Quelle Surprise! Tax Rebates Looking Increasingly Ineffective

The rebate checks haven’t yet arrived, and they are already being deemed likely to have little impact on the economy.

That isn’t surprising. What is perplexing it that they were successfully portrayed for a short while as likely to do anything other than increase the Federal deficit.

Readers may recall at the time the idea of fiscal stimulus was first mentioned, quite a few economists were not impressed with the rebate plan, arguing instead for programs that would put more cash in the hands of those with a high propensity to consume (read the low income), such as an increase in food stamps and extending unemployment benefits.

And the boost now looks to be lower than even the pessimists thought. Only 30% of the consumers surveyed by the University of Michigan intend to spend their check. The majority plans to save it ”as a safeguard against worsening future conditions.”

A Bloomberg story argues that the boost provided by those who do the American thing and hit the malls will be largely offset by fuel and food inflation:

Since President George W. Bush signed the stimulus package in February to much fanfare, the price of a gallon of gasoline has risen 64 cents,…

Food prices, too, have climbed at an annual rate of 5.1 percent since the start of the year, meaning another possible $5 billion or so bite out of consumers’ buying potential.

The increases will eat into the $25 billion to $50 billion economists expect the rebates to add to spending in the coming months. Personal consumption accounts for more than two-thirds of the U.S. economy.

“A lot of that stimulus money is going to go to filling the gasoline tank and the refrigerator,” says Mark Zandi of Moody’s Economy.com in West Chester, Pennsylvania. “It’s not going to be quite the boost that most of us were hoping for when it was put together a few months ago.”

The Internal Revenue Service plans to send out about $50 billion in rebates by the end of May. That’s more than many economists anticipated and has caused some of them to raise their forecasts for second-quarter gross domestic product….

The stimulus package gives as much as $600 to individuals who earn $75,000 or less a year. Married couples with household incomes as high as $150,000 will receive as much as $1,200. Families will get an additional $300 for each child.

Retailers, eager to get their hands on the money, are offering consumers incentives to spend….Americans may not take the bait. Consumer confidence fell in April to the lowest level in a quarter century, according to the Reuters/University of Michigan monthly survey. Plans to purchase furniture, appliances and home electronics declined to the lowest level since the 1980s.

Consumers are being hit by a triple whammy: rising prices, increasing unemployment and shrinking wealth. Companies have cut payrolls for five straight months, by a total of 326,000 workers.

House prices in 20 metropolitan areas fell 12.7 percent in February from a year earlier, the biggest drop since S&P/Case- Shiller began tracking the data seven years ago.

“We’ve had a very significant deterioration in the financial position of households in the past year,” Sinai says. “Consumers can’t tap their housing equity any more.”

Household debt has risen more than 85 percent since the middle of 2001 — the last time the government handed out tax rebates in a bid to spur the economy. That has prompted some on Wall Street, including David Rosenberg, Merrill Lynch’s North American economist in New York, to conclude that consumers will spend less this time, paying down debt instead.

“You have a much more stressed-out consumer today than you had in 2001,” he says…

Clarence Wright, an event planner who lives in Dale City, Virginia, is among those hunkering down, rebate check or no. “Gas prices are definitely cutting into my budget,” says Wright, 40, who fills the tank of his Nissan Altima twice a week. “We all had a good time in recent years, but it’s going to take several years before we get back to times like that.”