My Fellow Americans, Spend Those Rebates!

Surveys indicate many recipients will bank their cash rather than head for the mall. That's the last thing the Administration wanted to hear

By Howard Gleckman

The check is in the mail. Actually, the first of 92 million tax-rebate checks are in the mail. But they might not do much for the sagging U.S. economy.

The much-ballyhooed federal income tax rebate -- up to $300 for singles and $600 for couples, and due to begin arriving in taxpayers' mailboxes the week of July 23 -- may do a lot less to stimulate the sagging economy than the Bush Administration hopes. Why? Because the best way to give the economy a quick jolt would be for people to spend their windfall -- and fast. But a fistful of recent polls suggests that people are far more likely to save the money than spend it.

Economists had figured that half those getting checks would spend them -- pumping about $20 billion into the economy over the next few months. But a Gallup Poll conducted on July 10-11 reports that only 17% of those surveyed plan to hit the mall with their rebate. Nearly half say they'll save it, and 32% plan to pay off bills, which is just another form of saving. An ABC News/Washington Post poll taken in early June found a similar story: Only about 21% of respondents said they planned to spend the money. And a June 5 poll done by the Princeton Survey Research Group for the G7 Group economic consultants found only 14% expect to spend the dough.

Even Federal Reserve Chairman Alan Greenspan seems to be hedging his bets. He told Congress on July 18 that he didn't expect much of a boost from the rebate checks until late in 2001, suggesting that he also thinks folks may use the money to pay off credit cards now and hold off on spending again until around the holidays.


  If people do save most of their rebate, the immediate stimulus from the tax cut would be a paltry $7 billion to $10 billion -- hardly visible in a $10 trillion economy. And that would be bad news for those who hoped the checks would drive a consumer-led turnaround.

Of course, it's possible that people will spend more than they claim. Perhaps they were telling pollsters what they thought they wanted to hear. And never underestimate the power of the Great American Marketing Machine. Consumers are just beginning to hear from retailers, who will work overtime in the coming weeks to convince them to part with the windfall. And since marketers say most goods and services sold are not necessities, maybe folks will succumb to the advertising and decide they really can't live without that new leaf blower.

There's nothing wrong with saving, of course. Indeed, in the long run, the best thing that people can do for the economy is to put more cash in the bank or in the markets. But if consumers really do what they say, it will be exactly the wrong medicine for business execs and policymakers who are betting on a quick exit from the current doldrums. And it will leave the Bush Administration, which has bet the house on a rebate-driven recovery, deep in a political hole.

Gleckman is a a senior correspondent in BusinessWeek's Washington bureau. Follow his views every Tuesday in Washington Watch, only on BW Online

Edited by Beth Belton

Before it's here, it's on the Bloomberg Terminal.