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To spend or to save?

Marketplace Staff Feb 8, 2008

To spend or to save?

Marketplace Staff Feb 8, 2008


Tess Vigeland: And now a couple of public service announcements for those of you salivating over the idea of a tax refund check.

First, don’t go spending money you don’t have yet! Second, don’t fall for the e-mail and phone scams already out there promising to get the refund to you faster.

If and when that check does land in your mailbox, the government is rooting for you to spend it — jump-start the economy and all. But as Danielle Karson reports, the advice you’ll get from most financial planners isn’t what Uncle Sam wants to hear.

Danielle Karson: Experts like to rally around the mantra of the “three B’s”: get the biggest bang for the buck out of the tax rebates by targeting the money at families who will buy stuff fast. But not everyone plans on doing the government’s bidding.

Pat Crowe: We’ll pay bills with it. We have debt, and that’s where the money should go.

Pat Crowe lives in Arlington, Virginia. She’s the owner of a small publishing company. Her husband is a cabinet maker who doesn’t generate a steady income. Still, she’s furious about the government’s decision to spend billions on tax rebates:

Crowe: I think it’s an idiotic plan. The government is sending us out on a shopping spree like, whee! If my husband doesn’t earn enough money that week for our bills and all I have to do is run a little printing press and print some money to pay our bills, that’s what America is doing right now.

But Doug Elmendorf, an economist with the Brookings Institution, thinks Crowe’s view of the rebate plan is misguided. He says the whole point of fiscal stimulus is to run a deficit to get the economy moving, just like a similar plan several years ago.

Doug Elmendorf: There are ways to spend several hundred dollars without any trouble and the history of the 2001 tax rebate suggests that people will spend a good share of it.

Some surveys at the time found that people socked away most of their rebate money, but Elmendorf doesn’t buy it:

Elmendorf: People understand they’ll be better off in the long run by doing more saving and that’s the answer they give to survey questions, but when they actually get the money in their hands, it’s harder to save than they expect and they spend a good share of it.

But the National Foundation for Credit Counseling thinks that’s a bad idea. The group’s Nicholas Jacobs says people shouldn’t automatically head to the shopping mall with their tax rebate:

Nicholas Jacobs: Paying down debt, putting money into savings, in the long run, will add to one’s personal economic health, which we feel will add to overall economic health.

But Jacobs doesn’t want to spoil anyone’s fun. Just like with rich food, he advises, go easy:

Jacobs: People should have some fun with it, but $500 towards a $2,000 plasma screen TV still leaves you with $1,500 on your credit card and that’s what we would definitely counsel against.

If Americans do splurge on their rebate money, Brookings economist Doug Elmendorf says it will give the economy a needed jolt. If they don’t…

Elmendorf: Then it will not provide stimulus to the economy and the economy will proceed based on the conditions in housing markets and exports and on the actions of the Federal Reserve.

So, unless people spend their windfall, politicians will need to look at long-term solutions to address the country’s slump. That includes turning around the battered housing market, addressing global competitiveness and trusting that Federal Reserve rate cuts do the trick to spur investment and spending.

In Washington, I’m Danielle Karson for Marketplace Money.

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