Menus Subscribe Search

Follow us


Next Economic Stimulus: Everything 20 Percent Off

• April 11, 2011 • 4:00 AM

The next time the U.S. looks at economic stimulus, two University of Delaware economists suggest, it ought to consider offering a hefty discount on every retail purchase.

The American Recovery and Reinvestment Act — aka the stimulus bill — was the first bold stroke of the Obama administration. Most economists agree that the act prevented the economy from plunging into a deeper recession, even a depression.

But this wasn’t the last recession the U.S. will face, nor will it be the last stimulus plan that Congress will pass. There will be future recessions, and future debates over what government can do to prime the economic pump. Which raises the question: What should the stimulus next time look like?

The stimulus enacted by the administration was a cocktail of different measures aimed at jump-starting the economy: direct investments by government, federal aid to states, tax cuts. In the October 2010 issue of Business Economics, economists Laurence Seidman and Kenneth Lewis of the University of Delaware’s Lerner College of Business and Economics propose a new idea that policymakers should consider throwing in the mix next time around: a temporary federal discount.

The idea behind it is the same for any stimulus: get people to spend money again. Stimulus plans generally do this by either spending money on government programs that lead to jobs and relief — thus leading to more spending — or by putting more money directly in the hands of the public in the form of tax cuts (as Obama did) or rebates (as George W. Bush did in 2001).

The problem with the latter approach has always been that consumers oftentimes would rather stuff the extra money under the mattress — which obviously dulls a tax cut’s stimulative effect.

Here’s where Seidman and Lewis’ idea comes in. Instead of sending money to taxpayers in the hopes of sparking spending, the government would instead set a federal discount that would lower prices on goods and reimburse retailers the amount of that discount. For instance, if, as the authors recommend, the government sets a 20 percent discount, retailers would slash their prices 20 percent — with the expectation that the government would reimburse retailers every dollar of that discount for every item it sold.

In this scenario, a department store that ordinarily sold a refrigerator for $1,000 would slash its price 20 percent to $800. Consumers would pay the $800, and the government would make up the $200 difference to the department store. Not only would the lower price on the fridge incentivize the consumer to buy it now, the lower price leaves $200 of savings in his or her pocket to spend or keep as they please.

Seidman notes that other price incentive measures to stimulate the economy have been proposed in the past. During the 2001 recession, Princeton economist Alan Blinder suggested that the federal government reimburse state governments that temporarily cut or suspended their sales tax. Also around that time, Martin Feldstein of Harvard suggested that Japan temporarily cut its value-added tax during its recession.

But for those ideas to work, Seidman says that “you have to have a tax in place,” and the U.S. has neither a national sales nor value-added tax. The federal discount idea essentially sidesteps that problem while still offering a price incentive.

An important wrinkle to Seidman and Lewis’s idea is that it would be only temporary. In their conception, the discount would be pegged to the unemployment rate — as the rate goes down, the discount slowly gets phased out. Seidman says that an automatic phase-down would defuse a common criticism of stimulus programs from the right.

“Is this just an excuse to get a permanent new program? That’s always the objection,” Seidman says. “Tying it to the state of the economy should fix that problem.”

The temporary nature of the program should also go a long way toward addressing a frequent knock against stimulus plans: their effect on the deficit. “If you leave the big spending program in place, then you got the deficit problem continuing,” Seidman notes. But by making the program temporary, it won’t be a burden on the long-term budget — and it would also allay fears that a discount would only perpetuate an economy that is already too consumer-driven.

In their paper, Seidman and Lewis simulated the impact of a federal discount from the fourth quarter of 2009 through the fourth quarter of 2010. According to their models, a 20 percent discount on both durable and nondurable goods would result in a 1.4 percent drop in unemployment, from 9.1 percent to 7.7 percent, while costing $600 billion. (The Obama stimulus came out to $787 billion.)

Despite that cost, a 20 percent discount would result in a rise in debt only slightly greater than would occur without the program. Without a discount, debt in the final quarter of the period accounted for 60.2 percent of GDP. With the discount, it was 62.3 percent — a modest 2.1 percent increase, especially considering the program’s considerable impact on unemployment. The reason for the surprisingly small difference is simple, Seidman explains.

“When you look at the numbers that come out of macroeconomists’ models, while the debt increases, so does the GDP. And that’s what you’re doing this for,” he says.

Seidman acknowledges that a discount program has its disadvantages compared to tax cuts or rebates: “The trade-off is that it’s not as easy administratively.” And he admits that direct investments by government and cash transfers to the unemployed would still have a greater “multiplier effect” than a discount. (That means a dollar spent on those programs produces a greater ripple in the economy than other programs.)

But government spending and unemployment assistance also happen to be politically unpopular forms of stimulus spending, so tax cuts — which are less stimulative — get enacted during downturns. For policymakers considering tax cuts or rebates as stimulus, Seidman argues that “having a price incentive should be more powerful.”

And it would probably be just as popular. Seidman points to one Obama price-incentive program that met with a huge response, and that also partly inspired his idea: “cash for clunkers.”

That program paid auto buyers a $3,500 or $4,500 rebate to trade in old, fuel inefficient cars for new ones. It cost the government about $3 billion all told, most of it snapped up by consumers as soon as the money went out the door. While some have argued that it merely moved forward car purchases that would have been made anyway, others — including Blinder, who thought up the program — note that that was the point: to boost auto sales in a period when the economy needed a shot in the arm and not necessarily for the long term.

Unlike cash for clunkers, the federal discount idea arrived too late to be considered for the most recent stimulus. “This idea might be for a future recession,” Seidman says.

But noting the current mania for deficit-cutting that has dominated the agenda, Seidman expressed concern about Congress’s policy priorities. “The issue for debt is the long run. It’s just not correct to be worrying about the deficit right now,” he asserts. If spending cuts rather than economy-boosting investments continue to rule the day in Washington, Seidman and Lewis may well see their idea come up for consideration sooner than anticipated.

Sign up for the free Miller-McCune.com e-newsletter.

“Like” Miller-McCune on Facebook.

Follow Miller-McCune on Twitter.

Add Miller-McCune.com news to your site.

Subscribe to Miller-McCune

Elbert Ventura
Elbert Ventura is a Washington, D.C.-based writer whose work has appeared on Slate.com and The New Republic Online, and the San Francisco Chronicle and the Cleveland Plain Dealer, among other outlets. He holds a bachelor's degree in English literature and political science from Brown University and a master's degree in media and public affairs from George Washington University."

More From Elbert Ventura

A weekly roundup of the best of Pacific Standard and PSmag.com, delivered straight to your inbox.

Recent Posts

December 20 • 10:28 AM

Flare-Ups

Are my emotions making me ill?


December 19 • 4:00 PM

How a Drug Policy Reform Organization Thinks of the Children

This valuable, newly updated resource for parents is based in the real world.


December 19 • 2:00 PM

Where Did the Ouija Board Come From?

It wasn’t just a toy.


December 19 • 12:00 PM

Social Scientists Can Do More to Eradicate Racial Oppression

Using our knowledge of social systems, all social scientists—black or white, race scholar or not—have an opportunity to challenge white privilege.


December 19 • 10:17 AM

How Scientists Contribute to Bad Science Reporting

By not taking university press officers and research press releases seriously, scientists are often complicit in the media falsehoods they so often deride.


December 19 • 10:00 AM

Pentecostalism in West Africa: A Boon or Barrier to Disease?

How has Ghana stayed Ebola-free despite being at high risk for infection? A look at their American-style Pentecostalism, a religion that threatens to do more harm than good.


December 19 • 8:00 AM

Don’t Text and Drive—Especially If You’re Old

A new study shows that texting while driving becomes even more dangerous with age.


December 19 • 6:12 AM

All That ‘Call of Duty’ With Your Friends Has Not Made You a More Violent Person

But all that solo Call of Duty has.


December 19 • 4:00 AM

Food for Thought: WIC Works

New research finds participation in the federal WIC program, which subsidizes healthy foods for young children, is linked with stronger cognitive development and higher test scores.


December 18 • 4:00 PM

How I Navigated Life as a Newly Sober Mom

Saying “no” to my kids was harder than saying “no” to alcohol. But for their sake and mine, I had to learn to put myself first sometimes.


December 18 • 2:00 PM

Women in Apocalyptic Fiction Shaving Their Armpits

Because our interest in realism apparently only goes so far.


December 18 • 12:00 PM

The Paradox of Choice, 10 Years Later

Paul Hiebert talks to psychologist Barry Schwartz about how modern trends—social media, FOMO, customer review sites—fit in with arguments he made a decade ago in his highly influential book, The Paradox of Choice: Why More Is Less.


December 18 • 10:00 AM

What It’s Like to Spend a Few Hours in the Church of Scientology

Wrestling with thetans, attempting to unlock a memory bank, and a personality test seemingly aimed at people with depression. This is Scientology’s “dissemination drill” for potential new members.


December 18 • 8:00 AM

Gendering #BlackLivesMatter: A Feminist Perspective

Black men are stereotyped as violent, while black women are rendered invisible. Here’s why the gendering of black lives matters.


December 18 • 7:06 AM

Apparently You Can Bring Your Religion to Work

New research says offices that encourage talk of religion actually make for happier workplaces.


December 18 • 6:00 AM

The Very Weak and Complicated Links Between Mental Illness and Gun Violence

Vanderbilt University’s Jonathan Metzl and Kenneth MacLeish address our anxieties and correct our assumptions.


December 18 • 4:00 AM

Should Movies Be Rated RD for Reckless Driving?

A new study finds a link between watching films featuring reckless driving and engaging in similar behavior years later.


December 17 • 4:00 PM

How to Run a Drug Dealing Network in Prison

People tend not to hear about the prison drug dealing operations that succeed. Substance.com asks a veteran of the game to explain his system.


December 17 • 2:00 PM

Gender Segregation of Toys Is on the Rise

Charting the use of “toys for boys” and “toys for girls” in American English.


December 17 • 12:41 PM

Why the College Football Playoff Is Terrible But Better Than Before

The sample size is still embarrassingly small, but at least there’s less room for the availability cascade.


December 17 • 11:06 AM

Canadian Kids Have a Serious Smoking Problem

Bootleg cigarette sales could be leading Canadian teens to more serious drugs, a recent study finds.


December 17 • 10:37 AM

A Public Lynching in Sproul Plaza

When photographs of lynching victims showed up on a hallowed site of democracy in action, a provocation was issued—but to whom, by whom, and why?


December 17 • 8:00 AM

What Was the Job?

This was the year the job broke, the year we accepted a re-interpretation of its fundamental bargain and bought in to the push to get us to all work for ourselves rather than each other.


December 17 • 6:00 AM

White Kids Will Be Kids

Even the “good” kids—bound for college, upwardly mobile—sometimes break the law. The difference? They don’t have much to fear. A professor of race and social movements reflects on her teenage years and faces some uncomfortable realities.



Follow us


Don’t Text and Drive—Especially If You’re Old

A new study shows that texting while driving becomes even more dangerous with age.

Apparently You Can Bring Your Religion to Work

New research says offices that encourage talk of religion actually make for happier workplaces.

Canadian Kids Have a Serious Smoking Problem

Bootleg cigarette sales could be leading Canadian teens to more serious drugs, a recent study finds.

The Hidden Psychology of the Home Ref

That old myth of home field bias isn’t a myth at all; it’s a statistical fact.

The Big One

One in two United States senators and two in five House members who left office between 1998 and 2004 became lobbyists. November/December 2014

Copyright © 2014 by Pacific Standard and The Miller-McCune Center for Research, Media, and Public Policy. All Rights Reserved.