How Did You Spend Your Rebate Check?

Members of Congress and Presidents love to get involved when the US experiences economic recessions. There is ongoing debate as to whether it's more effective to give citizens money to spend (the rebate check) or for Washington to spend money (for supposed infrastructure projects and welfare benefits).


These activities are known as fiscal policies. That's in contrast to monetary policies that are conducted by the Feds, such as efforts by current Fed Chairman Ben Bernanke.

In this long running fiscal debate, Republicans tend to favor rebate checks. Democrats are disposed to having the government spend money to stimulate the economy.

Recently the Congressional Budget Office (CBO) examined whether the 2008 tax rebates stimulated short-term growth.

President Bush signed a stimulus package called the Economic Stimulus Act. It contained roughly $95 billion in tax rebates that went out last spring.

The CBO estimated that 40% of these tax rebates would be spent within six months––raising the growth of consumption in the second and third quarters of 2008 by 2.3 percent and 0.2 percent, respectively.

The CBO analyzed this question in various ways. It's difficult to find any meaningful impact from this tax rebate program.


This chart reveals the increase in income from such rebate checks. However, consumer consumption was barely affected. Hence, this form of stimulus appears to have failed to stimulate the economy!

Instead, most Americans saved their rebate checks or used the money to pay down credit cards and other forms of personal debt.


The New York Times reports, The economic downturn is forcing a return to a culture of thrift that many economists say could last well beyond the inevitable recovery. This is not because Americans have suddenly become more financially virtuous or have learned the error of their free-spending ways. Instead, these experts say, Americans may have no choice but to continue pinching pennies.

This shift back to thrift may seem to be a healthy change for a consumer class known for spending more than it earns, but there is a downside: American businesses have become so dependent on consumer spending that any pullback sends ripples through the economy.

You will discover that economists are divided about the effectiveness of tax rebates for stimulating short-term growth.

1. Some argue that the temporary nature of rebates leads households to save, not spend, virtually all of the additional income. If so, rebates do not add much to short-term growth.

2. Others argue that even temporary tax cuts will encourage spending, particularly if they are directed toward low-income households or those with few liquid assets. Such households, those analysts maintain, are more prone to spend any additional income.

I have doubts about using government money to stimulate spending and help the US economy improve its growth. I just don't think this is a very effective means of curing a recession. I believe this study provides support for this. It didn't work last year--and the OMB study also indicated that the $35 billion distributed in 2001 (represented then as advance tax refunds) didn't work either.

Likewise, I would suggest that the rebates within President Obama's stimulus package will also fail to provide any meaningful economic stimulus.

Just today we received another report that supports by hypothesis. In an Associated Press report, Households pushed their savings rate to the highest level in more than 15 years in May as a big boost in incomes from the government's stimulus program was devoted more to bolstering nest eggs than increased spending. The savings rate, which was hovering near zero in early 2008, surged to 6.9 percent, the highest level since December 1993.

The stimulus provided for one-time payments of $250 to people receiving Social Security, supplemental security income and other benefits. Wages earners will receive small credits each paycheck.