tax cuts. But I should say that on this, much, much is unknown by economists."

Posted by Dave at February 27, 2009 08:36 AM