The latest Heritage Foundation WebMemo looks takes on the idea that “deficit spending” is a good stimulus for the economy, given the upcoming federal deficit is going to the largest ever (around $1 trillion, depending on bailouts, or about the GDP of Canada). But neither borrowing nor government spending increase the economic pie – it merely shifts private investment to government spending, and from (future) taxpayers to chosen recipients. The only way to “stimulate” the economy through fiscal policy is by lowering tax rates, thus increasing productivity.
Lower tax rates will encourage businesses to prepare better now for future growth and in so doing will bring about a future of stronger economic growth. An effective fiscal stimulus means cutting tax rates–not because of the resulting higher deficits but because tax rate cuts improve the incentives for workers, investors, and producers to do more, thus stimulating the economy.
For more on this topic, check our commentary on how well state “economic development” spending has worked as well as video and presentations from our forum earlier this year on “Stimulating the Economy.”