Keynesian economists believe government spending on "shovel-ready" infrastructure projects -- schools, roads, bridges -- is the best way to stimulate our staggering economy. Supply-side economists make an equally persuasive case that tax cuts are the surest and quickest way to create permanent jobs and cause an economy to rebound. That happened under JFK, Ronald Reagan and George W. Bush. We know that when tax rates are cut in a recession, it brings an economy back.
Recent polling indicates that the American people are in favor of both approaches.
From a strictly economic perspective, it's a question of time. In the very short-term, a tax rebate is the most effective. We will get about 0.75 actual economic stimulus for each dollar of rebate. In the medium-term, say 1-2 years or so, we will get the most bang for our buck from shovel-ready projects. About 1.5 dollars of economic activity for every dollar spent. However, in the very long-run, I dunno 2+ years, a permanent cut in tax rates would be the best thing for economic growth.
Why is a permanent cut in tax rates the best thing? Well, it sets expectations in people's minds that they will have more money and they make decisions about how much and what to save and consume accordingly. The argument in favor of long-term benefits from government spending centers around externalities. Health care and education offer positive externalities. Your education makes me better off because you are more economically productive and a better citizen. Likewise, if you are healthy you are more likely to work and less likely to make me sick. If we invest in education and health this makes us all better off in the long-run. The issue is the government doesn't really know how much to invest in health and education to optimize the economic and social return. Nor are they particularly good at being efficient. So, it is, all told, better to let individuals choose what to invest in.
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