Robert Shiller says the stimulus checks don't provide enough insurance against the possibility of a recession, and much more is needed:
One Rebate Isn’t Enough, by Robert Shiller, Economic View, NY Times: Tax rebates ... will eventually put more than $100 billion into the hands of consumers. The hope is that by spending the money, they will lessen the risk of economic disaster from the subprime crisis.
Have the rebates, now mostly distributed, achieved their objective?
It’s not very likely. The rebates may be helping..., but the stimulus they are providing is certainly too small to make a real difference. More will be needed, perhaps much more, before the economy is truly on safe ground.
From the outset, government officials considered the tax rebates as a kind of insurance for the overall economy. ... Has the tax rebate substantially reduced the probability of a downward spiral?
It is too soon to tell, because the Treasury only started to send out rebate checks in late April. Retail sales did rise in May. But the dreaded serious recession still seems very much a possibility. The unemployment rate shot up to 5.5 percent in May, from 5 percent. The Reuters/University of Michigan consumer sentiment index has fallen below the lowest levels of the last two recessions.
The theory supporting tax rebates was originally devised by John Maynard Keynes... But people who have studied [Keynesian] models find that these repercussions aren’t powerful enough unless the initial stimulus is really large. ... Why aren’t they more powerful?
Part of the answer is in the slowness of people to spend extra money. Another is that some of the rebates will be spent on imports. That money will flow abroad..., with little of their rounds of expenditures finding their way back home. Third, the domestic expenditures will tend to result in higher interest rates,... which should reduce investment and lower asset prices. When asset values decline, people tend to cut spending through a negative “wealth effect.”
It is also possible that ...[h]eightened anxiety about the economy might spur people to ... pay off debts and to save, rather than spend. ...
Fuzzy as this picture may seem, there is unfortunately even more uncertainty about the rebates’ effects. ... [from] the peculiar lending dynamics in the subprime mortgage market,... the state of financial institutions’ balance sheets and the confidence that the public has in these institutions..., the vagaries of speculative asset markets, mistakes by securities rating agencies and the problems of bond insurers.
The economy is too complex to capture all these things in any single model. In trying to steer the economy, we are necessarily trying to steer something we don’t properly understand.
We simply do not have the means to quantify all the issues related to the rebates. But the models we do have suggest that the overall effects of the rebates are modest at best.
The reality of the subprime situation, augmented by the energy crisis, at least suggests that we’d better get ready for another round of rebates. There is little talk of it now, but we should be putting in place another stimulus package..., and stand ready for another after that, and another.
To me, the economy feels like a tug-of-war with good news on some fronts pulling one way, bad news on other fronts pulling in the other direction, and it's not yet clear which side will win the battle. If we can get more help on the good side of the rope, wouldn't that be best?
I'm sort of indifferent on a big push for a stimulus package right now, mostly because it seems like a non-starter on the political front - even if congress went along Bush would likely veto it - but it might also reflect a different probabilistic outlook for the economy. If we had included, say, infrastructure spending as part of the initial stimulus package, then the effects would kick in on a sustained basis over time rather than as a one-time hit as with the tax cuts. Thus, this type of spending could have provided the continuous stimulus Shiller is calling for. And if we are wrong and there is no recession, how big a problem is that? Well, what's so bad about building new infrastructure repairing what we already have, don't we need to do that anyway? With a stronger economy, wouldn't it be easier to pay for it? Insurance that also has investment value seems like a good bet to me. But we didn't include infrastructure spending, or any other type of sustained stimulus in the initial package, and while I'd like to see more infrastructure investment in any case, short of an obvious and sharp downturn in the outlook, there doesn't appear to be much chance of any new tax rebates, or spending on infrastructure or anything else anytime soon.
Update: Robert Reich says Unleash Fiscal Policy Now, or More Severe Recession Ahead.