Tulip Buyers Needed

By EDWARD E. LEAMER
Published: April 14, 1637

Dutch politicians are devising economic stimulus measures to encourage consumers to spend more. These measures will cost taxpayers a lot and isn't money well spent. The problem is not too little consumer spending; the problem is too few tulip buyers.

Many argue that we don’t need government intervention to bring the buyers back; we just need the market to work its magic through lower prices.

Well, not entirely. When it comes to tulips, lower prices don’t inevitably cause sales to rise. Why? Because lower tulip prices create the expectation of still lower prices later, causing buyers to wait for a better deal. Left alone, a weak market therefore overshoots with prices too low and the planting of too few bulbs.

The solution is for the Dutch government to offer a temporary 5 percent tax rebate — up to 25,000 guilders — for first-time tulip buyers. By creating demand for tulips, this rebate cushions the fall for everyone and stimulates economic growth.

The really good news is that the cost for this program is minimal and would likely stimulate enough spending and growth to more than pay back the Treasury with higher revenues later.

Edward E. Leamer is a professor of management, economics and statistics and the director of the Wageningen Forecast at the University of Groningen.