Looks like RCC has commented several times on the proposed "economic stimulus" package coming from DC. The main points describing this as a bad idea seem to focus on the long run, i.e. "the rebate money will just be financed by debt or tax increases, which will place a drag on the economy." This viewpoint, of course, is true.
But what about the short run?
Doesn’t it seem like sending a "rebate check" to millions of Americans will prompt them to consume more? Not so. Bruce Bartlett does an excellent job in this WSJ piece describing why using Milton Friedman’s permanent income hypothesis:
"(Friedman’s) 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, upon receiving said rebate checks, people will either save the extra money or use it to pay down debt (two sides of the same coin). Studies following the tax rebates of 1975 and 2001 confirm Friedman’s theory. Bartlett proclaims:
"A new rebate probably won’t do much harm. But anyone who thinks it will prevent a recession — if one is actually in the pipeline, which is not at all certain — is dreaming."
A better fiscal policy response? Treasury Secretary Paul O’Neill provided the best advice:
"If we want to change consumption patterns, we need to make permanent changes in peoples’ tax burdens."