Over a year ago, even before Congress approved the stimulus-rebate checks, there were concerns about if and how those rebates would be spent.

Now the Congressional Budget Office has weighed in, attempting to determine whether the one-shot payments actually provided a boost to the economy, whether individual taxpayers spent or saved their windfalls.

The CBO conclusion: 40% of the rebate dollars were spent which “implies that the rebates raised the growth of consumption in the second and third quarters by 2.3% and 0.2%, respectively, but reduced it by 1.0% in the fourth quarter, when the distribution of the rebates ended.”

The bottom line is the rebate payments gave a temporary -- not sustained -- boost to the economy, merely borrowing the growth from the end of the year.

What CBO didn’t study was whether spending patterns differed based on how the rebate-stimulus payments were received but the estimate of the percentage of rebates spent conveniently matches the percent of taxpayers who received the rebates as checks rather than direct deposits.

The CBO study begs the question of whether the stimulus would have offered a greater boost to the economy if it had been paid differently. One alternative had come from Dan Ariely, a behavioral economist at Duke and author of “Predictably Irrational.” Ariely suggested the rebate be distributed as a gift card which would have to be taken to a store to be converted to cash

“Once the money is part of your checking account,” Ariely said, “you’re more likely to want to hold on to it.”

The CBO study tried to compare how Americans used the 2008 rebate with how they used a similar rebate in 2001.

“Although both rebates were distributed during recessions,” CBO analyst Frank Russek wrote, “the economic environment at the time of the 2008 rebates was worse, with higher rates of unemployment and lower levels of consumer confidence.”

Russek said “Those worse conditions may suggest that more of the rebates would have been spent because recipients were in greater need, it is also possible that the overall response of consumers was to increase precautionary saving in anticipation of yet harder times ahead.”

He noted too the 2001 rebates “were essentially advance tax refunds resulting from a reduced tax rate for the lowest tax bracket effective for all 2001 liabilities. Because that reduced tax rate was scheduled to last through 2010, the 2001 rebates might have been viewed as less temporary than the 2008 tax rebates; if so, relatively more of the 2001 rebates might have been spent.”

On the other hand, he noted, “the 2008 rebates were limited to low-income and middle-income groups, whereas the 2001 tax rebates were distributed without regard to income. That difference would suggest that relatively more of the 2008 tax rebates might have been spent rather than saved.”

The temporary fix offered by the 2008 rebate program was clear according to the National Retail Federation. 

"Without stimulus checks from Uncle Sam, consumers had less money in their pockets to spend last month,” the NRF said after the Commerce Department reported retail sales in May increased 0.2% seasonally adjusted from April but dropped 4.7% unadjusted from May 2008.

“With no direct stimulus for consumers this year, retailers were left with tougher comparisons, making May retail sales appear weak,” said NRF Chief Economist Rosalind Wells.

In contrast to the Bush Administration one-shot rebates, the Obama Administration’s American Recovery and Reinvestment Act provided rebates in the form of ongoing increases in take-home pay for lower income wage-earners. Lower withholding rates --- translating into more take-home pay -- took effect in April. Indeed, although income increased $58.2 billion in April (only $3.2 billion of which represented higher wages), take-home pay went up $121.8 billion. (In May 2008, disposable income, take-home pay, rose $596 billion after total income rose $216 billion and wages increased $11 billion in the month.

“A slight sales increase from April provides hope that the economic turnaround may not be that far off,” according to Wells, anticipating the effect of the ongoing increase in take-home pay, more money in the wallet on a regular basis.
The 2009 stimulus payments differed from the 2008 program because a year ago the Internal Revenue Service which distributed the rebates qualified the payouts by noting “all or part of an economic stimulus payment may be applied to back taxes or certain other debts of the taxpayer, such as delinquent child support and student loans.

The stimulus plan was enacted in 2008 provided one-time $600 payments for most individuals and $1,200 for couples filing jointly with an additional $300-per-child payment. Individual taxpayers with an adjusted gross income of up to $75,000 ($150,000 for couples) were eligible for the full stimulus payment, which was then reduced by 5% for each additional $1,000 of income. Lower income workers, Social Security recipients and veterans who make too little to pay taxes were eligible for $300 checks as long as their income was at least $3,000.

This year’s stimulus bill provided for one-shot bonus payments of $250 apiece to Social Security recipients.

While it’s too early to determine the long term spending / saving impact this year, initial reports suggest it may have been positive: in May retail spending (about 55% of total consumer spending) rose almost $1.6 billion from April; in May 2008 retail sales rose $1.7 billion with an almost five-fold increase in take-home pay.

The CBO conclusions mirrored a survey by NRF which found 41% of consumers planned to spend rather than save their rebate payments.

CBO based its report on studies of spending patterns of tax rebates noting such studies “fall into three groups:”

• those based on detailed data about spending by individual households;
  
• those based on surveys in which people were asked what they intended to do or had already done with their rebate check; and
  
• those based on national data on income and consumer spending.

CBO acknowledged flaws in the studies, particularly the second category which Russek wrote “are subject to error because of incorrect answers.” People, he wrote, may report “they saved the tax rebate because they initially used it to pay down credit card debt; but if doing so enabled them to use credit to finance subsequent purchases, then, in fact, they spent the rebate.” Also, he said, respondents may have erroneously reported that they saved the tax rebate, because they thought that was the answer they were “supposed” to give.

Using aggregate consumption, Russek wrote, “may not detect the effect of rebates” adding “no spike in spending corresponds to the spike in income.”

While the CBO report wasn’t necessarily meant as a criticism of the two large payment stimulus or to compare them with the Obama increased take-home pay initiative, it wound up that way with the Obama plan the winner.

Mark Lieberman is the senior economist for the Fox Business Network. Prior to joining FOX, he served as first vice president and manager of economic analysis and research at Washington Mutual in New York. Before that, he served as senior vice president at Dime Savings Bank of New York (which was later acquired by Washington Mutual), where he specialized in credit and risk management. He is a member of the Executive Committee of the New York Association for Business Economics. He has a degree in Economics from the Wharton School of the University of Pennsylvania.