Stimulus Gift Card
December 1st, 2008 by klewiMany commentators have lamented the undeniable fact that people saved most of their 2008 “stimulus checks.” No economist seems to know how to send people a check they will spend. How bereft of creativity are they on the subject? One economist proposed a “national 10% off sale,” subsidized by the government. This would be administratively complex and force people to spend money in order to benefit. It would also be easily gamable by stores which could raise their prices just to lower them again. It would also create a massive peak-load problem, sort of like Black Friday every day, followed by empty malls once it ended, exacerbating swings in the economy. Clearly an impractical proposal. Yet, the current state of the new field of “stimulus economics” is so primitive that this proposal made the New York Times list of 2008’s most interesting ideas.
We propose instead the “Stimulus Gift Card.” Here’s how it would work. Whether a tax cut, a stimulus check, an income tax refund, or even a Social Security check, people would be given the option of either taking the check or else going to a government website showing a list of sellers in their area offering their own gift card. The gift card, for many reasons, will have a face value somewhat higher than the check. Logistically, once a consumer agrees to the card, the government cash gets credited to the seller’s account and the buyer gets the card instead.
It’s that simple. Benefits to the government for people who take the Stimulus Gift Card:
· Extra stimulus at no cost over and above what the government would spend anyway
· A “multiplier effect” on the government spending of greater than 100%. Usually, any economist will tell you, multipliers are much lower than 100%. That was certainly true with the 2008 check. It is unheard-of, until now, to have the first round of consumer spending be greater than the amount the stimulus costs the government
· By setting expirations (if any) the government could time its stimulus. Varying expiration dates strategically could smooth seasonal spending patterns
· Money is more likely to stay in the country when spent. This is subtle but important: Higher-margin sellers, such as restaurants and manufactureres, will offer higher premiums on the gift cards. HIgher-margin sellers are also likely to source more domestically. Sellers which source from low-cost countries like China tend to be lower-margin themselves and thus likely to offer lower premiums on their Gift Cards, making them less attractive to consumers.
If the premiums are high enough, enough people will choose cards that the entire maraket psychology of thte “paradox of thrift” could change. Businesses will start investing again because they know people will be spending again. This could create a “virtuous cycle” and singificantly increase confidence in the economy.
Any retailer, manufacturer, or service provider which passes a financial screen by the government could offer their own Gift Card. Benefits for the seller include:
· It is a very efficient way to market, totally targeted, unlike advertising. They could vary the gift card premium by region or zip code to direct traffic to particular stores in the chain. And unlike a subsidized “national 10% off sale” which would need a whole new bureaucracy, most sellers have experience issuing gift cards
· “Cost of capital” is zero. Sellers get their money before the consumer spends it. In this credit environment that is a huge advantage
Smaller sellers will probably group together, like mall tenants do today. For instance, an entire town’s business district might offer one card valid anywhere in town.
For consumers the advantage is obvious. Anyone planning to spend money will have more to spend. Anyone considering spending the money will see that the relative utility of spending vs. saving suddenly makes spending look very attractive. And there is nothing heavy-handed about it. Consumers who don’t want to participate, don’t have to.
There is really no downside. One comment suggests that retailers could collect the money and then go bankrupt, but consumers would then get a refund from the govemment. Since debts like this owed to the government are not dischargeable in bankruptcy, the government is ‘held harmless” The bankrupt sellers must either pay from their own pocket, work out a payment plan, or face criminal charges.
Tags: Add new tag, economic recovery, stimulus checks, stimulus economics
December 1st, 2008 at 6:25 am
This one is so good that I created a “Featured Idea of the Month” category for it. It’s found money for consumers, targeted advettising for retailers (it could be done on a per-zip-code basis so any retailer or service provider could sign up), and for the government, ensures that the stimuklus will be spent, while also “multiplying” it a little bit. One of those why-didn’t-I-think-of-this? ideas
December 1st, 2008 at 1:13 pm
I was a fan of this website before this idea showed up and now I am an even bigger fan. who comes up with this stuff and why isn’t anyone doing anything about it? This seems like something that someone should know about
December 2nd, 2008 at 6:46 am
This is why I alwyas check this site every week, because of stuff like this — We need to do this right away! Why didn’t they do this the first time? One constructive criticism — I am not sure that the gift card should expire so quickly. Perhaps the premium expires quickly. leaving people with a nominal value equal to the cash. But otherwise it’s a bit harsh and what if someone gets sick or something and can’t spend it in time? And what if the store goes bankrupt before the card gets spent? There is a lot of that going around. And while it’s great to stimulate early you’d have a ton of people going to the store all on the same day or in the same week. Wouldn’t you want to spread it out?
December 2nd, 2008 at 9:04 am
this is a GREAT idea. how do we get it “out there” so that it gets noticed other than by people like me who pore through policy blogs? You should have a links so that people can automatically forward these things to their congressperson
December 2nd, 2008 at 4:04 pm
A great solution in search of a problem. Are we even going to do another stimulus check?
December 2nd, 2008 at 4:40 pm
I think the idea is that you could do this with any mass mailing, even an income tax refund. you could even do it with the green dividend check
December 3rd, 2008 at 8:04 am
after I read this a couple of days ago I asked a lot of people and no one could come up with any reason not to do it. Some people thought stimuklus checks were a bad idea in teh first place, but this could be done with any government check. even a portion of social Security.
December 4th, 2008 at 10:13 am
I bet some retailers — small ones in certain local areas — will go as high as 20% over the cash value of the stimulus to bring attention to their stores and hopefully generate repeat business. This is like printing money. (I guess I’ve never understood why we don’t do more of that but i am sure there are good reasons)
December 4th, 2008 at 6:40 pm
the problem is that there is no way of getting the right people to listen. Anybody who reads this is going to say, duh, we should do this. BUt who is reading it? I see a lot of what looks like students and policy wonks but no one who can make it happen
December 6th, 2008 at 5:59 pm
Agree with Jim. I see the idea generation but I don’t see the people looking for ideas. The people who run this site should try to get some PR for it. Almost all of these are good ideas.
December 7th, 2008 at 11:06 am
There was just a whole thing in Ideas today on economic blogging and NONE of the bloggers have suggested this or the immigrants or the real estate thing, all of which seem far more compelling and easy to implement than what the Ideas article described as being on the bloggers website, like the government buying toxic loans. That may or may not be a good idea but it costs a lot of money and is risky.
December 9th, 2008 at 5:28 pm
This is a good variation of the stimulus check strategy, if that is the strategy. I would argue against it, not because this is not a good and creative idea (it is), but because the so called ’stimulus check’ strategy is better PR than stimulus. The evidence, as I understand it, is that, when monetary policy is not enough, the economy will be much better stimulated if the government spends the (same amount of) money. While the stimulus checks–or gift cards–may stimulate the retail sector, multiplier effects are diluted as the funds quickly go overseas (look at where those things from Target and Walmart come from). Government programs, on the other hand, always create more jobs (which stimulates retail) and CAN BE designed to focus on domestic production–creating a more effective multiplier effect.
December 9th, 2008 at 7:01 pm
Greedy, Greedy, Greedy! Americans have already spent $9 Trillion that we didn’t have. Yes, our economy was booming. No, we can’t keep do that any more. We need to concentrate our economy in long term goals not consumer junk that we will throw away in less than a year. Local food production, clean energy, infrastructure, sustainable homes, and American Made durable consumer goods like shoes and clothing. Going further in debt to buy disposable products Made in China is greedy and shortsighted.
December 10th, 2008 at 6:53 am
I think the point is being missed. This is not an argument FOR a stimilus check, just an argument about how to design one if we do one. ANY retail spending gets partly lost overseas. If you give someone $1 they will spend $.80 and there is a multiplier on that and some ends up abroad. But if you give someone $1.20 which must be spent, then it still whittles down but from a much higher level.
December 10th, 2008 at 8:23 am
I also think while Visinsea and Barry have points, they are missing the big one. Vicinsea’s best point is that we can’t sustain this artificial level of demand. I think a stimulus check, lke the real estate brokerage posting and the immigrants, are all about ways to gently land the economy before it can take off again on new sectors like sustainable energy. (Americans don’t make “shoes and clothing,” though.) The big point is that ASSUMING that people are going to get checks — whether tax refunds or stimulus checks — this is a way of making them more valuable and enhancing the multiplier.
And the gift cards don’t have to be for retail — they can be for services or durables. As I understand the idea, anyone who sells anything could participate.
December 10th, 2008 at 9:50 am
OK, just thinking out of the box for a second. If you combine this with the “green dividend” you get a stimulus which may result in some money eventually making its way to China BUT very much of the money you would have spent on gasoline does not go to the Middle East or Venezuela or Russia. There is no way of keeping it all in the US
December 13th, 2008 at 7:08 am
actually as I think about it, the argument against this on the basis of the”multiplier effect” going overseas is probably way overstates. Here’s why: retailers which get a lot of stuff from China are, by definition, in low-margin businesses. The premium which they would be able to afford over the case value of the gift card would therefore be somewhat lower than the premium which other buisnesses would be able to afford.
December 14th, 2008 at 1:01 pm
Hello,
I have been following all the discussions about the economic stimulus and the stimulus gift card. A couple of points that transpire from the idea itself and the discussions that followed and few thoughts of mine are listed below:
1. Al Lewis loves it.
2. I love it too. It has the potential of increasing the social welfare tremendously compared with the checks mailed to households. This increase in social welfare comes directly from increase in the efficiency as manufactures will lower the prices of the goods and therefore their profits to get the money that comes with the cards. I applaud it if we will come again to the point of make use of the stimulus checks.
2. As a public policy the stimulus checks are a complete failure. The core of the problem is not the lack of confidence that some wall street analysts try to paint it. In fact there is no such thing as lack of confidence. I think it should be called consumers coming back to their senses. This not because the populace is smart but because suddenly they figured out that they were chewing something that normally they should not be able even to taste or touch. This for five years as long as they did not have to pay the principal in their mortgage. What made the things worse is the fact that this illusion of affordability led to the other detrimental effect that nobody is addressing properly: the price inflation of goods and therefore the economic inefficiency. Of course price inflation lead to unimaginable increase in wealth of some who practically were sucking it from the rest of population who had an illusion too, and only an illusion lasting five years, of being rich. Take the case of housing and what builders like Havnovian and others are preaching on TV and newspapers: subsidizing the housing and curb the foreclosures. This does not do anything else except keep homebuilders wealthy as the prices of their products (homes) will continue to be multiples of costs incurred to build them and prolong the economic crisis. So, it is not a question of confidence or low demand. It is in fact a question of an oversupply of goods that are either unecessary or goods that necessary to households but with prices inflated, a situation that suppliers of both types of such goods want to keep going for another million years. Otherwise stated it is rather a question of efficiency in production process and pricing. The same with the auto industry. American cars are more expensive because of antiquated way of manufacturing and automakers want to keep the status quo because of change is inconvenient.
4. So what I would say to the government is let the market fix this problem; do not intervene. And if you want to intervene ending checks do it through this type of gift cards. At least they will work toward efficiency better than checks mailed. Although, in my opinion it will be the stupid thing to do.
December 16th, 2008 at 6:18 pm
anyone notice in the New York Times magazine there was an idea like this one? It lacked the key thing of voluntary subsidies by the retailers, though.
December 27th, 2008 at 11:51 am
Ironically I think the retailers would be the ones to fight this. One will offer a premium, then the others will and then it’s nothing but a giant price cut for retailers and a huge benefit for consumers
January 2nd, 2009 at 7:57 am
It was recently suggested to me to post that there was a risk of retailers going bankrupt and taking the government’s moeny with them. Retailers could go bankrupt but debts owed to the government are not dischargeable in bankruptcy and officers are personally liable for them. Also, offerings of gift cards could be limited to maybe 10% of revenues for any given retailer.
consltantpeter has a point, which is exactly why it’s a good idea for consumers
January 5th, 2009 at 5:05 pm
anyone see the Globe today? Ed Glaeser was lamenting that no one had come up with an idea to get people to spend their stimulus checks. Those Harvard people have to read this website before they mouth off in the paper. You don’t see us making that mistake.
January 6th, 2009 at 9:53 pm
nice site and great idea and smart comments. You obviously get a lot of wonks on this site since as far as I can tell the only way to find out about it is from other wonks.
January 11th, 2009 at 4:17 pm
sta4es could do this too. They give out tax refunds too, at least if they have incomes taxes. for staes it has the added advantage of keeping more of the money in the state
January 18th, 2009 at 4:40 pm
you are creating a new field here of “stimulus economics.” it’s obviously controversial, like any new field, and also, like any new field, not well understood. I see the points about how the stimulus checks are a dumb idea (I agree) and how the money ends up in China (I disagree) but that also misses the actual point of the posting: that you can do this with ANY government check.
It is also a way better idea than Kotlikoff’s idea about having a national 10% off sale financed by the government. How stupid can you get? (I am not putting my email address in so this doesn’t get back to him.) That would be a one-time hit and would be a pain to administer. The gift cards keep on going for a much longer time and you can always send out more. There is no deficit impact for the gift cards if they are based on checks which are already being paid out anyway.
January 19th, 2009 at 7:34 pm
These comments are helpful. I get that you could do this with any government check. The thing I question is an expiration date. The expiration date should also be a strategy. The government should set a DISTANT expiration date, to keep a lower level of sustainable stimulus, rather than the type of one-shot debacle which was the last check, spent all at the same time and quickly dissipated. Also, the more distant the expiration date, the greater the premium retailers will pay. More time-value of money and a greater chance that people will lose them
January 21st, 2009 at 3:23 pm
You have overlooked an important fact: MONEY IS FUNGIBLE. (Go look that word up, kids.)
So while soccer moms buy groceries on their stimulus cards, they reduce spending from other sources of income. The net effect of the stimulus card is probably comparable to a stimulus check. At best, you’ve made it minutely more difficult to save the additional income provided by the stimulus.
January 22nd, 2009 at 8:53 am
but it’s not 1:1. The stimulus gift cards would easily be worth up to 20% more than the checks. I mean, Shell gives you 5% off on gas just to use their credit card on it. So $120 in focused spending replaces $100 in spending elsewhere.
I also suspect there would be a secondary market in these gift cards so that people who spent half of theirs but then decided they needed cash might resell them. So they would be somewhat funigble too.
Good use of the word “fungible.”
February 1st, 2009 at 9:15 pm
I came for the pennies, stayed to look at the site. Cool stuff. this is the best idea.
February 3rd, 2009 at 11:28 am
Me too. Why is the only thing you are promoting the pennies idea when this idea is 10 times better??? I wouldn’t have even found the site if it weren’t for the pennies.
February 3rd, 2009 at 11:34 am
Wallstreetguy, I think you just answered your own question with the last sentence
February 3rd, 2009 at 4:12 pm
It occurs to me that Will makes a better point than I gave him creidt for because the wording was a bit hard for me to grasp even though just for the record I do know what “fungible” means. Yes, some of the “stimulus gift card” spending will substitute for other spending as he says.
But remember three things: (1) We are agnostic on the subject of WHETHER and HOW to do a stimulus, instead focusing on how to make it more effective; (2) By reducing the cost of spending vs. saving, more money will definitey be spent via the Stimulus Gift Card than without. Perhaps there will be some substitution but anytime you reduce the price of anything, people do more of it, and you are reducing the price of spending via the Card (3) You can do this with any government check, which will make it more likely to be spent
February 5th, 2009 at 4:51 pm
Great idea. Many economists have pointed out that much of the alleged stimulus package, especially the tax cuts for business, would not stimulate job growth. An exception would be the suggestion by Robert Reich that the payroll tax be abolished. This would put more money in the hands of workers and small business.
February 9th, 2009 at 12:14 pm
one side note — the Kotlikoff idea is also a nonstarter because 10% off leaves some stores like WalMart in the red and would need a subsidy whereas other stors are so upscale that they would still make money at 10% off and a government subsidy would be a total boondoggle. This idea is way better
February 11th, 2009 at 6:30 am
what about if someone wanted to cash in the unused portion? Obviously the stores wouldn’t give out 100 cents on the dollar. Probably for each store the website would list the gift card’s value which the store would set and the unused cash value which the store would also set.
February 18th, 2009 at 7:32 pm
I think the stock market is reflecting panic that the stimulus won’t hit soon enough. The government could do this RIGHT NOW and I bet it would lift the Dow 1000 points
February 22nd, 2009 at 10:25 am
If they do this they better do electronic cards from giftzip.com so we don’t waste a ton of plastic and money on processing.
February 22nd, 2009 at 2:56 pm
yes, it would be done eletronically. Here’s why the premiums would be high. There have been several occasions in the past, like with the 2008 Stimulus Check, where chains (Sears comes to mind) offered a 10% premium to anyone who went in and exchanged their checks for a card.
Now consider (1) that was when Sears was way more crowded and less panicky than today; (2) that was on a small scale; (3) they had to spend to advertise it; (4) no one else was doing it so there was no competition and (5) all the transactions were manual.
That’s why I am thinking this is a 20% premium on average
February 26th, 2009 at 9:13 am
My first thought was that companies should just do this themselves but that is a very ineffficent market, not a central market. Accessing that market would be expensive and would lack the obvious economies of scale
February 26th, 2009 at 9:18 am
Well, based on that I have another idea, whcih is that rather than the government host the site — and most people wouldn’t want the government in business unless there is a really good reason for it — the government basically just takes bids from a private company to host the site and rebids it eveyr now and then. I think a private company would do a better job
March 4th, 2009 at 3:50 pm
Cool idea. You could call these “Sugar Keynes”
August 11th, 2009 at 6:44 am
I think this is a great theory, but what about the people who have limited access to internet? They are more likely to spend the money versus saving it, having a more urgent need or goods, or having waited for tax returns or promised stimulus packages to purchase larger items that they would otherwise not be able to afford. However, without access to the suggested government website, they would not be able to take advantage of this.
November 20th, 2009 at 2:10 am
I like the idea that this could allow any size business to participate. I just hope that there will be no room for faudulent acts.