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Were the Tax Rebates a Bust?

by: Zubin Jelveh August 06, 2008 | about stocks: DIA / QQQQ / SPY    
Zubin Jelveh

Zubin Jelveh

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Harvard economist Martin Feldstein writes provactively in the Wall Street Journal that the stimulus package was a flop:

Here are the facts. Tax rebates of $78 billion arrived in the second quarter of the year. The government's recent GDP figures show that the level of consumer outlays only rose by an extra $12 billion, or 15% of the lost revenue. The rest went into savings, including the paydown of debt.

But what Felstein surprisingly leaves out is that his evidence is inline with two recent papers (which I've blogged about on a number of occasions) that showed that while consumers initially save most of their rebates, within six to nine months about one-half to two-thirds of payments are spent -- which is significantly higher than the 15 percent figure above.

This from a 2004 paper by David Johnson, Jonathan Parker, and Nicholas Souleles used data from Consumer Expenditure Survey to find

that households spent about 20-40 percent of their rebates on non-durable goods during the three-month period in which their rebates were received, and roughly another third of their rebates during the subsequent three-month period.

And this from a 2007 paper by Sumit Agarwal, Chunlin Liu, and Souleles used data from credit card accounts to conclude:

that, on average, consumers initially saved some of the rebate, by increasing their credit card payments and thereby paying down debt. But soon afterwards their spending increased, counter to the canonical Permanent-Income model.
...

For consumers whose most intensively used credit card account is in the sample, spending on that account rose by over $200 cumulatively over the nine months after rebate receipt, which represents over 40% of the average household rebate.

Spending rose even more for those who were in lower income brackets, which is the group the current stimulus plan tried to target.

The second-quarter GDP data only included one and two-thirds months' worth of data from which to judge the impact of the stimulus package. The two papers' results suggest we need about six or seven months more. And this may be part of the reason why the Fed has said it's too early to tell whether a second stimulus package is needed -- though it's unlikely that they'll wait that long to express their view.

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This article has 3 comments:

  •  
    Aug 07 09:22 AM
    This morning, the nation's two largest retailers, Target and WalMart, released their July comps. Now that the rebate checks are gone, this is the assessment from the retail perspective.
    One word:

    DISMAL

    The rebate was a bust. We simply became more indebted to buy more foreign goods. How is THAT beneficial over any time period but the short-term? And now, we're learning that it wasn't even beneficial over the SHORT-term!

    Fire Congress! Every last stinking one of them!
    Reply
  •  
    Aug 07 09:40 AM
    i agree with saint,we need all new leader's
    Reply
  •  
    Aug 07 11:18 AM
    Tie the income tax to the S&P 500! That would change things a bit. Might be interesting!
    Reply
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