Now that Washington has Reached a Deal, Will Americans Save their Tax Rebate?

In 2001, an economic stimulus package provided many Americans with a tax-rebate check ranging from $300 to $600, in an effort to support consumer spending and re-energize the sluggish economy.

By all measures, this initiative succeeded in boosting consumer spending with studies showing that 20 percent to 40 percent of those checks were spent in less than a week. Two-thirds of the total rebates were circulating in the economy by the end of the following quarter.

That was then, this is now, and as Congress and the White House reached a $150 billion deal that will give tax-rebate checks ranging from $300 to $1,200 per household, many are still wondering whether this stimulus package will actually spur on our slowing economy.

Some economists are suggesting that, this time around, many Americans may opt to keep their purse strings tightened, and forgo spending that check in the near term.

Though this assumption seems possible, what with the slumping housing market and rising prices for gas, food and energy, it also seems to gloss over the fact that such stimulus packages are aimed squarely at lower income Americans feeling the financial pressure of paying for these necessities, and the most likely consumer group to spend that money.

There is one very good reason behind the blistering 11.3 percent growth of revolving debt between October and November of 2007, and the over $900 billion in revolving debt now owed by consumers­­—Americans are broke.

The truth is that consumers may be burdened by mortgage resets and other outstanding debts, but they still need to put food on the table and gas in their cars, and it is almost certain that these cash-strapped consumers will need to spend their rebate.

A likely beneficiary of the economic stimulus package will be the credit card companies, certain to see consumers attempt to pay down their balances.

At the same time, it’s unlikely that lenders offering mortgages or closed-end loans will see any benefit from the rebate program. Paying down the balance of a credit card allows the consumer some temporary liquidity, but that ‘easy fix’ can’t be applied by most consumers to mortgages, equity loans, and auto loans.

The same goes for any other outstanding or delinquent debt that would allow for no future use of the credit line. This fact will present ongoing recovery challenges to the ARM industry, which will see no benefit from this stimulus package.