Expert Doubts Stimulative Effect of Rebate Checks

At the heart of the measure are rebate checks meant to get Americans to shop. There's a fundamental flaw with the plan, though, says Stephen Horan, head of private wealth at the Certified Financial Analyst Institute: The rebates won't really provide a stimulus and would do little to stave off recession. Horan points to historical research done on tax rebates to show they've been largely unsuccessful. The $100 to $200 checks disbursed by the Treasury Department in 1975 had minimal impact on spending. Ditto for the one-shot rebate during the economic slowdown in 2001, according to a 2002 University of Michigan survey.

In the measure's current iteration, single taxpayers would get a $600 rebate that would begin phasing out for those earning more than $75,000 a year. Married couples would get $1,200 and the phase-out would start at $150,000. Parents would receive an additional $300 per child.

Consumers are only likely to spend about 25% of their checks, Horan says, citing research on tax rebates. Indeed, in a recent survey sponsored by UBS Securities, the International Council of Shopping Centers polled 1,000 Americans asking how they'd use the money if the fiscal stimulus package was signed into law. It found that 43% of respondents said they would use the money to pay down debt, 26% would put in into savings, and 24% would spend it.

Horan says that's because rebates aren't altering people's permanent incomes — which makes the package an inefficient attempt at invigorating the economy. "One-off things that are unpredictable don't encourage people to spend money," he says. "They need to be able to count on the long term."

SmartMoney.com: How effective or ineffective do you think the stimulus package will be?

Stephen Horan: There are different elements to this package. If you focus on the tax rebates, we've seen it before, a number of times. Most recently in 2001 and 2003, we studied how tax payers respond to tax rebates. They don't spend much of it. The marginal propensity to spend the rebates is about 25%. That means that if I get a $100 tax rebate, I'm going to spend $25 of it. In this case, it's $600 [for single taxpayers]. For them, they would spend about $150. The rest is either saved or used to pay down debt. That's what we saw in 2001 and 2003. There's probably good reason to believe that behavior would prevail this time around.

If we take that behavior and apply it to today, there's $100 billion, the size of the tax rebate for individuals, and another $50 billion in tax incentives for businesses. So if about a quarter of that is spent, that's about $37 billion. That contributes about one-fifth of 1% to GDP growth. In terms of being an economic stimulus, it's not really effective. It's a fairly inefficient way to create an economic stimulus. What this is, essentially, is a wealth transfer from the government to taxpayers. Looked at differently, it's taking debt off taxpayers' balance sheets and putting it onto the government's balance sheet. That's essentially a socialization of debt. But that's largely what's happening.