Spend or save

by Russ Roberts on January 23, 2008

in The Economy

There’s a debate in the comments to this post about whether recipients of tax rebates spend or save them. There’s no right answer. It’s an empirical question. I was just giving the intuition for why people might save rather than spend a windfall gain, given that most people just presume it will increase spending. I will try and give some more empirical evidence down the the road. Meanwhile, you might find this survey result about the rebates of 2001 of interest:

A poll by the Gallup organization recently asked around 1,000 adults how they would spend their rebate checks. Seventeen percent said they would spend the money,
      while 47 percent said they’d use the cash to pay off bills. Thirty-two percent plan to save or invest it.

It’s only a survey. But I thought you’d find it interesting.

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tw January 23, 2008 at 10:31 am

One thought: Has any research been done to see what people do with their tax refund checks? While it's not a perfect comparison, wouldn't that be the best statistic to look at to see whether people would spend/save/pay off bills with a tax rebate?

Josh H January 23, 2008 at 10:33 am

Somehow I suspect it's not that simple. Most people will probably cash the check into their bank accounts, and will simply have more money. Their consumer preferences on future purchases and saving decisions will be subtly changed.

Brad Hutchings January 23, 2008 at 11:33 am

I'm with Josh. People lie to pollsters, especially on questions where they perceive some kind of moral test. A satisfactory explanation of whatever happens would (to me anyway) read like Arnold Kling's Oil Econ 101. Money is money both for most individuals and in aggregate.

With income taxes, most self employed people deal with it on a pay as they go basis. Even businesses do the same. You can't pay the employees or their tax withholding without cash in the bank. The only people who really have to regularly worry about future income taxes are self-employed people who have irregular incomes through the year waited heavily toward the end. And most tax advisors will tell you to eat the small penalty unless that's a regular income cycle. Even those who get surprised by the AMT can expect political recourse within a couple years.

And back to Russ's original example… I wonder if enough people actually planned that way if they wouldn't end up being part of the problem of government taking too much money rather than the solution. I can just see some pol getting up and saying "We gave the people this money to stimulate the economy and all they did was save it. Time to take it back."

Bret January 23, 2008 at 11:45 am

Note that paying off current bills with a rebate enables spending of money that would have otherwise been used for that purpose.

So about half spending, half saving.

OregonGuy January 23, 2008 at 12:04 pm

Keynes is so passe. But it's all the Democrats have to hang their hat (their collective hat) on.

In the previous thread, John Dewey points out all the wonderful work that is created when Walmart ships Chinese goods to market. First, I like Chinese goods. They make me laugh. And do so, affordably.

Second, Keynesians rely on the "multiplier effect" to rationalize their actions. What is taking place is income redistribution. If we can afford to send a check to Billie and Bobby Sue living next door for $1600.00, why couldn't we afford to reduce the tax code to reflect that "affordability" first? Why must we take money from people in order to do good?

We shift the demand curve. Good? Why? Are you, as the owner of capital, going to invest in a new ACME Widget Producer based upon this one-time shift in demand? Are we going to build more medical schools?

Little towns and cities have committees to promote their little town or city. They want tourist dollars. They talk about the multiplier effect on the local economy. It's easier to talk about the multiplier effect than admit they would be better off spending that money lobbying the legislature to make business investment easier and more affordable.

But that's the dilemna facing these people. Pander equals votes. Investment equals jobs.

So, the whole question boils down to, "Hey, Fred, what did you do with the fish the government gave you?" You either fry it or throw it away.

Objectivist January 23, 2008 at 12:09 pm

Hey, didn't your idol M.F come up with the permenant income hypothesis, which states that people see their income as relatively constant, and therefore spending doesn't fluctuate. If so, then people will obviously save the rebates they get, thereby defeating the purpose.

David Peterson January 23, 2008 at 12:31 pm

I think that the problem here is in the wording. This account implies that the reason that people invest rather than spend is because they anticipate a future increase in taxes and anticipate a need to pay it in the future.

John Dewey January 23, 2008 at 3:01 pm

The Tax Foundation cites three surveys about household response to the 2001 tax rebates:

Did the 2001 Tax Rebate Checks Stimulate Consumption?

The last one indicates that 53% to 73% of the tax rebate was spent for non-durable goods, but such spending was spread over a six month period.

Though I've provided this link, I wonder whether the behavior from 2001 is even relevant to today. Most households received their rebate checks within a couple of weeks before and after 9/11. Many of my coworkers and neighbors exhibited a form of economic paralysis from fear of what might happen next. No one knew how the economy would recover from this shock. That households did not respond to fiscal stimulus by spending immediately – given the extraordinary events – is not surprising to me.

FreedomLover January 23, 2008 at 3:18 pm

Considering most people live paycheck to paycheck carrying at least $5-$10K in credit-card debts and auto loans, why shouldn't they immediately use a tax rebate to pay off their ginormous debt loads? America truly is only a country for the privileged.

John Dewey January 23, 2008 at 4:35 pm

freedomlover: "America truly is only a country for the privileged."

What do you mean by this?

Do you mean that a boy who grew up in a shack at the end of a potato field cannot become CEO of the world's largest airline? Tell that to Bob Crandall.

Do you mean that a girl born to a poor unwed black teenager – a girl raised in a Milwaukee ghetto – cannot become one of the richest women in America? Tell that to Oprah Winfrey.

Do you mean that the daughter of an impoverished tenant farmer cannot become CEO of one of the nation’s largest real estate firms? Tell that to Mo Anderson.

Do you mean that a boy raised by poor grandparents after being abandoned by his father cannot become a Supreme Court Justice? Tell that to Clarence Thomas.

Americans born to lower income households have been using the “privilege” excuse for decades to rationalize their own lack of success. While they were doing so, the Crandalls, Winfreys, Thomases, and Andersons just ignored them and proved them wrong.

Bob in SeaTac January 23, 2008 at 5:13 pm

John Dewey — AMEN!!!!!

The Albatross January 24, 2008 at 12:56 am

Bob–I second that–The Albatross is an immigrant, but he has lived better than he deserves to; and will have words with anyone who questions the American Dream. Some of us did not find European enlightenment, or “well-regulated” markets, or anything else quite so wonderful. I like it better here, as does my father and Socialist mother (the latter reluctantly ).

P.S. I also Amen John Dewey

vidyohs January 24, 2008 at 9:20 pm

There are makers and takers in life and in this world:

"Bob–I second that–The Albatross is an immigrant, but he has lived better than he deserves to; and will have words with anyone who questions the American Dream. Some of us did not find European enlightenment, or “well-regulated” markets, or anything else quite so wonderful. I like it better here, as does my father and Socialist mother (the latter reluctantly ).

P.S. I also Amen John Dewey

Posted by: The Albatross | Jan 24, 2008 12:56:52 AM"

Love the makers, Albatross, welcome.

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