Put the money where the economy is
With rebate checks on their way to eager taxpayers, many consumers are bound for bad spending decisions. Danielle Karson talks to credit experts about wise places to put the money.
A customer prepares to spend her money. (Joe Raedle/Getty Images)
More on The Economy, Spending, Taxes
TEXT OF STORY
Scott Jagow: Which brings us to those tax rebate checks. Congress moved pretty swiftly on those, too. An economic stimulus package passed the Senate yesterday, and it's now on its way to the president for his signature. The $600 or $1,200 question is, will people really spend those checks? Danielle Karson reports from Washington.
Danielle Karson: Politicians are banking on people running to their nearest shopping mall to spend their tax rebate money -- or, in the case of this 25-year-old taxpayer, the nearest travel agent.
Young Taxpayer: I plan on going to vacation. I think I'm going to make a trip over to Colorado, pay for the plane ticket and all the expenses once I get there. So I'll spend it as soon as possible.
But experts who advise consumers on their spending habits have mixed feelings about that.
Nicholas Jacobs: We don't want to be the black cloud that rains down. But we do certainly think that there are a number of things that people can do when they receive their rebates.
Nicholas Jacobs is with the National Foundation for Credit Counseling. He says what might be good for the economy can be bad for the consumer.
Economists say the stimulus plan will help in a sluggish economy by targeting the rebates at low and middle-income families, the folks most likely to spend the money. But Jacobs thinks the checks should be put to more practical use.
Jacobs: Paying down debt, putting money into savings, in the long run, will add to one's personal economic health, which we feel will add to overall economic health.
But Jacobs doesn't want to be a party pooper, so he says by all means, splurge -- in moderation.
Jacobs: People should have some fun with it, but $500 towards a $2,000 plasma screen TV still leaves you with $1,500 on your credit card. And that's what we would definitely counsel against.
Some surveys show that people eventually spent a good chunk of their tax rebates back in 2001.
Doug Elmendorf, an economist with the Brookings Institution, says they're likely to do the same thing this year. Still, there are no guarantees.
Doug Elmendorf: It's difficult to get inside peoples' heads and know what they're actually going to do. But historical evidence suggests that the most likely outcome is that people will spend a good share of the tax rebate, and that that will then help to keep the economy on a stronger path.
Elmendorf figures if people spend most of their tax rebate, they could boost the Gross Domestic Product by as much as 3 percent. If they don't, the stimulus plan will barely generate a blip on the growth chart.
Elmendorf: And this whole exercise will not have gotten us very far.
In Washington, I'm Danielle Karson for Marketplace.
