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.