Stimulus Response

With the burst of the housing bubble, skyrocketing oil prices, and ample media coverage of it all, hysteria is in the air over a potentially looming recession, and all eyes are on the economy.

Enter the Bush 2008 Economic Stimulus package. A truly ingenious solution from a political standpoint, constituents’ worries are assuaged when they see concrete government intervention—especially when that intervention puts a $600 check in their pocket. The hope is that more money in the hands of consumers will lead to increased spending, and consequently stimulate greater production and investment.

But is this Keynesian-inspired remedy a miracle cure or just an economic band-aid?

History would argue the latter. These tax rebates are not the first of their kind, nor are they likely to be the last. Initially introduced by President Ford in 1975, the rebate was an impressive $200, or about $800 in 2008 equivalency. But this rebate failed miserably to achieve the goal of boosting consumer spending, and the next tax rebate proposal flopped in Congress. It wasn’t until the Bush Administration that we saw the revival of tax rebates in 2001 and 2003, as part of a larger pro-growth tax package, explained Rae Hederman, Assistant Director of the Center for Data Analysis at the Heritage Foundation.

“So the idea of a rebate system is very simple,” he said. “But there’s one problem with them, and it’s that they really haven’t worked.”

Hederman is reluctant to attribute any recent upswing in the economy to the tax rebates, which he says are much too fresh to be a significant causal factor.

“The weakest part of the economy was the fourth and first quarter, and we’re already starting to see some signs of life,” Hederman said. “I find it questionable that these rebate checks, which won’t even have taken effect for many people yet, are having an effect right now which people are trying to tout them for.”

Public opinion survey conclusions echoed the same pessimism concerning the effectiveness of the stimulus checks.

When news of the stimulus checks broke, people were asked what they planned to do once they received their government checks. Most responded by saying they would either put the money toward their savings, or pay down debt. When the public was surveyed afterward to find how they actually used their checks, the overwhelming majority said they indeed put it toward their savings, or paid down debt.

Because these uses of funds fail to create the desired effect of consumer spending, experts predicted that rebate checks would have minimal success in boosting the economy.

A glimmer of hope for the stimulus rebate appeared with a paper by Johnson, Parker and Souleles, whose data analysis suggested that consumers would spend between 20 and 40 percent of their rebate on nondurable consumption, causing significant positive effects in the economy.

“The result seems to be completely contradictory, so we started looking into it,” said Norbert Michel, of Nicholls State University.

Michel cleaned up their data set, throwing out the major outliers and tweaking the measure of “nondurables,” so that it no longer included healthcare.

“The key result is no longer positive, it’s actually negative. Which is the complete opposite of what they have,” Michel said.

Alan Viard, a resident scholar at American Enterprise Institute, agreed that support for Johnson, Parker and Souleles was weak, and said that economic growth as a result of stimulus checks would probably be fairly small, and certainly hard to measure. He emphasized that Keynesian policies provide temporary economic fixes, but do not promote lasting growth.

“The one thing to absolutely understand in any analysis of this question, is that Keynesian measures like this do not permanently expand the economy,” Viard said. “All can they do is alter economic fluctuations. They can give you additional growth during some episodes, but that’s paid for by a loss of growth in other episodes.”

Viard said that although some people will respond to the extra cash by spending it, that most will not make a permanent change in their consumption habits as a result of a stimulus check. Because their income hasn’t changed on a permanent basis, they’re not going to suddenly decide to rent a bigger house or send their kids to an expensive private school, just because they got a $600 check.

But if tax rebates are bad economics with a historical track record of failure, why did the legislature pass the 2008 stimulus package?

“You may have noticed that the stimulus debate started in January 2008, slightly after the first primaries,” said Steve Entin, President of the Institute for Research on the Economics of Taxation. “My guess is, a lot of the opposition withered in the face of the political season that we’re in.”

Michel also suspects that politics play a role in the quick-fix free-money economic policy.

“Politics is going to trump economics pretty much all the time,” Michel said. “It’s very difficult to impress upon someone that the rebate check is not free—that it is coming from somewhere else, and that there is an offset.”

Brooke Rieder is an intern at the American Journalism Center, a training program run by Accuracy in Media and Accuracy in Academia.