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Economic Stimulus Plan May Not Drive Americans To Open Wallets

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By RACHEL BECK, The Associated Press

Published: February 6, 2008

NEW YORK - "Just Do It," one of Nike's ad slogans, might also be something the government should use to encourage consumers to spend their expected tax rebates.

A large part of the economic stimulus plan's success will hinge on whether Americans go shopping with their newfound cash. Proponents say a surge in buying could kick-start the economy from its current dismal state.

But before anyone counts on that, consider why consumers may not blow those rebate checks: Their mounting debts and worries about their economic future may lead to more saving than spending.

It's a clear sign that times are tough when the government starts looking for ways to use fiscal stimulus to prop up the economy. While it's still unclear whether a recession is upon us, there is evidence that the collapse in the housing and mortgage markets has spilled over to the broader economy. Businesses have begun to clamp down on hiring and credit conditions have tightened.

The Federal Reserve has been trying to control the situation through monetary measures, including aggressively cutting the federal funds rate - the overnight lending rate for banks - by 2.25 percentage points since September to 3 percent.

Now Washington's politicians are working on a stimulus plan that includes tax relief for businesses and consumers.

The House has overwhelmingly passed a $146 billion aid package that includes rebates of $600 to $1,200 for most taxpayers. The plan would send at least some rebate to anyone with at least $3,000 in income, with more going to families with children and less going to wealthier taxpayers.

Rebates Not Expected For Months
Congressional leaders have been aiming to send the measure to President Bush by Feb. 15, but that date is in question amid partisan wrangling in the Senate. Democrats and Republicans want to add expensive components to the stimulus package, which includes rebates of $500 for individuals and $1,000 for couples in the Senate's version.

The earliest the rebates are expected to reach consumers would likely be in the late spring or early summer.

This isn't the first time that tax rebates have been included in efforts to recharge the economy - they were also used in 1975, 2001 and 2003. But those lump-sum cash payments provided only a "modest stimulus to consumption," according to a study by the congressional Joint Committee on Taxation.

That view was echoed by a new paper from the Congressional Budget Office, which said that "most studies of purely temporary, one-time changes in taxes have suggested that they have only a moderate effect on household consumption."

The CBO also said in a paper issued in January that "households not facing liquidity constraints will not alter consumption very much in response to a temporary change in income because it has a relatively small effect on lifetime wealth."

During the 2001 recession, one-time rebates were paid starting in the third quarter, and consumer spending rose at a 7 percent annualized rate in the fourth quarter. That failed to offset the downturn in business investment, and the economy only grew at a sluggish 1.6 percent annual rate in that quarter, according to the Heritage Foundation, a Washington-based think tank.

By the first quarter of 2002, consumer spending slowed to a 1.4 percent growth rate, hardly enough to trigger faster economic growth.

At the same time, the personal savings rates as the rebates were given out jumped to 3.4 percent from an average of 1.2 percent in the prior quarter. Economists at Merrill Lynch characterized that as a "vivid sign that much of the rebates went into the mattress."

Consumers Worried About Wallets

We could see a similar pattern today, especially given the budget pressures faced by consumers.

Financially strapped consumers are also worried about how economic deterioration in the months ahead could affect their wallets.

The Conference Board's Consumer Confidence Survey fell in January largely due to concerns over the weakening of business conditions and the job market.

That's why Americans might not put their tax windfalls toward the kinds of purchases - new cars or appliances, sprucing up wardrobes or taking trips - that could really recharge the economy's engines.

Instead, as was the case in 2001, the tax money they don't save or use to pay down debt could find its way to restaurants, drugstores, bookstores, electronics chains and toy shops, according to Merrill Lynch.

Six years ago, lotteries and casinos also claimed some of those tax-rebate dollars. That's how some Americans bet on a brighter tomorrow.

Rachel Beck is the national business columnist for The Associated Press.

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