Calculative tweak gives stimulus extra Keynesian oomph

February 23, 2009

A recent article on the Wall Street Journal suggests to me that Callon’s notion of economic calculation could be very relevant to the policy debate on Obama’s stimulus plan. According to the newspaper, the policy of stimulating expenditure through monthly installments of $8 could be far more effective than a lump sum:

The $116 billion in tax credits for 95% of Americans will come largely through reduced tax withholding from paychecks, over two years, rather than one-time payments. (…) The Obama administration is betting that an extra $8 a week in most Americans’ paychecks will boost consumer spending and help pull the U.S. out of its downturn

The hoped-for advantage of the experiment lies in the small size of the government handout. “In the past, consumers might connect a relatively large, single check in the mail to a credit-card debt or other loan that needs to be repaid. It is hoped, in other words, that the $8 will not be enough to warrant new plans,” writes the Journal.

The administration’s move connects with a raging macroeconomic debate that accompanied the stimulus package. To a majority of economists, stimuli do not work. The Keynesian idea that a recession can be staved off by a program of increased public expenditure was long abandoned among mainstream economists. Rational consumers, economists argue, would simply save more in anticipation of the higher taxes needed to pay for the stimulus — rendering the government’s efforts ineffective.

But now, American public policy has returned to the Keynesian idea. This time around, the government is seeking to circumvent the rational calculations of the taxpayers by trying to get underneath their “calculative radar.” This smart policy innovation is right out of a textbook in behavioral economics.

Will it work? I would argue that while it may well work for most people, the trick may not quite work for consumers with high-powered financial planning devices: users of Quicken or Excel spreadsheets, for instance. They will see right away that their $8 a months adds to a larger total, which they can assign to whatever large expenditure they want.

The implications are intriguing: the effectiveness of macroeconomic policy depends on the Callonian market devices used by consumers in their personal finances. It follows that progress in exiting the credit crisis will needs a better understanding of how consumers make decisions, and of the material devices that they use to accomplish them, in the fashion of Martha Poon and Joe Deville.

One Response to “Calculative tweak gives stimulus extra Keynesian oomph”

  1. […] the week with a special section on personal finance. The topic has been attracting my attention and blogging for the past months. Why? The foolish decisions on the part of consumers and savers have been a key contribution to the […]

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