Alternate Currencies – A Creative Solutiona for Tough Times?

One of the main issues with one time tax rebates as economic stimulus in tough economic times is that people will often save a large share of the additional money (in preparation of even worse times that my lie ahead ahead) instead of spending it. This was again seen with last year’s tax rebate and is one of the reasons this year’s stimulus has been structured the way it is (focusing more on infrastructure spending and money to producers).

One way is to give more money to poor who tend to spend a larger share of their income but given the current level of economic uncertainty even these might be less willing to spend. What if there were a way to force or at least strongly incentivize people to spend money they get from particular sources. One method for doing this is through Alternative Currencies, which have recently become more popular for a variety of reasons.

A recent Economist article talked about a number of Alternative Currencies that forced people to spend their money quickly so as not to have to pay special fees, such as the Chiemgauer (which is currently in circulation):

Spent it must be, because it loses value every quarter. The notes have an expiry date after which they need to be renewed with a sticker costing 2% of their value. The quicker money is spent, the faster, in macroeconomic terms, its velocity. Gesell argued that a higher velocity of money helps combat deflation.

Ignoring the bit about velocity of money, this scheme should force people to spend their newly gotten tax rebates if it is received in this kind of currency. It’s definitely unorthodox but I think it definitely sounds like an interesting solution and I’d be very interested to hear what some of the downsides might be.

Update: I’ve long wanted to have an actual reference that I can cite for the claim that people will only spend a small share of a temporary stimulus in uncertain times and I think the following Romer, Bernstein evaluation works pretty well though they don’t actually have any firm numbers but it will do for now:

It is important to note that the jobs effects of temporary broad-based tax cuts would probably be considerably smaller. Large proportions of temporary tax cuts are saved, blunting their stimulatory impact on output and employment.