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A National Gift Card?

post #1 of 17
Thread Starter 
Note: I posted this first on The Bill Sebastian Forum in response to an op-ed piece Bill aired on his radio show. I have his permission to publish his pieces in the forum.


(Excerpted from one of Bill's op-ed pieces about the stimulus package which aired on Thursday, Feb. 5, 2009 on The Bill Sebastian Show on WHBY Radio)

Quote:
Originally Posted by Bill Sebastian
It’s good to see that the Senate finally is getting hip to a principle that some of us have been talking about for months now. Instead of handing over blank checks to big firms they are now trying out the principle of funneling that money through us – the American taxpayer – the people who are paying the bills on this whole thing. New provisions for home buyers will give you a ten percent tax credit up to $150,000 worth of house. On new or used homes that are purchased. You will not have to be a first-time home buyer to get that credit. Just a day or two ago the Senate voted to add a similar provision for new car buyers. These people, in Congress, may be a little bit slow, but they’re beginning to see the light. They’re beginning to see that they can serve the American taxpayer while still serving their masters – the big money campaign contributors. Congress has been serving their masters for so long that they had somehow forgotten that they can serve all of us at the same time. But they’re starting to get it now. If you want to funnel money to any specific industry, funnel it through us!! Give us tax credits!! Big tax credits, for buying that industry’s products. Homes, good! Cars, good! We could probably add a couple other products to that list, too. Funnel it through us. We’re paying the bills, after all. Don’t send money straight to business. Don’t give us checks or tax cuts that we might simply latch on to and save. Give us tax credits that direct us where to spend. Because it’s spending that will get this economy moving again, not saving. We’ve got to save more than we used to, but at the moment we’re spending way too little.
(c) 2009 Bill Sebastian, Woodward Communications

On the face of it, this sounds like a great idea. I think the general concept of giving the money directly to the consumer to spend rather than directly to business is a better idea. The specifics of this proposal would save or stimulate selected industries by giving the American consumer a tax credit for purchasing products made by that industry. The plan would probably work to one degree or another, because you give the American consumer incentive to spend, and to spend on selected products, thus saving the selected industries and stimulating the American economy at the same time.

I'm sorry Bill, but I have to disagree with this plan, even though I said it would work, because there's a better way. First allow me to outline some reasons why it's not a good idea:

1) When the government funnels money, either directly to business or indirectly through another channel - military spending, infrastructure spending, health programs, whatever - the deluge of government funds seriously distorts ordinary economic function wherever that money goes. You've seen it already in the financial institutions that should have been allowed to fail but were propped up with a huge influx of both direct government funds and with government guarantees for their obligations. So we save these financial industry dinosaurs for now, only for what purpose? To make all that money evaporate and then fail with even more dire consequences? Any time normal fiscal decision making is influenced by government money the normal decision-making process gets distorted and thrown out of whack. Throwing one sector out of whack causes distortions and problems in every other sector. Witness the distortions in the home mortgage industries which impacted the Wall Street banks, which impacted the securities markets, which impacted people's retirement accounts, which impacted their discretionary spending.....it goes on and on. Funneling the money directly through the taxpayer doesn't make any difference. It still distorts ordinary fiscal and economic decision-making. Targeting certain industries or sectors will just cause those sectors to become money-pits of malinvestment, managed and operated for the goal of competing for and getting those government dollars, not for the goal of providing the consumer with a product the consumer wants and for a price the consumer is willing to pay. It is just not good economics, Bill. It's not a good idea. It has never turned out well and it never will. Money always influences the way things work, and the more money, the more influence, and if you use gasoline instead of lighter fluid, your grill will blow up, and you and well as your steak will get charred.

2) If you ARE going to funnel money to American consumers anyway, doing it through the mechanism of tax credits is a poor choice. The biggest reason why is the time lag. This economy needs help now, not in April of 2010 or later. And most taxpayers don't understand tax credits anyway. This is money they don't see now, and money not seen now will not get spent now. Furthermore, people who generally only file 1040-EZ returns won't get this benefit, unless some new tax form and new tax regulations make it possible for people with simple tax returns. And then of course, you get the IRS heavily involved and they'll think of some way to make it more difficult or to screw it up. And then how about the people who don't make enough to file, or -gasp!!- make their incomes through the cash economy? No, a tax credit is not a good way to get American consumers to spend.

3) Which industries do we want to save? Frankly, how many industries are there left that produce goods that Americans want to buy? The economic benefit may not be what proponents of these plans envision simply because there won't be enough American products made by American industries that will have enough of an impact on the economy even if all Americans go out to buy those goods. Oh, and speaking of that, up comes the next objection:

4) Encouraging consumers to buy specific products will drive up the price of those products. Simple supply and demand. Not much more I can say here; it's self-evident.

OK, I agree the economy needs stimulus. Serious stimulus, and seriously soon. But this plan isn't the way to do it. I give your co-worker co-talk-show-host Robbie Johnson credit for fleshing this one out: I don't remember the exact details of his proposal, but the general principle remains in mind: a national credit card. Or may you could call it a national gift card. This national credit card would have the following features:

1) a die-by date. Use the money on the card by this date or the card expires.

2) a spend-only provision. The money on the card can be used only for buying non-essential products and services. It's no good for food and rent. It can't be put in savings. It can't be used to pay the electric bill. It should, however, be available to be used toward a down-payment on a house.

Some of the advantages of a national gift card are that it can be implemented fairly swiftly, getting the stimulus out into the economy pronto; it doesn't involve filing a tax return; and the biggest advantage is that the consumer makes the decision about what to spend the money on, not the government. In other words, normal economic forces are in play here -- people making their own decisions about what to spend their money on. The only differences are they have a little more money to spend than they would have had, and the biggie here, Bill: they have to spend it or lose it.

Money funnel, funnel money, funny money. There are better ways. I like the gift card approach.
post #2 of 17
I do think people need money for the essentials though, Tim, so I'd worry the black market would benefit from it. Seems like everyone's complaining they need money for food, gas, electricity, so they would just sell their cards for cash. Then the original intent is lost, as whoever has the cards would be buying whatever they had in mind, not necessarily falling into a category that helped the economy. What if they just bought like $1000 worth of i-Tunes? That wouldn't help anyone.

People are going to do what they want with whatever they get, even if its not in their best interests or the Nation's.
post #3 of 17
Thread Starter 
Quote:
Originally Posted by neetanddave View Post
People are going to do what they want with whatever they get, even if its not in their best interests or the Nation's.
Exactly, and why I think the individual should be making the decisions about how much and on what to spend stimulus money, not the government. Interesting observation about the black market, though. Something I didn't consider. Perhaps the cards could be encoded somehow so only the individual receiving the card could use it?
post #4 of 17
Quote:
Originally Posted by coaster View Post
Exactly, and why I think the individual should be making the decisions about how much and on what to spend stimulus money, not the government. Interesting observation about the black market, though. Something I didn't consider. Perhaps the cards could be encoded somehow so only the individual receiving the card could use it?
I don't know how, they've not even been able to stop Food Stamp fraud, and they have cards with PIN numbers.

It's a mess. I don't know that any one person has the answer, but I'm inclined to believe that the 300 leading economists that took out an ad last week in major US newspapers are right: government can't solve this by spending their way out of it.

Even the CBO has repeatedly said so, time and time again.
post #5 of 17
Quote:
Originally Posted by coaster View Post
Exactly, and why I think the individual should be making the decisions about how much and on what to spend stimulus money, not the government. Interesting observation about the black market, though. Something I didn't consider. Perhaps the cards could be encoded somehow so only the individual receiving the card could use it?
What if the cards was like national funds cards where peoples tax returns and everything was direct deposited to the card. That way they couldnt just trade it off and stuff they would always have to have or like report is missing and get a new one. Do you think that might work?
post #6 of 17
No matter what, there are going to be some people who circumvent the purpose of the stimulus. I think Tim's is the best plan I've heard so far though!

Honestly, I'm one of those who could really use the card for everyday expenses. My husband has been laid off since October. My first thought would be to sell it to someone, perhaps my Mom, who would actually use it for a non-necessity. I could then use the money to pay bills. Win-win. My bills get paid and the card is still going toward stimulating the economy.

But, Tim - how 'bout $1500?
post #7 of 17
Thread Starter 
It's so highly unusual to get 300 economists to agree, more or less, that I think what they have to say should be listened to. Usually you can't find any TWO economists that can agree. Usually they don't even agree with themselves. Was it Pres. Reagan who wished he could find a three-armed economist because they would always tell him "on the one hand" this "but on the other hand" that?

Nevertheless, spend their way out of it is what they're going to do. We'll have to wait and see if they're just digging a deeper hole instead of filling one in. In hindsight now, I think they should have just allowed first few companies they bailed out to fail. It would have been a shock to the financial systems, but would the results to date have been any worse?

And if they are going to solve the problem by throwing money at it, better to throw it at the taxpayers, from whence the money came (and will come) because individuals are going to make better decisions about how to spend THEIR money than the government will ever make.

One more thing: I think President Obama needs to stop telling the country about how bad things are and even "accelerating", to use his very own wording. If an executive can't say something good, he shouldn't say anything at all about it in public and should reserve his doubts and disatisfactions for the privacy of his own office and boardroom. Obama should take a caution from the Carter Presidency.
post #8 of 17
Quote:
Originally Posted by coaster View Post
It's so highly unusual to get 300 economists to agree, more or less, that I think what they have to say should be listened to. Usually you can't find any TWO economists that can agree. Usually they don't even agree with themselves. Was it Pres. Reagan who wished he could find a three-armed economist because they would always tell him "on the one hand" this "but on the other hand" that?

Nevertheless, spend their way out of it is what they're going to do. We'll have to wait and see if they're just digging a deeper hole instead of filling one in. In hindsight now, I think they should have just allowed first few companies they bailed out to fail. It would have been a shock to the financial systems, but would the results to date have been any worse?

And if they are going to solve the problem by throwing money at it, better to throw it at the taxpayers, from whence the money came (and will come) because individuals are going to make better decisions about how to spend THEIR money than the government will ever make.

One more thing: I think President Obama needs to stop telling the country about how bad things are and even "accelerating", to use his very own wording. If an executive can't say something good, he shouldn't say anything at all about it in public and should reserve his doubts and disatisfactions for the privacy of his own office and boardroom. Obama should take a caution from the Carter Presidency.
I think your right but if he doesnt say anything then there are those people who are going to be screaming that hes hiding something
post #9 of 17
Quote:
Originally Posted by Caleeko View Post
I think your right but if he doesnt say anything then there are those people who are going to be screaming that hes hiding something
I think you could pretty much bet on that statement! He's damned if he does and he's damned if he doesn't. It's been that way for him for quite some time.

I personally don't want my country's leader to be hiding the true economic condition of my country from me and my fellow men. I'd rather he come out and be honest about it so I give Obama full marks for being up front about the situation.
post #10 of 17
Thread Starter 
I don't disagree with being "upfront" but he doesn't need to draw attention to "accelerating" unemployment; how dire things are and how bad they're going to get if his stimulus package doesn't get passed. He's got underlings to deliver the bad news. A chief executive should stay upbeat, within the truth, of course. If he's asked about it, he should tell it like it is. I'm not asking him to hide anything. But Pres. Obama's going a bit too far in the way of transparency. He doesn't need to trot it out in front of the press corps and thereby the nation.

Linda, you're old enough to remember Pres. Carter, aren't you? His "sweater" chats to the nation about how lousy things were? "Economic malaise?" Well, Carter's "candor" accentuated the very malaise that he was moaning about. Pres. Reagan is a good role model for tough times. In this part of the country it's still not as bad as I remember it being in the early 1980's. Yet Reagan always remained upbeat about the strength of the country and the economy, and about the future.

Yes, I think Obama's being too alarmist. There's plenty of other people doing that already; he doesn't need to be directing the choir.
post #11 of 17
One thing's for sure - this plan being used to subvert the tax code isn't going to help any.

http://www.heritage.org/Research/Economy/wm2275.cfm

You can't just move money around like that and have any real effect. The same thing with the government jobs it creates - you're just using tax money to pay someone to do something that didn't exist before.
post #12 of 17
Quote:
Originally Posted by neetanddave View Post
One thing's for sure - this plan being used to subvert the tax code isn't going to help any.

http://www.heritage.org/Research/Economy/wm2275.cfm

You can't just move money around like that and have any real effect. The same thing with the government jobs it creates - you're just using tax money to pay someone to do something that didn't exist before.
Do they get it on a gift card?
post #13 of 17
My first reaction when I heard about a tax credit for buying a new car was, heck yes, let's encourage people who don't need or possibly can't afford a new car to go out and buy one, kind of like we did the home buyers who contributed to this mess. But why stop there. People who manufacture RVs, boats, etc, all have to make a living. And the travel industry. Let's give a tax credit for taking a vacation. And why not vet bills! Yeah, pet care is a huge industry and they've got to be feeling the crunch. Let's deduct our vet bills too. I see problems with this. Plus when it comes to the auto industry, will it apply to foreign cars built in the US too?

One of the issues that bothers me is... People who have saved their entire lives to have enough money to invest in CDs, federal govt issues, etc, are receiving nothing on their deposits. The government wants to keep the interest rate close to zero for as long as they can so businesses/consumers can borrow. But what about the people who depend on interest for their income? The money market rate now is next to nothing. One years CDs are what, one percent? So people with cash aren't investing it, aren't spending it... which makes sense, cause they are receiving NO income. If the government had something all those boomers could invest in and receive a decent return for, they might start spending money again.
post #14 of 17
Thread Starter 
I'm going to consider it a "gift" when I send in my income tax return this April.
post #15 of 17
Quote:
Originally Posted by coaster View Post
I'm going to consider it a "gift" when I send in my income tax return this April.
At least you don't live in CA, Tim, they're handing out IOU's for refunds this year.
post #16 of 17
There's an opinion piece on the subject in today's Washington Post:
The Best Stimulus Targets


Quote:
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?
...
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?"
post #17 of 17
Thread Starter 
That would probably be the net result for persons and families with excess cash flow. The money just goes into a pot and whatever needs to be spent comes out of the pot. So if the gift card is used for some of those items then more money remains in the pot.

I think the intent is to benefit families that don't have that additional cash flow. They're stretched to the limit just to provide the necessities. So a card with funds that can't be spent on necessities frees them up to buy something else that they ordinarily wouldn't have been able to buy. For those folks, it results in a net increase in spending without an accompanying increase in saving.
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