Spend that rebate — or save it?

By Jonathan A. Parker
The Washington Post
Published: Sunday, May 11, 2008 12:46 a.m. MDT
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Back in January, as the economy wobbled, even President Bush and House Speaker Nancy Pelosi were able to agree on a short-term shot in the arm — checks to most American households. Now the first round of economic stimulus payments is making its way to taxpayers via direct deposits, and the actual paper checks are being mailed out.

Bush said that Americans should "use this money as they see fit — to help meet their monthly bills, cover higher costs at the gas pump or pay for other basic necessities." Basic necessities like a new television? Retailers sure hope so. But should you fill a shopping cart?

Let's start with all the reasons not to. In a typical economy, if the government gave you back nearly $2,000 (let's assume you're married, filing jointly, with two kids), you should probably save most of it. If you spent it right away, you would temporarily boost your standard of living but set yourself up for future declines. (When it came time to put those two kids through college or if your hot water heater broke, you would regret not having saved a chunk of your windfall.) So you might rather go out for a nice dinner and set the rest aside. But wait: You might not even want to go out for that dinner, because when the government sends out the checks, it is borrowing to do so. And more federal debt means more taxes or fewer government services in the future — which means that you might want to save your payment instead.

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But these times are not typical. That's why the checks are in the mail in the first place. Today's consumer-confidence numbers could more accurately be called consumer-anxiety numbers. And despite the Fed's strenuous attempts, retailers are selling less, unemployment is rising, and the threat of recession looms large.

For many people, the price of what they buy has gone up while their income has gone down. So you may want to spend that check to maintain your standard of living. If enough of us follow suit, maybe we could avoid idle factories, unemployment and the R-word.

It has worked before. In 2001, we spent about a third of our rebates within one to two months and two-thirds within four to five months, spending enough to haul the economy out of recession. We spent more on things such as clothes, restaurant meals and health expenditures than on utilities, basic foodstuffs and gas.

So head to Sears, Home Depot or Restoration Hardware in good conscience. You are providing the "shot in the arm" that Bush promised when he first called for the stimulus package — a shot in the arm that might just land you a new flat-screen TV. Or at least allow you to replace that old hot water heater.

Jonathan A. Parker is a professor of finance at Northwestern University's Kellogg School of Management

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