Lessons from the 2001 Tax Rebates Jason Furman of the Brookings Institution talks about the studies of how consumers used their 2001 tax rebates and how effective they were in stimulating the economy. If checks had been sent to poor people who don't pay taxes, the effect on the economy would have been more significant, he says.
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Lessons from the 2001 Tax Rebates

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Lessons from the 2001 Tax Rebates

Lessons from the 2001 Tax Rebates

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The last time the government issued tax rebates to stimulate the economy was in 2001. The country was in a recession. About $38 billion of rebate checks were sent out to two-thirds of U.S. households. Typically, individuals received $300, married couples, $600. So where did that money go? And did the stimulus actually work? Those are the questions we asked Jason Furman of the Brookings Institution. He was a White House economic advisor in the Clinton administration.

Mr. JASON FURMAN (Senior Fellow, Brookings Institution): As far as the economy is concerned, the most important question is did people spend it or did people save it? And it seems as if people spent about two-thirds of those rebates within six months of receiving them.

BLOCK: And when you say that's the most important question, that's because the whole idea behind this is put money in people's pockets, they'll go out and spend it, and that will stimulate the economy, right?

Mr. FURMAN: That is exactly the economic theory. And in a good year, that type of theory doesn't work because the only way to grow the economy is to have more productive capacity. But in a bad year, when the economy is in a downturn and there's spare capacity, that it really can work to basically pull yourself up by your bootstraps by spending more money.

BLOCK: You know, of the people who spent the money and didn't save it, where did they spend it on?

Mr. FURMAN: The number one item that people spent money on was clothing. The second biggest item - which I think would be a surprise, but it shows up in the statistical evidence - was on health care items, and that is something that would include glasses and, and items like that. And the third biggest was food.

BLOCK: Now, would it matter - if you're looking at a stimulus package and the results of that - would it matter what people spent it on or is it all good?

Mr. FURMAN: To a first approximation, what matters is are you spending it on domestically-produced goods or are you spending it on imports. So, spending on health care or food at home would be a little bit better for the economy than spending on apparel, where a bunch of that money ends up disappearing outside of the U.S. economy.

BLOCK: One of the studies that I've seen ended up concluding that the rebates provided a substantial stimulus helping to end the recession. Do you agree?

Mr. FURMAN: Well, the recession was about halfway over by the time the checks went out, and they certainly provided a big boost to consumption. I think it might have ended the recession a little bit earlier as well.

BLOCK: How long did it take for the checks to go out?

Mr. FURMAN: The checks were mailed out over a 10-week period. This time around, it'll take longer to get that process started because the IRS is busy processing everyone's tax returns. But once the IRS gets started, they're going to be faster about actually getting the checks out this time because so many more people have electronic accounts that the money will be sent directly to.

BLOCK: Uh-huh. The rebates back in 2001 amounted to about 0.4 percent of GDP. Do you get a sense of how this $150-billion package would compare?

Mr. FURMAN: Well, first of all, only about two-thirds of that package is for the rebates, the rest of it is for business tax breaks. But it is somewhat larger of a share of the economy than the rebates we had in 2001.

BLOCK: Jason Furman, thanks so much for talking to us.

Mr. FURMAN: Thank you.

BLOCK: Jason Furman is a senior fellow at the Brookings Institution.

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