How Will You Spend Your $13 Stimulus This Week?
As you might have guessed, this post is about the individual tax credit component of the stimulus plan that President Obama signed yesterday. It will increase the size of the average weekly paycheck (for those earning less that $75,000 yearly) by $13.
Notice that the title of this post suggests that the $13 take-home pay bump will show up this week. It won’t. Estimates are that the tax credit won’t actually hit the payroll and withholding systems until June. Why is that?
You may recall receiving a stimulus payment in 2008. (I don’t because I didn’t receive one.) Depending on your circumstances, you or your family received $600, $1200 or even more with dependent children. It arrived in a lump sum. That didn’t work out so well for the economy.
A Harris Poll study by the Principal Financial Group found that most recipients used their 2008 stimulus money to pay off debt, to pay regular monthly bills, or saved it. Those are not uses that trigger a resurgence in an economy that depends so much on consumer spending.
So the government learned its lesson. This time it wants the money doled out slowly, which is why we are receiving a steady increase in take-home pay and not a lump-sum payment. But how about that four month delay before people actually see the benefit in their paychecks?
People know that the money is coming – that’s certain. Many consumers will spend in anticipation of receiving money. Think of all of the Christmas bonuses that get spent before they actually arrive. Or how about all of those income tax refund anticipation loans that are made every tax season? We are known as a consumer society that has been inclined to spend money we don’t have anyway. The spending attraction of money you know is coming could be overwhelming.
That’s what I think the government is hoping for – that many consumers will spend now, in anticipation of receiving an increase in take home pay. Indeed, I think the government is hoping that some consumers will light up those credit cards again, using a “buy now, pay it back this summer” mentality. And this is where the debt multiplier effect comes in. If someone is going to make a credit card purchase in anticipation of a soon to arrive monthly increase ($52) in take home pay, will they limit themselves to a $400 purchase? (This is the total amount of the 2009 tax credit.) Or will this new spending consider that the tax credit will extend into 2010? If this is what happens, the economy will experience a spending surge in summer 2009 based on money anticipated to be received well into to 2010.
On the one hand, that is probably a clever economic strategy by government planners. But this strategy has a dark side as well. First, it “stimulates” a return to the credit-driven consumption days that helped get us into this mess. Second, I think there is a substantial risk – and the government may want this – that consumers won’t actually limit themselves to the total amount of the tax credits for 2009 or even 2010. All they will think about is that “monthly” payment. They will figure that if they have an extra $52 per month to spend well into to 2010, they won’t worry about what happens after that. Maybe they will engage in wishful thinking that the government will do something else for them or that the economy will recover, giving them a raise in another way. So the spending will multiply beyond the $400 or $800, using available credit. Not good in my opinion. Please don’t think like that.
Or I could be completely wrong and consumers will actually wait until June, after which there will be a sudden increase in weekly purchases of lottery tickets, fast food, and alcohol. Is that any better?
How do you think this stimulus spending will play out?