The problem with 'Wal-Mart stimulus'

Video

More video

The stimulus plan is supposed to help the U.S. economy but many plan on spending it in ways that would send that money overseas. Play video

---

With another rate cut looming, market watchers weigh in on the Central Bank's effectiveness. Play video

NEW YORK (CNNMoney.com) -- Politicians in Washington deserve praise for quickly cobbling together a stimulus package to try and rejuvenate the foundering economy.

Too bad the plan, which relies mainly on tax rebates, won't do much to significantly boost the economy.

Now don't get me wrong. The $150 billion stimulus plan is a welcome start. Many Americans are struggling and need the cash. But at best, this may only provide a temporary boost to consumer spending, not a major jolt as some would argue.

America can't spend its way out of a recession, if that's what this rough patch winds up becoming.

In a research report from Monday, Merrill Lynch analyst David Rosenberg pointed out that consumer spending picked up only "modestly" in the third quarter of 2001, the quarter when most Americans received their tax rebate checks.

What's more, Rosenberg noted that the retailers that seemed to get the biggest benefit from the rebates in 2001 were book stores, restaurants, drug stores and toy sellers. People also spent more on lotteries. (You've got to be in it to win it!) Meanwhile, consumers did not spend significantly more on bigger ticket items such as autos, furniture and appliances.

Rosenberg expects a similar scenario this year. Consumers will spend more, but not that much more, and they will do it over a brief period.

"Since the rebate checks to individuals likely won't be mailed out until May or June, the lift to consumer spending is probably going to be a shortlived third-quarter event," he wrote.

When all is said and done, Rosenberg said the economy may wind up posting 1 percent growth in gross domestic product this year because of the stimulus, up from an earlier projection of 0.8 percent growth. In other words, the tax rebates will have a negligible impact.

Still, that isn't stopping retailers from trying to do their best to jumpstart the economy as well. In what has to qualify as one of the more absurd headlines for a press release in recent memory, Wal-Mart (WMT, Fortune 500) announced what it called its "Economic Stimulus Plan for U.S. Shoppers."

The company said it was cutting prices on thousands of health care and household products and other items between 10 percent and 30 percent ahead of this Sunday's Super Bowl.

I can only hope that this is meant to be tongue-in-cheek but Wal-Mart actually said in its press release that "against a backdrop of continued talk of a credit squeeze, Wal-Mart is concentrating on savings on the items customers need to buy at this time of year - unbeatable prices for the big game."

So rest assured, consumers. You don't need to wait for your tax rebate check. Go splurge today on Pepsi 12-packs, Tostitos Scoops and Hillshire Farms Cocktail Smokies.

You've got to be kidding me.

Getting people to spend more is only one way to fix the economy's woes. To really get the economy back on track, what's needed is an overhaul of the mortgage lending process in order to protect borrowers from overzealous banks pushing exotic loans that the borrowers really cannot afford.

In addition, stimulus that actually promotes investing and not just spending would be welcome. It's worth pointing out that the dividend tax changes in 2003 did more to boost the economy and market since they encouraged more companies to start paying dividends or boost existing ones.

Many investors used the income from dividends not just for spending, but more importantly, to reinvest in the market. In turn, businesses used the money invested in them for capital spending, hiring and other measures that can boost the economy.

"Politically, the rebate makes people feel better. Consumers may have a little more confidence so it's a good thing," said John Derrick, director of research for U.S. Global Investors, a money management firm based in San Antonio. "But encouraging investment by consumers and corporations would be more helpful."

Thanks! Finally, hats off to everyone who responded to Monday's debut Morning Buzz. I'm glad to see that the column struck a nerve with readers and I think it's fantastic that so many people posted their thoughts about what they think the Fed should be doing. (340 comments so far and counting!)

There was a healthy mix of people who agreed with me that the Fed needs to stand up to Wall Street as well as those who believe the Fed is making the right moves to cut rates aggressively. Anyway, keep the comments coming.

What do you think? Will the tax rebates keep the economy from recession?