A few months ago, I explained why I doubted that the handout, er I mean the "federal government tax refund stimulus package", would help the economy. Well now we have data to see if I was right or not.
Turns out I was wrong. Sort of.
I speculated that consumers would do what they said they would do with the extra dough: pay down bills (42%) and save it (21%). That's where I went astray. You should never believe the American consumer when he says that he's going to save money. Apparently when a pollster asks us what we're going to do with the rebate, we give the responsible answer that we think he wants to hear. But in reality, we run out and buy that flat screen TV that we've been coverting. And predictably, those at the bottom of the economic ladder are making the worse economic decision (i.e., spending more and saving less).
Quoting from the study by Professers Broda and Parker at University of Chicago School of Business and Kellogg, respectively:
"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 estimate that demand for overall nondurable 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."