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The Economic Stimulus Plan of 2008

June 20th, 2008 by Linda Rosencrance

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When all is said and done, 130 million Americans will receive more than $100 billion in tax-stimulus checks from the federal government. The theory is that once people start spending that money, the economy will start to rebound. But it’s unclear how this theory translates into practice.

According to a survey by the National Retail Federation (NRF), many people are using their rebate checks to pay for necessities like food and gas rather than discretionary goods like electronics, clothing or furniture.

The NRF 2008 Tax Rebates Consumer Intentions and Actions Survey, which was conducted by BIGresearch from April 29 to May 7, was designed to gauge consumer behavior and shopping trends related to the upcoming tax rebates.

“The rising cost of groceries and gasoline means that discretionary spending is taking a backseat to necessities”

The survey found that because of rising fuel costs, the majority of consumers plan to use some of their rebate checks to pay for gas at the pump. And due to the rising cost of such items as milk, bread and rice, consumers said they plan to spend their stimulus checks on groceries. As a result, fewer people plan to spend their rebate checks to buy furniture or cars, or just use it for “me” time at salons or spas, according to the survey.

“The rising cost of groceries and gasoline means that discretionary spending is taking a backseat to necessities,” said NRF President and CEO Tracy Mullin, in a statement. “For many consumers, struggling with rising bills and lowering home values, economic stimulus checks could not come at a better time.” According to the survey, consumers as a whole plan to spend 39.9% of their tax rebate checks, providing a $42.2 billion boost to the economy. Consumers will also use the money to pay down debt, save, invest, and pay medical bills.

In February, President Bush signed H.R. 5140, the Recovery Rebates and Economic Stimulus for the American People Act of 2008. Under the $152 billion law, working individuals will receive rebate checks of up to $600, while married couples will receive up to $1,200, plus $300 per child for families with children. The law also includes new tax incentives for business for job creation.

But will these stimulus checks actually stimulate the economy? Experts say probably not.

“Many retailers have already announced creative promotions to give consumers an extra incentive to shop with them,” said Phil Rist, Vice President of Strategy for BIGresearch, in a statement. “Some retailers are helping customers stretch the value of their rebate check further by tacking on an additional ten percent to gift cards purchased or holding special in-store promotions.”

But will these stimulus checks actually stimulate the economy? Experts say probably not. The idea of a rebate system is very simple– to give consumers money during an economic slowdown to try and boost a weak economy, said Rea Hederman, Assistant Director of the Center for Data Analysis at the Heritage Foundation, at a conference at the center earlier this month. “But here’s one problem with them– they really haven’t worked.”

Hederman explained that tax rebates were first introduced by President Gerald Ford in 1975. At that time the rebate was $200, or about $800 in 2008 dollars. Hederman said that experiment was such a failure that the idea was put on the shelf for the next 25 years– until the Bush administration resurrected the idea in 2001 and 2003 as part of larger pro-growth tax cut packages, and then again this year.

“Rebates just try to boost temporary income. But the reason rebates don’t work is because government is basically shifting its pot of money around to pay for them…”

But the 2001 and 2003 plans didn’t have the desired effect on the economy, he said. And he said he’s reluctant to attribute the recent uptick in the economy to the rebate checks because many people hadn’t even received them.

“The weakest part of the economy was in the fourth and the first quarter and we’ve already seen signs of life, but it’s questionable [if it’s the] rebates checks because they haven’t even taken effect for many people,” he said. “Rebates just try to boost temporary income. But the reason rebates don’t work is because government is basically shifting its pot of money around to pay for them, inside of offering a permanent income change to individuals.”

Consumers responding to other public opinion surveys, like the one conducted by tax giant H&R Block, indicated that they would be using their rebate checks to pay bills. According to the survey, 45% of consumers said they would use the rebate to pay bills; 21   they would spend it on necessities like groceries or car repairs; 18% said they would invest the money; and just 16% said they spend it on luxury items, jewelry, electronics or a vacation.
Speaking at the Heritage event, Alan Viard, Resident Scholar, American Enterprise Institute, said the stimulus checks would probably only have a small impact on economic growth.
Viard said that while Keynesian policies– named for John Maynard Keynes, a proponent of the demand-side view of economic, who believed it was the up to the government to create demand for products by redistributing people’s money– might stimulate the economy in the short term, they do not provide for lasting economic growth.

Steve Entin, President, Institute for Research on the Economics of Taxation, agreed. “To boost demand, either the government increases its own spending or it cuts taxes to give you money to spend,” Entin said. “There are several problems with this concept of fiscal stimulus [because] if you don’t think your income has changed on a permanent basis you’re not going to run out and a rent a bigger house or send your children to a more expensive private school. You’re not boosting your entire consumption behavior pattern simply because someone has given you a $600 check.”

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3 responses so far.

  • Duke Adams - Jun 22, 2008 at 6:42 pm

    The most important thing a small business owner should do this year is take advantage of Section 179 tax deductions with increased limits made available with the economic stimulus act of 2008.

  • The Stimulus Payment Was a Ridiculous Political Stunt - Wealthy Reader - Jul 9, 2008 at 10:48 am

    [...] much of the stimulus payment is spent on essentials like food and gasoline.  According to this survey by the National Retail Federation, a majority of consumers were spending the stimulus payment on bills and necessities and only a [...]

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