Economic Stimulus: What fiscal stimulus options are of questionable effectiveness?
Policies that boost investment, such as direct spending on public infrastructure or tax incentives for businesses, are likely to have a smaller impact on the economy than policies designed to increase consumer spending. In particular, the available evidence suggests that the stimulus they provide would be small, not well-timed, or both.
- Increase infrastructure investment. Although additional investments in physical and technological infrastructure might provide an important boost to long-term growth, they are difficult to design in a manner that generates significant short-term stimulus. In the past, infrastructure projects that were launched as the economy started to weaken added little to total spending until after the economy had recovered. However, declining revenue during a downturn may force state and local governments to cut previously planned infrastructure spending (such as road repair), and such reductions can actually intensify the downturn. If policies could be designed to effectively prevent such cuts, economic stimulus could be delivered more quickly.
- Create temporary investment tax incentives. Temporary tax incentives for business investment, such as the bonus depreciation provision enacted in 2003, could stimulate the economy in the short run by inducing businesses to undertake investment immediately that they would otherwise have pursued in some future year. But research has found that this effect is small at best, and it appears to work more slowly than measures aimed at boosting household consumption. In addition, temporary investment tax incentives provide no direct help for families coping with a temporary downturn.