Sunday, March 22, 2020

History Shows Direct Assistance Won't Boost Consumption

The state of the economy is on everyone’s mind due to the COVID-19 and the more frequent practice of social distancing. People are staying at home due to the virus, which will have a negative impact on consumption. On Tuesday, Treasury Secretary Steve Mnuchin said that the administration is “looking at sending checks to Americans immediately.” The idea is similar in approach to proposals from Sens. Tom Cotton (R-Ark.) and Mitt Romney (R-Utah).

The approach of direct cash-based assistance isn’t a new idea. On the surface, it may sound like a good approach. Americans get a check from the federal government based on the hope they will spend the money to boost consumption. In this instance, the direct assistance the administration appears to hopes to help some Americans meet their financial obligations, such as mortgage payments and utilities.

If the administration hopes to see an increase in consumption, however, history says that it won’t work. Not only are many people staying home in light of COVID-19, but the data show that people tended to save the money they received from the federal government rather than spend it. Some may have paid off debt, although there isn’t good data on this particular theory. A better way to boost businesses would be to provide a payroll tax holiday for an indefinite period.

In June 2001, President Bush signed the Economic Growth and Tax Relief Reconciliation Act. This bill was the first of two major tax bills that President Bush signed into law during his first term. The law not only cut marginal individual income tax rates and capital gain tax rates, among other changes to the tax code, it also created a 10 percent income tax bracket on taxable incomes of $6,000 for an individual and $12,000 for a married couple filing jointly. The maximum amount an individual could receive was $300. The maximum for a married couple filing jointly was $600.

These tax rebates were sent to taxpayers in the form of a check. The hope was that the tax rebate would have a stimulative effect on consumption. But did the 2001 tax rebate have the desired result? Different studies on the effect of the tax rebate have different conclusions. Using an idea from John B. Taylor of the Hoover Institution, who looked at the effect of the 2008 tax rebate, we’ve compared disposable personal income (DPI), which is after-tax income, to personal consumption expenditures (PCE) between January 2000 and December 2002. If the tax rebates were effective, we would expect to see a significant rise in both DPI and PCE. The data shows this not to be the case.

As the chart below shows DPI did rise after the passage of the 2001 tax rebate, but personal consumption expenditures (PCE) declined briefly before jumping and then declining again and leveling off. Not shown in the chart is the PCE-to-DPI rate. In December 2000, the rate was 91.6 percent. In May 2001 and June 2001, the PCE-to-DPI rate was 91.5 percent. It declined to 90.4 percent in July 2001 and 89.3 percent and 89 percent in August and September 2001.

2001 Tax Rebates

Interestingly, the personal savings-to-DPI rate increased between July and September 2001. Prior to these three months, between January 2000 and June 2001, the rate had not exceeded 5.4 percent, which was the rate in January 2000. The personal savings-to-DPI rate increased to 5.6 percent in July 2001 and peaked at 7 percent in September 2001. The PCE-to-DPI rate increased in October and November 2001 to 92.6 percent and 92 percent before falling back to 91.6 percent in December 2001.

Personal savings declined to 3.4 percent and 4.5 percent in October and September 2001. Throughout 2002, the personal savings-to-DPI rate never dropped below 5.4 percent. The PCE-to-DPI rate didn’t rise above 91.1 percent in 2002.

One could surmise from the 2000 through 2002 data that many who received tax rebates decided to save the money rather than spend it or saved it knowing that they were receiving a check that could be spent later. Others may have paid off personal debt with the rebate. In February 2002, the White House Council of Economic Advisers released a short paper that claimed the previous year’s tax rebates “provided valuable stimulus to economic activity in the short run,” but there’s little evidence that is the case.

The Bush administration used a similar method 7 years later with similar results. In February 2008, President Bush signed the Economic Stimulus Act, which provided another round of tax rebates. Unlike the tax rebates in the Economic Growth and Tax Relief Reconciliation Act, the Economic Stimulus Act provided tax rebates to taxpayers, even those with no tax liability, who earned a minimum income of $3,000. Rebates were reduced for individuals with incomes above $75,000 and married couples filing jointly with incomes above $150,000 by 5 percent of their 2007 reported adjusted gross income. There were other tax aspects to the Economic Stimulus Act for individuals with children and businesses.

In 2008, the rise in DPI was even more noticeable around mid-year, but PCE declined substantially. Of course, in this instance, the recession began in December 2007 and lasted until June 2009, which, more likely than not, explains the decline DPI and the even more substantial decline in PCE.

2008 Tax Rebates

What all these numbers demonstrate is something that fiscal conservatives have long known. Centrally planning the economic activity of millions is an effort in futility. Every time we have attempted using stimulus policies to stimulate the economy, the real-world impact has been negligible. Moreover, a direct cash infusion of the type Secretary Mnuchin has proposed would require financing billions of dollars in payments by taking on an incomprehensible amount of excess debt and all of the negative externalities that come along with it.

In short, the stimulus package that the administration has expressed support for would not only fail in its objective but would hold far-reaching consequences for our nation’s fiscal security.



In a Time of Crisis, Let's Stand Together

For quite some time, aided and abetted by a rapacious media and take-no-prisoners howlers-at-the-moon on social media, "partisanship porn" has been America's most enduring frame of reference. You're either with me or you're the enemy, the idiot, or simply beneath contempt. Thus one must be ridiculed, defriended, socially ostracized, and/or ignored. All of our differences are irreconcilable and civil war inevitable.

Except that it's not.

This writer is a conservative who finds much of the progressive agenda wrongheaded at best and detestable at worst. But an agenda is not a person and hatred, simply for hatred's sake, might be the most contemptible default position one can have — in the best of times.

In a time of national emergency, it may prove deadlier than the coronavirus that has precipitated that emergency.

One wants to point out that the Trump administration has done a lousy job reacting to the virus, while someone else wants to counter that there's a double standard regarding how well the Obama administration handled swine flu and Ebola? Point and counterpoint. Tit for tat. Nah, nah, nah, nah nah.

Toward what end, other than to stoke division in a time when unity is desperately needed?

Columnist Micheal Goodwin reminds us that even during a world war, soldiers on both sides took a respite from the baser aspects of the human condition. "Starting earlier in December and culminating on Christmas Day in 1914, many allied British and French troops on one side and Germans on the other left their trenches and greeted each other on No-Man's Land," he writes. "The sudden fraternization happened on many spots along the Western Front, with soldiers swapping souvenirs, raising toasts, singing Christmas songs and playing soccer."

He believes the same mindset should prevail in Washington, DC. "If warring European soldiers could do it a century ago, surely warring American political leaders can do it today," he asserts. "God knows our nation needs a truce."


Nonetheless, there is little doubt the partisanship that afflicts our Ruling Class will play itself out in whatever series of measures politicians attempt to implement during this crisis. Thus, conservatives will complain about possible loss of constitutional rights precipitated by mandatory shutdowns of various economic sectors, while progressives will complain about efforts viewed as sacrificing vulnerable Americans to protect the economy — all while reliably hysterical media pundits exacerbate the differences and fan the flames of panic for their own perceived advantages. Conservatives will rail against nationalization schemes, progressives against tax cuts, etc. etc., ad infinitum.

Here's an idea: In a nation beset by large philosophical differences, how about inserting a sunset clause into every measure enacted by Congress during the crisis? According to the current worst-case scenarios, we are in for a long period of hard times. Perhaps such sunset clauses could be tied to information regarding when the transmission of the virus peaks and begins to wane. At that point, any measure related to the outbreak will either have to be renewed or it will automatically expire.

A heavy lift? No doubt. But one that would certainly mitigate the paralysis that inevitably arises when one side sees the other as seeking permanent changes, using coronavirus as a pretext. Indications that bipartisanship is already occurring are a welcome sign, and such clauses would further that end.

Perhaps financial markets should be temporarily closed as well. Since panic is the current worldwide default position, and most economies are in some form of suspended animation, it seems sensible to suspend the unprecedented and potentially catastrophic gyrations of financial markets as well. Price discovery, which is the basis of the entire system, can be determined at a later time.

Americans themselves? One hopes that self-quarantining and isolation might induce reflectiveness. Perhaps we might begin to realize that most of the issues we argue about, sometimes to the point of insanity, are reflective of our ... luxury. The overwhelming majority of Americans are well fed (even to the point of obesity) and our definition of "poor" is the envy of a world where, for the overwhelming majority of people, simple survival is still a 24/7/365 effort.

And then there's perspective. "For those who grew up in the 1930s and 1940s, there was nothing unusual about finding yourself threatened by contagious disease," writes self-described "80-something" columnist Clark Whelton. "Mumps, measles, chicken pox, and German measles swept through entire schools and towns; I had all four. Polio took a heavy annual toll, leaving thousands of people (mostly children) paralyzed or dead. There were no vaccines. Growing up meant running an unavoidable gauntlet of infectious disease."

In modern day America, "growing up" has become an increasingly heavier lift in an increasingly narcissistic nation. No doubt largesse, coupled with technology, has made "look at me" a national sport. But one suspects a crisis that has likely caused millions of Americans of every generation to contemplate their own mortality may ultimately engender a much-needed "were all in this together" response. At the very least, we may realize just how petty many of our disagreements are, and one hopes that in turn will engender an appreciation of each other that transcends those differences — even if it is only for the duration of the crisis.

We already know where the alternative gets us, and the reality that some people will never get it should not deter the rest of us from seeking common ground, no matter how narrow the parameters. Americans will always disagree, even vehemently, about what is right and wrong for our nation, but the wholesale elimination of mutual respect does not have to be part of the equation.

Moreover, we should be enormously thankful for the legions of unsung, everyday heroes who persevere and often risk their own well-being taking care of the ill, delivering much-needed supplies, and performing other innumerable tasks that may ultimately be the difference between civilization and anarchy. Few of their names will ever be known, but millions of Americans will owe them an enormous debt of gratitude.

America persevered after Pearl Harbor and 9/11. We can do it again. And maybe, just maybe, for the first time since it was coined, there is a phrase Americans can take to heart in an entirely different context than it was first presented:

Never let a crisis go to waste.




MEDICAL SUPPLIES AT THE READY: Trump invokes Defense Production Act to buoy the manufacturing of medical supplies (The Hill)

COVID-19 BESIEGES CAPITOL HILL: Reps. Mario Diaz-Balart and Ben McAdams are first lawmakers to announce testing positive for coronavirus (Fox News)

NO JOKE: Baltimore mayor begs residents to stop shooting each other so hospital beds can be used for coronavirus patients (CBS Baltimore)

COMMUNIST MALFEASANCE: Outbreak could have been reduced by 95% if China acted sooner (The Daily Wire)

HITTING THE BRAKES: Most automakers shut North American plants (AP)

SILVER LININGS: Gas prices could hit 99 cents in some states due to coronavirus and supplies (Fox News)

ROCKET-ATTACK RETALIATION: U.S. imposes new sanctions on Iran, seeks release of Americans (National Review)


For more blog postings from me, see  TONGUE-TIED, EDUCATION WATCH INTERNATIONAL, GREENIE WATCHPOLITICAL CORRECTNESS WATCH, AUSTRALIAN POLITICS, and Paralipomena (Occasionally updated), A Coral reef compendium and an IQ compendium. (Both updated as news items come in).  GUN WATCH is now mainly put together by Dean Weingarten. I also put up occasional updates on my Personal blog and each day I gather together my most substantial current writings on THE PSYCHOLOGIST.

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