Everyone is talking about increasing spending in the economy. In recessions like these, people prefer to hoard money. Can you blame them? No. Why will anyone spend money when his/her confidence in the economy is low. People who are short of confidence and resources, prefer to defer consumption. But the problem is that to kick start the economy, spending needs to be boosted dramatically. How to make people spend?
Well, you can make people spend money by either-
1.Making money hoarding costly
2.Making spending more attractive Economists typically prefer the
first approach. Greg Mankiw argues for
negative interest rates. Excerpts from his article in
NYtimes-
Until recently, most economists relied on monetary policy. Recessions result from an insufficient demand for goods and services — and so, the thinking goes, our central bank can remedy this deficiency by cutting interest rates. Lower interest rates encourage households and businesses to borrow and spend. More spending means more demand for goods and services, which leads to greater employment for workers to meet that demand...
... Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent.
That move would free the Fed to cut interest rates below zero. People would be delighted to lend money at negative 3 percent, since losing 3 percent is better than losing 10. Ken Worsley talks about a hypothetical solution-
Currency manipulationExcerpts from his article in
Japaneseeconomynews.com-
The first idea in this series should wreak havoc and cause panic spending in all sorts of sectors, while simultaneously creating millions of new jobs. To do this, the Japanese government simply needs to create new banknotes and coins that are all radically different in size to what currently exists. Ideally, notes should be larger and differently proportioned, while the size and weight of all coinage should dramatically change...
... consumers will find that the new banknotes will not properly fit in their existing wallets. Every wallet in the country now needs to be replaced, and the National Police Agency could issue a timely (and helpful) warning that using the new notes with old wallets might leave one open to a greater risk of becoming a pickpocket victim.The above two solutions work in theory. However, the common point you will notice is that here the strategy is to make a condition (hoarding money) costly for individuals. Hence, people will have to quickly change their preferences/decisions in order to avoid being worse-off.
Let’s talk about the
second approach-
Making spending more attractiveI have written earlier about consumption rebates- incentives given to individuals to consume more. Here, the individuals have an incentive to change their preferences in order to become better-off.
What I am suggesting here is not something very new. The Indian tax law gives some incentive to spend(although very minimal) in the form of food/gift coupons. Yes, these coupons have an expiry date. The money people spend to buy these coupons is exempt from taxation. But the problem is that this amount is very small. What I have suggested in the past is to get a consumption rebate on a larger scale.
Now the question is that which approach is better- Making hoarding costly or Making spending attractive?
In an economy where consumer/investment confidence is low, people might not react quickly to incentives. In such a situation, I prefer the latter approach because if people don’t respond to the former approach in a timely manner then they will become worse-off very quickly. This is not true if people adopt the second approach.
