CHAMPAIGN, Ill. – Pulling the plug on a government-backed stimulus plan once the U.S. economy rebounds is as important as launching one now, a University of Illinois economist says.
Left unchecked, a proposed $789 billion package of spending and tax cuts would be a long-term economic drag by compounding an already massive federal deficit, said J. Fred Giertz, the interim head of the U. of I. economics department.
Deficits undermine the economy by increasing interest rates for consumers as well as the federal government, which means more tax dollars are effectively wasted to pay down the nation’s debt, economists say.
“While a fiscal stimulus leading to large deficits may be desirable in the short term, the country needs to find a way to reduce long-term deficits that will mount from the demands of an aging population relying on Social Security and federal health-care programs,” Giertz said. “Just as it is important to get the stimulus package in place quickly, it is important to stop it once the economy is in better shape.”
Giertz says the stimulus plan being debated by Congress would likely provide a short-term economic boost.
How quickly, he says, remains clouded by questions over how soon new spending programs could get under way and how much of temporary tax increases people would actually spend.
Temporary tax cuts typically provide less of an economic jolt because people tend to spend less than if the cuts were permanent, Giertz said. But he says the government cannot afford permanent cuts with hefty costs for aging baby boomers looming.
With those challenges ahead, Giertz cautioned Democrats and Republicans to use the stimulus package only for a short-term economic boost, not as inroads to advance party goals.
“The stimulus package should not be a back door way of achieving permanent tax cuts for Republicans or a larger-sized government for Democrats since that would increase the long-term fiscal deficit,” said Giertz, a member of the U. of I. Institute of Government and Public Affairs who compiles a monthly index on the Illinois economy.
He says proposed tax cuts, infrastructure improvements and aid to state and local governments offer the best hope for the economy, while long-term commitments such as expanding health-care benefits are bad ideas.
“There are right and wrong components of the package,” Giertz said. “It probably doesn’t make a lot of difference if a few good things are left out and a few bad things are included.”
