Rebate Checks, Direct Deposit: Testing how to fool people

A friend from Grinnell was discussing how she thought the NPR’s Marketplace April Fools’ joke about sending everyone a gift like an air conditioner could have been true. She also thought it would be just like the government to do something like that or send everyone Visa gift cards so people could not repay debt, but had to spend the money.

In turns out my friend is not alone. Not only did Wednesday's post on the April Fools’ joke generate the most hits ever for this blog (so many people must have believed it to). But her visa comment might need some thought too. Dan Ariely, MIT Economist, suggested today that the government should test how households will make decisions to spend based on how the rebate is receive (e.g. by check, direct deposit, or debit card. )

As Dr. Ariely pointed out on Marketplace (link) :

“The field of behavioral economics has rather convincingly shown that money given in different forms can have different effects. For example, paying for dinner in cash feels very different than paying the same bill with a credit card. And an increase in monthly salary has a different effect on a person's spending than the same amount in an equivalent yearly bonus. These results suggest that how you deliver the stimulus package will have a considerable effect on how the money is spent.”

As my friend from Grinnell suggests, if we received Visa cards we would be less likely to pay down debt. Dr. Ariely, suggests the only way we will know which system will work the best is to try to send some people checks and some people direct deposit and some debit card. This type of suggestion is part of a growing trend in economics to test impacts of a policy by running experiments where you give treatment to some and no treatment to a comparable control group just like you would with a new pharmaceutical drug. Compare to the treatment and control group and you have an experiment!

If the government needs any test subjects, they can send my rebate check, deposit it directly, or give me a debit card. Just don’t send pennies.

April Fools: The Government Used Your Tax Rebate to Buy You a Gift.

I usually detest April Fools jokes. However, marketplace had a great one yesterday. (link) They had a fake story where the IRS instead of sending a check to an Arizona couple behind on their mortgage, they sent them an air conditioner. The story goes on to say how the IRS will look into charactestics based on where people live to find out what should be sent to them. As Robert Reich, former Labor Secretary and my college graduation speaker, points out in the piece:

Also, the government is not terribly good at knowing what individual people want, even in the same neighborhood. I mean, my neighbor might want, say, Viagra, but if the government ships a toaster oven to my neighbor and ships Viagra to me -- and by the say, I don't use Viagra -- that's not going to be terribly efficient; I would much rather get the toaster oven. Now, I suppose my neighbor and I could barter, but then I would have to know exactly what the government shipped my neighbors and it would be difficult for all of us to get together and know that fact.

The humorous piece make a couple of good economic points.

1.People will always prefer a cash transfer of equal value to a transfer of an item if with that cash they could buy that item or something else they prefer more they must be better off with the cash or at least just as well off.

2.The point of the cash payments is a short term increase in consumption, but if people save it will not stimulate the economy.

One final thought in some cases giving people something instead of money might actually be better than cash if there are benefits to people besides the recipients. An example of this might be vaccines or school supplies. As vaccines prevent the spread of disease, while school supplies might promote education and therefore long term economic growth.

In case Uncle Sam wants to know what transfer I want, let me go on record as saying baseball tickets or good local DC restaurant gift certificates would be more fun than stashing the rebate check in the housing fund.