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Would tax rebates work?
The government aims for more spending, but in the past many saved their checks.
By Ron Scherer | Staff writer of The Christian Science Monitorfrom the January 22, 2008 edition
Page 1 of 2
New York - If the US government can zip tax-rebate checks into the mail – as in legislation Congress is now developing – here's an idea of the type of economic stimulus it might provide:
•The gross domestic product could grow by as much as an extra percentage point, some economists say. The extra growth could translate into about 400,000 jobs that would not have been there otherwise.
•There could be a psychological lift that ends the current gloom-and-doom atmosphere in corporate boardrooms. On Monday, the world glimpsed the depth of negativism when stock markets from Europe to Canada to Asia nose-dived. The US markets were closed for the Martin Luther King Jr. holiday.
•The rebate checks could be a boon to tourism, home-appliance companies, and electronic-appliance stores.
Altogether, the government is hoping to add $145 billion to the economy. While the exact amount per person hasn't been determined, some estimates on Capitol Hill put it at $800 per taxpayer.
This would be almost four times the amount the government spent in 2002, the last time it tried to stimulate the economy.
Congress is more than aware of the need for speed: On Friday, Sen. Arlen Specter (R) of Pennsylvania told Fox Business Network that a bill could be on President Bush's desk within a week. In a best-case scenario, that might mean checks would get to consumers by spring.
In 2002, once the printing presses started to roll, the government printed as much as $8 billion a week in checks. It took ten weeks to get them all in the mail.
"It may be too late, but it could mitigate the severity of the downturn or even jump-start us out of a recession," says Mark Zandi of Moody's Economy.com. "But I think that stimulus is helpful."
Mr. Zandi, who is skeptical Congress will act quickly, estimates the proposed package could add $80 billion to real GDP in the second half of the year. That translates to about 1 percentage point of annualized growth. He also estimates that would support some 400,000 jobs.
Economist Ethan Harris of Lehman Brothers offers a slightly different analysis. He estimates that a stimulus package of $100 billion could add 0.8 percent growth to the second quarter and 0.2 percent to the third quarter. "Perhaps even more important," he writes in a research report to his clients, "the policy would provide a psychological boost to the economy."
The 2002 rebates, however, were not as successful as anticipated. Recipients used more money than expected to pay down debt and contribute to savings. Of some $38 billion in rebate checks, only $8.36 billion was spent, according to a University of Michigan survey.
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