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A Second Stimulus?

There has been some chatter recently that the economy needs another stimulus package. The Brookings Institution’s Martin N. Baily cautions against one -- unless growth remains sharply negative through the end of the year. Then he’d like to see a stimulus in the form of tax rebate checks, such as President George W. Bush issued twice during his presidency. One problem: any stimulus proposal is, by its very nature, less than a zero-sum proposition. Stimulus involves taking some money out of the economy, wasting some of it on bureaucracy, then putting it back in. Rebate check-style stimulus is less harmful than the pork-laden American Recovery and Reinvestment Act. But the same logic still applies. There are transaction costs to sending out millions of checks. And if the rebate increases the budget deficit, then tomorrow's taxes will have to be raised to pay off today's rebate. Worse, one-time stimulus checks don’t change peoples’ spending behavior very much. This is because of what economists call the Permanent Income Hypothesis; people base their spending behavior on their expected long-term income, not on short-term windfalls. People tend to save their checks instead of spend them. If you’re wondering why no stimulus package has ever had much discernible effect, those would be the reasons why. Instead, I would urge a deregulatory stimulus.