In times of recession, why government spending is better than tax cuts

Extraordinary times require extraordinary measures. In normal economic times — that is, when the economy is growing at a sustainable pace, and inflation and unemployment are low — government deficit spending is not a good idea.

One of the reasons why we are in recession today is because the government has been running up deficits in relatively good times by spending on wasteful wars and tax breaks that benefit primarily those at the very top of the income scale — a group that does not produce either immediate economic stimulus or jobs.

(Note: There are other reasons as well, which is why, as some economists say, our current situation is "the perfect storm.")

When he economy is weak, as it is today, money needs to be pumped into the system, and deficits become secondary. This is a sentiment expressed by some of the country's best economic minds, including conservative economist Mark Zandi, Nobel prize winner Paul Krugman, and former Labor Secretary Robert Reich.

Below is perhaps the best, most succinct synopsis of why, at this juncture, a government economic stimulus is necessary and why tax cuts won't do the trick:

The best way to move the economy

by Robert Reich
Marketplace

Most economists agree that government spending has a bigger stimulative bang than do tax cuts. According to calculations by Mark Zandy of Economy.com, each dollar of spending generates about a dollar and a half of stimulus, while a dollar of tax cuts generates far less.

There are three reasons. First, most people who receive a tax cut don't spend all of it. They use part of it to pay down their debts or they save it. Most of us did one or the other last spring with that tax rebate. Now from the standpoint of any particular individual, paying down debts or saving may be smart behavior -- even commendable.

But what's intelligent for an individual does not necessarily translate into what's good for the economy as a whole. The only way to create or preserve jobs is through additional spending. And unlike tax cuts used to pay down personal debt or add to savings, every dollar of government spending flows directly into the economy and adds to overall demand.

Second, even that portion of a tax cut we might actually spend doesn't necessarily go into the American economy. It goes all over the world. Now I have nothing against creating or preserving the jobs of Asians who assemble those flat-panel TVs you see at the mall, for example, but right now we're trying to create or preserve jobs here in America. By contrast, when government spends to repair a highway or build a school or help pay for medical services, the money and the jobs stay here in America.

Finally, those who say cutting taxes on businesses is the best way to create or preserve jobs forget about the demand side. Even with a tax cut, businesses won't hire workers unless there are customers to buy what those workers produce. A government stimulus that creates jobs is a necessary precondition.

This isn't a matter of more or less government. It's just economics. When consumers and businesses can't or won't spend enough to keep the economy going, government has to be the spender of last resort.

The article is here.