Permanent, Pervasive and Predictable

...so says John Taylor, the should-be Nobel laureate, in the WSJ about the best way to promote real economic stimulus, rather than the non-stimulating stimulus proposed by Obama. Remember that stimulus in mid-2008 that ballooned our deficit by $150 billion? The nearby chart shows how much benefit that did (read: nothing).

The top line shows a blip in disposable personal income when certain taxpayers and non-taxpayers alike received a check. The bottom line shows that it had zero impact on personal consumption.

Taylor is perplexed by this renewed belief that Keynesian economics (the government taxes you in order to spend the way it sees fit) is actually efficient or useful.

These results may seem surprising, but they are not. They correspond very closely to what basic economic theory tells us. According to the permanent-income theory of Milton Friedman, or the life-cycle theory of Franco Modigliani, temporary increases in income will not lead to significant increases in consumption. However, if increases are longer-term, as in the case of permanent tax cut, then consumption is increased, and by a significant amount.

...Why did that consensus seem to break down during the public debates about the fiscal stimulus early this year? One reason may have been the apparent success of the rebate payments in 2001. However, those rebate payments were the first installment of more permanent, multiyear tax cuts passed that same year. Hence, they were not temporary.

Once again, Taylor reminds us that students of economics would be wise to read the WSJ while students of liberalism should just continue reading the NYTimes or Washington Post.