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State legislators should learn from failed federal stimulus efforts

November 5, 2014

State legislators looking to spur job creation should reject federal stimulus efforts as a model. In fact, there are at least two lessons in what not to do that policymakers can learn from President Obama’s failed effort to energize economic growth through government spending and temporary tax gimmicks.

Lesson 1: Government spending does not usually create new employment opportunities for the unemployed. A study from the Mercatus Center at George Mason University shows the firms that received federal stimulus money were more likely to hire currently-employed workers from other firms or from outside the labor force than from the ranks of the unemployed. That’s because the money was directed not by market forces but by bureaucrats. As a result, it went to firms that weren’t necessarily prone to new investment or the most in need of assistance.

Lesson 2: Temporary measures don’t spur new long-run economic activity. Imagine a temporary tax cut that is meant to spur hiring today. The business that might need to hire a worker knows the benefit will likely disappear in a few years. So they will either avoid hiring or they will simply hire workers on only a temporary basis.

Added to these economic truths is the continuing uncertainty of future tax and regulatory burdens coming from Washington. The federal government has queued up economic threats just waiting to pounce on businesses, from new air-quality controls to the massive debt load that could precipitate higher taxes in the future. Federal policy seems bent on ensuring a high degree of uncertainty and growth-dampening policies that hang like smog over the future.

Against that backdrop, it’s no wonder businesses are sitting on their investment capital instead of taking the risks that are vital to robust economic growth and job creation.

Elected officials at state capitols should learn from these mistakes and instead focus on ways to lower the regulatory and tax burdens on all businesses, not just a select group, and to do so for the long run by making those changes permanent.

Stephen Slivinski is senior economist for the Goldwater Institute.

Learn More:

Mercatus Center: Did Stimulus Dollars Hire the Unemployed?

Mercatus Center: No Such Thing as Shovel Ready: The Supply Side of the Recovery Act



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