Alex Tabarrok at Marginal Revolution generally opposes the call for fiscal stimulus packages. He thinks that new "spending and tax decisions can rarely boost an economy" for a few reasons:
First, the money for any new spending or tax cuts has got to come from somewhere, right? Thus there is usually substantial crowding out of any stimulus.
Second, by the time the new spending or tax cut gets through the political process the economy has moved on and the stimulus is no longer relevant except by accident.
Third, there just isn't that much discretionary spending to play with and even a large increase in spending, say tens of billions, is too small to make much of a difference in a 13 trillion dollar economy.
Fourth, in their desperation to "do something" politicians will often do something foolish. If a spending increase or tax cut isn't worthwhile on its own merits then it's highly unlikely to be worthwhile once we add in the benefits of "stimulus." Thus, it's one thing to argue for extending unemployment benefits as a matter of welfare it's quite another to think that an increase in unemployment benefits will so increase spending as to reduce unemployment! (The implicit view of Larry Summers.)
Economists may call for "temporary," "conditional," and "targeted" stimulus but they won't be the ones designing the plan. Spending increases and tax cuts are policies with long term consequences that we need to think about carefully.
Thus, I do not favor a fiscal "stimulus" package.
But he's willing to admit that an investment tax credit may do some good. Why?
Cuts in income taxes and increases in spending must be paid for somehow, so traditional fiscal policy can be crowded out by declines in private spending (My colleague Russ Roberts says fiscal policy is like trying to raise the water level by dipping a bucket in the deep end of a pool and dumping it in the shallow end.) But an investment tax credit works through a change in incentives - it increases the incentive to invest now, when times are tough, at the expense of less future investment when times are better.
Also, cuts in income taxes stimulate the least when they are expected to be temporary. But in contrast, an investment tax credit stimulates the most when it is expected to be temporary. (A temporary credit must be used now or lost while a permanent credit gives you the option to wait).
Thus, a broad-based, temporary investment tax credit has some appeal as fiscal stimulus.
In other words, an investment tax credit would give the folks who can an incentive to pump much-needed capital into the economy, while avoiding the nonsense and other drawbacks of the other plans out there, including Bush's.
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