A Stimulus Shot in the Dark?

When the economic stimulus checks start making their way to our mailboxes later this year, the government is hoping we’ll all cash them and promptly go shopping.

In the last round of rebates, in 2001, many did: according to Citigroup, 25 percent of the rebates issued in 2001 were spent at Wal-Mart alone.

But it’s unclear how Americans will spend the rebates this time. The economy is unquestionably worse; housing starts are at their lowest level since 1991, according to Commerce Department data released Wednesday.

And everyday living is getting more expensive. The CPI rose by 0.4 percent again in January. Food costs shot up 0.7 percent, their most abrupt increase in a year.

Which may be why one recent poll found that only 16 percent of Americans plan to spend all their rebate; nearly one in three respondents said they planned to pay down debt with the rebates of $600 per individual and $1,200 per couple.

If you consider that Wal-Mart customers last month were cashing in their Christmas gift cards on basics like food instead of discretionary income buys like stereos, according to the Financial Times, it stands to reason the rebates will go toward life’s little–and big–necessities.

Still, another survey–this one by the National Retail Federation– found Americans will spend 40 percent of their rebate cash when it gets here in May, putting $30 billion will go toward paying debt and $19.8 billion will go into savings. But maybe that’s just wishful thinking on the part of the retail association.

The whole point of the stimulus plan was to increase consumer spending and beef up the economy–but if one in three people use it to pay debt or bank it, it’s going to have a lesser effect. Therein lies the problem with the stimulus plan–we have no way of knowing what the majority of Americans will do with a check for $600 to $1,200.

It’s unlikely, unfortunately, that they’ll spend it on housing. Remodeling is struggling (the National Association of Home Builders expects little remodeling growth in 2008, according to MarketWatch) and, although bonuses–another form of extra gifted money–helped propel the New York real estate market in recent years (and, when Wall Street bonuses declined, helped threaten it last year), $1,200 won’t go far toward a downpayment.

But if consumers spend the rebate on retail goods, increasing consumer spending, the ripple effect could eventually reach housing–once manufacturing picks up, banks feel secure enough to relax their lending standards and more houses disappear off the bloated U.S. housing inventory.

But $600–heck, even $1,200–is a long way away from that. Will the stimulus plan work? What do you think?