Why Stimulus Can't Work, How Tax Cuts Can Go Wrong

This is probably the best explanation I've seen of the basic premise that stimulus packages simply cannot work (emphasis mine):

Just last month in a speech to The Brookings Institution, President Obama outlined his proposal for a third round of stimulus funding on top of the $787 billion stimulus he signed into law last February. Third stimulus you say? Yes, third stimulus. Any fair accounting of government deficit spending in response to this recession must also include President George Bush's failed 2008 $168 billion economic stimulus bill. Why did these first two economic stimuli fail? For the same reason any third stimulus will also fail: government spending does not inject any new money into the economy. Heritage Foundation Senior Policy Analyst Brian Riedl explains:

Congress does not have a vault of money waiting to be distributed. Every dollar Congress injects into the economy must first be taxed or borrowed out of the economy. No new spending power is created. It is merely redistributed from one group of people to another.
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Yes, government spending can put under-utilized factories and individuals to work–but only by idling other resources in whatever part of the economy supplied the funds. If adding $1 billion would create 40,000 jobs in one depressed part of the economy, then losing $1 billion will cost roughly the same number of jobs in whatever part of the economy supplied Washington with the funds. It is a zero-sum transfer regardless of whether the unemployment rate is 5 percent or 50 percent.

That's the bottom line with 'stimulus': in order for the government to inject money into the economy, they first have to tax it out of the economy.  Remember, the government doesn't have any money on its own; it has to take it from taxpayers first.  So, if you look at the whole system, all of these stimulus things are a net wash at best.  And even a net wash is only if you trust the government to do the redistribution efficiently and effectively.  Ha ha ha.

The rest of the post has some great information that is worth checking out, too.  For example, even tax cuts can be done wrong, too:

...the wrong kind of tax cuts can also be worthless in spurring economic growth. Riedl explains:

Many tax cutters commit the same fallacy as do government spenders when asserting that tax cuts spur economic growth by "putting spending money in people's pockets." Similar to government spending, the tax-cut cash does not fall from the sky. It comes from reduced investment and a higher trade deficit (if financed by budget deficits) or from government spending (if offset by spending cuts).

Permanent cuts to marginal to high marginal tax rates can encourage more business investment and economic growth. But Bush's 2008 tax cuts and Obama's 2009 tax cuts were both just tax rebates which, especially when they are given to people with no tax liability to begin with, are economically indistinguishable from government spending.

That's how Obama got away with campaigning on 'tax cuts' (though some of us were pointing out even then that this wasn't an actual tax 'cut', but it's kind of a moot point now) for 95% of Americans - he offered a one-time minuscule tax rebate (mostly to people who paid no taxes anyway) which did nothing to stimulate economic growth in the future.  People simply pocketed the money and changed nothing about their behavior or activities.  On the other hand, Reagan's tax cuts in the 1980s and Bush's tax cuts in 2003 were great examples of those permanent cuts because they implemented long-term changes in the actual tax rates.  Businesses and individuals saw that the tax rate they would be paying for years into the future were lower, thus freeing up more of their resources for growth and expansion for years into the future, and they changed their plans accordingly.  That's why these tax cuts actually worked.

Excellent stuff, and critical to understand.

There's my two cents.