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President Obama's $825 billion stimulus package includes $300 billion in tax cuts, which would come to the American spending public in the form of rebates. But history proves that refunds, whether dispersed in a small steady amounts or in one lump sum, do little to jumpstart a spending spree.
For an assessment of what a tax rebate should look like under an administration that runs on the motto of "change," "The Takeaway" talks to Dan Ariely who is the James B. Duke Professor of Behavioral Economics at Duke University, and author of "Predictably Irrational: The Hidden Forces That Shape Our Decisions."
According to Ariely, the way the money we are given is framed makes a big difference in how we spend that money: "Imagine that your job said that you could get $30 extra every month, or you could get $300 at the end of the year as a bonus -- how would that make you feel; how would you use the money differently? What most people think is if they ... got the raise ... they will ... spend the money on bills; but if they got the money at the end of year as a bonus, they will end up spending the money on something big, different, frivolous."
Ariely explains how this applies to motivating Americans to spend their tax rebates: "One of the things we know is that when you assign money to a particular category, and you separate it from the rest of your money -- for example, if they gave you a gift certificate -- people feel very good about spending that money.
"Imagine that the government gave us a debit card that was pre-loaded with some amount of money, and it had the logo of the government, a picture of Barack Obama smiling, and a statement that says, 'spend the government's money' -- how long will it stay in your pocket?"
According to Ariely, it's about whether or not this will benefit the economy: "What's happening is that we're going to give a tax benefit to people, let's say we're going to spend $200 billion dollars. The question is what value are you going to get out of it? You can get a smaller value if people spend a small proportion of it and deposit most of it in their checking account. And you can get more value out of it if you make people feel that they should spend more out of it."
But Ariely cautions against just getting Americans to spend, and offers another option: "There's a bigger point here, which is to say, is it correct to try and buy Americans into spending more money ... one way to think of economic recession is as social coordination problem ... if we all start believing that it's actually good for us to help each other to donate, to help people in need, to buy more things, we could actually save the economy."
"The Takeaway" is PRI's new national morning news program, delivering the news and analysis you need to catch up, start your day, and prepare for what’s ahead. The show is a co-production of WNYC and PRI, in editorial collaboration with the BBC, The New York Times Radio, and WGBH.
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