Fiscal Stimulus: The Consumption Dilemma

Zubin Jelveh has some advice for the IRS on how to spin the upcoming tax rebate so that people will spend it rather than save it. It’s good advice, too – for any politician looking to maximize the bang for any fiscal-stimulus buck.

But the irony is that many of the recipients of this rebate would actually be better off not spending the money. The poor, especially, who are most likely to spend the money are also very likely to be running a large revolving credit-card balance. From a personal-finance point of view, the best thing they could do with the money would be to apply the whole thing to their credit-card balances, rather than leaving those balances untouched and spending the money on extra goods and services.

A responsible politician, then, is likely to be torn. On the one hand, a fiscal stimulus doesn’t stimulate unless it’s spent. But on the other hands, that stimulus will often be put to better (if less stimulating) use if it isn’t spent, but rather used to pay down debt. So maybe it’s sensible not to spend too much effort encouraging spending.

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