It’s Science

The Dirty Money Stimulus (Literally)

A new survey shows that you’re more likely to spend a ratty dollar bill than a crisp new one. James Warren on why former White House aides may be taking notice.

12.02.12 9:45 AM ET

President Obama’s 2009 stimulus bill included what may go down in history as the Invisible Tax Cut, or arguably the least noticed ever by taxpayers and voters. It’s one reason why we might pay heed to new economic research on our relationship to the money found in our pants pockets and purses, shiny or used.

The Making Work Pay tax credit amounted to a hefty $100 billion. But after heated White House debate, it was decided not to send out the money as a check for $400 (or $800 for married couples filing jointly) but to pass it out quietly in dribs and drabs via roughly $16 per week in reduced federal withholding in pay checks.

Obama’s top economic advisers won out, citing research in the increasingly influential academic field of behavioral economics. The field, which has caught attention through popular works such as Freakonomics, argues that real people don’t necessarily act in the same rational ways that most long-influential laissez faire, free-market theories would have it.

In this instance, the Obama economics team turned to a body of work that concludes we’re more inclined to save, not spend, money when it shows up in a big, obvious chunk. It was more likely that the economy would be positively jolted if we didn’t realize the windfall had arrived, they argued. It’s a view that drove those concerned with the politics of the stimulus absolutely nuts.

“The geniuses on the economic team wanted the money dripped out so nobody fricking saw it” is how Chicago Mayor Rahm Emanuel, then Obama’s chief of staff, puts it in Michael Grunwald’s The New New Deal, an account of the stimulus. David Axelrod, a chief political consigliere, says, “Our political imperatives conflicted with our responsibility to get this economy moving again.”

Well, now comes an article in the Journal of Consumer Research (PDF), “Money Isn’t Everything, but It Helps If It Doesn’t Look Used: How the Physical Appearance of Money Influences Spending,” in which two Canadian business professors argue that consumers routinely rid themselves of worn bills because they inspire various feelings of disgust—while they are far more likely to keep hold of crisp new currency.

“The physical appearance of money can alter spending behavior,” conclude Fabrizio Di Muro of the University of Winnipeg and Theodore J. Noseworthy of the University of Guelph.

“Consumers tend to infer that worn bills are used and contaminated, whereas crisp bills give them a sense of pride in owning bills that can be spent around others,” they write.

The professors used college students at the University of Winnipeg as their guinea pigs and, over and over, found they would spend far more dirty bills they were given than new ones. In one of five studies, they gave the students $20, in various types of bills, and told them they could spend whatever they like on any of 26 products, ranging from a $3.40 bag of potato chips to a $16.25 box of Cadbury chocolates.

Like most things in life, the physical appearance of the money was linked to a social context—when people felt that others were watching their actual spending, they were inclined to use a crisp bill.

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Otherwise, the research suggests, “People want to rid themselves of worn currency because they are disgusted by the contamination from others. However, people put a premium on crisp currency because they take pride in owning bills that can be spent around others. People tend to spend crisp bills more when they believe they are being socially monitored.”

Ultimately, if the Canadians are correct, we clearly tend to find importance in not just the nominal value of money. But does worn currency really and truly alter spending behavior?

Here, the researchers, in classic academese, add a final qualifier. Their results, they write, might just be driven by the fact “that the motivational effects of pride and disgust override spending norms. This is not to downplay the results. Indeed, there is growing interest in how consumers generate detailed inferences from a product’s physical appearance. This work suggests the same for money.”

The caveats aside, if Emanuel reads the journal, which just happens to be published by the University of Chicago, he might think back to his fights with Larry Summers and all the other big-shot economists at the White House.

He could well wonder why Obama didn’t just send all of us ratty-looking $100 bills and herald their arrival. The research suggests they would have been spent in a hurry.