Optimizing Government Rebates

The government has decided to put out a stimulus package and give people “tax rebates” in the hopes people will spend the money and jump-start the economy. An individual can get around $600 in rebates in the form of a government check that can be deposited into a bank account and then spent as you wish, or not spent at all or spent on paying back loans. And here’s the sticking point. With so many people out there struggling to pay their monthly loan or mortgage bills and other obligations, it seems likely a good percentage of the rebate checks will end up being used to pay off debt. This, of course, was not the government’s intention. The money was intended to provide a stimulus to the economy and to be spent out in the market for goods and services.

Behavioral economist Dan Ariely of MIT, whose book I have cited previously, wondered about this too, and has some great points. He mentions the government’s use of the word “rebate” and notes how when something is called “rebate” people are much less likely to spend it than when it is referred to as, say, a “bonus.” The reason is that a rebate is something you overpaid and you should have never spent to begin with, while a bonus is something extra you get, that you wouldn’t have had otherwise. While technically this shouldn’t make a difference as it’s the same amount of money either way, people look at it in different ways and are more likely to spend “bonus” money and keep “rebate” money. But Ariely is modest and doesn’t purport to know everything. Instead of outright saying the government should have sent people debit cards of the Visa or Mastercard variety (and with “spend the government’s money” printed on them) instead of a check, which, given what we know about people’s behavior, would likely lead to a much more effective stimulus than a “rebate” check, he suggest to test different “methods of delivery” so we can determine which is the most effective one. It’s the kind of thing a company that can’t afford to waste money would do. Or anyone else who wants to get the most bang for the buck for that matter. Then again, it has never been the government’s strength to put forward the most effective solutions.

But let’s get back to the debit card idea. I think it’s a great suggestion – the government could even put an expiration date on the card, some nice text that makes spending even more likely (as suggested above) and could thereby ensure that the economy gets to see the money in the right way and at the right time.

Explore posts in the same categories: Economics, Politics

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