Last week, on Monday, May 14, I was one of ten outside academics invited to present a briefing to the Board of Governors of the Federal Reserve on the topic of consumption. All of the Governors, Eric Engen, the Federal Reserve Board economist who had organized the briefing, and all ten academics were seated around the gigantic oval table where the Federal Open Market Committee (FOMC) makes monetary policy decisions. Bob Hall, a Stanford Professor who is one of my favorite macroeconomists, was the moderator.
In my ten-minute presentation, I proposed an addition to the toolkit of fiscal policy: “Federal Lines of Credit” or FLOC’s. Here is the idea. Imagine that the economy is in a recession and the President and Congress are contemplating a tax rebate. What if instead of giving each taxpayer a $200 tax rebate, each taxpayer is mailed a government-issued credit card with a $2,000 line of credit? ($4,000 for a couple.) Even though people would spend a smaller fraction of this line of credit than the 1/3 or so of the tax rebate that they might spend, the fact that the Federal Line of Credit is ten times as big as the tax rebate would have been means it will probably result in a bigger stimulus to the economy. But because taxpayers have to pay back whatever they borrow in their monthly withholding taxes, the cost to the government in the end—and therefore the ultimate addition to the national debt—should be smaller. Since the main thing holding back the size of fiscal stimulus in our current situation has been concerns about adding to the national debt, getting more stimulus per dollar added to the national debt is getting more bang for the buck.
I have a new paper that spells out the argument in greater detail. It has the same name as this post. Here it is: "Getting the Biggest Bang for the Buck in Fiscal Policy."
In Europe right now, the corresponding National Lines of Credit would be even more helpful. In my paper "Getting the Biggest Bang for the Buck in Fiscal Policy" I write:
Austerity and traditional fiscal stimulus can only be reconciled by the difficult two-step of spending more or taxing less now while promising to spend less or tax more in the future. By contrast, it is perfectly possible to combine an immediate or relatively-quickly-phased-in austerity program with the issuance of large national lines of credit to counteract the negative aggregate demand effects of the austerity program. (Some countries may be close enough to being shut out of credit markets themselves that they might need an outside loan to be able to provide national lines of credit to their citizens.) Politically, these lines of credit could be explained as a way to cushion the blow of an austerity program on household budgets as well as providing macroeconomic stimulus.
I stayed in D.C. the rest of the week to work with my coauthors Claudia Sahm and Brendan Epstein and talk to other economists I know there. Tuesday, the day after the briefing to the Board of Governors of the Federal Reserve System, I got a call from Bill Greider, a columnist at The Nation who has taken a special interest in the Fed. (He has written a book about the Fed, Secrets of the Temple, and many articles about the Fed, including the recent article "The Fed Turns Left" about the Fed’s support for fiscal stimulus.) Bill Greider said he had heard about my Federal Lines of Credit proposal the day before and wanted to interview me. Late Wednesday afternoon I walked from the Federal Reserve Board to Bill’s office on K Street. For well over an hour, he interviewed me and kept me well entertained with his avuncular style in his unkempt office. If he writes anything based on that interview, I will make sure to post the link.