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A Stimulating Discussion
The economic-stimulus package enacted this year calls for $116 billion in tax cuts and credits that will effectively put an additional $8 a week into most Americans’ paychecks. So if you’re getting an extra $8 each week, and as a good citizen you want to do your part to get the economy going, what should you spend the money on, and why? We took a quick survey of economists to get some ideas. Robert Shiller, Yale University: I suggest using it to give an extra-generous tip to taxi drivers. They talk to lots of people, especially active business-oriented people, and they will be feeling more upbeat, sensing that some people are feeling flush, and they will communicate this feeling to numerous people, thereby helping restore confidence. If you don’t take taxis, give it to your barber or hairdresser. They talk to a lot of people, too. This will also help people feel that Americans care about each other, not just about rich people. Ricardo Reis, Columbia University: You should use the money in the way that is best for you and your family, whether that is saving or spending, buying this or paying that. Doing what is in your best interest usually leads to doing what is best for the economy. Justin Wolfers, The Wharton School: Find a cash-strapped soup kitchen. If they are looking at having to make cutbacks, then your $8 donation really will yield $8 worth of extra soup purchases. A good Keynesian will point out that this $8 in extra spending will enter the circular flow, creating the much-needed economic stimulus. More importantly, the $8 you spend helping the hungry really can have a big bang-for-the-buck at a time when food spending is plummeting and unemployment rising.
Tyler Cowen, George Mason University: In my view, fixing the banking sector is more important than getting the stimulus right. So if you can afford to lose the money, go to a large bank (more likely to be insolvent), find their most overpriced service, and buy as much of it as you can. That way you are doing your part to recapitalize our banking system. If you’re stuck for ideas, just keep on using ATM machines owned by other banks, so you can pay large fees to take out small sums of money from your checking account. When you need to, take all of your withdrawals and deposit them back in the account once again and start all over with the process. Ethan Harris, Barclays Capital: Get a haircut. It is a purely domestically produced service with extremely high labor content. This means no drain in spending power out of the country; it is “Buy American” without violating any trade agreements. It also has a high impact on employment due to the high labor content. Finally, an $8 haircut—as opposed to the $100 variety—is probably being done by a low-income person who is likely to spend rather than save the eight bucks, ensuring strong second-round spending effects. We will groom our way to recovery. Greg Mankiw, Harvard University: How about buying a good economics textbook? James Hamilton, University of California, San Diego: The financial system is paralyzed at the moment in part because everybody is suddenly afraid to take risks. There are some outstanding investment opportunities out there right now, and America’s recovery begins when people start to take advantage of them. My advice, both for the economy and your personal financial success, is if you’re not putting a little money into stocks each month, start today. Richard Thaler, University of Chicago’s Booth School of Business: I think the answer depends on your circumstances. If you are carrying lots of credit-card or other forms of debt, I say your first priority should be to make progress on that. Call it a private bailout of the banks if you want. If you are lucky enough to be solvent and you want to spend your money patriotically, then I would encourage what might be called “home infrastructure” spending. There are lots of unemployed contractors out there. Get some bids on making your home more energy-efficient. It is probably as good a financial investment as you can find these days, and will put some people back to work. Thomas Philippon, New York University’s Stern School of Business: I would spend my $8 on what I need, without trying to be strategic. Being strategic would only distort the market more than it is now. The only exception is energy efficiency. So spending $8 on improving insulation and energy efficiency of my home would be my priority. It would also be good for the construction industry that is being hammered by the recession. Adam Posen, Peterson Institute for International Economics: Invest in human capital through existing institutions: Buy $8 of cupcakes at the PTA bake sale; attend a lecture at a community college ($8 admission); purchase a book on personal finance or retraining—any of these get spending into the economy with no lag, but also improve your or your family’s future productivity. Robert Gordon, Northwestern University: Don’t go to an $8 movie, that won’t create jobs. Save it for three weeks and get a $24 meal, which will directly help restaurants avoid layoffs and closures.
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