Stimulus options should be tested first
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KAI RYSSDAL: If you want to be at the head of the line come tax rebate time, direct deposit’s the way to go. The IRS says electronic rebates are going to start going out on the 2nd of May. Commentator and behavioral economist Dan Ariely says the government might not realize it, but the way we get our cash is going to affect the way we spend it.
DAN ARIELY: The U.S. government’s recently announced $153 billion stimulus package is supposed to rejuvenate the economy and stabilize the market.
Will the current plan achieve its goal? That depends.
The field of behavioral economics has rather convincingly shown that money given in different forms can have different effects. For example, paying for dinner in cash feels very different than paying the same bill with a credit card. And an increase in monthly salary has a different effect on a person’s spending than the same amount in an equivalent yearly bonus.
These results suggest that how you deliver the stimulus package will have a considerable effect on how the money is spent. Individual tax relief is different than tax rebates, which is different from giving money toward retirement saving, gift certificates, or pre-paid debit cards.
Given that the method of delivery could make a large difference, which approach should we choose? The reality is that we just don’t know. Which is why we should conduct an experiment.
We force drug companies to test the efficacy of their drugs before rolling them into the market. So shouldn’t we ask the government to first test its ideas before it invests billions of dollars of our tax money into some stimulus package?
Experiments like these aren’t easy to do. But in order to learn what is truly most effective, we must select a few possibilities. We should try them out in different markets or market sectors and compare their effectiveness over time.
For instance, I suspect that giving people a prepaid debit card will do more to rejuvenate the economy than mailing out checks, but direct deposits wouldn’t be nearly as effective. I also suspect that if we added a line on the debit card that reads “spend the government’s money” this would work even better.
The investment in experimentation like this would be modest compared with the value of an effective stimulus package that does what it’s supposed to do.
RYSSDAL: Dan Ariely is professor of behavioral economics at M.I.T. His new book is called “Predictably Irrational.”
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