'Tax rebate' checks expected to yield short-term benefits, long-term troubles

Economists foresee renewed economic growth over the next few months, but increased inflation and declining wealth will take a bigger toll.

By David R. Francis

from the April 28, 2008 edition

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Today, Uncle Sam begins to deposit money directly into the checking accounts of some 130 million American households. Probably $600 for a single person, maybe $1,200 for a couple – maybe less, or maybe more, depending on family circumstances.

Washington hopes recipients will spend much of it, and revive the flagging economy. Most economists expect the $152 billion stimulus package will boost economic activity for several months. They debate the degree of stimulation.

"There is going to be an impact," says Brian Bethune, an economist with Global Insight, an economic consulting firm in Waltham, Mass. But it will be "muted … not strong or explosive." High oil prices will hurt the economy, and by 2009, Global Insight predicts the economy will slip perilously close to zero growth.

Lacy Hunt, an economist with Hoisington Investment Management Co. in Austin, Texas, is even less cheery. "It's a one-shot deal," he says. "At best, it will lift the economy for a little while."

Budget expert Stan Collender doesn't even like the "tax rebate" terminology used by Washington, since many of the poorer recipients will have paid no 2007 federal income tax or amounts less than their government check. The stimulus package, he says, is really "pure borrowing … just increasing the [federal] deficit."

For lawmakers, passage of the stimulus package in February offered Democrats and Republicans alike the merits of showing voters they are taking action on the economy. For the White House and Congress, it was the equivalent of the Monopoly "Get Out of Jail Free" card, maintains Mr. Collender, managing director of Qorvis Communications in Washington. [Editor's note: The name of the company Collender works for was misspelled.]

The stimulus package is equivalent to 1.1 percent of fiscal 2008 gross domestic product (GDP), the nation's total output of goods and services. Some $107 billion goes to households, $45 billion to businesses – mostly by giving them a bonus depreciation to deduct from their tax burden.

Global Insight assumes 20 percent of the rebate amounts will be spent within three months, 40 percent within six months, and 50 percent within a year.

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