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Taking Exception

Stimulating Our Inner Consumer

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By Dan Newman
Saturday, March 7, 2009; Page A13

Tossing an idea out in public is like watching a bird take wing, with a breathless moment before it flies or falls. So when op-ed contributor Bernard Ries saw his idea for a speedy stimulus tumble under the withering gaze of economist Martin Feldstein ["The Best Stimulus Targets," op-ed, Feb. 14], I felt for him, doubly so because Ries suggested that Feldstein's view also meant the death of my own proposal ["A Way to Revive Spending," op-ed, Feb. 7].

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Ries and I both suggested jolting the economy with a stimulus that has an expiration date; his idea was 60-day coupons and mine a $2,000 government gift card. In Ries's view, Feldstein sank both notions by asking, "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?"

In truth, those ideas have already made successful use of human nature. We both touched on the concept of using behavior to help the economy.

Classical economists shun consideration of human behavior when it strays beyond simple self-interest. They are flummoxed that many Americans -- including me -- mow their own lawns rather than pay, say, $20 for the service, yet they wouldn't mow a neighbor's lawn if offered the same amount. Such economists protest that in the first case, we value $20 more than our time, and in the second, the reverse. To me, that's quite natural: The first lawn is mine. It's an irrational, widespread human bias toward what's right in front of us.

Yet we can steer such preferences toward reigniting the economy once we recognize them. With that goal, behavioral economists such as Richard Thaler plan policies around our love of convenience. They accept that regardless of our hunger, we'll eat more when seated in front of a bowl of chips than if we never open the bag.

After my gift card proposal was published, Thaler linked to it from his blog to discuss "nudging" people toward consumption. The idea has also been embraced by more traditional economists, including Princeton's Alan Blinder, who consistently reminds policymakers that any stimulus should aim at "creating jobs by creating new spending."

Even Feldstein has acknowledged as much ["The Stimulus Plan We Need Now," op-ed, Oct. 30, 2008]. Observing that "the only way to prevent a deepening recession will be a temporary program of increased government spending," Feldstein cautioned against a slow start since "previous attempts to use government spending to stimulate an economic recovery, particularly spending on infrastructure, have not been successful because of long legislative lags." Feldstein did not specify a solution but concluded that "the key is to stimulate demand."

We can do so as surely as people will eat from a bowl of chips.

Ries's temporary coupons have helped before. Called "stamp scrip," they were so effective in southern Germany in 1931 that leading American economist Irving Fisher advocated their use worldwide. Since the slump of 2003, Bavaria has again printed notes that must be spent quickly to avoid a fee for renewing their expiration stamp.

As for the idea of a government gift card, Taiwan began a similar plan in January. The Taiwanese have until September to spend a government-issued voucher for $108. In terms of gross domestic product per person, that would be roughly $4,000 per person in America. The program began without significant logistical hurdles, and China's Ministry of Commerce is expected to propose similar voucher programs in several areas.

With the majority of purchases now made using plastic, government gift cards could stimulate great activity in the United States. Classical economists are right that consumers could choose to save the money that gift cards would provide, just as any behaviorist or Weight Watchers leader admits that it is, in theory, possible to ignore food on the counter. But in practice, convenience exerts a strong pull. That's why items by the cash register tend to be among the highest-margin items in a store.

Since most of the money from the $789 billion stimulus package will not be disbursed until 2010, we may need additional short-term stimulus. Would some people save money from a federal gift card? Sure. But there is a reason gift cards have an 80 percent redemption rate. In Taiwan, the retailer Carrefour reported a 30 percent increase in sales the weekend after that plan began. Many Americans would be as eager as the Taiwanese were to spend their gift cards.

We need to have the courage to let such a program take flight.

The writer opened a retail food store in Seattle five years ago.


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