TOPICS > Economy

Booster Shot?

July 27, 2001 at 12:00 AM EST
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MARGARET WARNER: Will the rebate checks that began arriving this week boost the flagging U.S. economy? We put that question to Eileen Appelbaum, research director of the Economic Policy Institute, a Washington-based research group.

And Ken Kies, a managing partner of the tax practice at Price Waterhouse-Coopers. He formerly served on Capitol Hill as chief of staff for the joint committee on taxation in the mid 90s. Welcome to you both.

Eileen Appelbaum, today after the new GDP numbers came out, President Bush said these tax rebate checks would provide, he said, an incredibly important boost to economic growth. Do you think that’s going to happen?

EILEEN APPELBAUM: Well, you know, what we know from research is that the people who spend their tax refunds, who go out and spend them immediately, are young households, low-income households, households that have a lot of debt and just very little in the way of savings. But these checks that are going out are going to middle-income and upper-income households. There are many taxpayers. There are 51 million taxpayers in this country who will receive either no rebate at all or only a partial rebate. And those are the people who I think would have gone out and spent it all. In February….

MARGARET WARNER: Let me just interrupt you there. You’re talking about people who pay, say, payroll taxes but pay no income taxes or not enough income taxes so they’re not eligible for this?

EILEEN APPELBAUM: That’s correct. But, you know. I don’t understand the distinction, why we make a distinction between income taxes and payroll taxes. All of us contribute, all of us work hard. I think it’s outrageous that the presidents of universities, the managers of Walmarts and other stores, that the executives of nursing homes, they’re all going to get their $300, but the workers who take care of the elderly, those who take care of our kids, they cut the grass, they pick up the trash, they clean the rooms, these workers pay payroll taxes. They have taxes taken out of their checks every week and they will not see anything.

MARGARET WARNER: Ken Kies, what is your view on what this will do for the economy, and Ms. Applebaum’s point that the very people more likely to go right out and spend it are the people who aren’t getting one?

KEN KIES: We have to first realize that half of the people that are going to get the refund are in the under $50,000 income class. A lot of those people are going to spend it; they’re going to spend it by going out perhaps to a dinner at a restaurant or go buy a television. So a large percentage of the $38 billion goes into the hands of the people who are going to spend it. We have to realize what the idea here was, and it was to give back money to people who pay taxes.

Many of the people that Eileen refers to don’t pay any tax at all including payroll tax because 29 million people received the Earned Income Tax Credit, which more than offsets the payroll tax, both the employer and the employee share. I think there is a very potential stimulative effect that can come from this $38 billion. Thirty-eight billion is a lot of money; in a $10 trillion economy, it may not sound like much but when you think of the size of some industries, the restaurant industry is only $400 billion a year.

If $5 billion of this credit was just spent on people going out to dinner, that would be a 5 percent increase in the fourth quarter of this year. So $38 billion is a lot of money and it’s just the first installment, which is part of the psychology here. There are more tax cuts coming. When people see the first check, they’re going to realize that this 1.35 trillion tax cut is real and it is actually going to happen.

MARGARET WARNER: Eileen Appelbaum, is there any way to quantify or estimate or predict whether it will actually have that kind of effect, given that it is going to be the amount it is, fair or unfair — what kind of effect it is going to have on the economy, on the GDP numbers that came out today and were so poor?

EILEEN APPELBAUM: This is a $10 trillion economy, and so it takes a bit of a boost to be felt in such a large economy. What we know is that if we had sent a check for $300 to everyone in this country, the total amount would have been $90 billion, about. And that is just the amount or very close to the amount by which consumption increased as a result of the run-up in the stock market between 1997 and 1999. And that for sure we know was effective. Now this is, you know, a little more than a third of that, but of course this is going to middle and upper income people. And we’ll be lucky if they go out over the next three months and spend about 70 percent of that.

So, okay, this will be a boost of $26 billion, $27 billion. I hope it is going to be effective. That is a reasonable number. But I don’t think we can be sure. We would have been much more certain, we would have had a much sharper boost to the economy, which we need desperately at this moment. We’ve had seven cuts in the interest rates and six cuts already and seventh proposed and you know, it’s not having any effect at all. We needed a larger stimulus.

MARGARET WARNER: Ken Kies, your view on really how much it will help economic growth.

KEN KIES: Well, I think that it has a strong potential to help economic growth, because again when people see the money, they see the real live check coming, they’re going to know that Congress actually really did pass a big tax cut and they’re going to think not just about the three, five or $600 they’re getting in the first installment but they’re going to think about what is going to happen next year; when people make decisions about whether to put a down payment on a new car, they think not only about the cost of the down payment, but where am I going to get the money to make the payments that are going to come next year.

Seeing this check is going to tell these folks that this is for real, that the president really meant it, and there’s going to be more coming. $1.35 trillion is a big tax cut even in an economy of our size. So I think the potential to give people some confidence and enthusiasm to go out and make those purchases either in the appliances or even in cars, to take an airplane ride, it’s very real.

MARGARET WARNER: Eileen Appelbaum…

EILEEN APPELBAUM: You know, there is a $1.35 trillion or larger tax cut coming, but I think that everyone knows that the rest of the tax cut that is coming in the years after this year is highly skewed to the upper income folks. For 80 percent of the American people, the tax cut that they have seen this year is the size of the tax cut or most of the tax cut that they are going to get in each of the next ten years. If they’re getting $300 this year, they may get $400 or $450 in the future, but that’s it. When these tax cuts are fully phased in, the richest 1 percent of us will have tax cuts on average of $50,000 a year. Now that tax cut is larger than most middle class Americans are living on today.

MARGARET WARNER: Let me go to one other point, Ken Kies, before we end about the rebate checks. We’ve heard economists say that it’s better for the economy if everybody or many of the people who get these go out and spend it at these stores, restaurants, whatever, rather than save it. One, do you agree with that? And if so why? Why isn’t savings and investment as good for the economy as spending it?

KEN KIES: I think we need to think about both sides of this equation. Spending the money right now gives a short-term boost to the economy. But frankly, saving is probably even more beneficial in the longer term because it means that money goes into creating new capital, investment, new jobs, which is going to give people the ability to earn more money and then spend more money.

So I think it’s important to realize that there’s both a savings side of this and a spending side. You shouldn’t ignore one to the benefit of the other or vice versa. The tax cuts that Eileen alludes to, that upper income will get, most of that money is going to go directly into new savings. And that’s not a bad thing either.

MARGARET WARNER: You disagree with the conventional wisdom then. You think that is helpful even if it doesn’t show up, say, in the next quarter?

KEN KIES: There’s absolutely no doubt about it. It is – we are much better off taking money that the government would spend in programs that produce a relatively modest boost to the economy and putting it back into the hands of savers and letting them invest it. Long-term, the economy is going to do a lot better if we focus as much addition on that as we do in trying to stimulate the consumption side as well.

MARGARET WARNER: And your view, Ms. Appelbaum, on which kind of use of this tax cut is most useful?

EILEEN APPELBAUM: Let me just say that it is the conventional wisdom to say that if you give money to rich people they’re going to save it, and it’s going to be great for the economy and trickle down to us because we need the savings for investments. We should know from the last couple of years that that is just not true. We had a negative savings rate from 1996-2000. We had a large investment boom. There is no relationship between that savings and investment. We don’t need that tax cut.

MARGARET WARNER: Back to the tax rebate checks going out this week – the man in Spencer’s piece — the first man said, “I’m going to save this. I’m not going to spend that.” Is that less helpful than the guy who is going to spend it?

EILEEN APPELBAUM: That is definitely less helpful.

MARGARET WARNER: Why?

EILEEN APPELBAUM: The purpose of the stimulus is to get spending going today. Putting money into the bank is not going to show up in the receipts of a restaurant, in the receipts of a Home Depot, in the receipts of a Walmart. That money that goes into the savings does not stimulate the economy, does not allow us to preserve the jobs that we have now. What we’d like to do is turn the economy around. We have a recession in manufacturing, in telecommunications, in software, in computers. We don’t want that to spread to the rest of the economy. So we hope to get that money into the hands of people who will spend it.

MARGARET WARNER: All right. On that point of disagreement, we’ll leave it there. Thank you both very much.