The debate in Washington is about how the Federal government should dole out fiscal spending to jump-start the economy. Everything is on the table: direct investments in companies and in public infrastructure; tax credits, rebates and reductions; food subsidies and research grants. The argument is over which kind of spending will have the greatest impact, have the greatest "multiplier effect."
As far as I can tell, this dispute is as old as the practice of economics itself. The fact that it persists today, more than 230 years after Adam Smith wrote the Wealth of Nations (often thought to be the book that founded modern economics), is a sign that we don't really know the answer. Economists introduce models, based on the limited data available to them (predominantly from surveys), to promote competing points-of-view on the subject.
Few things are as awkward as missing an anniversary -- unless, of course, you didn't know that there was a date you were supposed to be marking in the first place. That was the case this past week when the National Bureau of Economic Research, the last word in gauging the state of the economy, declared that the US has been suffering a recession since December 2007.
Media coverage of this event was quick to point out that the economic news has not been entirely gloomy over the past twelve months. Most notably, the domestic economy saw 2.8% growth in the second quarter of 2008. Analyses tend to attribute this spike to our government's most recent experiment in fiscal stimulus -- the $152 billion package it issued this past spring which, by my calculations, was equal to about one-third of the total incremental growth in the economy. If that pay-out were the sole explanation for second quarter growth, we would have to conclude that for every dollar that government spent, the economy benefited by another two dollars.
But several other theories vie to explain the circumstances. The two I've seen most often is that, in the second quarter, imports dipped somewhat and US exports grew. Again, no one really knows the truth of the matter.
My good friend Marco Olmi reminded me that I should be outraged by this vagueness. It was Jully 11th and Marco -- a native of Genova, Italy -- had just become a US citizen. It was a perfect summer evening, and we were celebrating with our families in our front yard in brownstone Brooklyn, American flags and American wine distributed around a long table. Marco has built and run at least three successful businesses. His excitement about the occasion was tempered by his innate pragmatism, and a new sense of common cause with his fellow Americans. Reflecting upon the government's recent attempt to boost the economy, he was frustrated by its inefficient approach.
He had a proposal: Why doesn't the government issue debit cards, loaded with stimulus payments, that would permit us to record with much greater certainty where all that money went? Did people pay down their credit card debts, did they buy gas for their cars, did they purchase basic staple goods, did they go shopping, or did they deposit the funds into savings accounts?
Our conversation expanded from there. Putting tens of billions of dollars on the market gives the government tremendous negotiating leverage. It could target specific product categories that are especially important to people's lives or that are exceptionally expensive at the moment. It could zero in on industries that it wants to cultivate. So, for example, if the government wanted to counteract high gas prices, it could negotiate with all the major energy companies, requiring that they grant discounts to stimulus card holders. If it wanted to bolster the auto industry, it could drive potential customers to the Big 3's doors by, again, agreeing on a system of discounts. Invariably, this approach would also bolster credit card issuers, because only they are equipped to make such a stimulus card work.
Most important, precisely measuring the effects of stimulus payments in this way would allow the government to fine-tune its policies in the future, to achieve the type and volume of growth that it desires. This is not a foreign concept to the business world: Precision of this level has long been expected by direct marketers, and even more so by interactive marketers. As the world's single biggest investor, acting on behalf of tax payers, the US government should ask no less of itself.
The next round of fiscal stimulus will likely be far larger and more complex than the last one. The stimulus card idea might not apply in some instances, but the principal holds true: We need to approach fiscal spending in a methodical way that lends itself to measurement and calculated returns-on-investment.
Copyright 2008, John Hearn
Interesting proposition. For me it has three main drawbacks:
ReplyDelete1. Any cash given directly to people will primarily be used as savings, to pay down debt or for some minor purchases, not any big ticket items (as was seen with the Bush refund check). How much money per person are you talking about, $500, $1500, not much if you want to push them to buy a car or a new house.
2. A system like the one you propose would rely exclusively on the cc/debit card providers. That means you are giving them a 1% to 3% cut right off the bat. That is quite a large bailout when they do not need it. You could use the EBT network, but the stigma associated to it would probably limit its use.
3. The level of detail described is not necessary given privacy concerns.
I think there are better ways to funnel money to those who need it. Increasing minimum wage is critical so that people do not drift into poverty, as is expanding unemployment benefits. These are things that can be done now, and though you do not have detail about where they spend the money, you know in what categories they spend it (based on existing data collecting methods). I do not think that more detail would be necessary or politically possible at a macro scale.
If you wanted to push people to buy new cars or houses then at a national level the government could offer a tax break/incentive to do so, or a government discount (like it has been done in Portugal with new cars). As long as it is not focused only on US car makers. That type of protectionism would be, in my mind, a step back. If you wanted to help people pay for gas, then Obama needs to reinstitute his proposed windfall profits tax on the big energy companies (it was cancelled last week with gas prices so "low"). This money could be reinvested in alternative fuel programs and to help low income families pay for winter heating.
Just a thought.
1. Your assertions about how people spend stimulus payments may be correct, but we don’t know for certain because we have only relatively crude methods to record those transactions. We have no empirical data. That is the primary point I am making.
ReplyDelete2. What do you suppose is the cost of issuing hundreds of thousands of checks, and how does that compare to paying credit card issuers a 2-3% fee (especially when the latter approach will permit the government to calculate specific returns-on-investment and improve performance over time)? Although mortgage debt has gotten a lot of attention recently, some think that credit card debt will be the next crisis spot. Don’t look now, but credit card issuers may require some help soon, too.
3. Your concern about privacy is important. The best way I know to address it would be for the credit card issuers to report spending data to the government in aggregate, without any single-account information.
I am not qualified to comment on your other ideas for boosting the economy through fiscal spending. My blog entry only concerns a single idea for how to more precisely record the effects of such spending.