Do stimulus programs increase consumer spending?

One common way government tries to deal with a recession is to motivate consumer spending by providing tax rebates and deductions. N.C. State University economist Mike Walden considers whether there is evidence that this works.

“This has been an area of research by economists for a long time. In fact, I remember when I was in graduate school some now 40 years ago, we talked about this and examined this. And the … economic theory says that if someone is given extra money, they know that that extra money is going to be given them only for a temporary period of time. They’re not really going to change … their day-to-day spending. But what they’re probably going to do, they’re either going to save that money or they’re going to buy some big ticket items.

“So we now have some new research that looks at the impacts of the 2008 tax-rebate program, and actually results clearly support what economic theory suggests. What the researchers found is that consumers spent only between 10 and 30 cents of every dollar in rebate on everyday spending, so-called non-durable spending. But they spent as much as 90 cents of every dollar rebate on durable items like vehicles.

“So, again, I think this makes sense. If people know that some sort of tax change is temporary, they’re not going to make a big change in their life. Insteadm they’re going to go out and do things like buy furniture, buy cars, buy appliances, maybe even bank some of the money.”