History of Government Spending
The history of government implementation of economic stimulus to revive the economy goes back to the mid-1930s, following the Great Depression, when President Franklin D. Roosevelt attempted to alleviate unemployment and national financial and business failures. During this time, many banks failed and consumer confidence was low.
Generally, opponents of economic stimulus intervention feel that the economy should correct itself. These opponents cite the 150-year history of the US without economic stimulus programs, during which time the economy eventually recovered without widespread government intervention in the form of stimulus packages and bailouts (Higgs 2009). However, supporters of stimulus efforts contend that government involvement can reduce the unnecessary suffering of citizens and prevent the unnecessary failure of businesses and the collapse of industries.
The New Deal was a term used during the time of President Roosevelt to describe his efforts to restore American hope and trust in the aftermath of the worldwide economic downturn that was known as the Great Depression. His efforts began after his election in 1933. Roosevelt believed the government would have to take action to move the country to an economically viable position. These actions included reform of banking, and relief to workers and farmers. A second new deal launched the Social Security Act and provided protection for unions and migrant workers (Library of Congress 2004).
Other economic stimulus packages throughout history have resulted in varying degrees of success. Journalist Richard Wolf of USA Today noted that economic stimulus packages were "enacted during five of the past seven recessions—in 1964, 1971, 1975, 1981 and 2001," (2009). These bills found little success in the 1960s and 1970s, and were more effective in 1981 and 2001 because the government and administration realized that faster action led to better results.
A popular way to create economic stimulus is to get money into the hands of people who will likely spend it. A direct rebate is one method, and a reduction on tax burden is another. Individuals received a reduction in the individual income tax rate in 1964, 1975, 1981, 2001, and 2003, and it is likely that reduction of taxes will be popular in the future (Wolf 2009). Other methods relax the tax burden by increasing the amount of deductions individuals can take and the amount allowed for dependent exemptions.
Similarly, economic stimulus packages must support businesses that employ individuals. Businesses, like individuals, are likely to spend any additional money they have at their disposal. Some of the money spent could be used to employ workers and make purchases from other businesses. Popular stimulus cuts for businesses include reducing the corporate tax rate, which was done in 1964 and 1981. Governments have to balance the tax burden on individuals and businesses, and sometimes these two groups are at odds with each other because each feels that it pays more than the other. Businesses may feel they are paying enough, while individuals may feel that businesses have the wherewithal to pay more. Other economic incentives for business have allowed for "modification of depreciation schedules" in 1962, 1971, 1981, 1992, 2002, and 2003 (Wolf 2009). Like individuals, businesses can also benefit from incentives that include increasing business deductions.
As in President Roosevelt’s day, any return to taxpayers—business or individual—has a healthy psychological effect on Americans. Economic stimulus can increase confidence in government and business, as well as reduce crime and social problems caused and exacerbated by unemployment and the lack of funds for social concerns.
Economic stimulus in 2001 was needed for several reasons. The technology bubble burst, creating a recessionary climate due to the massive increase and subsequent failure of Internet-based and other technology companies in the late 1990s through the early 2000s. In addition, the September 11, 2001, terrorist attacks wreaked havoc on the transportation and tourism industries and caused extreme difficulties for businesses affected by the attacks (US airline companies, for example). Similarly, tax and other benefits were extended to victims of the Hurricane Katrina disaster of 2005. An example of a government benefit extended during times of economic hardship is a 50 percent special depreciation deduction for businesses from the Internal Revenue Service (IRS) that was enacted from September 11, 2001, through December 31, 2004. After 2004, this 50 percent deduction was only for what was called the "Liberty Zone" in New York and the hurricane affected "Gulf Opportunity Zone." However, the later Economic Stimulus Act of 2008 reinstated this deduction (Internal Revenue Service 2008).
Congressional Democrats promoted economic stimulus in 2008 for about $152 billion in tax relief that was signed into law by the Bush administration. It was called the Economic Stimulus Act of 2008 and targeted "low and middle income taxpayers and incentives for business investment" (About.com 2009). The Bush administration later signed the Emergency Economic Stabilization Act of 2008 into law to address the problems of the financial industry. Again, there is debate regarding the success of these actions. Critics of economic stimulus packages fear the mismanagement of these large sums.