January 21, 2008
A new tax rebate - as part of an economic stimulus package -- probably won't do much harm. But anyone who thinks it will prevent a recession -- if one is actually in the pipeline -- is dreaming, says Bruce Bartlett, former deputy assistant secretary of the Treasury for economic policy.
One of the early dissenters on tax rebates was economist Milton Friedman, says Bartlett:
- His research had led him to conclude that consumer spending was less a function of liquidity than something he called "permanent income."
- Friedman observed that when workers lost their jobs, they didn't immediately cut back on spending; they borrowed or drew down savings to maintain spending, in the expectation of finding a new job shortly.
- Conversely, consumers didn't immediately spend windfalls; they kept spending on an even keel until they achieved a promotion at work, or other increase in their long-term income expectations.
In short, there is virtually no empirical evidence that tax rebates are an effective response to economic slowdowns, says Bartlett. The increased personal saving doesn't help the economy because the federal budget deficit, which can be thought of as negative saving, offsets all of it in the aggregate. The main benefit of a tax rebate would seem to be political -- giving politicians a way of appearing to be doing something about the nation's economic problems that is superficially plausible.
Source: Bruce Bartlett, "Feel-Good Economics," Wall Street Journal, January 19, 2008.
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