Thursday, February 5, 2009

The Rebate in Retrospect

One argument against the tax cut provisions in the stimulus bill under consideration in the Senate is that the last one - the spring 2008 tax rebate - was not followed by a significant increase in consumer spending. The right question, however, is how did the rebates affect spending compared to what would have happened in their absence. That is, relative to what we call the "counterfactual" scenario, which is unknown, though we can try to estimate it.

The Times' David Leonhardt revisits the issue, and finds some evidence that it was more effective than many think:
For one thing, growth in consumer spending was falling throughout 2007 and 2008. In 2007, it fell sharply between the first and second quarters, was flat from the second to the third, fell from the third to the fourth and then fell again from the fourth quarter of 2007 to the first quarter of 2008. It then rose, albeit not by much, in the second quarter — before plummeting, with a decline of 3.8 percent, in the third quarter. Those numbers seem to suggest that spending would not have risen 1.2 percent in the second quarter without the rebate.

The most compelling evidence, though, comes from a chart that we ran in The Times today. It separates consumer spending by those households below the 95th percentile of the income distribution from spending by those in the top 5 percent. Households in the bottom group generally received the rebate. Households in the top group generally did not.

Guess what? Spending by the bottom group spiked in the second quarter. Were it not for a big pullback by the top group, overall spending growth would have been much higher.
Speaking of the stimulus, President Obama makes his case in a Washington Post op-ed.


Anonymous said...

Do you feel that a full out spending plan in civil projects, buy American, and, investing in renewable energy would be a better solution? That is no tax cut?

Bill C said...

In principle, government spending is more effective than tax cuts at increasing aggregate demand, because part of any tax cut will be saved. And I also agree that we do need more public investment.

That said, the tax cuts can work faster than spending, since projects take time to get going, and if they are aimed at lower- and middle-income families who are living "paycheck to paycheck" more of the money will get spent. So I think the tax part of the Obama plan made sense as a complement to the spending but I definitely wouldn't go for a broad based tax rate reduction instead of spending, as the Senate Republicans seem to suggest.

While the "buy American" provision would prevent some of the spending from "leaking" to imports, I think that benefit is outweighed by the cost to our relationships with our trading partners. If everyone puts in "buy domestic" rules, we all end up losers, so I think its better not to start down that road, and I'm relieved they are watering down that part of the bill.