Does perishable e-money signify the way forward for fiscal stimulus?

“IIf you want to see how the free market really works, this is the place, ”said Milton Friedman on“ Free to Choose, ”his 1980s television series. He was sitting on a cross-port ferry in Hong Kong. The city, he said, is “an almost laboratory experiment in what happens when the government … gives people the freedom to pursue their own ends”.

This week the same city started another experiment: not only giving people the freedom to pursue their own goals, but also giving them money for their own purchases. On August 1, Hong Kong residents received the first installment of the government’s consumer voucher in an attempt to revive the city’s battered retail trade. The amounts are generous (HK $ 5,000 or $ 640) and the distribution is smooth. The money is added to a person’s Octopus card (widely used in shops and public transit) or deposited into e-payment apps like Alipay. Shops are now competing for their customers’ undeserved money. The Mira Hotel, where Edward Snowden revealed America’s secrets to the world, offers a 75% discount on a romantic “Staycay”. In contrast to normal cash spending, these e-vouchers have to be issued within a few months. Otherwise they “expire”.

So will Hong Kongers use it or lose it? Similar experiments had mixed results. After South Korea provided perishable coupons in May 2020, only 36% of households said they had increased their retail spending (and some of them cut other spending). After Taiwan distributed physical vouchers in 2009, most people spent them on things they would have bought anyway, according to Kamhon Kan of Taipei’s Academia Sinica and his co-authors. Only about a quarter used it on unplanned purchases, which doesn’t make it any more effective than America’s more conventional tax rebates in 2008.

These shortcomings would come as no surprise to proponents of the “sustainable income hypothesis,” who argue that households will attempt to smooth out their consumption over time and spend a fraction of their estimated lifetime wealth. In these models, unexpected gains are largely suppressed. Hong Kongers cannot put their voucher money aside without losing it. But luck still lets them save more of their normal money because they don’t have to spend it on the things they buy with their vouchers.

The founder of the permanent income hypothesis was none other than Milton Friedman. If Hong Kong’s new experiment is to work as the government hopes, one of its most cherished cities will have to overcome one of its most famous theories.

This article appeared in the Finance & Economics section of the print edition under the heading “Temporary Income Hypothesis”