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Suddenly, Stimulus

February 7, 2008 - by Donny Shaw

It’s nearly certain — every U.S. citizen who earned between $3,000 and $75,000 in 2007 will receive a tax rebate check of around $600 sometime in May. In a period of just ten days, the House and Senate debated, amended and passed H.R.5140, the economic stimulus bill designed to provide individual tax rebates, business investment tax incentives, payments for seniors and disabled veterans, and an expansion of the FHA and the GSEs. The bill was imagined and approved largely on a largely bipartisan basis. As Senate Minority Leader Mitch McConnell (R-KY) said, it was “an opportunity [for Congress] to demonstrate to the public that we could come together, do something important for the country and do it quickly.”

The Washington Post lays out the specifics; who will receive the payments and rebates, and how much they can expect:

>The legislation would provide $600 payments for individuals — $1,200 for couples — plus $300 for each child younger than 17. It would begin to phase out eligibility at $75,000 in adjusted gross income for individuals and at $150,000 for couples. Workers who can show $3,000 in earned income last year — too little on which to pay income taxes — would be eligible for payments of $300. The payments would be sent out separately from tax refunds.
>Businesses would be given generous incentives to invest in new plants and equipment. The Federal Housing Administration and the federally backed mortgage consolidators Fannie Mae and Freddie Mac would be allowed to insure larger home mortgages.
>On a 91 to 6 vote, the Senate added a provision to grant $300 payments to seniors, disabled veterans and veterans’ widows who could show $3,000 in Social Security or veterans’ disability benefits last year. Senators also tightened the rules to prevent illegal immigrants from claiming payments. In all, the payments would cost the Treasury $105.7 billion, all of which would be added to the budget deficit.

The final vote on passage in the Senate was a strong 81-16. After passing the Senate it went on to be approved by the House (again) by a vote of 380-34.

But, while their was overwhelming agreement in Congress that this bill will provide a solid boost to the economy, there is still some doubt, among policy experts and citizens alike, that it will deliver strong results. Some, like Jared Bernstein of the Economic Policy Institute, think that it could have been focused differently to have more of an impact:

>My earlier analysis of the House bill was that, given its emphasis on tax rebates and business deductions, we’d be lucky if it provided a one-for-one boost to GDP. That is, if the stimulus package amounts to about 1% of GDP, and it looks like this one does, you want it to boost GDP by at least that much. Some economists score the rebates as about one-for-one, or even higher, but I’m skeptical. So many people are so indebted right now that they’re likely to save the rebate or use it to pay off debt, neither of which directly boosts growth.
>By leaving out extended unemployment benefits and other more directly stimulative measures, like helping revenue-strapped states invest in infrastructure (roads, school repairs), the Congress and the White House missed the chance to get a significantly bigger return on our investment.

At Slate, Daniel Gross reminds us that a similar (but smaller) economic stimulus proposal was enacted in 2001, and that people pondered the same issue then: will consumers help spur the economy by buying things with their rebate checks, or will they just put them in the bank and/or use them to pay off debts? Like research happening in regards to this year’s stimulus bill, economists in 2001 used consumer surveys to predict what people would do with their rebate checks. They concluded that the majority of people would use their checks to pay off debt, and that only about 22 percent would actually use them make purchases.

But when researchers went to review the data in the months after the rebates were issued, they found that a much higher percentage of the money went to boosting consumption:

>Upon crunching the numbers (pdf), David Johnson of the Bureau of Labor Statistics, Jonathan Parker of Princeton University, and Nicholas Souleles of the Wharton School found that “households spent 20-40 percent of their rebates on non-durable goods during the three-month period in which their rebates were received and roughly another third of their rebates during the subsequent three-month period.” The rebates helped boost total personal consumption expenditures by an impressive 0.8 percent in the third quarter and 0.6 percent in the fourth quarter. They also found, contra Slemrod and Shapiro, that “people with low income and low levels of liquid assets spent more.” In addition, there’s evidence that moves to pay down debt today simply laid the groundwork for higher spending in the future, as noted in this paper (pdf) by Sumit Agarwal of the Federal Reserve Bank of Chicago, Chunlin Liu of the University of Nevada at Reno, and Souleles. They found that “on average, consumers initially saved some of the rebate, by increasing their credit card payments.” But down the road, in the nine months after receiving the rebate, credit card spending rose again.

Money photo by Tracy O, used uder a Creative Commons license.

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