Rebates Won't Stimulate the Economy
October 17, 2001
Congress is poised to enact yet another rebate, giving $300 to everyone who had no income tax liability in 2000, and probably none this year either. Thus it is not a rebate at all, but a transfer from those who pay taxes to those who don't.
- With consumption representing about two-thirds of gross domestic product, even small changes in consumption can have a major impact on GDP growth.
- Thus Friday's report that retail sales were down 2.4 percent in September -- four times worse than expected -- pretty much guarantees that third quarter GDP growth will also be negative.
To boost incomes and thereby stimulate consumer spending, Congress enacted a rebate earlier this year that sent checks for $300 ($600 for couples) to every person who paid income taxes last year; yet even before Sept. 11, the data showed no increase in consumption.
Experience with past rebates shows that most rebates are saved and not spent. Moreover, poll data showed that would be the case this time as well:
- A July 24 Gallup poll found that only 17 percent of people expected to spend their rebates.
- Bloomberg News polls in August and September found that only 14 to 15 percent would spend their rebates.
- A University of Michigan poll released on October 9 got exactly the same result.
Psychology plays a critical role in consumers' decisions to buy today or not. Over time consumption is driven primarily by income, but over short periods it can be overwhelmed by other factors.
Right now consumers are being influenced more by fears about the terrorist threat and future economic conditions than by their current financial circumstances. Rebates won't change that reality.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, October 17, 2001.
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