Economic stimulus is a collection of monetary and fiscal policy initiatives undertaken by a government in an attempt to revive economic output. The measures can include increases in government spending, tax cuts, or both. The American Recovery and Reinvestment Act (ARRA) of 2009, for example, included new Federal government spending in infrastructure, health and education, and unemployment assistance. It also included tax cuts and extensions to other government benefits for lower-income households.
Stimulus packages are usually employed in times of economic crisis and are designed to increase employment and consumer spending. The theory is that when the government spends money, people have more to spend and this creates a virtuous cycle in which people buy more goods and services which leads to businesses increasing production and hiring more workers.
However, there are many critics of economic stimulus programs. For example, they may encourage irresponsible business practices by bailing out companies that are failing and stopping newer, more successful businesses from entering the market. They can also cause inflation by raising demand and not increasing supply, which decreases the relative value of assets held by consumers.
Whether or not economic stimulus works depends on how it is implemented. Supporters of Keynesian economics tend to be strongly in favor of it, while supporters of the Austrian economic school and those who follow Rational Expectations economic theory are typically against it. In addition, any type of economic stimulus package that relies on the government increasing debt can suffer from crowding out, which is when higher government spending causes an equivalent fall in private sector spending.