Not Just a Flop, a Bailout

Thu, 07 Aug 2008 16:34:05 +0000

Writing in yesterday's Wall Street Journal, Martin Feldstein reads the 2nd quarter GDP figures and declares the stimulus a flop:

Congress enacted the tax rebate program earlier this year because it perceived a growing risk of recession. In addition, it feared monetary policy alone would not be effective because of the dysfunctional credit markets. As American taxpayers know, most of the rebate checks have now been mailed and cashed.

Those of us who supported this fiscal package reasoned that the program would boost consumer confidence as well as available cash. We hoped the combination would cause households to spend a substantial fraction of the rebate dollars, leading to more production and employment. An optimistic and influential study by economists at the Brookings Institution projected that each dollar of revenue loss would increase real GDP by more than a dollar if households spent at least 50 cents of every rebate dollar.

The evidence is now in and that optimism was unwarranted. Recent government statistics show that only between 10% and 20% of the rebate dollars were spent. The rebates added nearly $80 billion to the permanent national debt but less than $20 billion to consumer spending. This experience confirms earlier studies showing that one-time tax rebates are not a cost-effective way to increase economic activity.

These conclusions are significant for evaluating the likely impact of Barack Obama's recent proposal to distribute $1,000 rebate checks to low- and middle-income workers at an estimated cost of approximately $65 billion. His plan, to finance those rebates with an extra tax on oil companies, would reduce investment in refining and exploration, keeping oil prices higher than they would otherwise be.

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.

Those of us who did not support this deficit spending thought it was bad public policy to take revenue from future taxpayers to give current consumers a temporary boost of confidence or cash.

So, in the cold light of day, what happened with the rebates was that the government issued more debt than it would otherwise have issued, and consumers now hold less debt than they otherwise would have. That looks like a shifting of liabilities from individual balance sheets to the government balance sheet. In other words, it was a bailout of consumer debt.

While I am not happy for my share of that additional government debt, I am glad that households that received these rebates had the good sense to save them or pay down debt--it shows us some attention to future economic needs that were simply not present in the debt-laced consumption rampage of recent years.