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….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.
It’s a peculiar op-ed, however, as he then goes on to say:
The small rise in spending in response to these tax rebates is similar
to what previous studies of one-time tax cuts found. It also
corresponds to what both basic economic theory and common experience
imply. Although someone who receives a permanent annual salary increase
of $1,000 typically would increase his annual spending by an almost
equally large amount, a $1,000 rise in wealth caused by a share price
increase or a tax rebate would raise spending only gradually over a
number of years.
Right. But a short-term tax cut is exactly what Feldstein called for in an earlier op-ed.
The poor effects of the Bush tax rebate as fiscal stimulus, however, let Feldstein now attack the Obama plan for a $1000 tax rebate. Nothing wrong with that – McCain has nothing better however – but what Feldstein doesn’t say is that if you follow the logic of his two op-eds (and this is not something I would necessarily buy into) the conclusion should actually be that fiscal stimulus would work better if it ran through government spending.