Tax Rebates: 'Feel-Good' Economics?
NEAL CONAN, host:
This is TALK OF THE NATION. I'm Neal Conan in Washington.
In hopes of forestalling or at least reducing the effects of a recession, the president and Congress are looking for ways to pump up the economy. And while negotiations continue, one item on almost everybody's list is a tax rebate. Proposals ranged from $500 for individuals to 1,600 for couples. Many economists believe that if you put a windfall in people's pockets, they'll spend it, and that added spending could kick-start a sluggish economy.
Of course, some economists disagree. Among them, Bruce Bartlett, who worked in the Treasury Department under the first President Bush. Bruce Bartlett joins us now from his home office in Virginia. He wrote an op-ed entitled "Feel-Good Economics" that appeared in Saturday's Wall Street Journal.
Nice to have you in the program today.
Mr. BRUCE BARTLETT (Economist; Author, "Feel-Good Economics"): Happy to be here.
CONAN: And you note in your piece that tax rebates have been tried before under precisely these circumstances. The first time, all the way back in the Ford administration.
Mr. BARTLETT: That's right. We first tried this back in 1975. And what happened at that time is that people did not, by and large, take the money and run out and spend it. They either saved it or they used it to pay bills or pay down debt, which is exactly the same thing as saving. So that the net increase in spending was extremely modest. And there were number of studies done by Nobel Prize-winning economists that - after the fact that pretty proved that was the case. And then we did it again in 2001. And studies by the University of Michigan and elsewhere have shown that exactly the same thing happened. And so basically, you don't really get the economic impact of these rebates that people think that you're going to get.
CONAN: So instead of spending the money on some new wonderful gizmo or gadget or a part of a new car or whatever, people are either saving it or using to pay down debt.
Mr. BARTLETT: That's exactly right. And in fact, there was an article in this morning's Wall Street Journal. The headline says "Tax Rebates May Be Used to Cut Debt This Time." So the people who study consumer spending are already basically saying that we're going to have the same effect. And there's absolutely no reason to think otherwise.
CONAN: Well, on the other hand, these are politicians making this decision. Sending money back to people is probably a good thing to do in election year.
Mr. BARTLETT: Well, from a purely political point of view, that's true. You know, you'll never - the voters are probably never going to turn away a free government check no matter how bad the underlying rationale for it is. But I think that to the extent that if diverting our attention away from whatever the economy's real problems are, it may have a higher cost than we may think.
CONAN: It's also - the government, when crisis seems to appear - recession would certainly seem to be in that category - they want to be seen to be doing something.
Mr. BARTLETT: That's absolutely right. Don't just stand there, do something. It's a very common problem. And I wish we could figure out some better way of reacting to these kinds of events. But you're going to do something so you might as well do something that doesn't do much harm, I suppose.
CONAN: And you do think that a tax rebate, though you don't think is going to do a lot of good, is probably not going to do a lot of harm either.
Mr. BARTLETT: No, I don't really think so. Because the government is just going to borrow, you know, whatever, say a hundred billion dollars. But then, people are going to save an extra hundred billion because it's just going to take all that money and put it into the saving account. So the net impact really won't hurt much of anything. But if it doesn't affect the economy - and I don't think it will - they may feel that they have to come back and do even stronger measures in the future. And maybe if they'd done something more modest or better targeted in the first place, we'd be better off in the long run.
CONAN: Now, you traced this idea back to the famous British economist John Maynard Keynes - this, of course, basically before the Second World War - who argued that spending was the driving force in the economy. And one of the things that he proposed - well, yeah, consumer spending for sure, but also government spending. And after the Second World War seem to bear him out; we sort of sped our way out of the depression, among other things. That sort of became, well, I guess a form of, well, accepted theory.
Mr. BARTLETT: Well, conventional wisdom, maybe, is the word you were looking for. Yeah, I think that from a conservative point of view, may be stimulating investment, getting businesses to invest more, to modernize and expand plant and equipment, or it might be a better way from a liberal point of view, maybe having the government do more in the area of public works, it might be a better way. I think that there's lots of different things we could be talking about other than a rebate whose only virtue seems to be that it's the second choice of both liberals and conservatives, so is the one thing they can sort of half agree on.
CONAN: Well, the conclusion you come to is that people don't change their spending habits much until they see a permanent change in their financial prospects. So, you know, a tax cut, you argue, would be far better than a tax rebate?
Mr. BARTLETT: Well, I was really mainly trying to make the argument against a rebate rather than make an argument for permanent tax cut. But the basic theory is exactly as you explained. That people's spending is related to what economists call their permanent income. So for example, if people lose their - if somebody loses a job, he doesn't immediately go out and slash his spending, he'll draw it out on saving or borrow money to keep his spending on an even keel in the expectation that he'll find another job relatively soon.
Similarly, when people have windfalls or win lotteries and things, they generally don't go out and spend it all immediately. They save almost all of it and, again, keep their spending on an even keel. And that's why you don't really get any impact from things like rebates.
CONAN: But isn't there a psychological effect if they - people feel like they have more money even if it's in their savings account. They'll feel a little bit looser with their wallet and start spending more and that might, in fact, start the economic snowball riding again.
Mr. BARTLETT: Maybe, but the amount of money per family is going to be so small as I don't really see it having much of an effect. I mean, the most that they're talking about in terms of this rebate is like 1 percent of GDP and that's just not enough to have the kind of effect you mentioned.
CONAN: Which raises an interesting question: Is there anything that a government can do if we're either in the beginnings of or about to enter as most people think a recession? Is there anything the government can do to stop that or forestall it?
Mr. BARTLETT: I think the Federal Reserve is really our first line of defense and I think they're doing what they can in terms of easing monetary policy and lowering interest rates. As far as fiscal policy is concerned, that is to say taxing and spending, the record shows that almost all - every program that's been enacted to try to do something to that area has come long after the end of the recession. And so they end up being worse than useless, they end up over-stimulating the economy on the upside. So I think a case can be made for doing nothing but then, it runs again into that problem we talked about earlier that no politician could be seen to be just doing nothing even if nothing is the right thing to do.
CONAN: Yeah, I was going to say that doesn't suggest you're planning to run for office anytime soon.
Mr. BARTLETT: No. Definitely not.
CONAN: And if doing nothing would probably be the best advice you would give to Congress and the White House at this point, that's difficult advice to follow as we suggested. Let's turn to our listeners.
We have a caller from Binghamton, New York. And it's Tom(ph) on the line.
TOM (Caller): Yes. Hi.
CONAN: Go ahead, Tom.
TOM: My comment is if you give the money to people below even the level of filing income tax - like a lot of people on Social Security or people have no jobs so they file no income tax - believe me, that would be spent and it would be reused to work load on the public assistance system.
CONAN: Well, that's an interesting idea. Of course, the tax rebate would go to people who pay taxes, I guess, by definition, Bruce Bartlett?
Mr. BARTLETT: Well, that's right. I mean, certainly, one can see a program that targeted people who are - who really will go out and spend the money, but I think it's politically unlikely that you can do something like that because you'd be excluding almost everybody out who's not in poverty. So it becomes just a welfare program rather than an economic stimulus. So I think that - and it's hard to target those people. So it's - I think it's impractical, certainly politically impossible to do that.
CONAN: Thanks for the call, Tom.
TOM: My pleasure.
CONAN: Okay. Let's turn now to Van(ph). Van's calling us from Boulder, Colorado.
VAN (Caller): Yeah. You know, one of the things that's really upset me about listening to all the experts, so-called, and this actually ties into another segment I think is coming up on ALL THINGS CONSIDERED is that, you know, people have been talking about this comment for a long time. There's a guy named Bondad that's been posting on Daily Kos for two-and-a-half years talking about exactly this scenario happening. Paul Krugman's referred to it. Atrios(ph), another blogger, has been talking about this and he has an expletive that a - first, it was a manure pile essentially of death, all these loans that are out there.
So now, we do this economic stimulus package too little, too late. And, you know, nobody should be surprised about what's going on. I mean, we're getting a Katrina response to, you know - what was it, Martin Zucker(ph) was talking about the large - you know, the most dangerous economic downtrend since the Great Depression and we're going to send out 800 bucks? I mean, come on.
Mr. BARTLETT: Well, it is true that people have seen this coming. I…
VAN: I mean, I'm a real estate broker and I saw this coming.
Mr. BARTLETT: Well, the problem is nobody knew precisely when it was coming. A lot of people, including some of the people you mentioned, were expecting this a year, two years, even three years ago and nothing happened and that's just the way it is with the economy. It's a little bit like blowing up a balloon. You know that if you keep blowing it up, eventually, it's going to burst and blow up, but trying to predict the exact spot on the balloon where the burst is going to occur is practically impossible. And that's sort of what we're dealing with here. We knew it was coming, we just didn't know when and where and how.
CONAN: If that stimulus package, though, has been passed two years ago, might it did have an effect?
Mr. BARTLETT: I doubt it. I think two years ago, we could have done some other things that would have dealt with the problems in the subprime loan market and the housing market, but it's way, way too light for that now.
CONAN: Bruce Bartlett, thanks for your time today.
Mr. BARTLETT: Thank you.
CONAN: Bruce Bartlett, deputy assistant secretary, the Treasury for Economic Policy in the administration of the first President Bush. He spoke to us from his home in Virginia.
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