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The Right Economic Medicine?

Newsweek • 8/6/01

By Adam Bryant

The first tax-rebate checks are arriving, and Bush says the $38 billion will give the ailing economy a needed shot in the arm. But with growth slowing, layoffs climbing and CEOs increasingly grim, it may not provide much of a boost.

Raymond Herbst, a New York firefighter, is going to splurge. He's taking his wife to dinner at Windows on the World atop the World Trade Center. Coren Claborn, a bank teller in Spring, Texas, plans to spend the cash on a CD player for her car. Richard Stahmer, a fund-raiser in Houston, is parking the money in his son's college-savings account. Karen Dean, who lives near Cincinnati, can't decide between a paint job for the kitchen and a new dining-room set.

She's certain, though, that the money won't be going into savings. "This is money we didn't expect," she says. "It should be spent, not saved." This summer, it's not just a punch line--the check really is in the mail. Last week the U.S. government started sending out the first of 92 million tax-rebate checks, the consumer-friendly opening volley of President George W. Bush's $1.35 trillion tax-cut package. Singles will receive up to $300, and married couples who filed joint tax returns will get up to $600. To some, it's a lot of money that will finally repair a faltering car. To others, it's a rounding error, the kind of money spent on a whim for a pair of Christian Dior's new iridescent sunglasses. But collectively, the checks add up to much more. All told, they amount to a $38 billion advance on next year's tax break, money that Bush has said will be a "much-needed shot in the arm" to the economy.

Yet whether the checks will be sufficient medicine to cure the ailing economy is a very open question. Layoffs are mounting fast and corporate chieftains are increasingly candid about their lack of hope for a quick recovery (following story). Just last week Hewlett-Packard cut 6,000 jobs, and JDS Uniphase said it would lay off 7,000 workers on top of the 9,000 cuts it had already made. Growth in the second quarter was a meager 0.7 percent, the weakest performance in eight years, and consumer confidence slipped in July. Bush said last week that the economy is "puttering along; it's not nearly as strong as it should be."

The lone bright spot has been the willingness of consumers, whose spending accounts for two thirds of the economy, to keep buying big-ticket items like houses and cars despite all the doom-and-gloom headlines. Thanks to what economists call the "multiplier effect" of fresh spending rippling through the economy, the tax-cut package could add as much as a full percentage point, or $100 billion, of growth to our $10 trillion economy. Given that most economists are predicting modest growth for the balance of the year (1.5 to 3 percent), that additional 1 percent certainly can't hurt.

Optimists also point to falling energy prices and half-a-dozen interest-rate cuts this year. The Bush administration is banking on a noticeable lift from the giveback. Paul H. O'Neill, the Treasury secretary, predicts the rebates "will give us a bounce, and that bounce will carry forward into next year." Even the IRS is nudging consumers to get out and shop. At the www.irs.gov site, a chatty section on the rebate muses, "Let's see--new barbecue, early holiday shopping. You get the idea."

Financial experts are closely monitoring how taxpayers spend their windfalls, viewing the individual decisions as an important litmus test of consumer confidence. People will spend the money if they are feeling good about the future, but save it or pay down debt if they're getting worried. After the national spending spree of the past several years, the average American family has amassed credit-card debt of around $8,000, and the national installment-debt load is more than $1.5 trillion. As a result, many people are expected to use the checks to chip away at that debt. A recent Gallup poll found that almost half the respondents said they would use the rebate to pay bills. The poll also found only 17 percent admitting that they planned to spend the money, while 32 percent said they will save or invest it. History provides some clues. The last time Americans received such a rebate was 1975, when the Ford administration sent out checks of up to $200, totaling $8 billion. Back then, consumers were scared about the economy's double whammy of high unemployment and inflation and taxpayers spent nearly one third of the rebate and saved the rest.

These days, however, Americans seem to be better shoppers than savers. The personal-savings rate is now in negative territory, compared with about 7 percent in the Ford years. (That means for every $100 dollars earned, they saved $7.) Many economists therefore expect that even people who say they plan on saving are likely to pump it back into the economy on back-to-school supplies and clothes, or add the money to their holiday-shopping budget in December. "It's not a huge windfall," says Jeffrey M. Humphreys, director of economic forecasting at the University of Georgia's business school. "They're going to spend it." Humphreys will be right if enough people think like Ebba Berlinsky of Brooklyn, N.Y., who has tabbed the money as "throwaway income'' and will probably use it for a weekend vacation.

In true American fashion, many businesses are looking at the rebates as a marketing opportunity. Kmart is offering to cash the rebate checks free of charge, with a 5 percent bonus that could turn a $300 check into $315 if all the money is spent in its stores. Home Depot, which conducted research that showed about 10 percent of the $38 billion will be spent on home improvement, mounted an ad campaign suggesting people use the money to make their homes more energy efficient. "It's a pretty noble cause," proclaims a Home Depot spokesman. Pizza Hut sliced a dollar off the price of its "twisted crust" pizza, which, its ads say, is "almost as good as a refund but tastes a whole lot better." Morgan Stanley, selling its investment services, is running full-page ads suggesting that most people think "it's only about $300 refund check," while a savvier minority "knows it's about thousands extra for retirement."

Other organizations want consumers to earmark the money for altruism or political activism. Lenox Hill Neighborhood House, a Manhattan social-services agency, sent out a letter to past contributors suggesting they can get double duty from the checks by donating them and then claiming the money as a charitable deduction next April. Some people see the rebates as a crass political ploy that the country can ill afford--especially in light of all the current hand-wringing over Social Security shortfalls and dwindling budget surpluses--and want to use the money to lobby against Bush.

Tony Adams, a Web-site developer in Houston, set up TaxRebatePledge.org, with links to organizations, such as the NAACP, the Sierra Club and Citizens for Tax Justice, that Adams says are fighting Bush's policies (he claims the site has helped redirect more than $280,000). United for a Fair Economy established RejecttheRebate.org to encourage people to give the money to charity or back to the Treasury to protest what it calls an "irresponsible'' tax cut that primarily helps the rich.

But to many Americans, debates about the larger meaning of the rebate are academic. When they check their balance at the ATM, the numbers will be slightly bigger after they've cashed their checks from the Treasury. And for a lot of folks, that means one thing: time to go shopping. "In this day and age it's easy to spend $600," says Phillip Chavez of Pebble Beach, Calif., who'll probably use the money to buy school uniforms for his daughters. "I can spend that much dreaming.'' But such dreams may not be enough to keep the economy from slipping into a nightmare.

Copyright 2001, Newsweek

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