Recently the Senate put an end to five months of partisan wrangling by failing to approve either the Republicans' or the Democrats' economic stimulus package. It's just as well since both packages were heavier on political symbolism than economic stimulus.

Consider the proposals to send out another round of "rebate" checks that were a prominent part of both parties' packages. (I put the word rebate in quotation marks since this round of checks was intended for people who did not have any federal income tax liability to begin with.) Although I'm all for people sending me $300 checks, it is unlikely that we can rebate our way out of a recession. Here's why.

Modern macroeconomic theory, known as the permanent income hypothesis (PIH), is based on the 1950s research of Nobel laureates Milton Friedman and Franco Modigliani. The PIH, in contrast to the simple-minded Keynesianism in which people robotically spend, say, 95% of their after-tax income every year, postulates that consumers are forward-looking. These forward-looking consumers base their consumption decisions not only on the income they earn today, but also on the income they anticipate earning in the future. Moreover, such consumers are concerned with their future consumption not just their consumption today. Consequently, consumers tend to smooth their consumption over time even though their annual incomes may fluctuate because of macroeconomic conditions or other factors. (Hence, it should not be surprising that consumption has held relatively steady in recent months even though we've been in a recession and stock prices have fallen substantially.)

Accordingly, changes in consumption depend on whether changes in disposable income are permanent or transitory. A permanent income increase, such as a raise, leads to a roughly one-to-one increase in consumption; a transitory income increase, such as finding $1,000 on the sidewalk, leads to a much smaller increase in consumption since consumers spend a little today but save the remainder to boost their consumption in future years. Since a rebate check would be a one-time windfall, consumers would probably spread any increase in consumption over several years. As a result, the short-term stimulus to the economy would likely be quite modest.

Admittedly the PIH sounds a little too ivory-towered to seem like a reasonable theory of how people behave; not even this economist sits around the dinner table with his wife and discusses how we need to adjust our future consumption because of some unanticipated income. (My wife is no doubt thankful for this.) However, the usefulness of a theory is not how plausible it sounds, but rather how well it predicts economic behavior. And there is overwhelming empirical evidence that the PIH provides a superior explanation for consumption behavior than the myopic Keynesian theory that dominated economic thinking in the middle of the last century.

For example, in response to the 1974-75 recession, the Ford Administration implemented a one-time tax rebate totaling $9.4 billion. Consistent with the PIH's predictions, consumers saved most of the rebate; the savings rate rose to 10 percent in the second quarter of 1975 from 6 percent in the first quarter. Reflecting on the episode, the 1977 Economic Report of the President notes that "Consumers normally adjust expenditures to their 'permanent' or long-run income." More recently, President George H.W. Bush tried a similar, though even lamer, policy of adjusting the amount of taxes withheld from workers' paychecks (but not their total tax liability) with predictably dismal results. And, of course, just this past summer the Treasury mailed out some $60 billion in rebate checks. Research by the University of Michigan's Office of Tax Policy Research found that only 22% of households receiving rebates expected to spend them. Not much stimulus there.

Although it might have been useful for the Congress to enact a stimulus package that enhanced people's incentives to work or businesses' incentives to create new productive capacity, we shouldn't lament the demise of the parties' political vote-buying schemes. Instead, we should be thankful that we've managed to ride out this apparently short and mild recession in spite of the politicians' refusal to enact beneficial policy.

E. Frank Stephenson is Assistant Professor of Economics at Berry College in Rome, GA. Some of the information herein is taken from Macroeconomics by Robert E. Hall and John B. Taylor.