Saturday, March 7, 2009

The Guilt-Free Stimulus

Do we really build debt when we move to increase spending?

In my column in today's Washington Post,  'Stimulating our Inner Consumer,'  I propose that we can use human nature to encourage consumer demand, easing the loss of jobs until longer-term stimulus projects take root.

If people find it easy to spend with a $2000 prepaid American Gift Card, we're likely to see such a boost, as convenience is hard to resist. People are likely to eat more when seated by a bowl full of chips, and many diners wave away bread to remove that very temptation.

But some people still wonder how much new spending a gift card would encourage. What if consumers ended up buying the same groceries as usual and saving more of their paychecks?

The answer is: that's fine. Doing so costs nothing, and it doesn't build real debt.

If you save the equivalent $2000 then repay it through taxes years from now, there's no cost to you or the government.

Even interest on the debt goes to you and back. When the government borrows money, it issues Treasury bills mainly to Americans; only one in six is held abroad. That means it borrows from you before loaning that same money back. If you save all the money, the result is exactly the same as if you got a $2000 IOU and then returned it a few years later.

In such a case, issuing the Gift Card truly does cost nothing (save administrative costs, which have tended to be low for past rebate checks), as it does nothing.

Fortunately, such absolute saving is unlikely, and we can expect real results. If you hand $2000 to the man on the street, he'll have a strong incentive to spend at least a portion more than usual. The 'marginal propensity to consume' varies with income - a gift card may have less influence on Bill Gates than on me - but it's always more than zero.

We really can encourage more consumer demand, just as surely as people will eat from a bowl of chips.

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