Another Look at the Stimulus

Sun, 10 Aug 2008 14:36:09 +0000

Stan raises a couple of good points in his response to my earlier post on the Stimulus Bailout. Both of them pertain to the counterfactual--what would the second quarter GDP growth rate have been had the stimulus deficit package not been enacted? In his calculations, Feldstein assumes that consumption would have been the same in the second quarter as in the first if not for the wii-bates:

Here are the facts. Tax rebates of $78 billion arrived in the second quarter of the year. The government's recent GDP figures show that the level of consumer outlays only rose by an extra $12 billion, or 15% of the lost revenue. The rest went into savings, including the paydown of debt.

There are two other assumptions underlying the calculations--that the wii-bates were the only shock to hit consumption that quarter and that it is appropriate to assume that all of the impact of the wii-bates can be measured in that single quarter.

Other assumptions could be seen as equally plausible, including the assumption that the level of second quarter consumption would have been (much) lower than in the first quarter. It was the supposed fear of that possibility--and the implications of negative growth in GDP--that motivated the politicians to enact the stimulus deficit package. That's the counterfactual that the Administration would likely play up. See this White House e-mail as an example.