Economic stimulus refers to measures put in place by government lawmakers or central bankers to boost an economy when it slows down. These measures can be categorized into two different types: monetary and fiscal. Monetary stimuli include lowering interest rates, while fiscal stimuli include boosting government spending or cutting taxes.
In general, the key to effective economic stimulus is focusing on increasing aggregate demand when demand dips. For example, reducing income tax rates or raising unemployment benefits both increase disposable income for individuals and therefore encourage them to spend more, which helps to boost the overall economy’s consumption.
Another popular way to increase aggregate demand is boosting government spending, especially on infrastructure projects. This type of spending tends to have a high bang-for-the-buck effect as it can help to spur long-term growth and improve productivity.
However, some economists have criticized the effectiveness of these and other economic stimulus plans. They argue that the effect is often offset by other offsetting behaviors. For example, higher consumer spending could lead to rising wages and reduced business profits, thereby counteracting the effects of the initial infusion of liquidity.
Another important consideration is whether the policy is well-targeted. For example, tax cuts for businesses typically rate much lower in bang-for-the-buck terms than those for consumers, since businesses may be able to raise cash through other means than cutting taxes. Additionally, in a recession, the primary problem for most businesses is lack of customers, so policies that boost their purchasing power will likely have a greater impact than those that simply increase revenue or reduce expenses.