On Stimulus Checks

May 9, 2008

The Bush administration’s rebate checks have started to appear in consumers’ bank accounts. USC experts look at whether they will boost the economy, or go toward debt.

“Well, clearly some portion of it will be spent,” says Thomas D. Griffith, a taxation professor in the USC Gould School of Law. “One of the reasons they’re giving a lump some is that some people are going to get the check and will go buy something they wouldn’t otherwise buy. Others are going to do something more sensible, like pay down debt or go into savings.”

The rebates will have some effect on the economy, but the size of that impact is unclear, Griffith says. “The important additional point is that the U.S. has a substantial long-term structural deficit. The U.S. has to do some long-term work to cut spending, and this tax rebate exacerbates that problem.”

Griffith, holder of the John B. Milliken Professorship in Taxation, is an expert on tax policy and federal income tax laws.
Contact him at (213) 740-2533, (310) 477-4964 (home) or tgriffit@law.usc.edu.

These tax rebates are aimed primarily at low- to middle-income consumers, notes Lars Perner, assistant professor of Clinical Marketing at the USC Marshall School of Business. Such consumers are likely to spend, rather than save, a higher percentage of any additional income that comes their way. “Thus this type of tax rebate is likely to get a greater bang for the buck than rebates aimed at higher-income consumers,” Perner explains.

“Thanks to rising food and gas prices, an increasing number of low- to middle-income consumers are facing a considerable budget crunch at the end of each month,” Perner notes. “For such consumers, there won’t necessarily be any big new purchases; rather, the effect will be to counteract an earlier decline in spending.”

A third group will save their rebate money rather than spending it, motivated by fears of job instability, Perner says. “This type of saving limited the effectiveness of a similar stimulus measure employed by Japan, whose economy experienced a significant downturn during many of the last 10 years.”

Perner is an expert in consumer behavior, especially the psychology of price changes and bargain-hunting.
Contact him at (213) 740-7127 or (760) 412-0154 (cell) or perner@marshall.usc.edu.