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August 19, 2008

Did the stimulus package actually stimulate?

One of the big questions of the policy season is surely “Did the $100 billion of tax rebates distributed to households in May, June, and July actually work?” “Work” in this case means “stimulate consumer spending.” You may want to sit down before I tell you this, but so far economists disagree. In one corner you have Christian Broda at the University of Chicago and Jonathan Parker at Northwestern University:

The Economic Stimulus Act of 2008 was aimed at increasing disposable income temporarily through tax rebates in the hope this would stimulate spending and end or at least mitigate the severity of a U.S. economic slowdown. We find that to a significant extent they succeeded. The stimulus payments are initially being spent at significant rates. These rates are slightly higher than those observed in 2001 when fiscal policy has been credited with helping end the 2001 recession.

In the other you have Martin Feldstein:

Although press stories emphasizing that the rebates induced additional consumer spending were technically correct, they missed the important point that the spending rise was very small in comparison to the size of the tax rebates.

A recent, widely reported academic study by Christian Broda and Jonathan Parker showing that the rebates led to increased spending on nondurable items (like food and drugs) does not contradict the implication of the more comprehensive data—on national retail sales and total consumer spending—that the induced rise in consumer outlays was small relative to the size of the rebate.

Oh boy. Let’s back up a step. Before the fact, here is what people said they were planning to do with their rebates (by at least one report):


So what did the people receiving the rebates do with them? Well, if we could answer that one, it would be easy to resolve the Feldstein vs. Broda-Parker dispute. It does seem undeniable that a pretty good piece of those rebates was saved, at least in the first two months.


Can those elevated saving rates recorded in May and June reflect an outbreak of thriftiness? The real answer is “who knows?” but we can do a little back-of-the-envelope arithmetic to put things in perspective. Ignoring the Katrina-related dip in August 2005, the average saving rate from the beginning of 2005 through this past April was about 0.61 percent.

So, here’s the question: Assuming that consumers saved out of nonrebate income at the rate of 0.61 percent, how much would they have had to save out of the sums distributed in May and June to raise the overall saving rates to the observed values of 4.9 and 2.5 percent?

If you do the annualized calculation for the $43 billion of rebates in May and $28 billion in June you get some pretty striking numbers: An implied saving rate out of the rebates of somewhere in the neighborhood of 83 percent in May and 63 percent in June.

You can argue that there is a sense in which even these figures are understated. Durable goods purchases, for example, are theoretically a form of household saving, and the Broda-Parker survey respondents did indicate that about 20 percent of their rebates went toward the purchase of durables. However, if that is so durable expenditures without the tax rebates would have been really low. Though expenditures on durables grew at an annualized rate of 5.8 percent in May—not bad—they shrank by 17.4 percent in June.

These back-of-the-envelope calculations are pretty rough, of course, but they are broadly consistent with evidence from the 2001 tax rebates. That evidence also suggests that about one-third of the rebates were spent in the quarter following their disbursement, so the spending effects of this year’s model may yet have legs.

On the other hand, even if the rebates do prop up consumer spending in the short run, that would hardly settle the debate about whether they were the best way to spend $100 billion. But that’s a different debate for a different time.

August 19, 2008 in Saving, Capital, and Investment, Taxes | Permalink


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By Fester: The point of a short term stimulus package is to encourage people to spend money. The reason is to kick-start demand because the problem is primarily seen as a short term crisis of confidence. An effective stimulus package [Read More]

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Looking forward to our class starting next month.

A possibly dumb question from someone who has not had macro in 15+ years, but are the savings rates shown in these charts permanent?

Say I get a check for $1000 and I deposit it in my savings account with the best of intentions, but 2 weeks later I see a great new gizmo I cannot live without and spend the entire amount I had 'saved'.

Initially, I saved the money and later I consumed with it. How does the data handle such a situation? To me, it looks like my actions might be double counted as both saving and spending.

Posted by: Diorex | August 19, 2008 at 06:30 PM

I will bet that not a penny of the rebates will be left in personal or family "savings" by December 24, 2008.

Yes, I read both of your references. Interesting assessments. Not sure what to think. But I will stick with my prediction.

Posted by: Movie Guy | August 20, 2008 at 12:38 AM

I hypothesize that the remainder of the stimulus will be spent in direct relation to a turnaround in consumer sentiment.

Posted by: Marco Loureiro | August 20, 2008 at 08:49 AM

Looking at the 2001 episode, I can see no basis for tha argument that any of the rebate was saved - unless there is another explanation for the downward spike in the saving rate that occurred after the upward spike.

Posted by: don | August 20, 2008 at 04:22 PM

1. You state, "the spending effects of this year's model may yet have legs". Does this not miss the point of the stimulus? I thought the point of a fiscal stimulus was to get money in the hands of consumers faster (so they can spend it) than could otherwise be done through monetary policy initiatives.
2. Doesn't this simply prove what you taught us about the marginal propensity to consume? Since the increase in disposable income (tax rebate) is temporary and not permanent, the incentive to increase consumption will be (has been) limited. Perhaps you should teach your Macro course up on Capitol Hill so that we don't have to have this debate in the future!

Posted by: Ken | August 20, 2008 at 08:47 PM

I am not American but I suspect that people spent their money on the petrol and food instead of saving.

Posted by: Man | August 21, 2008 at 01:01 AM

Why is there no discussion of the import share of spending from the stimulus checks? One survey (the Fed's beige book?) said that a lot of the PCE was for electronics, almost all of which are produced abroad. To the extent that the stimulus was spent on imports: the US borrowed money from abroad, sent checks to almost all households, who used a portion of the money to buy imported goods. Brilliant policy! Great for China; not for the US.

Posted by: Charlie Poole | August 21, 2008 at 12:36 PM

A couple of responses: To the question of whether the change in saving is permanent, the simplest response is probably "no.” The evidence of the 2001 tax cut clearly suggests that the "marginal propensity to consume"—that is, the fraction of the extra income spent—is smaller in the quarter the rebates are disbursed than it tends to be over several quarters. Does that run counter to the intent of the policy? I'd be inclined to say "no" here as well: If there is a fairly strong impact on spending for the year as a whole, I would count that as stimulating consumption spending even if the bulk of the impact occurs with a delay of a quarter or two.

The issue of whether or not rebate checks were spent on food and gas is an interesting one. One of the observations in the Parker and Broda study is that sales shifted from traditional grocery stores to supercenter outlets. The latter of course are more likely to sell fuel. As an example, in Wal-Mart's second quarter revenue report, fuel sales accounted for about half of the growth in sales at their Sam's Club stores.

I'll note that it is not too hard to construct a story that an outsized (by which I mean bigger than theoretically predicted) response to spending would be a perfectly rational response if consumers were actually expecting the pullback in oil and gasoline prices that has actually occurred. If the tax rebates are expected to more-or-less match higher energy prices, which themselves are also believed temporary, it would be perfectly reasonable for consumers to react by smoothing the impact on other types of spending by allocating the rebates to their bills at the pump.

As to whether the rebates went to imports, I don't know. The foregoing discussion of gasoline spending would be consistent with that—though China would not be the destination in this case. But more to the point, import growth did fall off substantially in the 2nd quarter, which is actually one of the bigger stories of the year's first half:

Posted by: David Altig | August 25, 2008 at 06:02 AM

There is nothing in this post that suggests income tax refunds also start arriving in May,June,and July. Some that may have spent more heavily around that time may have been inclined to put something back from the rebate. This would help explain the pre - May downward spike bfore the upward boost.
Does this data include the entire spectrum of incomes? If so tax refunds were falling on those in the upper brackets, who did not set up their withholdings to minimize government use of their incomes, as well.
That could also affect the savings rate as those in the upper incomes may have been hedging, and their savings rate has the potential of being much higher, enogh to affect the aggragate picture.

Posted by: Dennis | September 18, 2008 at 10:28 PM

How about redistributing purchasing power through the tax system?

Poor people generally spend more of an extra dollar than rich people do. So redistribution can be expected to boost aggregate demand without simultaneously boosting public deficits.

Even weak households can of course be expected to save some of the extra dollars. Given their indebtedness, that’s not a bad thing.

One may argue that poorer people spend their dollars differently from richer. But many products sold lately were anyway meant to satisfy needs for rather conspicuous consumption. More resources must be allocated to the satisfaction of (slightly) more basic demands.

Growing inequality is a major explanation for the crises. For many households credit growth has worked as a substitute for wage growth.

This process will have to be reversed one way or another. We must make sure that wage differentials decreases rather than the opposite. In addition to tax breaks for the weaker households, mortgage assistance is needed.

When you run out of helicopters, distribute fresh money through increased unemployment benefits. This will improve the bargaining power of the weakest employees. But make sure the informal economy doesn’t explode. ID-cards for all wage earners are needed!

Jan Tomas Owe

Posted by: Jan Tomas Owe | January 13, 2009 at 08:12 AM

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