The economy has been in choppy waters lately. A rise in manufacturing is negated by a weak jobs number. Housing market signs of life are impeded by gas prices. The euro zone appears to improve, then a sovereign debt rogue surfaces in Spain.
This spring, the U.S. government handed out $100 billion in tax rebates. Twentieth century economic thinking - permanent income hypothesis, Ricardian equivalence, and the like - suggests that most would have been saved, as Martin Feldstein recently argued. Not so. Recent research on microdata shows that the typical family increased spending by 3.5% when the rebate arrived, boosting overall nondurable consumption by 2.4% in Q2 of 2008. The number should be 4.1% in 2008Q3.