Thursday, May 21, 2009

Policy Ineffectiveness Theory Demonstrated

Another policy response was the Economic Stimulus Act of 2008 passed in February. The major part of this package was to send cash totaling over $100 billion to individuals and families in the United States so they would have more to spend and thus jump-start consumption and the economy. Most of the checks were sent in May, June, and July. As would be predicted by the permanent income theory of consumption, people spent little if anything of the temporary rebate, and consumption was not jump-started as had been hoped.

The evidence is presented in the figure above. The top line shows how personal disposable income jumped at the time of the rebate. The lower line shows that personal consumption expenditures did not increase in a noticeable way. As with the earlier charts, formal statistical work shows that the rebates had no statistically significant increase in consumption.

~From Stanford professor John Taylor's paper "The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong" (HT: Lee Coppock)

This is a good example of the Policy Ineffectiveness Proposition, which suggests that "governments are powerless in the management of output and employment in an economy."


At 5/21/2009 4:20 PM, Anonymous gettingrational said...

I remember this because it was a tax rebate and millions of people who paid no federal tax recieved money. I got money but I had to declare this income and pay taxes on it for 2008. How was this a rebate and not outright redistribution of wealth? Is it any wonder these schemes do more harm then good?oated

At 5/21/2009 5:02 PM, Blogger Hot Sam said...

This comment has been removed by the author.

At 5/21/2009 5:58 PM, Anonymous Invictus said...

Perhaps last year's stimulus didn't work because we were just entereing the deleverging process whereby Americans finally figured out they had way too much debt on their balance sheet? Perhaps that money went to pay off some of the debt? Perhaps that stimulus was the wrong idea from the very start? And perhaps it is not indicative of government's ability to manage output and employment?

At 5/21/2009 6:39 PM, Anonymous Anonymous said...

If the stimulus check is an ADVANCE on next year's tax refund, why would sane people waste it?

Time-shifting money does not create money. Does our govt desire that we think otherwise, so act irresponsibly?

Since Americans have NOT acted irresponsibly, must the govt do so, in abundance, on our behalf? Eeewww!

Best wishes from Kansas. --Redbud

At 5/21/2009 7:02 PM, Blogger PeakTrader said...

You need to compare disposable personal income with final sales, because inventories rise on anticipation of increased demand. Final sales spiked with disposable personal income in that period.

Also, given high household debt (caused by enormous real gains in assets and goods), some of that tax cut likely flowed into paying-down debt, while some flowed into consumption (real GDP also spiked higher in Q2 2008).

I stated before:

Just like the volume of output in itself will cause declining prices and induce demand, the volume of capital will in itself cause interest rates to fall and induce demand. The gains of U.S. assets increased faster than the gains of U.S. liabilities. Similarly, the increases in U.S. output exceeded the rises in U.S. inflation, which induced demand and raised living standards.

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