Obama's Stimulus Plan: It's All About the Framing 7 comments
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In his recent article in the New Yorker, writer James Surowiecki discusses how important “framing” can be in economic policy. For example, framing the same economic policy in a different way can drastically change the way people respond to that policy - the difference between success and failure. At the center of his discussion is Obama’s proposed $100 billion tax rebates, distributed to individuals through reductions in withholding payments. The proposed tax rebates are part of Obama’s $800 billion stimulus package, and intended to encourage people to spend to help jump start our economy.
Critics of the plan worry that the tax rebates won’t be effective. Two of its more outspoken critics, Univ. of Mich professors, Matthew Shapiro and Joel Slemrod, believe it’s ‘low bang for the buck‘ as economic stimulus, and shouldn’t play a significant part in the federal economic stimulus package. According to Shapiro, “putting cash into the hands of the consumers who use it to save or pay off debt boosts their well-being, but it does not necessarily make them spend.”
To support their view, skeptics point to the failure of the $152 billion tax rebate plan approved in 2008 by Congress. Economists now say that money failed to boost the economy because individuals used the rebate checks to pay off debt and businesses banked the tax savings rather than expanding and hiring employees. Although Obama’s rebate comes in the form of a lower withholding payments rather than a lump sum check like it did in 2008, they believe the reduction in withholding payments (which amount to approximately $40 per month) will be too small to make a difference. Rather than spend the rebate, they believe most people will again, simply save it.
While criticism is abound, Surowiecki is more optimistic that Obama’s rebate plan will achieve its desired effect.
The very things that seem unusual about Obama’s rebate plan - that it will be handed out by reducing withholding, instead of in one lump sum, and that it will add a small but steady amount to Americans’ take-home pay - are precisely why it’s more likely to succeed.
The reason it may work, he suggests, boils down to a simple case of “framing”. Surowiecki believes the reason rebates haven’t worked well in the past is that they’ve been handed out as lump sums rather than in smaller increments.
You might think that handing people a chunk of change is a perfect way to get them to spend it. But it isn’t because people don’t treat all windfalls as found money. Instead, in the words of behavioral economist Richard Thaler, people put different windfalls in different ‘mental accounts’, which in turn influences what they do with the money. Where the money comes from can have a big impact on whether they spend it or save it: casino winnings are more likely to be spent than, say money from an inheritance.
If you want people to spend the money, you don’t want them to give them one big check, because that makes it more likely that they’ll think of it as an increase in their wealth and save it. Instead, you want to give them small amounts over time. And you want the rebate to show up as an increase in people’s take-home pay, because an increase in steady income is more likely to translate into an increase in spending. What can accomplish both of these goals? Reducing people’s withholding payments.
Surowiecki sums it up best when he writes, “on its own, Obama’s rebate plan isn’t going to resurrect the economy. But it’s a policy that works with people as they are, rather than as we imagine they should be. And that’s a stimulus in itself.”
Time will tell whether or not Obama can set out to accomplish what we all hope he can. If he can’t, well, maybe it’s just a matter of framing.
Stock position: None.
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However, another way to look at this is to say that if someone's doing a job he believes in he might aswell do it properly. I'm no fan of the 'stimulus-package' but if they're going on with it they really might aswell make the best effort possible.