Do Economic Stimulus Checks Stimulate the Economy?

Why the Obama Plan Will Fail and Why There is a Better Idea

Part of President-Elect Barack Obama's plan for a stimulus package consists of mailing people rebate checks, similar to the ones mailed by the government earlier this year. But experience suggests that this is a poor way to stimulate economic growth.

John B. Taylor, a former Under Secretary of the Treasury for International Affairs and currently a senior fellow at the Hoover Institution and a professor of economics at Stanford University,

provides an analysis of the recent stimulus package in the Wall Street Journal. Taylor showed that while disposal income enjoyed a blip around June 2008 due to the stimulus rebate check, personal consumption expenditures did not enjoy any increase.

Temporary increases in income do not lead to permanent increases in consumption. People who receive temporary rebate checks realize that the operative word is "temporary" and will tend to either save the money or else pay off debt. They will certainly not buy big ticket items such as automobiles that require a long time to pay off, being uncertain about their future income and economic conditions.

So how does Obama provide a stimulus that will foster long term, economic growth? Taylor suggests something that may be heretical to the incoming Obama administration, but has tended to work when tried. While the theory behind issuing rebate checks is that stimulus should be "temporary, targeted and timely," Taylor suggests that a stimulus should be "permanent, pervasive and predictable." He suggests that a permanent stimulus package should "focus on the "automatic stabilizers" (the tendency for tax revenues to decline in a recession and transfer payments such as unemployment compensation to increase in a recession), which are built into the tax-and-transfer system, and on more permanent fiscal changes that will positively affect the long-term growth of the economy."

How to accomplish this? Taylor suggests the following: