FRBSF Symposium: The Effects of Fiscal Stimulus

Since the topic of another stimulus package is coming up more and more, e.g. see below, here's a discussion of "Research on the Effects of Fiscal Stimulus" posted today on the SF Fed website:

Research on the Effects of Fiscal Stimulus: Symposium Summary, FRBSF Economic Letter, by Dan Wilson: This Economic Letter summarizes the presentations at a symposium held at the Federal Reserve Bank of San Francisco on May 9, 2008... Presentations are listed at the end, and three of the four are available online.

On February 13, 2008, President Bush signed into law the "Economic Stimulus Act of 2008," which consisted of roughly $100 billion of tax rebates and more than $50 billion of investment incentives for businesses. The act was a response to weakness in the economy and prospects for more substantial deterioration... Its enactment has prompted questions about its potential effects—will consumers spend or save the funds from the rebate checks? will the short-lived tax breaks boost business investment?—and has renewed the broader debate about the use of "activist" countercyclical fiscal policy. ...

Here's one of the four summaries (the other three summarize results by Michael Boskin, Mathew Shapiro, and Alan Auerbach):

...Evidence on the 2001 rebates from credit card and consumer expenditures data What people say they will do and what people do are not always the same, however. As Shapiro points out, the survey evidence should be complemented with data on individuals' actual consumption and savings behavior to get a full picture of the rebates' effects. The third speaker of the symposium, Nicholas Souleles of the University of Pennsylvania, has been at the forefront of the research looking at such individual level data and has coauthored two of the most important papers in this area.

Both studies exploit a little noticed feature of the IRS's rebate disbursement process. To minimize on logistical and mailing burdens, the IRS spaced out the check mailings over several months into separate batches according to the penultimate digit in the recipient's social security number, a digit that is essentially random. This randomness in when people receive their rebates allowed Souleles and his coauthors to isolate the effect on an individual's spending and saving behavior coming from the rebate from any macroeconomic effects that would affect all people at the same time.

In the first study, Johnson, Parker, and Souleles (2006), the authors looked at data on household expenditures from the Consumer Expenditure Survey. They found that, in terms of spending on nondurables, a little more than one-third of the average rebate was spent in the first quarter after receiving the rebate, a result closely matching the direct survey results of Shapiro and Slemrod. However, in contrast to those results, Souleles and his coauthors found that more than two-thirds is spent by the end of the third quarter after receipt.

In a second study, Agarwal, Liu, and Souleles (2007) looked at credit card data from a large, national credit card company. Using a representative sample of card customers over the 2000-2002 period, the researchers separated individuals in the sample according to the penultimate digit of their social security numbers. This allowed them to identify when each individual received the 2001 rebate check. They then looked at what happened to credit card spending and debt pay-down for the average credit card holder in the month of, as well as several months after, the receipt of the rebate. The results reveal that the typical credit card holder primarily paid down debt in the first couple of months but then began increasing spending and reaccumulating debt, returning to pre-rebate debt levels by six months after receiving the rebate.

These results suggest that the 2008 rebates could in fact provide a substantial boost to consumer spending. Souleles noted, however, that the 2008 rebate effect could be smaller because consumers' overall balance sheets are weaker in 2008 given the declines in housing wealth. ...