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Money and Main Street
3 of 12
Give consumers debit cards instead of checks?
Give consumers debit cards instead of checks?
Will Durnan, 22, is a student at The Golf Academy of America. He is seen here with his fiancee, Therese.
Question: "The popular response to splitting the bailout money amongst taxpayers instead of the banks is that the recipients will save it, not spend it. Would a government-backed 'debit card' or 'gift card' be an alternative? I feel that it would because it would *have* to be spent and couldn't be saved, as cash could be." - Will Durnan, Scottsdale, Ariz.

Expert: Garett Jones, associate professor of economics, George Mason University

Answer: "That's a great question, and it gets to the heart of what a recession is.

Certainly, the government could send out $10,000 debit cards, and the debit cards could have an expiration date so that everyone would have to spend all the money quickly. But would this be a good policy? If the goal is to raise demand for consumer goods today, then yes, it would help a little.

But in this recession as in most, the biggest fall in spending isn't caused by consumers cutting back: It's caused by businesses cutting back. The big puzzle of recessions is why business spending collapses. Handing debit cards to consumers probably won't do much to get businesses buying more machines, more software and more buildings.

In this recession, as in most, it's the collapse in investment that needs the most fixing. So in order to get economists on board with debit cards, you'd have to show that all this extra consumer spending would somehow cure the collapse in business spending. And there isn't much evidence for that idea.

Another important point: While some cash-strapped Americans would quickly use the debit card to spend a lot more than otherwise, most Americans would probably just use the debit card instead of spending their own money.

Let me use an example from my own life: I go to Starbucks a lot. For Christmas, my mom put a Starbucks gift card in my stocking. Did this encourage me to go to Starbucks more often? Maybe a little, but mostly what it did is get me to pay for my coffee with the Starbucks card rather than with my own cash.

Milton Friedman noticed this 'gift card effect' back in 1957. He predicted that one-time tax rebates wouldn't spur much extra consumer spending because most people would just save most of the rebate.

Since then, economists have decided he was mostly right.

So whether we call it a 'rebate' or a 'debit card,' the effect will be about the same: Outside of the most cash-strapped families, the debit card won't spur much spending."

NEXT: Save the banks by giving consumers cash?
Last updated April 14 2009: 11:56 AM ET
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