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.

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

    FMF Policy Bulletin/ 26 July 2011
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