August 2008

The Impact of the 2008 Tax Rebates on Consumer Spending
Between May and July of this year, the U.S. Federal Government has distributed more than 90 billion dollars worth of economic stimulus payments, or tax rebates, to American households. Despite much recent concern that households would save the money, we find that households are doing a significant amount of extra spending because of the stimulus payments. The typical family increased their spending on food, mass-merchandise and drug products by 3.5 percent when their rebate arrived, relative to a family yet to receive its rebate. Based on these estimates and on results from previous analysis, we forecast that demand for overall non durable consumption in the second quarter of 2008 has been boosted by 2.4 percent as a direct result of the stimulus payments, and will be held up by around 4.1 percent in the third quarter of 2008. We also study who spent their rebates and on what. We find that low income and low asset households increased their spending at nearly double the rate of the average household. We also find that shoppers are spending a higher share of their rebate in supercenters –like Walmart and Target– relative to their usual behavior. Most people report that they are not spending much of their rebates to increase or maintain their purchases of apparel or groceries, but are instead spending more of their rebates on durable goods and personal services. Finally, the rebates are having different effects in different parts of the country, with people in the Greater Los Angeles and South East regions spending more than people in major metropolitan areas in the rest of the country. Our findings underscore the potency of the economic stimulus payments in stabilizing consumer spending during recessions.

Christian Broda

Jonathan A. Parker

March 2008

Averting a Recession
In the words of Aldous Huxley, “Experience teaches only the teachable.” As United States policymakers attempt to halt the economy’s careening express train to recession, the $168 billion question is: Will the fiscal stimulus plan enacted last month really work? Income tax rebates and business tax breaks trigger déjà vu, with the response to today’s flagging economy bearing striking resemblance to action taken in the dog days of 2001. But this time around, lawmakers are armed with more than just blind faith that putting money in the hands of millions of Americans could make a difference.

David S. Johnson

Jonathan A. Parker

Nicholas S. Souleles