What makes better stimulative fiscal policy, spending or tax cuts?
The traditional view has been that spending has a greater stimulative impact since some tax cuts ultimately go toward savings rather than consumption. In recent years, this has been challenged by some academic studies which have surprisingly shown that tax cuts may have a higher multiplier effect (i.e., how much additional economic activity a dollar generates). This is an ongoing debate which really goes to the specifics of spending proposals. Government spending for fiscal stimulus is often compared to employing someone to dig a hole in the ground. If it is just an empty hole, you’ve just wasted money. If on the other hand, you dig a well, that water can now irrigate crops and sustain other productive activities and growth. The recent studies which show that tax cuts have been more effective suggest that government programs for fiscal stimulus end up digging a lot of dry wells. The jury is still out on whether tax cuts or spending is better — conceptually spending is better, but in pr
