Should the Government Give Money to Consumers to Pay Off Credit Cards, Mortgages?

BY busadmin  February 13, 2009 at 10:13 AM EDT

Out of debt; photo by Garretc, via flickr

Editor’s Note: Paul recently answered “Five Good Questions” on the economy for the PBS Engage blog. You will also be able to find those answers here on the Business Desk all week.

Question/Comment: What is your response to Jon Stewart’s idea of the govt. sending bail out money to consumers to use for paying off credit cards and mortgages? Mimi

Paul Solman: The idea of a debit or gift card was, it seems, seriously considered by Obama administration, though perhaps not inspired by “The Daily Show.” One per household. It was apparently considered too difficult to implement.

The basic concept was to force folks to spend and it wasn’t clear they wouldn’t find ways to save the money instead by, for example, paying off credit cards and mortgages. And what would be wrong with that you might ask? Well, the problem we’re in right now is that folks are saving instead of spending. In the short run, that deprives businesses of customers, forcing them to lay off workers, which further shrinks the total pie, leading in the end to – (drumroll, please) – LOWER SAVINGS. This is known as “the paradox of thrift.” And if everyone saved every penny they had and no one spent a cent, well, you’d have no economy at all.

Presumably this could never happen. In the longer run, then, things should work out. People have to put those savings SOMEWHERE and so long as it isn’t literally tucked under the mattress or buried in the backyard, the recipient of the savings would lend it out to some risk-lovin,’ lip-smackin’ entrepreneur, who would now have the funds to hire new folks and build the next generation of industry.

Moreover, the greater supply of savings would drive down the PRICE of savings, aka the interest rate, and so the entrepreneur would be able to borrow at a bargain rate. The circle would start moving onward and upward, “virtuous” once again.

That’s in the long run, though. And as the Great Depression economist now so much in the news, John Maynard Keynes, wrote nearly a century ago: “In the long run, we’re all dead.”

The basic problem right here and now in the SHORT run is that someone has to spend and you can’t count on the usual suspects – the American Consumer, American Business, or Foreign Consumers and Business – to do it. In steps the government, then, to try to make up the spending shortfall.

That’s why the stimulus is driven by spending measures. The fear would be that if money just went to consumers, they do just as you suggest with it – pay down debt – and not spend, thus doing nothing to reverse the vicious circle we’re in.