“But the stimulus checks haven’t been sent yet,” you say. “A stimulus package hasn’t even been passed yet,” you exclaim.
Right you are. But in expectation, my stimulus will be around $500. (90% chance a $750B deal will pass relatively soon and 75% captured by special interests leaves $500 each for the rest of “us”.)
“Alright smarty, but if you’re so ‘rational’ then why aren’t you saving all your expected stimulus in order to pay back the future taxes that will have to be raised to pay for all of this,” you respond.
Yes, given I’m forming expectations about the future, it looks a lot like I’m Ricardian. Maybe. If we’re allowed to stray from rational exceptions, though, its no holds barred. We can invent any psychology we want. Maybe my expectations are rational, i.e. expectational errors have mean zero, for cash in-flows but not for cash out-flows. Its easy to form expectations about in-flows — paychecks come in fixed intervals with some known probability— but the consumption side of my brain is next to unpredictable and so I don’t know the distribution from which my consumption draws originate.
Or maybe I expect to be poor in the future and I also expect a more progressive tax structure. Then its rational for me to spend other (future) people’s money.
Or more likely my future richer self really wants to give my poor-graduate-student self money to help smooth my consumption. He can’t do that because the right kind of long-term intertemporal consumption credit markets don’t exist. Fiscal stimulus just acts to complete the market.
“Right, so anyway, how do you like the phone.”
Thanks for asking. I’d have to say the iPhone is the best gadget I’ve played with in years. Its too early to tell but I’d say it may be the best gadget I’ve ever used.