The Prisoner's Dilemma of Tax Rebates

In a January 27th post to her blog, Elizabeth Warren likens the American consumer to a battered athlete who is being asked to go back in and do it one more time for the economy. Spend to help us win the game again. The proposed stimulus package will give the athlete a boost by putting a few hundred dollars in his or her pocket. The analogy is apt, because for millions of tapped-out consumers, spending the tax rebate will just put off debt repayment and maintain their current level of vulnerability to unexpected expenses or any other bumps in the economic road ahead.

The stimulus package highlights the Prisoner’s Dilemma of our current economy. Spending is good for the economy as a whole, but saving is good for the individual consumer. We have over-fished the waters of the consumer economy, and too many individual citizens have been sacrificed in the process. Rather than spend their rebates—which, ironically, the federal government must finance with borrowed money!—Warren recommends that consumers use the rebate to pay off some of their debts. BabyBelle, a commenter to Warren’s post, says she plans to deposit the rebate in her rainy day fund. Both of these ideas are on target. The rule should be (a), if you have debt, use the rebate to pay it down or (b), if you are debt free but have little savings, save the rebate. On the other hand, if you have no debt and plenty of savings, do whatever you want with your rebate. Unfortunately, not enough Americans fit in to this enviable category.

These recommendations may not help the economy as a whole, but generally “the economy” is defined as the stock market—the current value of the portfolios of wealthy investors. When the market starts to drop, the economy is said to be taking a down-turn, and the media and politicians begin to pay attention. But for far too long the personal financial portfolios of individual middle class and poor consumers have been going south without raising an eyebrow. It is time these consumers ignore the call to bail out the rich investors and concentrate on what is best for their personal economies. Save your rebate or use it to pay down debt. Don’t spend it.