How Will Rebate Checks Get Spent?

What is the likely economic effect of tax rebate checks that are now going out? Mark Zandi, who authored a study used by Congress as it debated stimulus packages, says rising prices for staples may negate the impact of the check.

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MICHELE NORRIS, host:

Remember those tax rebates, the more than $100,000 billion set aside as part of the economics stimulus package to help jumpstart the economy? Well, those rebates - up to $600 for individuals, $1,200 for couples - will start landing in taxpayers' bank accounts this week for those who signed up for electronic deposit. Paper checks will start going out on May 9th. So, where's that money likely to end up?

Mark Zandi is chief economist for MoodysEconomy.com.

And Mark, there have been a number of surveys of consumers on this, what do people say?

Mr. MARK ZANDI (Chief Economist, MoodysEconomy.com): Well, one-third say they're going to save it, one-third say they're going to pay down debt, one-third say they're going to spend it. I think everyone's well intentioned, they know they should save or pay down that credit card. But at the end of the day, I think most people got to spend it. Based on our experience from the 2001 tax rebate, two-thirds of the money was spent over six months. I think that's probably what we'll get with this tax rebate.

NORRIS: So even if the people's intention is to sock it away, it's going to end up being spent?

Mr. ZANDI: Yeah. I think so, you know, they get mixed signals. Economists tell them to save, save, save, and in the longer run that's exactly what they should do for themselves and for the economy. But the moment economists are saying spend, spend, spend, because we need as much consumer spending power out there right now as it could possibly get to get this economy moving again.

NORRIS: If people are saving or erasing debt with this rebate checks, it's good for personal finances, is it also good for the economy.

Mr. ZANDI: Well, if you ask a financial adviser, they'll probably tell you to pay down that credit card and to save it. If you ask Congress and the administration and the economists, they'll probably hope that the consumer will go out and spend the money. The idea here is to try to get money out into the economy to stimulate the economy, because certainly it needs all the help it can get.

NORRIS: For those people who do save their going-to-spend rebate, are they're clues to how they're going to spend it?

Mr. ZANDI: Well, one thing we know they're going to spend their money on is gasoline, which is going up in price nationwide. The gallon is going for about $3.60, it's headed towards four by Memorial Day. So, unfortunately, some of the rebate is certainly going to go to paying for gasoline. That's not much of a boost and that's unfortunate. But I think people will spend it on groceries, they'll spend it on daycare, they'll spend it - if they got the dental problem that they'd put off, they'll spend it on that, repairing the car. I think they'll use it for lots of different things.

NORRIS: If you're spending it on groceries, they're not going to get as much as there either with prices going up so high.

Mr. ZANDI: Yeah, unfortunately. And that really is mitigating the benefit or the stimulus for the economy with the higher prices for everything from filling a gasoline tank to buying a loaf of bread. It's just not going to go as far as policymakers had hoped when they put this together a few months ago.

NORRIS: What difference does it make if I, say, use my $1,200 - if I had it - to buy a $1,200 appliance or if I bought $1,200 worth of clothes or if I just spend all of it on gasoline and groceries? Why does it matter?

Mr. ZANDI: Well, the idea is to get the money out there to people in our economy who are producing things. I mean, if you spend all the money on gasoline, a fair amount of that is going to over to the Middle East, to the big oil companies. It's really not going to generate a lot of jobs and income in - for people who are working here in the United States. If you take that money and if you pay for daycare, for example, you're paying that person that money and they're going to out and spend it, it's going to help them get by, so it has a bigger boost to the economy.

If you spend it on groceries, the effect is kind of mixed. Certainly we grow a lot of the things that we consume here in this country. We're going to employ the people who moved at the agricultural products to the store shelves and people in the grocery stores. So that will be helpful as well. But any kind of service that we spend our money on, I think that will draw us the biggest boost.

NORRIS: In the end, Mark, do you think this rebate checks will make much of a difference? If the goal was to stimulate the economy in the short term, will they work?

Mr. ZANDI: I think it'll be helpful. I mean, this is a tough time for many people, gasoline bills are rising, grocery bills are rising. So it does take the edge of. It doesn't solve our problems. Fundamentally, the problems lie on our housing market and this does nothing to solve that. And I don't know that this is going to be enough to (unintelligible) even those people are really hard-pressed over for very long. So, we may need to see another stimulus package come through later in the year. So the answer is, it helps but it's not enough.

NORRIS: Well, Mark Zandi, thanks very much.

Mr. ZANDI: Thanks for having me.

NORRIS: Mark Zandi is chief economist for MoodysEconomy.com.

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