Friday, August 8, 2008

Gas prices, falling home values stymied the stimulus plan

The US government mailed out $100 billion in stimulus checks April, May, and June, and July. According to Martin Feldstein, a Professor of Economics at Harvard University, only $20 billion was spent and $80 billion was saved. Amid soaring food and gas prices, consumers are saving, rather than spending the checks; this was not the intended effect.

The graph plots monthly data from the Bureau of Economic Analysis’ personal income accounts spanning the years 2000-2008. It shows personal consumption, income, and saving for the 3 recent rebate periods:
1. 2001: Economic Growth and Tax Reconciliation Act of 2001
2. 2003: Jobs and Growth Tax Relief Reconciliation Act of 2003
3. 2008: Economic Stimulus Act of 2008

For the 2001 and 2003 rebate periods, personal saving rose sharply, but fell quickly thereafter. Real consumption grew in both periods, which contributed to economic growth. For the 2008 rebate period, personal saving rose sharply, and as in the previous periods, fell quickly thereafter. However, real consumption continued its previous downward trend. Most estimates expected consumers to spend at least 40% of the rebate checks, but in the end, they only spend 10%-20%. This has had negligible effects, if any, on economic growth.

What’s different this time?

Gas prices are rising and home values are falling sharply. Both trends reduce current consumption. First, rising gas prices strain income (wages rising much slower than gas prices), and according to the June retail sales report, consumers are spending more on gas and less on many other goods. Second, falling home values reduce consumer wealth. By some measures, national home values fell 16% since last year, dragging with it consumer wealth. As wealth falls, consumption falls because consumers have less to spend over their lifetime. The negative effects from gas prices and reduced wealth outweighed the positive effects coming from the stimulus rebate checks.

Consumers are saving rather than spending, and the 2008 stimulus plan failed to stimulate the economy. Hopefully Congress will listen to this simple reason if Obama’s proposal for a $65 billion stimulus plan II comes to pass.

Please leave comments. Best, Nontruths

1 comment:

  1. Love the fact that people are actually saving. What a novel concept! With any luck, it will continue with people having 3-6 months of cash banked away for emergencies. Even month-to-month spenders have some cash to sock away if they really want to do it. The "stimulus" is there.