Rebate Checks Will Do Little To Spur Economy

With Congressional leaders huddled up this week negotiating terms for an economic stimulus package, investors should keep their expectations in check. We won’t know how much each taxpayer will receive in rebate money until the plan is approved (estimates are between $300 and $600 per person, plus more if you have children), but regardless of the actual amount, its impact will be minimal at best.

The main reason for this can be shown by how Americans tend to behave when they get one-time rebate checks like this. You will recall we have already done this before earlier in the Bush presidency, and the statistics surrounding those rebate checks (despite what Bush supporters might try and tell you about their large economic impact) are quite interesting. According to government data, only about 20% of the rebate check money was spent by consumers (which is the entire argument for such a package). In fact, the largest chunk of the money received, 60%, was used to repay debt.

The good part, of course, is that Americans are pretty smart people. Debt repayment, rather than additional spending, is exactly what people should due in uncertain economic times when many of them are over leveraged to begin with. The bad part, however, is that rebate checks will do little to spur economic growth. The rumored rescue plan for the monoline bond insurers would have a far greater impact on the economy and the stock market.