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Follow Up: Tax Rebates And Consumer Spending (And Porn, For Good Measure)

August 1st, 2008 · 22 Comments
Behavioral Econ · Follow Ups · Policy

A few weeks ago, I wrote about why putting your tax rebate in a savings account is a pretty good idea. The basic logic is that, since the government is borrowing money in order to be able to give you your rebate, taxes are going to be higher than they would have been otherwise at some point in the future so that the government can pay back its loan. Therefore, this money isn’t really a permanent windfall, even though it may seem that way at first glance.

I hinted briefly in this article that people were not perfectly forward-looking, since it seems like a lot of households go out and spend their rebates as soon as they get them. But what are they buying? Behavioral economists have studied the topic for a while, and they came up with two main relevant findings:

1. Windfalls tend to be spent on marginal items, which are items that the consumer would not have purchased otherwise. In other words, consumers aren’t just choosing more of what they already buy. See here for more details.

2. These marginal items tend to be items that are considered treats or indulgences. Again, see here for more information.

So what happened in the case of the latest tax rebate? According to Greg Mankiw’s blog, “many websites focused on adult or erotic material have experienced an upswing in sales in the recent weeks since checks have appeared in millions of Americans’ mailboxes across the country.”

Apparently “stimulus package” is a pretty appropriate name for such a rebate, and I will, of course, sleep better at night knowing that the porn stars of the world (not to mention Joe Francis, whatever he’s up to nowadays) will be able to weather an impending recession. On the up side, behavioral economists are probably happy to see more empirical evidence that supports their theories.

Tags: Behavioral Econ · Follow Ups · Policy

22 responses so far ↓

  • 1 Professor Coldheart // Aug 4, 2008 at 3:09 pm

    #2 is interesting, but #1 seems like a conclusion we could have reached from our armchair. If you give me more of any resource, I’ll use that resource to acquire the good that fulfills my next marginal want.

    And of course, porn is interesting too.

  • 2 econgirl // Aug 4, 2008 at 3:39 pm

    I think I wasn’t particularly precise in my wording- when receiving a discount or a windfall, one option is to not increase or change spending at all. I suppose that another way of explaining the marginal item point is by saying that the marginal propensity to (immediately) consume the windfall is not zero. This is a point that is actually less obvious than it seems, since my initial argument is that the windfall doesn’t actually increase lifetime wealth.

    In the context of the referenced paper, it is actually non-trivial to note that consumers who received a $10 off coupon didn’t just say “cool, my groceries are $10 cheaper, maybe I can buy more of something else later”, but they bought extra stuff right then instead.

  • 3 allan // Aug 5, 2008 at 2:54 pm

    I don’t know much about the macro effects of rebate stimuli, but it seems to me that increased consumption of digital (non-rivalrous) goods has a minimal impact on the creation of new value, compared to tangible goods or rivalrous services.

    Moreover, if the consumer of porn fits your behavioral model, it’s not even clear that porn stars would benefit. If a star is paid piecework, then only the rights-holder gains from extra sales. And if the stimulus is a one-off affair, there is no incentive for new players to enter the market, nor would existing owners see a benefit to create competition for their existing catalogs.

  • 4 ppearlman // Aug 11, 2008 at 4:10 pm

    ha!

  • 5 econgirl // Apr 12, 2009 at 5:34 pm

    (Much) delayed response to allan: I think you raise some good points, but, in the context of economic stimulus, what matters most is the fact that the porn spending is going somewhere, regardless of whether it’s going to the actors (not everyone can be a “star”…though there are no small actors, just small parts…ha.), the porn company owner, whatever, provided that whoever gets the money uses it for consumption as opposed to putting it under his mattress. In this case, if the spending accrues to the company owner and the company owner is already very wealthy, the consumption cycle may not continue as desired. But you are right in that no jobs (I am replacing your word value with my word jobs) are directly created at this step if consumption is non-rival.

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