Accuracy in Media

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, 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.”




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