Rebates and Personal Consumption

While legislators finalize yet another round of stimulus spending, they should self-impose a time-out to assess the ineffectiveness of the last two years of government-directed stimulus. After two years of repeated government stimulus programs, the economy remains either in recession or in very slow recovery and yet the federal government continues to tinker with new ‘stimulus’ programs financed with bloated deficit spending.

Recent NBER research focusing on the 2008 tax rebate stimulus reveals that there was only a modest per dollar stimulus effect. Indeed, households that found themselves short of money did not go out and spend their rebate checks as many in Congress thought they would. In technical terms, these households showed a very low marginal propensity to consume -– an MPC roughly equal to 0.3. Low-income and low-wealth households did not report spending more as a result of the rebate, and households with expected income growth are substantially more likely to spend the rebate than those with expected income declines.

These findings also suggest that about one-fifth of households receiving the stimulus rebates actually decided to increase their spending and that the rebates “did not stave off the sharp drop in economic activity in 2008 [although] they affect the timing of its onset by making growth in household spending noticeably stronger in the second quarter and noticeably weaker in the fourth quarter than it would have been absent the rebate.” Most importantly boosting income relating to the tax rebates will remain ineffective because it does nothing to change the marginal incentive to work and also create any permanent change to individuals’ real wealth.

Moreover, the Obama fiscal stimulus package – which has largely shifted the focus of the government-directed dollars to shore up public sector employment, state Medicaid budgets, spending on ‘shovel-ready’ construction projects, etc – is more of the same bad reality: another hugely expensive mistake. Despite the repeated rhetoric that the most recent round of stimulus measures has ‘created or saved between 1.5 and 2 million jobs’, employment statistics reveal that since January of 2009 there has been a net loss of 3.5 million US jobs. Additionally, over a 5-year period (2009 to 2013), Robert Barro of Harvard University asserts that “the fiscal stimulus package is a way to get an extra $600 billion of public spending at the cost of $900 billion in private expenditure.”

It is becoming a broken record, yet it is high time that federal policy makers scrap the ineffective (and grossly expensive) model of economic growth which relies on government-directed income and consumption stimulus. Instead, in a real attempt to bolster business confidence and give business a chance to grab a breath of air, Members of Congress should seriously turn to no-cost stimulus legislation that will actually promote investment and entrepreneurship – and hence productive and sustainable economic growth.