Will the rebates work?
PAYMENTS START THIS WEEK | Experts say people will spend, but plan's no sure thing
The first of the tax rebate checks began hitting consumers' pockets this week, part of the U.S. government plan to boost the sickly U.S. economy. Will the checks be the medicine the economy needs?
As the rebates are dispensed between now and July, some early signs of success or failure will emerge in monthly retail sales data starting in May, said Mesirow Financial Chief Economist Diane Swonk.
(AP)
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Rebate checks
Second- and third-quarter retail sales combined with consumer confidence data, service sector reports and personal consumption numbers will signal if the rebates do indeed boost the economy, added Jonathan Parker, professor of finance at Northwestern's Kellogg School of Management, and author Jared Bernstein, an economist with the Economic Policy Institute.
Here are reasons these three experts say the rebates should succeed in stimulating the economy, with a few obstacles that could cause them to fail.
1. People will spend. The rebates are targeted more toward low-income people, who are more likely to spend more of their rebate. Meanwhile a lot of other people also are getting pinched, and they'll use the money to maintain their standard of living, which otherwise would slip.
2. Those who don't spend are likely to pay down credit cards. That will free up credit, so those consumers will have more credit to use over the summer.
3. Those who choose to save or invest the rebate will help spur money-market funds and other types of accounts, helping to re-establish confidence in the market.
4. The multiplier effect. When money is spent at one place in the economy, it reverberates through other places. If folks are buying more goods from the hardware store than they would have, those shelves need to be stocked. Those inventories need to be reordered, and so on.
5. It's big enough. It's pretty hard to throw $168 billion at the economy and not have it show up somewhere.
6. It worked the last time the government did this in 2001.
1. It's too big. The previous rebates were typically $300 or $600. This time they're typically $600 or $1,200, plus $300 a kid. That amount of cash will make people pause and think about not blowing it. They may opt to set the rebate aside for a rainy day or invest it in a child's scholarship fund.
2. Some of the problems in the current slowdown are linked to banks and the credit markets. Giving money to consumers doesn't directly address that. It doesn't help companies that want to borrow, grow and hire.
3. Import leakage. If people go and spend a lot on gasoline or at Wal-Mart and other stores on other imported goods, that stimulates the economies of those exporters, not the U.S. economy.
