Stimulus Spending Facts and Myths

Veronique de Rugy, a senior research fellow at the Mercatus Center, dispels three myths about federal government stimulus spending.

Myth 1: Stimulus spending can jump start the economy and fix unemployment.

Fact 1:

Recent experience suggests stimulus spending won't help.

The unemployment rate started at 7.6 per cent when President Obama took office and peaked at 10.2 per cent in October 2009.

Since the enactment of the stimulus bill in February 2009, the unemployment rate has not approached pre-American Recovery and Reinvestment Act (ARRA) levels, even though $382 billion has been made available by government departments and agencies (on top of tax credits and other tax-related items).

In fact, unemployment recently edged up, from 9 per cent in April to 9.1 per cent in May.

Myth 2: Additional infrastructure spending is an effective way to stimulate the economy and create jobs.

Fact 2:

In theory, infrastructure spending injects more money into the economy than other types of government spending.

In reality, however, politicians rarely include infrastructure spending in stimulus bills.

Instead, they spend money on items like transfers and tax cuts.

Only 3 per cent of the last stimulus went to infrastructure.

Myth 3: Tax rebates will stimulate the economy.

Fact 3:

The evidence says they don't.

First, people usually save the extra money.

Second, even if tax rebates did increase consumption, companies don't hire employees or build new plants because of a one-time boost.

Source: Veronique de Rugy, The Facts about Stimulus Spending, Reason Magazine, July 8, 2011.

For text: http://reason.com/archives/2011/07/08/the-facts-about-stimulus-spend

For more on Economic Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=17

First published by the National Center for Policy Analysis, United States

FMF Policy Bulletin/ 26 July 2011

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Publish date: 04 August 2011
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The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation. This article may be republished without prior consent but with acknowledgement to the author.

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