Ideas abound to spur spending

`Gift certificates' from U.S. among offbeat proposals

December 03, 2001|By William Neikirk, Washington Bureau.

WASHINGTON — From payroll tax holidays to sales tax holidays, suggestions for unconventional ways of stimulating the economy have emerged with the announcement of an economic recession.

But some are more unconventional than others, and whether they will work is open to conjecture.

Take the idea of Paul Kasriel, economist at Chicago's Northern Trust Corp. He suggests having the Treasury Department issue debit cards to Americans with a specified amount of money to spend in a specified time, the equivalent of a gift certificate with an expiration date.

"If they want to stimulate spending in Washington, I can't think of a better way to do it," Kasriel said.

Americans get those kinds of shopping vouchers all the time from businesses trying to lure people into stores. The private sector is ahead of the government in learning that the essence of economic stimulus is to get money into the hands of consumers or businesses with the hope that they will spend it quickly.

Kasriel said his proposal is modeled on a Japanese shopping voucher that the government in Tokyo tried in 1998 without much success. The program was not large enough at $5.8 billion and was not promoted by the government, Kasriel said.

It also did not work because Japanese are diligent savers. Many used the vouchers to buy items they normally would purchase with their regular income. At the time, critics said the program had the effect of increasing savings, the opposite of its intended effect.

Americans also might use such vouchers to buy items they normally purchase--groceries, for instance--which would not help the economy much.

That doesn't worry Kasriel. For one thing, he noted, Americans love to spend their money and do not need much prompting when they have extra income. But if they don't spend the money, he said, the government could keep issuing the Treasury "gift certificates" until people do start spending.

"It arises from the old University of Chicago teaching example that if you dropped money from a helicopter, someone would come by, pick it up and spend it," Kasriel said.

No one in Congress has proposed the gift-certificate plan, but there are other variations, all designed to induce people to spend the country out of the recession. Like Kasriel's plan, they all have drawbacks.

Sales tax holiday

The proposal for a sales tax holiday has been pushed in both houses of Congress, with the holiday usually limited to 10 days or two weeks. The federal government would reimburse the states for lost revenue.

One economist, Michael Evans, believes there ought to be a six-month state sales-tax holiday to give the economy a major kick. He said it would cost no more than the $100 billion stimulus package being considered by Congress and would do much more good.

Like Kasriel's plan, it has the virtue of requiring consumers to buy something to take advantage of the incentive.

To several economists, sales tax holidays are impractical. Not all states have a sales tax, they said, and it be an administrative nightmare of figuring how to reimburse states for the lost revenue.

There also would be too much temptation for states to overstate how much money they are due or to shift money around in other accounts to get the maximum reimbursement, they said.

Robert Reischauer, president of the Urban Institute, said he wants to return to an old idea to help stimulate the economy--revenue sharing with the states. President Richard Nixon launched such a program as part of an effort to shift more power to the states, but it was abandoned after a few years.

Reischauer said states need a handout just like consumers. His program would be in the form of grants.

The federal government may be increasing its spending during the recession, but state governments are doing just the opposite. Their revenues are shrinking, causing deficits that they cannot legally run.

"Revenue sharing would keep them from cutting programs, which is what they are going to do," Reischauer said. And when state programs are cut, he said, income is lost and spending is reduced.

No one has stepped forward to propose the idea in Congress, but Reischauer said the Senate Democratic stimulus plan--rejected on the floor--had an alternative. It would increase the federal matching rate under the federal-state Medicaid program for low-income Americans.

A plan to have a one-month holiday from the Social Security payroll tax has many supporters in Congress, but critics say that even if it is passed, it will take three to six months to change corporate computers so it can be implemented.

Incentives for businesses

There are all kinds of proposals to help business, such as faster tax write-offs for purchases of new equipment or abolishing the corporate alternative minimum tax. Economists prefer the plan to give a faster tax write-off if businesses decide to spend their money for equipment.

Like Kasriel's Japanese-style debit-card plan, this is contingent tax relief that many economists believe will produce results in the short run.

If you don't believe corporations like it, consider how they are lobbying for it--and for every dollar of relief they can get.

After Senate Democrats offered a 30 percent bonus tax write-off for new equipment ordered by companies, for example, a top Senate Republican, Sen. Pete Domenici (R-N.M.), offered a plan to cut that to 20 percent, causing howls of protest from businesses.

Mark Mullet, vice president for federal government relations for Verizon, said a 20 percent bonus write-off "would have limited or little real impact on our investment decisions."

But 30 percent? That amount "should have a significant influence on our buying decisions, and would clearly affect job creation," he said.