If raining stimulus money onto the economy buttresses consumption during economic downturns, does that demand remain vibrant once the shower of money stops? If the argument for fiscal stimulus is to hold, that money has to drive real, sustainable economic growth that doesn’t disappear after the spending stops.
A new study analyzing the effects of the 2008 stimulus payments suggests that the stimulus had a “significant macroeconomic effect”, bumping consumption to the tune of $47 to $116 billion over the course of 2Q and 3Q 2008. Still, the authors admit that the effects were largely transitory, and produced only a marginal effect on consumption trends.
The chart below, produced by the study’s authors, shows the actual trend of personal consumption expenditures (the blue line) and the authors’ projection of what consumption would have been without the stimulus payments (the purple line). Though a potentially stimulus-induced bump is visible in the blue, real line in mid-2008, that trend has almost converged with the theoretical, non-stimulated trend by the end of the year. Thus, even in the authors’ scenario, in which the effect of the stimulus is “significant”, there is little reason to believe that effect lasted much beyond the end of 2008.
Other details in the study tell a similar study. For example, the authors note that much of the stimulus money that was spent on consumption was put towards durable goods, “especially motor vehicles.” As this chart from CalculatedRisk demonstrates, vehicle purchases held steadily for around 3 months in the middle of 2008 (the effects of the stimulus, presumably?), only to plunge dramatically in the fourth quarter. Though sales have slowly recovered as consumers have begun spending again, it seems clear that one-time purchases of durables like cars did not spur growth in the lean months of 2009.
These patterns reinforce a point made many times on this blog: one-time handouts that people use to buy things like vehicles and housing are unlikely to juice the economy any longer than their own lifespans.
Also check out the discussions of who actually drove this consumption bump – possibly the rich as well as the poor – over at Megan McArdle’s blog and The Economist.