Taking Exception

The Best Stimulus Targets

By Bernard Ries
Saturday, February 14, 2009

Food retailer Dan Newman offered his views on this page last week on the most effective way to stimulate the economy ["A Way to Revive Spending," op-ed, Feb. 7]. He dismissed the tax cuts and tax rebates under discussion as inadequate. Creating a healthy demand for goods and services, Newman said, could be most efficiently and speedily accomplished by sending every taxpayer a $2,000 debit card, the money to be spent in a defined period. This notion struck a regrettably familiar chord with me.

In an Oct. 30 Post op-ed, Harvard economics professor Martin Feldstein also discussed the tools that might be brought to bear on the economic crisis. One approach that he, like Newman, opposed was a tax rebate, and Feldstein pointed out that the rebate given in early 2008 had not had a stimulative effect, since 80 percent of the rebated money was saved or used to pay down debt.

This dismissal bothered me. If the problem with a rebate is that folks will just keep their money in the bank, I wondered whether the government could somehow entice consumers to spend the rebated cash on goods, thus getting it into circulation. Suppose the Treasury were to issue taxpayers some sort of coupons that would only possess value if the holder used them within 60 days to make purchases from local retailers. The retailers would then redeem the coupons from the Treasury. This seemed sensible to me.

I thought about this off and on and soon drafted an outline. I sent my proposal to The Post and then to two Post columnists, but they all managed to contain their excitement. In December, as panic over the economy intensified, it occurred to me that Martin Feldstein got me started on this; why not get his opinion?

Feldstein graduated summa cum laude from Harvard; he has published more than 350 papers on economic topics bearing titles with the density of fruitcake baked in 1997; he was chairman of the Council of Economic Advisers under Ronald Reagan. Obviously, this was a man worthy of hearing my idea. So I introduced myself and my thesis to him by e-mail on Dec. 5. That evening, Professor Feldstein replied:

"Thanks for this e-mail. Why wouldn't the recipient of these coupons spend these on whatever he would otherwise have purchased and use the cash that he would otherwise have spent to pay down debts or increase saving?"

I stared at these words. In a lifetime of occasionally failing to think a problem through, I had never failed quite so spectacularly. Feldstein's gently crushing reply gave a whole new meaning to the term "no-brainer."

The following day, I wrote again, apologized for having bothered him and, in mitigation, suggested that the lesson here might have been "not to fall too blindly in love with an idea that you think could save the world." I had also failed to apply the test of Nobel laureate James Franck, who said, "The only way I can tell whether my thoughts . . . really have some weight to them is the sense of terror when I think of something new." Unfortunately, I had experienced no terror.

I suspect that Dan Newman has similarly failed to be appropriately terrified. While he rejected the notion of a rebate like that mailed to taxpayers in 2008 because "most Americans saved the money or used it to pay down debt," he simultaneously assumes that most Americans will now, as the economy slides downhill, use government debit cards for extra consumption. He argues that gift cards "have a nationwide redemption rate of 80 percent." Yet money is money, whether arriving by rebate or gift card. I suspect that both methods would be treated similarly by recipients.

Newman suggested that taxpayers could buy whatever they wish: "smarter clothes, dinners out, a weekend away, a new heater." Some might; but in this worsening economy, many taxpayers would probably use a $2,000 debit card to buy their groceries or gas or lunch or insurance and sock away the $2,000 that would otherwise have come out of their pockets.

The day before Newman's op-ed was published, Post columnist Steven Pearlstein wrote, "Spending is stimulus, no matter what it's for and who does it" [Business, Feb. 6]. Surely Pearlstein is right about that. But in parceling out our stimulus money, shouldn't the government direct most of it toward those who will really need to use it right away, whether the disbursement is done by payroll tax cuts, gift cards, unemployment insurance or any other device? Breaking out of the population the neediest segment may not be easy, but nothing is easy in an economy that is, well, breaking down.

The writer, a retired lawyer, lives in the District.

© 2009 The Washington Post Company