umption did not recover.
The theory of economic stimuli suffers from several serious problems. First, it assumes people are stupid. Tax rebates, for example, presume that if people get money to increase their consumption, businesses will expand their production and hire more workers. Not true. Even if producers notice an upward blip in sales after the rebate checks go out, they will know it's only temporary. Companies won't hire more employees or build new factories in response to a temporary increase in sales. Those who do will go out of business.
Second, the thinking behind stimulus legislation assumes that the government is better at spending $800 billion than the private sector. When President Obama says, "We'll invest in what works," he means, "unlike you bozos." The president's faith in Washington is charming, but politics rather than sound economics guide government spending. Politicians rely on lobbyists from unions, corporations, pressure groups, and state and local governments when they decide how to spend other people's money. By contrast, entrepreneurs' decisions to spend their own cash are guided by monetary profit and loss. That's likely to work better and certain to produce more innovation.
But the biggest problem is that the government can't inject money into the economy without first taking money out of the economy. Where does the government get that money? It can either borrow it or collect it from taxes. There is no aggregate increase in demand. Government borrowing and spending doesn't boost national income or standard of living; it merely redistributes it. The pie is sliced differently, but it's not any bigger.
Stimulus packages—and present or future tax increases that fund government spending—end up burdening the economy. Such was the case in the 1930s, during World War II, and in 1990s Japan. Thankfully, the 2001 and 2008 tax rebates, while ineffective as stimuli, didn't make things worse.
If politicians actually want to do something cost-effective to solve our economic woes, here's some advice: Stay away from spending increases and tax rebates. Instead, focus on real incentives to stimulate work and investment, such as cutting everyone's marginal tax rates, slashing payroll taxes for employees and employers, and ending the corporate income tax.