Policy Ineffectiveness Theory Demonstrated

Another policy response was the Economic Stimulus Act of 2008 passed in February. The major part of this package was to send cash totaling over $100 billion to individuals and families in the United States so they would have more to spend and thus jump-start consumption and the economy. Most of the checks were sent in May, June, and July. As would be predicted by the permanent income theory of consumption, people spent little if anything of the temporary rebate, and consumption was not jump-started as had been hoped.

The evidence is presented in the figure above. The top line shows how personal disposable income jumped at the time of the rebate. The lower line shows that personal consumption expenditures did not increase in a noticeable way. As with the earlier charts, formal statistical work shows that the rebates had no statistically significant increase in consumption.

~From Stanford professor John Taylor's paper "The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong" (HT: Lee Coppock)

This is a good example of the Policy Ineffectiveness Proposition, which suggests that "governments are powerless in the management of output and employment in an economy."

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Policy Ineffectiveness Theory Demonstrated

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