Feb 18 2008
Is being wise with your money bad for the economy?
Published by Jason Welker at 9:24 pm under AD/AS Model,Fiscal Policy,Macroeconomics,Recession,Taxes
How the World Work – Salon readers refuse to go on spending spree
Many of the recent posts on this blog have attempted to analyze the likely impacts of the US Congress’s fiscal stimulus package consisting of $120 billion in rebate checks to be mailed to American households in the next few months. Washington’s intention, of course, is for households to spend their rebate checks on American goods and services, with the hope that new consumer spending will ward off a recession at home.
Salon.com blogger Andrew Leonard surveyed his readers a couple of weeks ago to find out what real Americans would do with their $600 checks when they arrive this spring. The responses he received do not look promising for America’s weak aggregate demand:
Sixty-eight said they would use it to pay down their credit card debt… Fifty-four said they would sock it away in some form of savings account. Another 26 planned to use the money for either a college savings plan, investment in foreign stocks, taxes, paying off student loans, or applying toward mortgage or car payments.
These are the smart people… any financial adviser would tell you to pay off existing debt and other obligations before spending more on new goodies. Ironically, some readers claimed they’d use their tax rebates to, yep you read it, pay their taxes. Hmm… what a funny system! Unfortunately, being wise with your money is NOT what the government hopes you’ll do, because none of the above equal C (which is, of course, our abbreviation for the magic word, consumption).
Those are the boring responses, here’s where they get interesting:
Twelve promised to donate their check to Barack Obama. Two said they’d give theirs to Hillary Clinton. Three planned to donate to the Democratic Party, and two to a “third party.”
Charitable impulses: church, a food bank, pregnant teenage girls, charity, California elementary schools, Kiva, a veterans group, the Electronic Frontier Foundation, the Dallas Peace Center, Union for Concerned Scientists, Eastern Washington University and “organizations fighting the Bush administration.”
And elephants.
Five planned to buy gold, two mentioned ammo and survival gear.
A fair amount of cash appears headed toward boosting the economies of other countries, including Ireland, France, Jamaica, Europe and England. But some travelers will stay closer to home — Miami, New Orleans, and getting their kicks on Route 66…
A handful will do their patriotic duty. Among the consumer items mentioned were a Mac, a musical keyboard, an iPod, an iPaq, comic books, plain old books, a new computer, a CD player, an HD DVD player, three HD TVs, an Xbox, a PlayStation and a Wii. Two promised to specifically focus on Chinese-made goods. Three vowed to buy only locally made goods.
From 261 respondents, only a handful plan to go out and spend their checks in a way that may contribute to America’s aggregated demand and output, indicating that Washington’s fiscal policy actions probably won’t do much to prevent a recession at home.
So I thought I’d ask my own readers: what would you (or will you) do with your $600 rebate checks if you (or when you) were to receive them in the mail this spring?
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About the author: Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course.
Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author17 Responses to “Is being wise with your money bad for the economy?”
All we really found out from Leonard's survey is what Salon.com readers want to do with their rebate, not what Americans as a whole plan on doing. A surprisingly large amount of Americans have very little knowledge of how computers work, and I would imagine that this very large portion of the population would not have been reached by the survey. Moreover, since the survey was not mandatory, only people with really strong views, or had concrete plans for the money would have been motivated to respond (voluntary response bias).
I am sure that in actuality much more than a handful of Americans will do their patriotic duty to stimulate the economy than this survey suggests.
Although this stimulus package intends for increased consumer spending, I doubt it will cause very many Americans to spend the money they receive. I mean think about it, for any American with decent pay, 600 dollars will not make much of a difference. Yes it is a nice little bonus, but I can't see too many successful adults going out and splurging from 600 dollars. However, younger American workers are much more likely to go out and spend there tax rebate on a luxury good. But besides the young workers, not too many adults will be go on an impulsive spending streak. I would assume that most Americans learn how to manage their money, and by the time you've already made a lot of it 600 dollars is not going to have a big enough impact on your disposable income. And I don't think very many Americans consider it a "patriotic duty" to spend money to stimulate the economy because it is their money, and if saving it will benefit them then why would they spend it. Therefore, I think this stimulus package is too weak and won't really help America very much in coming out of its current recession.
I'm only a teenager, but if I were to receive one of the $600 checks, I'd most likely put it my bank account, since I have a lot to save up for (college, car payments, etc.) Eventually, it will be used though, so it will go into the economy.
Of course, considering that I've heard that the money you put into accounts at banks gets used by the banks for various things, it's already going into the economy. So I don't see the problem with people putting the money there rather then spending it on something like an iPod.
Do elections and campaign money stimulate and increase GDP? If they dont, that would be a great, great waste.
If i received $600 and did not understand why I received it (in order to boost GDP through consumption etc.) as the case may be, I would probably store it up. Despite that people should actually invest during times of recession as money deflate, many people might save their money. It all goes back to whether or not Americans understand why Bush created the Stimulus Package.
But, knowing what I do, I'd probably go out shopping. Being patriotic and all.
The United States idea for the stimulation for the economy is not very realistic. Like it says here, over 60 some percent would not spend the money. They would put it away in a savings acount for a rainy day. This would not support the economy because they are not buying anything, it would just furter the ressision. The one glimmer of hope that I can see is the 40-some percent that said that they would use the $600 check to pay off thier credit debt. Although this doesn't seem a good idea at first, by paying off thier debt they can spend more. Instead of having to pay off the intrest on something, they can purchase a brand new thing. This, in fact would stimulate the economy.
If I was to get the $600 check for the government, I'd probably use it to pay for half of a new coumputer for next year at college, or put it in my checking account to spend next year at college. Either way I am spending it, just not right now for the later of the options. I even know someone that already tentitively spent it, AND THEY DON'T EVEN HAVE IT YET! Hopefully more Americans will be like my friend and spend it, support the economy, and help us get out of this ression. (Technically it isn't a ression yet.)
As has been mentioned before me by others and by classmates of mine, the stimulus package seems more like a hope than a plan; most Americans [myself included, were I to recieve such a such] would SAVE, SAVE, SAVE it. And with good reason too, what with a disturbing amount of people being up to their necks in debt. Although this isn't a very accurate sample, I've been speaking to numerous people I know who will be receiving the checks, and not a single one of them plans to spend [yes, it seems I hang out with the money-conscious crowd].
But if all of us realize that most of the money will not be spent 'to help the economy,' I question why the goverment doesn't openly acknowledge this fact, too, since I would sincerely hope they'd be intelligent enough to ask around. Does the gov't. really think the American people are going to dig themselves in deeper in a vain attempt to keep the US dollar strong? I've heard all the American steriotypes, but for the most part, I like to retain the idea that we're not really THAT stupid. Forgive me for wanting to pay for college rather than going on a spending spree.
AS much as I'd love to help the US economy, I think I'd save up my money as well due to the recession. Okay I'm not that holy, I wouldn't save all of it. Of course I would go spend some, just like how I spent my first salary even though my parents urged me to save it. But I wouldn't spend all of it and that's the problem that the government didn't seem to realize (or chose to ignore it).
Americans aren't going to spend all of $120 billion, especially not if the economy has a chance of going into recession. A better way would be to export more and import less because America seems to spend way too much on imports, which could be detrimental to their economy when recession is coming.
If one day I opened my mailbox and saw a $600 tax rebate I would save it all. Okay maybe not all, but at least some of it. Since the government gave me this rebate to help the economy, I might as well do what I'm supposed to do and spend it. Maybe I'll get a new Sony Vaio laptop or a new pair of basketball shoes mmm.
If I got a 600 dollar rebate I would probably save most of it and spend some on food. This is because the economy is in the state od recession, it would be wise to save up just incase something happens and I need some money.
If I receive $600 rebate checks, I'll just save most of it in bank and put some in my wallet. However, I would probably not use it for a long time since I can't think of anything I want to buy now. Since I am only a teenager now, $600 is a lot for me. So basically I won't really spend it.
If someday i got a 600 dollar rebate check, i would most likely to save them all. However saving the money doesn't mean it's going to stay in the band forever. It will be used eventually. Just like Shana said, the banks are actually using those money people put in the savings. They lend money out for business to make investments and things like that. Therefore i personally without any doubt, the money will eventually go into the economy.
I really can't believe that so many people would save their $600 dollars. I mean, we don't even pay taxes, I doubt we have debts to repay, our life is pretty much free at the moment. And when handed $600, you'd save it in the bank? You do realize that you gain almost nothing with $600 in the bank? With the US Dollar's depreciating value, and extremely low interest rates in banks, you're bound to lose money.
Personally, i would spend the money on goods while my money is worth something. That or exchange the money into RMB and wait until "the price is right" (i cant believe i just said that) and THEN use it. actually, i really want an Xbox 360. so i can play Mass Effect, that looks like such a cool game. Bioware is definitely the best RPG game producer in the world. Oh and i want to play Too Human…and
Sometimes I wonder whether the government actually realizes the probable-impact the fiscal stimulus package will cause.. then I just remember, it's all about politics; government spending would be a more direct input of expenditures, ensuring that $120 million (* multiplier) would be used up, as opposed to attempting to stimulate consumer spending. Personally, if I recieved the $600 dollar rebate, I would go out and spend a good portion of the money now, before the U.S. dollar falls in value more and the purchasing power of the rebate lowers.
With this $600 dollar tax rebate I personally would spend it right away on something nice that I have maybe been trying to save for awhile now. This package will only help stimulate me as a consumer in the purchasing factor role in the society therefore helping the US nation as a whole.
By giving $600 dollar tax rebates to households, the government can not be certain that it would help stimulate the consumer spending, thereby energizing the economy. There is no way that the government can be sure that everyone who receive the rebate would spend it; some or maybe most of the people may save the money. The people's confidence in the economy is probably rather low at the moment, therefore they would probably save more than they would spend.
As Salon.com's survey showed, the government's fiscal stimulus package isn't, well, that stimulating. The paradox here is that because of the recession, people want to save money. However, in order to pull the country out of recession people need to start spending. My money would go straight to my college fund, both increasing the GDP through purchasing a service and my education. I'm selfless like that.
If i got a 600 dollar tax rebate, it would really depend on the situation i'm in to decide whether or not i would spend it. Since the economy is in recession and the moneys value is going down, i would be trying to save as much money as i can. But knowing that the 600 dollars is used to boost our economy, maybe i would spend it on something i've been really wanting. But it all depends on the situation i'm in.