Tax rebates: How big a boost?

Rebate checks have begun flowing from the US Treasury, and economists from Washington to Wall Street are now waiting with fingers crossed, eager to see if this $107 billion in government stimulus spending will jolt the US economy out of its doldrums.

Most figure the money will provide at least a modest boost. But there is no consensus on when the bump might start or how long it might last.

Much hangs on the behavior of consumers: how much of their checks they spend and what they spend them on. As retailers know, the US consumer in its shopping habitat can be a wildly unpredictable animal.

Overall, the checks should add three-quarters of one percentage point to the gross domestic product this year, estimates Douglas Elmendorf, an economist at the Brookings Institution in Washington.

"Given the current state of the economy, it is extremely important that we did this," says Mr. Elmendorf.

At a Tuesday press conference, President Bush sidestepped a question about whether Washington should consider a second stimulus package. He counseled patience, saying the economy had yet to feel the effects of the first round of stimulus checks.

"Now you know, after a period of time, the money is beginning to arrive. We'll see what the effects are," Mr. Bush said.

Checks arriving in individual accounts

The first direct deposits of the tax- rebate checks approved by Congress and the White House in February began appearing in individual bank accounts on April 29, a few days earlier than anticipated. Paper checks will start going out on May 9, a week earlier than planned.

Some 130 million households will eventually receive money, in amounts ranging up to $600 for an individual and $1,200 for a married couple – plus an extra $300 for eligible children younger than 17.

The amount of the rebate is gradually reduced for individual taxpayers making $75,000 annually, and couples with a combined income of $150,000.

For the most part, the money itself is not subject to federal income tax, and shouldn't be listed as income on 2008 tax returns, according to a report on stimulus program details by the Congressional Joint Committee on Taxation.

From the point of view of consumers‚ the arrival of the rebate checks now appear to be well timed. With gasoline prices soaring and the job market weakening, the Consumer Confidence Index fell to 62.3 in March, the Conference Board announced April 29. That is its lowest point since March 2003, just prior to the US invasion of Iraq.

Furthermore, stimulus checks are something of a proven technique. Washington has approved individual cash rebates at least three times in recent history: in 1975, 2001, and 2003.

An analysis of the economic effect of the 2001 rebates published in the American Economic Review in December 2006 found that the effect of the checks on US consumer spending was "substantial."

Two-thirds of the money was spent within six months, according to the analysis. Much of it was spent on nondurable goods, flowing through the US economy at a relatively quick pace.

Economist Mark Zandi of Moody's Economy.com figures that this year's checks will get spent similarly. That is good news for the economy, he figures.

Though there are bad signs, "the recession is expected to be mild and short, mainly because policymakers are fully engaged in stemming it," Mr. Zandi writes in his latest outlook for the US economy.

The extent of the boost the checks may provide is a matter of debate, however.

A survey of 38 economists taken earlier this year by the Philadelphia Federal Reserve found that the median prediction was an extra 0.3 percent growth in GDP for 2008, and an extra 0.1 percent in 2009, because of the stimulus spending.

But the survey notes that "a wide divergence of opinion surrounds these median estimates," with some economists thinking the checks will have no effect, and others predicting as much as a 1.5 percent GDP boost.

Working in tandem

In general, the $107 billion by itself is not meant to blast the US economy back into orbit. Rather, it is intended to work jointly with the easier credit provided by the Federal Reserve's interest rate cuts, to provide a temporary boost.

Think of it as a bridge that might allow the US to avoid the depths of a recession and more easily cross into the good times to come.

From an economist's point of view, the more quickly the money gets spent, and the less of it that gets stashed away, the better.

And US retailers will certainly do their best to suck the money out of consumers' wallets, with everyone from Wal-Mart to the corner store offering rebate-check deals and putting up signs keyed to check arrival.

Both grocer Kroger and retail giant Sears are offering discounts to consumers who turn their checks into gift cards, for instance.