The Democracy in America Blog Bashes Martin Feldstein

In response to Martin Feldstein's criticism of the tax rebate checks, which I posted yesterday, the Democracy in America blog rips Feldstein a new one:

MARTIN FELDSTEIN wrote back in December of 2007 that a fiscal stimulus was needed, and that a good way to design said stimulus was in the form of uniform tax rebates. For once, Congress did just what an economist wanted it to do, introducing a tax rebate stimulus plan that sent cheques to millions of households in the second quarter of this year. Naturally Mr Feldstein is appreciative, no?

No. In today's Wall Street Journal, Mr Feldstein writes that of course the stimulus didn't work, and what's more, any old fool should have known it wouldn't. I believe this is what is known as a flip-flop.

To make things worse, when Feldstein testified before Congress advocating a tax rebate, he spoke out against policies which are known to be effective economic stimuli—namely more food stamps and unemployment benefits.

A short-term economic stimulus works by encouraging people to go out and spend money when the economy is weak. Therefore, you want to give money to people who will go out and spend it, rather than save it. It is well-known that the poor spend a larger percentage of their income than the middle class and wealthy. Giving money to the poor and unemployed is thus a much more effective economic stimulus than giving out money to everyone. This is not an issue of fairness or helping those in need. Instead, it is simply about what is economically effective as a short-term stimulus.

While encouraging people to spend money is a good short-term economic stimulus, encouraging people to save is better for long-term economic growth. It's a trade-off. Ideally, consumers should be encouraged to spend money when the economy is weak and save money when the economy is strong. Their natural inclination, however, is to do the opposite. This causes the boom-bust economic cycle.