Economic stimulus is a policy that involves government deficit spending, tax cuts, or lowered interest rates in order to spur consumer and business spending. The idea stems from the theory of economist John Maynard Keynes in the 1930s. These kinds of policies are typically employed during recessions in an attempt to increase spending in the economy, which then leads to a greater need for goods and services. This in turn drives more hiring, and then the cycle continues. Some economic stimulus is also accomplished when central banks like the Federal Reserve buy securities in a process called quantitative easing, which helps expand money supply and encourage lending.
While some economists think economic stimulus is ineffective, others believe it’s a vital part of keeping the economy moving during a recession. Keynesians argue that a recession is caused by a lack of demand, which is why the government should step in to boost spending and consumption.
Some of the most popular forms of economic stimulus are payments to individuals and businesses, as well as reduced taxes on corporations. These are viewed as having high bang-for-the-buck effects because they reach the people who are most likely to spend the money. Lower-income households are especially prone to do this. The reason is that these individuals are already struggling to meet their daily expenses, so they have the most to gain from increased spending. Broad-based tax cuts for companies, however, tend to rate much more poorly in terms of their bang-for-the-buck effect.