Recession Rebate Follies

The Congress and the president are planning to give rebates to taxpayers in an effort to pump up consumer spending and avert a recession. Individual taxpayers would receive up to $800 and married couples up to $1600. People may receive a tax credit even if they pay little or no taxes.

Essentially, the government is going to increase the deficit today (by borrowing money) to give rebates to taxpayers. Years in the future, the government will have to raise taxes by an amount even bigger than the rebates, to pay off the government debt caused by this rebate, plus the interest on that debt.

There is no talk of reducing wasteful government spending or repealing job-killing, revenue-reducing regulations to pay for the rebates. They will be financed by irresponsible government borrowing that increases the already large deficit.

In the Examiner, Jay Ambrose points out that rebates during past recessions such as 1975 and 2001 didn’t do much good. They didn’t increase consumer spending much, since the people who received the rebates knew the rebates weren’t permanent and wouldn’t last, and thus saved them rather than spending them. (Those who did spend them were often silly to do so).

Brian Riedl of the Heritage Foundation points out that the logic behind the rebates is flawed:

“Supporters of rebates respond that redistributing money from ‘savers’ to ‘spenders’ will lead to additional spending. That assumes that savers store their savings in mattresses, thereby removing it from the economy. In reality, nearly all Americans either invest their savings (which finance business investment) or deposit it in banks (which quickly lend it to others to spend). Therefore, the money is spent whether it is initially consumed or saved.”

Moreover, with America’s savings rate as low as it is, there isn’t that much room to increase spending anyway. Pumping up spending through deficit-financed rebates can simply prolong an economic bubble. It can also lead to excessive government borrowing that drives up interest rates and thus makes it harder for businesses to raise capital and create jobs.