The Economic Stimulus Package: Will It Work, and for Whom?

Siegel says a recession appears more likely than it did a few months ago, but that a recession, if it occurs, is not likely to be deep or prolonged because the employment and consumer spending pullbacks have not been severe. "The odds are definitely going up," he says of recession prospects. "But so what? If we get plus-point-one percent [GDP growth] it's not a recession; if we get minus point-one percent, it is a recession. Nobody can tell the difference."

Others are less optimistic. "I think the economy's contracting," says Mark Zandi, chief economist and co-founder of Moody's Economy.com. "It shrank in December. It shrank in January.... It's likely contracting again for February. We still have another three or six months of decline to go. That is recession."

Zandi points to falling employment figures and pullbacks in retail and vehicle sales. In addition, his weekly survey of businesses finds executives newly focused on the need to cut payrolls and equipment investment.

But several factors could keep the recession mild, according to Zandi. "Corporate balance sheets, outside housing-related businesses, are in good shape," he says. Hence, companies "can weather a very serious financial storm like the one we are experiencing." And the global economy remains strong. "I think, particularly, emerging economies, which account for half of global GDP, will hold up very well."

Finally, U.S. policy makers are handling the downturn well, Zandi adds, citing the Federal Reserve's recent rate cuts and Fed chairman Benjamin Bernanke's signals that more cuts could come quickly. "The fiscal stimulus is significant and unprecedented in the sense that it was put together so quickly." The rebates are "targeted to the right people, who are more likely to spend them quickly. I suspect most people who get this money are going to spend it on groceries, daily living expenses, electric bills.... I think it will be enough to get the economy growing, along with low interest rates."

2001 vs. 2008

The best analogy to the current package was the Economic Growth and Tax Relief Reconciliation Act of 2001, a response to the recession that began that March. About two-thirds of U.S. households received tax rebates of $300 to $600 as an advance on the income-tax cuts that also were part of that package.

Souleles, along with David S. Johnson of the Bureau of Labor Statistics, and Princeton economist Jonathan A. Parker, added questions to the Bureau's regular Consumer Expenditure Survey to find out how people used the rebates

For logistical reasons, the government spread the $38 billion in rebate checks over 10 weeks from late July to late September. Because each week's recipients were selected at random, the survey, taken as a whole, automatically negated the effects of other temporary influences on spending, such as changes in the stock market or car makers' cheap-financing deals.

The study found that the average household spent 20% to 40% of its rebate on non-durable goods during the three-month period the money was received. After six months, about two-thirds of the rebate had been spent.

The rebates increased consumer spending on non-durable items by about 2.9% in the third quarter of 2001 and 2.1% in the fourth quarter, a significant boost that coincided with the economy's recovery, the authors said. "Our findings imply that the rebates provided a substantial stimulus to the national economy, helping to end the recession of 2001."

Souleles and his colleagues also found that in the three months during which the rebates were received, low-income households spent 63% more of the money on non-durable goods than high-income households did, buying things like food, clothing and health-related items. "In sum, we find that households with low income or low liquid wealth consumed more of their rebates than typical [households did]..." the authors wrote.

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