Professor Jonathan Parker Photo © Evanston Photographic Studios

Finance professor says rebate checks have mitigated economic slowdown

By Ed Finkel

Could the economy be any worse? Based on preliminary research, Kellogg Professor of Finance Jonathan Parker says the current U.S. economic crisis likely would be deeper without the stimulus provided by the rebate checks mailed to taxpayers in May.

Kellogg World: What does your ongoing research show about the impact of federal tax rebate checks?

Jonathan Parker: At this point, we have only five weeks of data following rebate receipt from May and the first half of June. The spending on the goods we're watching rises about 3 percent after the rebate check has arrived. That's a pretty big kick in aggregate spending. What we don't know is whether that will be consistent. We're going to get the weekly data for all of calendar year 2008. That will come in February.

KW: How do you tease out the effects of the rebates on consumer spending?

JP:  In 2008, as well as in the 2001 anti-recessionary check program, they randomized when they gave people the checks. We're looking at otherwise identical groups of households, some of which got their checks early and some later. We're tracking to see if spending rises vis-à-vis the households that haven't yet received a check. It's a clean way of looking at this. We observe a bunch of products purchased using universal bar codes. A.C. Nielsen runs a large survey database, with over 100,000 households participating. They get a ScanTrack scanner, and when they come home from any grocery store trip, they're supposed to scan in their receipt and bar codes for each item they purchase.

KW: In your 2001 research, what did you find?

JP:  People on average spent about one-third of their rebate in the three months in which it arrived. They spent another one-third in the next three months. That was enough of a kick that it helped end the recession. This time, the impact of the receipt is similar so far. We don't know if it will be as prolonged or as significant in total. Consumer spending is in the dumps now. Even four months ago, five months ago, in May and June, we had consumer confidence at 20-year-low levels. The question we're asking is, could things be even worse? Our initial research suggests things would have been significantly worse had there not been the rebate mailing.

Watch an interview with Professor Parker at kellogg.northwestern.edu/insight/in-person