Jared Bernstein, a senior economist at the Economic Policy Institute, says nothing has changed. "A Keynesian is a supply-sider in a recession," he jokes, implying that as soon as economic ill winds begin to blow, fans of trickle-down economics turn into New Deal activists. "Most economists since Keynes accept that there is a role for precisely this kind of policy when the private sector engine fails."
Maybe so. But there is evidence that the recession of 2001 gave us new insights into what people do when handed money by the government. If they're poor, they spend it. If they're rich, they sock it away.
"The standard view of more conservative economists is that stimulus packages like this don't work, because people know that whatever money they get now will be taxed back in the future," says John Schmitt, a senior economist at the Center for Economic and Policy Research. "But there has been some careful research of exactly what happened in 2001, and it showed that's not the case. People who are up against the wall, paying their bills, maxed out on credit cards, don't put it into the bank -- they spend it."
In 2001, some 90 million households received $38 billion in rebates, in the form of checks for $300 for individuals and $600 for married couples. In 2005, a landmark paper by economists David Johnson, Jonathan Parker and Nicholas Souleles, analyzed how and when those rebate checks were spent.
"We found there was a fair bang for the buck," says Parker. "It provided a substantively important effect. And those who spent it more quickly were those who had low incomes and low liquid assets."
Another study pored over credit card data. According to the Congressional Budget Office analysis, "[It] concluded that households with lower credit card limits, those with credit card balances near the limit, and those that used their cards intensively increased credit card spending much more than other households in the nine months after receiving their rebates."
The fiscal stimulus package "strengthened the case for fiscal policy -- it was a rapid response to a slowing economy," Parker says.
The benefit of getting money into the hands of the poor and maxed-out is that when they turn around and spend it, it increases the overall demand for goods and services in the economy. That impels businesses to rev up production lines and hire more workers. The effect is like priming a pump, or jump-starting a car.
The consensus of economists today is that the rebate checks delivered in the summer of 2001 -- and spent immediately -- did take a bite out of the recession. The rapidly solidifying consensus that action should be taken now, in a "timely, targeted and temporary" fashion is in part due to that experience -- one of the few occasions in modern American history when the government managed to act quickly enough to make a difference.
But there's a catch. Instead of confining itself in 2001 to the kind of surgical strike that economists are now recommending for 2008, the Bush administration seized upon the downturn back then to push through a massive package of tax cuts for people who didn't need them, and who didn't respond by increasing their own spending. As we all know now, those tax cuts were not matched by spending cuts, resulting in an unfunded and long-term liability that now constrains the government's ability to act as decisively as might be necessary if the economy runs into a harsh recession.
We know what worked in 2001. But we also know what didn't work. The challenge for Congress now is to see if it can learn from the mistakes and duplicate the successes.
About the writer
Andrew Leonard is a staff writer at Salon.
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