Federal gift cards are one gift that could keep giving

Marketwatch.com Chief Economist Irwin Kellner sometimes boldly goes where no man has gone before, to cite an old Star Trek phrase, and a few months back Kellner recommended something that seemed truly over-the-top: a $3,000 federal gift card for everyone over age 16.

Today, however, I'm not sure it's so outlandish. Back in January, Kellner argued that a better way to stimulate the economy than a near-$800 billion fiscal stimulus bill would be a direct cash infusion to the people, via debit cards, which he called "federal gift cards." The money from them could only be used to pay down debt or to make purchases, not saved. Kellner's estimated cost for the program: $705 billion for 235 million people.

Coming soon to you: Federal gift card?

Kellner has since argued that had the federal gift card program been implemented in January, the U.S. economy would be in much better shape as a result of the millions of citizens buying goods and services with cash that the private sector needs, without all the paperwork of the federal government's civil servants telling people what to do.

In other words, the fiscal stimulus from cards would have had a much quicker -- and larger -- positive impact on U.S. GDP.

Back in January I opposed the gift card plan because: 1) I didn't think it would pass and 2) I didn't like the lack of a savings option for the money. Of course, the whole point of "stimulus" is to "spend," but I still saw the pay down-buy restriction as going against freedom; perhaps it was my long-grained American sensibilities, which cherish freedom, that kicked in.

Now, six months later, and well into the fiscal stimulus package's spending period, I'm not so certain Kellner's idea was that off the mark.

First, it's increasingly clear that the era of the "frugal consumer" is becoming entrenched. The U.S. savings rate is at a 14-year high of 4.7 percent, and citizens are in hunker-down mode: saving more, paying down debt, and most assuredly being more cautious about what they purchase.

The American people also appear to be adopting a philosophy of "you can live with less stuff," perhaps even one that asserts "it's cool to live simply." All of above doesn't bode well for consumer spending, which historically accounted for 60 to 70 percent of U.S. GDP.

Second, with the structural changes occurring in the U.S. economy, it's unclear whether the new sectors -- health care services, information technology, infrastructure, education, renewable energy, high-end and tech-based manufacturing, and biotech -- will be able to generate the type of GDP growth that Americans, and certainly investors, are used to.

The net result? Absent a reversal in consumer spending, or the appearance of an unforeseen growth sector or some breakthrough technology, U.S. GDP may lag, even during the next expansion. In short, the U.S. economy of the future may be "consumer-challenged," which supports Kellner's idea for a federal gift card.

Don't misunderstand: Congress will not pass a federal gift card this year (although the House did pass a partial consumption incentive with the $3,500 to $4,500 cash-for-clunkers car subsidy plan): there's no money available for the gift card program.

Still, if the nation meanders through tepid growth for quarters, even after the recovery starts, and assuming taxes are raised elsewhere to cut the budget deficit, the case may build for a smaller gift card plan to get what could be a very lethargic U.S. economic recovery moving again.

- -

Financial Editor Joseph Lazzaro is based in New York.

Read Full Story

Sign up for Breaking News by AOL to get the latest breaking news alerts and updates delivered straight to your inbox.

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.