Saturday, April 26, 2008

Becky Quick: The Rebate Check is in the Mail

But should it be called a “rebate” a “bonus” or would it stimulate the economy more if it were called your “winnings?”

Becky Quick is a brainy, cute, and clever financial commentator on CNBC’s “Squawk Box”. You could say that she is appropriately surnamed. Recently, Ms. Quick recounted the story of a New York economics professor who did a study on government give-backs to stimulate the economy. The president went on the telly just yesterday saying that the first wave of checks would soon arrive in the mail. The whole idea of the "rebate" is to get people to pump money back into the economy. But there is a great deal of psychological worry as to whether the scheme will work. Will some people choose to save the money? Will others go on the spending binge which will provide a surge of economic activity? The professor had a theory which holds that the success of the program would depend upon what you called it. Semantics, in other words, was more important than substance.

To prove his theory, the professor set up two groups. Each group would get $50 dollars to do with what they liked. In one group, the government give-back was called a "rebate." In the second group, the give-back was called a "bonus." Can you guess which group pumped more money back into the economy?

Here’s what happened. People getting $50 bucks of "rebate" money spent about $12.50 whereas people receiving "bonus" money spent about $22.00. You can do the psychology yourself.

Maybe a third alternative would better suit the goal of pumping money into the economy: call the give-back money the taxpayer's "winnings." Then maybe they would do what they’re supposed to do: blow it all.

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