Will rebates really work?

Americans may enjoy an early-summer surprise this year: Nice big checks from the U.S. government.

Republicans and Democrats have spent the last few weeks hammering out details of an economic stimulus plan, of which tax rebates are the centerpiece, intended to offer a much-needed boost to a U.S. economy weighed down by the mortgage and credit mess, a worsening housing slump and rising energy prices, among other factors.

According to the plan approved by Bush and the House—but, as of this writing, facing changes in the Senate—most Americans would receive $600, with couples getting $1,200. Those on the highest or lowest end of the income scale could expect $300 each, while families with children could receive $300 per child. The idea, of course, is simple: Put money in people’s pockets, then hope they spend it.

Jeremy Siegel says Americans are likely to do just that. But while the financial expert says the plan is likely to provide the economy with a one-time boost, he also says it’s no panacea, and may come at a long-term cost. “My feeling is that it will have some effect on the third quarter, at least,” says Siegel, the Russell E. Palmer Professor of Finance at the Wharton School. “The problem is that we want it now. Something like this works with a lag, so it’s nowhere near as effective [in the immediate term] as monetary policy.”

Siegel says he still believes the U.S. economy can and will avoid a recession, though he adds that “slow growth” is likely.

That’s where the stimulus plan can help. Essentially, the checks should pump enough money into the economy to give it a 1 percent boost. Historically, similar packages have had just that kind of impact, Siegel says. But there are long-term considerations, too.

“This will provide a boost to spending,” he said. “But where is the money coming from? It’s coming from increasing the national debt. ... A tax rebate is essentially like taking a loan from yourself. … It does pose the danger of being a long-term drag, because eventually it will have to be paid back.”

As for the global meltdown, seen in late January, as overseas markets reacted to the growing U.S. malaise? Siegel says such a reaction is to be expected.

“The world economies and especially the financial markets are linked like never before,” Siegel says. “Optimism and pessimism flies through all of the markets. ... If the U.S. suffers a recession, nobody is immune.”

Originally published Feb. 7, 2008.

Originally published on February 7, 2008