Shore Up the Nation's Balance Sheet with Tax Rebates to Individuals

Tax rebates to individuals have fallen out of American political favor in stimulus packages. The 2001 tax cuts in part included rebates to individuals, and the 2008 stimulus package did as well, but the 2009 stimulus package, on the other hand, did not, taking the form instead of tax cuts, intergovernmental transfers, grants, and loans. The administration initially wanted to include rebates, but they were eventually dropped from the package.

This is in great part due to the concern that individuals won't spend the rebate, but rather save it, which in America means paying down credit-card bills and other debt. The results are, of course, mixed, and they have been since the 1970's. Some of the rebate is spent, and some is saved. The portion that is saved though, frustrates the purpose of fiscal stimulus, which is to increase short-term aggregate demand. Spending stimulates; saving doesn't.[1]

Now, I'm no economist, but the thought has occurred to me: perhaps individuals saving, especially in the form of paying down credit-card debt, rather than spending a rebate is actually a good thing. Consider first that the average interest rate that an individual, at the moment, pays on credit cards is 15%. Then consider that the federal government, at the moment, only pays about 2.5% on ten-year treasuries. Thus, when an individual pays down his credit cards with government rebates, the nation is essentially refinancing its debt at a risk-free rate.[2] Finally, consider that American government, as the least risky  borrower in the world, can and apparently does expect to pay similarly low rates, at the very least for the better part of a decade, the end of which time is about the time that Moody's has said it would downgrade American debt if the government didn't get its act together.

At least in isolation, then, refinancing the nation's debt through rebates to individuals seems to be a national policy worth promoting over the next couple of years as a way to shore up the nation's balance sheet in preparation for what will be the truly monumental and excruciating task of reforming the structural imbalances in the federal government's budget.

Notes.

[1] I don't know if there's room to argue that a person with a better balance sheet will increase demand as well over the longer term, if at all, but it seems right to say so.

[2] This arrangement would seem to make equally good sense even if the rebate was used to increase already positive savings. Risk-free financing of a rebate that is used to increase an individual's already positive savings would essentially be the nation leveraging return on investments. For this all to work, of course, the returns on investment would have to exceed the risk-free rate and the increased taxes on investment imposed to repay the government loan.