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April 17, 2009

Boosting consumer spending

Economists agree that reviving consumer spending is essential to ending the recession. Last year, there was a tax rebate that was supposed to do this. Did it work? And if not, what lessons have we learned?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, it's now been long enough that we have good information on what happened to those tax rebates in the summer of 2008, and what we find is that consumers overwhelmingly did not spend that money. In fact, only 20 percent of households reported spending their tax rebate. The rest of that rebate - 80 percent - was either saved or was used to pay down on debt. So it didn't really do all that much to boost spending in the economy, which is what it was designed to do. Now there is a tax reduction plan that is part of the recently passed stimulus plan coming out of Washington, and I think some of the lessons from 2008 have been incorporated into this plan in that the tax reductions now will take the form of small monthly reductions in withholding . . . tax withholding from your paycheck rather than one big lump sum tax reduction. And I think the idea here from the crafters of the stimulus plan is that if people see a little bit of a reduction in their withholding they will more likely spend that than if they got one big massive paycheck and said, 'Well, gosh, I can use the paycheck to pay down my credit card or put it in the bank.' So we'll have to see, but I think we did learn some lessons in terms of trying to boost spending from the tax rebate of 2008."

Posted by Dave at April 17, 2009 08:00 AM