Tax rebates = Higher consumer debt?

There’s something almost diabolical about the new administration’s 2009 model of tax rebates — aside from the usual caveat that Uncle Sam is broke and any “tax break” now will come back to bite us later in the form of inflation.

First, I confess I wasn’t aware until last night that the plan all along for the rebate was to do it in the form of reduced withholding, rather than the lump-sum check from the IRS we got last year and in 2001. My wife brought it to my attention as she perused The New Yorker, where James Surowiecki writes about the rationale.

You might think that handing people a big chunk of change is a perfect way to get them to spend it. But it isn’t, because people don’t treat all windfalls as found money. Instead, in the words of the behavioral economist Richard Thaler, people put different windfalls in different “mental accounts,” which in turn influences what they do with the money…

The key factor in these kinds of distinctions, Thaler’s work suggests, is whether people think of a windfall as wealth or as income. If they think of it as wealth, they’re more likely to save it, and if they think of it as income they’re more likely to spend it. If they think of it as wealth, they’re more likely to save it, and if they think of it as income they’re more likely to spend it. That’s because many people tend to base their spending not on their long-term earning potential or on their assets but on what they think of as their current income, an amount best defined by what’s in their regular paycheck.

Makes perfect sense in the context of Keynesian/Krugmanian ideology, in which consumer spending is thought to be the engine of economic growth. That’s bad enough. What’s worse is that this rebate amounts to the mother of all attempts to use the tax code for social engineering. (Turns out Thaler’s written a whole book about how world improvers like him can and should “nudge” us sheeple into doing what they want.)

But I sense something worse still here. If the idea is to make people feel a little more flush by increasing the size of their paycheck, might that not create a false mindset of prosperity that would encourage them to spend more than the roughly $20 extra that’ll show up in their direct deposit every two weeks? The new iPod purchase that might have been put off, the restaurant meal that might have been foregone, things that appeared to be out of reach before the rebate showed up, suddenly seem a little more accessible. Sure, they’ll cost more than $20, but that’s what credit cards are for, and they can be paid off soon enough because the paycheck is bigger now…

You see my point. This could have the effect of encouraging consumers to rack up even more debt than they already have. What a gift this would be to the banksters who helped foot the bill for the new president’s inauguration festivities.* Never forget: They don’t make money when you pay off your credit card. They make money when you roll over your balance every month and pay interest and fees. They make money by keeping people in perpetual debt.

I have a better idea — stick it to the banksters and put every penny of the rebate in a piggy bank, an envelope, or something else at home. You’ll keep the money outside the banking system, and you’ll steadily build up a small cash reserve in case of, oh I don’t know, a bank holiday.

And if it’s higher income you’re looking for these days, here’s a much better suggestion than waiting for these rebates to kick in.

*That really frosts me. For all intents and purposes, we’re talking about recycled TARP money. The banks collected TARP funds, some of which were handed out in the form of holiday bonuses to executives, who then turned around and contributed some of that money as a thank-you to the new president for pushing his fellow Democrats to switch their votes on the bailout bill that made the TARP money possible.