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The theory was that by giving consumers tax rebates, aggregate demand could be increased. This in turn would, along with the corporate tax cuts, give firms more confidence to increase their own spending. When the bill was being drafted, the economy was not yet in a state of total devastation, but there were signs of a pending recession. By drafting a bill that would increase aggregate demand, it was hoped by that business cycle could be forestalled or reversed. The government did not view recession as inevitable at the time. Rather, they felt that with sufficient increase in aggregate demand, the recession could be averted. As we have seen, the recessionary conditions at the outset of 2008 were merely the tip of the iceberg and the stimulus package was therefore woefully inadequate.
The hope, though, was that the multiplier effect would take hold. If consumers spent more, companies would be more profitable. If companies were more profitable, they would invest more, creating more jobs. With more jobs, consumers would spend even more. In this way, the government hoped...
However, by the time the checks were issued, fuel prices were at their highest, consumer confidence was diminishing and most leading indicators pointed to the situation getting worse before it got better. As a result, the multiplier effect did not take hold. Ultimately, the multiplier effect only works if consumers and businesses make a conscious decision to spend. In times of diminished confidence, such decisions do not occur as much. Thus, the multiplier effect is not strong enough during times of low confidence. Certainly, it is not strong enough to reverse the business cycle, which was the law's overall intent.
Works Cited
Pender, Kathleen. (2008). How Tax Rebates Work in Stimulus Package. SF Gate. Retrieved March 6, 2009 at http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/02/12/BUOAV0BJP.DTL
Herships, Sally. (2009). Decoder: The Multiplier Effect. American Public Media. Retrieved March 6, 2009 at http://marketplace.publicradio.org/display/web/2009/02/06/mm_decoder_multiplier
Works Cited
Pender, Kathleen. (2008). How Tax Rebates Work in Stimulus Package. SF Gate. Retrieved March 6, 2009 at http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/02/12/BUOAV0BJP.DTL
Herships, Sally. (2009). Decoder: The Multiplier Effect. American Public Media. Retrieved March 6, 2009 at http://marketplace.publicradio.org/display/web/2009/02/06/mm_decoder_multiplier
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