Bankruptcy

The Stimulus that Can't Stimulate

By Elizabeth Warren

Hanging the worldwide economic recovery on reigniting consumer spending is like investing in used fireworks.  The pizzazz is already gone. 

How are Americans planning to spend their stimulus checks?  According to a new poll, fully 41% say they will use their rebates to pay down debts.  Another 19% are trying to protect themselves by saving it, so that 60% have no spending plans at all.  Only 7% describe new spending.  Debt is blocking a large part of any impact the stimulus package might have had.

[The rest of the breakdown:  17% will spend it on "ordinary expenses," presumably what they would have bought anyway.  No, the numbers don't add to 100%--I assume they left out 16% non-responses and didn't knows.] 

Why is paying down debt the number one objective of the tax rebate?  Take a look at at a BusinessWeek graphic that shows how consumer debt increased 2000-2007 at a rate much higher than in the 1990s.  While you are there, read the article on the powerful contraction occurring in consumer spending.

Debt is crowding out consumer spending.  A family that is paying 18.9% on a balance of $8000 has a lot less money left over for basic purchases, much less any money to buy anything new.

Alan Greenspan thought that it was great for Americans to continue spending in the 1990s and early 2000s because it kept the economy healthy.  But it didn't keep the economy--or the family--healthy. Instead, it meant that we had a false boom, growth that was financed out of tomorrow's earnings.  Now the bills are coming due.   

Full post as published by Credit Slips on April 14, 2008 (boomark / email).