Bill Greider on Federal Lines of Credit: "A New Way to Recharge the Economy"

Bill Greider with Bill Moyers, July 18, 2008 (video)

In my second post, “Getting the Biggest Bang for the Buck with Fiscal Policy,” I wrote about my interview with Bill Greider and promised I would let you know when his article came out. Bill Greider is national affairs correspondent for The Nation, and the author of Secrets of the Temple, a history of the Federal Reserve. And at the link under the picture, you can see a short clip of Bill Greider talking to Bill Moyers that will give you some of the experience I had in meeting Bill Greider. Bill’s article is out now, on The Nation’s blog. Here it is. The simple summary is that Bill is pushing my proposal of Federal Lines of Credit as hard as he can, while connecting it to some of his own longstanding interests. 

Let me say what I hope is obvious: this blog and my relatively accessible academic paper “Getting the Biggest Bang for the Buck in Fiscal Policy” are authoritative about what I am proposing in relation to Federal Lines of Credit, not Bill Greider’s post. (See also the Powerpoint file for my presentation at the Federal Reserve Board.) But though Bill’s nuances are very different from mine, the only serious issue I have with his post is that Bill makes it sound as if I want to have a less independent Fed. Far from it! What I actually said in my paper “Getting the Biggest Bang for the Buck in Fiscal Policy” is this:

The lack of legal authority for central banks to issue national lines of credit is not set in stone. Indeed, for the sake of speed in reacting to threatened recessions, it could be quite valuable to have legislation setting out many of the details of national lines of credit but then authorizing the central bank to choose the timing and (up to some limit) the magnitude of issuance. Even when the Fed funds rate or its equivalent is far from its zero lower bound at the beginning of a recession, the effects of monetary policy take place with a significant lag (partly because of the time it takes to adjust investment plans), while there is reason to think that consumption could be stimulated quickly through the issuance of national lines of credit. Reflecting the fact that national lines of credit lie between traditional monetary and traditional fiscal policy, the rest of the government would still have a role both in establishing the magnitude of this authority and perhaps in mandating the issuance of additional lines of credit over the central bank’s objection (with the overruled central bank free to use contractionary monetary policy for a countervailing effect on aggregate demand).

Let me explain that “National Lines of Credit” is just another name for “Federal Lines of Credit” that I use in the paper because that name of the program works better in Europe, where it is most likely to be done by individual nations rather than by the Eurozone as a whole.

What I want is amore powerful, but still fully independent Fed.  In particular, I want a Fed that is in charge of aspects of policy that are in between traditional fiscal policy and traditional monetary policy and a Fed permitted by law to purchase a wider range of assets, as the Bank of Japan is. (See my post “Future Heroes of Humanity and Heroes of Japan.”) I believe that the Fed is doing less stimulus than it otherwise would because it is not fully comfortable with balance sheet monetary policy on the scale required. (See my post “Trillions and Trillions: Getting Used to Balance Sheet Monetary Policy.”) In other words, I am claiming that if the Fed had been given the authority by Congress to use Federal Lines of Credit as a tool, it would have done more stimulus, and the economy would be in better shape. (On my respect for the Bernanke Fed, see the lead-in to my first list of “save-the-world” posts.)

Two things I hope that Bill mentions if he returns to this topic in the future, as I hope he does, are

1. the evidence from history that Federal Lines of Credit will work that is flagged in my post “Brad DeLong and Joshua Hausman on Federal Lines of Credit,” and 
2. my proposal to use the timing of the Federal contributions for Medicaid as a way of getting States to spend more in recessions.  See my post Leading States in the Fiscal Two-Step, and the comparison with Mark Thoma’s related proposal in my post “Mark Thoma on Rainy Day Funds for States.”

I hope to have many more interactions with Bill Greider in the future, both in cyberspace and in person.

Reply to Mike Sax's Question "But What About the Demand Side, as a Source of Revenue and of Jobs?"

Russell B. Long, Louisiana Senator 1948-1987

Mike Sax writes about my exchange with Karl Smith, starting with my post “Why Taxes are Bad,” Karl Smith’s reply “Miles Kimball on Taxing the Rich” and finally my post “Rich, Poor and Middle-Class.” He has at least three different lines of questions. In this post I want to answer two that might be summarized as “But what about the demand side, as a source of revenue and a source of jobs?” Here is what Mike says:

One more point: Implicit is the idea that rich are the "job creators.“ It’s not wholly true that the Occupy Wall Street presumed that most wealthy people are rich through personal chicanery. Much of their indignation is directed to what they see as systemic injustice-I for one do believe that capitalism is the most efficient and potentially most just allocator of resources, though I’m skeptical of too much laissez-faire.  What I see in Supply Side analysis is no recognition that 70% of GDP is consumer demand. So who is exactly the job creators?

http://useconomy.about.com/od/grossdomesticproduct/f/GDP_Components.htm

If there’s no money in people’s pockets there’s no demand and no job creation. Again, my position is a "Demand Sider” I’d like to find ways to reduce the demand side taxes-the taxes that the poor and middle income have to pay, from high payroll taxes, to the litany of state sales taxes, and fees-traffic fees, meters, indeed, insurance. As I suggested in my first reply to Miles nothing gets my goat more than this Cato canard that’s repeated ad nauseum that “45% of Americans pay no tax.”

Even the wino on a park bench pays tax every time he gets his hands on demon rum.

Does Miles recognize the distortions that come from the demand side of income-the taxes that the nonrich pay? Again, I poise these questions to Miles as I appreciate his contributions to the debate. Hopefully he understands the spirit that I poise these questions. I’ve certainly changed my opinion some on the “progressive consumption tax”-not enough to take the scare quotes away yet, of course!-and am willing to be persuaded on supply side issues.

Mike is absolutely right that the poor and middle class pay substantial amounts of sales taxes and taxes on earnings such as Social Security taxes. When people want to argue that the tax system is unfair to the rich, they often skew things by only talking about the income tax. But a key point to make here is that almost all countries that devote a higher fraction of GDP to government spending than the U.S. tax the middle-class a lot through a national sales tax or a value added tax (VAT) which is a lot like a sales tax except that it is harder to evade because much of the tax is collected from companies long before the good gets to the final consumer. The European model, in particular, is to tax the middle-class heavily in order to give benefits to the middle class. I believe that the resultant tax distortions are why so many Europeans work many fewer hours per year than Americans. They used to work roughly the same amount as Americans when they had lower tax rates. (These are facts that Ed Prescott has made much of.)   

Why not just tax the rich to pay for benefits for the middle class? The basic problem is that there aren’t enough rich people. I found this video by Tyler Durden etertaining and revealing on this topic. I can’t verify what he says exactly, though I think the basic point is right. You have to include at least the upper middle class in your tax in a big way, or you can’t get enough extra revenue to do a big expansion of social programs. 

So the “demand side” is a big source of potential revenue, if by that you mean some kind of sales tax of VAT tax. But to get a lot of revenue, you have to include people who don’t think of themselves as rich, and whose acquaintances might not even think of them as rich. Maybe we should do it anyway, but it won’t feel like what people imagine a tax on the rich would feel.  Here I remember Senator Russell B. Long’s parody:

“Don’t tax you, don’t tax me, tax that man behind the tree.”

There just aren’t enough “men behind the tree” who don’t seem like you or me.

What about the demand side as a source of jobs?  (This is a more typical meaning of “demand-side.”) Here, my answer is that, despite the floundering of policy makers lately, it is fundamentally easy to get enough aggregate demand. On this, just click the sidebar link on the June+ 2012 table of contents and look at all the posts on monetary policy and short-run fiscal policy, together with the recent post on evidence that Federal Lines of Credit should work: “Brad DeLong and Joshua Hausman on Federal Lines of Credit.” (My post “Dissertation Topic 1: Federal Lines of Credit (FLOC’s)” is also useful, but is pretty heavy.)  The bottom line is that monetary policy can provide plenty of aggregate demand, and if the Fed won’t do what it takes, we can use Federal Lines of Credit and the change in the timing of Federal payments to the states for Medicare that I talk about in “Leading States in the Fiscal Two-Step” to get enough aggregate demand without adding too much to the national debt. So, you wouldn’t know it from the news or from big chunks of discussion in the blogosphere, but getting enough aggregate demand is the easy problem. Raising aggregate supply while getting the revenue we need is the hard problem.

Brad DeLong and Joshua Hausman on Federal Lines of Credit

World War I veterans in 1920, who later had the chance to borrow against their bonus

Brad Delong not only praises Federal Lines of Credit, he managed to identify some empirical evidence that suggests they should indeed be more powerful than tax rebates! Here is what he says:

The interesting thing is that we have done this before. In 1931 and 1936 the Congress (over the objections of President Hoover in the first case and President Roosevelt in the second) gave World War I veterans the option to borrow against the WWI Veterans’ Bonus that they were going to be paid in the future:

Then Brad cites a study of letting veterans back then borrow against their bonus by Berkeley graduate student Joshua Hausman. Here is Brad’s summary of the results:

Because the bonus was paid to veterans and only veterans, Josh has substantial cross-section identification off of the different proportions of veterans in the several states. The (preliminary) figures and regression results are, to my eye, awesome: a cash-flow multiplier that looks to be 0.8 or so.

Federal Lines of Credit are an extraordinarily effective recession-fighting policy when mental accounts or liquidity constraints are important, and it looks as though they were very important in the 1930s.

Miles's Presentation at the Federal Reserve Board on May 14, 2012 (pptx)

Here is a download of the Powerpoint file for the presentation I gave at the Federal Reserve Board on May 14, 2012, as recounted in my second post “Getting the Biggest Bang for the Buck in Fiscal Policy.” It had an element of discussing Stefan Nagel’s longer presentation immediately before, a presentation based in part on his paper with Ulrike Malmendier “Depression Babies: Do Macroeconomic Experiences Affect Risk-Taking,” but ranges beyond that to a wider discussion. My most important idea in this presentation is Federal Lines of Credit (FLOC’s) as a way to provide fiscal stimulus without adding much to the national debt–an idea laid out in full detail in my academic paper about Federal Lines of Credit: “Getting the Biggest Bang for the Buck in Fiscal Policy.” As academic papers go, this one is quite accessible to non-economists.

Dissertation Topic 1: Federal Lines of Credit (FLOC's)

A Depiction of “The Miracle of the Seagulls” from Mormon History

QUESTION

Miles, I greatly enjoy your blog. I am 3rd year econ phd with a burgeoning interest in the impact of fiscal policy and government expenditure during recessions. Much of the literature simply attempts to calculate a jobs or GDP multiplier, but there are many other impacts of fiscal policy. What are important costs and benefits of fiscal policy that you feel are understudied? Who are the winners and losers from stimulus expenditure? I have a particular interest in firm and worker outcomes. Thanks! – markcurti

ANSWER

The answer here is easy for me. There has been no formal modeling of my Federal Lines of Credit proposal in my second post

“Getting the Biggest Bang for the Buck in Fiscal Policy.”

 This is a serious proposal–and in my view an extremely important proposal–that deserves formal modeling, but I am not going to do that formal modeling myself. (Why don’t I do this myself? See on my CV at the sidebar the number of other research projects I have in progress–many more than the number of my publications!) So it definitely counts as understudied. Here again is the link to the full article that I have submitted to a professional economics journal laying out the proposal in some detail. I even have an NBER Working Paper by the same name that you can cite, though I recommend reading the one I link to rather than the NBER Working Paper. 

When I say “formal modeling,” I am thinking this is one place where a Dynamic Stochastic General Equilibrium (DSGE) model would be quite appropriate in order to get some sense of likely magnitudes. Since analyzing Federal Lines of Credit requires modeling borrowing constraints and heterogeneity, as well as modeling sticky prices so that aggregate demand matters for output, there would be plenty of chances to develop and show off technical skills. I would be truly delighted to have someone do this analysis. 

Since I think the corresponding National Lines of Credit are even more important for Europe than Federal Lines of Credit are for the United States, if you want to do something empirical, to me the key issue is measuring the degree of spillover in fiscal stimulus from one country in the Eurozone to another. Similarly, you could look at the degree of spillover in fiscal stimulus from one U.S. state to another given a state-level fiscal stimulus. However, in general, the amount of empirical precision available for empirical studies of fiscal policy is not great, so this may not be that promising in the end. In either case, DSGE modeling of fiscal spillovers from one Eurozone country to another or from one state to another could be useful. 

July 8, 2012 Update

For other readers, let me translate my statement “the amount of empirical precision available for empirical studies of fiscal policy is not great”:

Despite many claims, aside from military spending, there is not much evidence about the overall effects of short-run fiscal policy on the economy one way or another.  

I would be glad to have this claim contested, but I can say that I have seen a lot of economics seminars lately with empirical estimates of the effects of short-run fiscal policy that are all over the map. Valerie Ramey (who has done work on fiscal policy with my colleague Matthew Shapiro) is one of the experts on what evidence exists. Here again is what she had to say about a recent short-run fiscal policy paper by Brad Delong and Larry Summers:

Valerie’s Powerpoint file and Valerie’s writeup of her discussion. There is an active thread on Twitter from my tweeting the link to Valerie’s writeup and calling it devastating.

Now I am not so sure. There are many objections being voiced to Valerie’s discussion. Anyway, the twitter thread backs up the idea that it is hard to get definitive empirical evidence in this area. 

By the way, Mark, please leave a comment below giving some indication of your likelihood of pursuing this. If you definitely aren’t pursuing it, letting us know will reassure others that there isn’t too much competition on this research topic.

Thoughts on Monetary and Fiscal Policy in the Wake of the Great Recession: supplysideliberal.com's First Month

This post will serve as the Table of Contents for the first month of supplysideliberal.com.  But it is more than that. It is a chance to reflect on questions such as

Where have I been coming from in the posts so far?

Why am I here writing a blog?

Where am I going from here?

Only the most important reflections come before the Table of Contents proper. Lesser musings come after the Table of Contents.  

The most important thing to say about where I have been coming from is that all the posts are meant to last. I try to make each major post and most minor posts count as parts of overarching arguments that  extend over many posts. And I hope that the whole is greater than the sum of the parts, so that anyone who reads the entire thread of posts in a given topic area will learn something they wouldn’t have learned from reading each post in isolation.

I think of blogging as an art form that I am undertaking seriously as a beginning novice.  My lodestone for literary structure here is my favorite television series Babylon 5.  In Babylon 5, the first season seems episodic, but in fact each episode lays part of the foundation for the narrative arc that picks up in earnest with the second season.  Some of the charm of a blog is in its unexpected turns as a blogger interacts with others online.  I want to have that and an overall progression.  

As to my motivations for beginning a blog, there are many personal motivations that I will talk about in due course. But I know that the one thing that has given me some sense of urgency to start now rather than wait until later is seeing the world economy flounder in the wake of the Great Recession. It is galling to see the world suffering below the world’s natural level of output when, in my contrarian view, getting sufficient aggregate demand is fundamentally an easy problem compared to the long-run challenge of balancing concerns about tax distortions against the value of redistribution and other government spending.

On where I am going from here in this blog, let me say that I have the titles of many potential posts kicking around in my head, each potential post struggling for primacy so it can be the next one written. They can’t all win at any given moment, and I don’t think I can maintain the pace I have kept so far, let alone increase that pace. And responding to other things currently going on in the blogosophere and in the news takes a certain degree of precedence. But there is a lot coming. 

The Table of Contents below is organized by topic area. Monetary Policy comes first because responding to other bloggers and to events has led to the most posts in that area. Monetary policy is one way I believe we have plenty of tools to get sufficient aggregate demand. The other way to get sufficient aggregate demand is through Short-Run Fiscal Policy. But in everything I say about short-run fiscal policy, I worry a lot about the effects on the national debt and work to find novel ways to minimize those effects.  The third topic area heading is Long-Run Fiscal Policy–the issues that motivate the title of my blog.

The last substantive heading is Long Run Economic Growth. I am not a growth theorist or a growth empiricist, and so am not qualified to say as much as I would like to be able to say about Long Run Economic Growth. But Long Run Economic Growth is arguably the most important subject in all of Economics. I have often thought that if I had started graduate school just a few years later, I would have focused on studying economic growth in my career, as my fellow Greg Mankiw advisee David Weil has to such good effect.  

Under the last two headings in the Table of Contents, I organize posts on Blog Mechanics and Columnists, Guest Posts and Miscellaneous Reviews. (I put many reviews under the relevant substantive heading because they help to understand the thread of the argument.) I will talk more about these aspects of the blog and about blog statistics after the Table of Contents.  

TABLE OF CONTENTS: FIRST MONTH

Monetary Policy

Balance Sheet Monetary Policy: A Primer

Stephen Williamson: “Quantitative Easing: The Conventional View”

Trillions and Trillions: Getting Used to Balance Sheet Monetary Policy

Karl Smith of Forbes: “Miles Kimball on QE”

Scott Sumner: “‘What Should the Fed Do?’ is the Wrong Question”

Is Monetary Policy Thinking in Thrall to Wallace Neutrality?

A Proposal for the supplysideliberal Community’s First Public Service Project: a wikipedia Entry on “Wallace Neutrality”

Mike Konczal: What Constrains the Federal Reserve? An Interview with Joseph Gagnon

Going Negative: The Virtual Fed Funds Rate Target

The supplysideliberal Review of the FOMC Monetary Policy Statement: June 20th, 2012

Justin Wolfers on the 6/20/2012 FOMC Statement

Should the Fed Promise to Do the Wrong Thing in the Future to Have the Right Effect Now?

Wallace Neutrality and Ricardian Neutrality

Future Heroes of Humanity and Heroes of Japan

The Euro and the Mediterano

Short-Run Fiscal Policy

Getting the Biggest Bang for the Buck in Fiscal Policy

Reihan Salam: “Miles Kimball of Federal Lines of Credit”

National Rainy Day Accounts

Leading States in the Fiscal Two-Step

Mark Thoma on Rainy Day Funds for States

Long-Run Fiscal Policy

What is a Supply-Side Liberal?

Can Taxes Raise GDP?

Clive Crook: Supply-Side Liberals

Why Taxes are Bad

A Supply-Side Liberal Joins the Pigou Club

“Henry George and the Carbon Tax”: A Quick Response to Noah Smith

Avoiding Fiscal Armageddon

Mark Thoma: Laughing at the Laffer Curve

Health Economics

Long-Run Economic Growth

Leveling Up: Making the Transition from Poor Country to Rich Country

Mark Thoma: Kenya’s Kibera Slum

Blog Mechanics

Miles’s Tweets

Miles’s Curriculum Vitae

Comments on supplysideliberal.com

Notice of Revocable Permission to Reproduce Content from this Blog with Appropriate Attribution to this Blog and Notice of Miles Spencer Kimball’s Copyright

@mileskimball on twitter

suppysideliberal.com on Facebook

Columnists, Guest Posts, and Miscellaneous Reviews

An Early-Bird Tweet from Justin Wolfers

Noah Smith: “Miles Kimball, the Supply-Side Liberal”

Gary Cornell on Andrew Wiles

Diana Kimball on the Beginnings of supplysideliberal.com

Gary Cornell on Intergenerational Mobility

supplysideliberal.com Takes on a Math Columnist: Gary Cornell on the Financial Crisis

Diana Kimball: Recording Skype Conversations on a Mac

Mike Sax: Review of (Some) Economics Blogs

Let me say a few words about blog mechanics, columnists, reviews and blog statistics.   The most important blog mechanics are indicated by links at the sidebar. But the posts under Blog Mechanics provide a little more detail. On all the blog mechanics, I owe a great debt to my daughter Diana Kimball. 

I have already said it in several posts, but let me say again that those who are not following my tweets are missing a lot. I have been having a lot of fun engaging with the news of the day and with other people’s tweets. And I routinely tweet announcements of new posts appearing on the blog itself.

Among the Miscellaneous Reviews, the one I recommend most highly is Noah Smith’s.  I owe a lot to Noah’s encouragement and help with this blog. I see this blog as part of the Noahpinion universe.  

On blog statistics, I will do a separate post a little later on traffic sources, which is interesting because it helps show the shape of my corner of the blogosphere.  My first post was on Memorial Day, May 28, 2012, exactly one month ago. I didn’t get Google Analytics set up until a few days later, so those statistics are from Sunday, June 3 on (and end at midnight last night). Google Analytics reports 20,386 total pageviews, 13,392 visits, and 7,411 unique visitors. I got some help “grep"ing to verify that the Google Analytics statistics do not include the now 593 subscribers receiving the posts on Google Reader unless they also click separately from Google Reader. Together with the 62 Tumblr subscribers, that adds up to 655 subscribers, plus some number of subscribers on Facebook that I can’t separate out from other Friends and however many subscribers I have on other platforms I don’t know about. Finally, I have 353 Twitter followers. The mismatch between that and the number of subscribers to the blog itself is why I have been making a point of recommending following my tweets.

To me, this past month has been a heady time. The excitement of starting a new blog that has been so generously welcomed has caused me some of the most pleasant insomnia that I have ever experienced. One of the reasons I expect to slow my pace somewhat is that once that enthusiastic insomnia wears off, I will have less time to blog.   

Update: I added posts from the rest of June, 2012 to the Table of Contents above so that from now on monthly tables of contents can be based squarely on calendar months.  

Mark Thoma on Rainy Day Funds for States

Mark Thoma, Professor of Economics at the University of Oregon and Author ofthe Blog Economist’s View, which is the Center of the Economics Blogosphere

I have to apologize to many in the blogosphere for not having been a regular blog reader in the past and so not being aware of posts preceding mine that are clearly relevant to my posts and so deserve acknowledgement.  Unfortunately, writing this blog on top of all my other duties as an economics professor and in my private life also doesn’t leave me a lot of time for reading everything out there that I ideally should be reading.  So please do let me know of things out there that are highly relevant to my posts and I will make an effort to acknowledge them–assuming I agree that they are highly relevant.  This post is an acknowledgement of an article by Mark Thoma that is extremely relevant to one of my posts.  Mark let me know by tweeting about his prior article with @mileskimball included in the tweet. 

Back in October 26, 2010, Mark Thoma suggested in the Fiscal Times that the Federal Government help states out financially in return for states setting up rainy day funds.  (I have to apologize to many in the blogosphere for not having been a regular blog reader in the past and so not being aware of many things that people have said.)  This is very similar to my proposal in “Leading States in the Fiscal Two-Step."  So (assuming that, like Ben Bernanke, Mark thinks more fiscal stimulus is in order at this point) both Mark and I are calling for this kind of action.  One difference in our proposals is that I am suggesting that the Federal Government effectively require the states to repay the money given them now, and then go beyond that to accumulate positive balances in their rainy day fund.  Thus, my proposal will not add to the Federal Government’s debt in the end, while Mark’s will. 

Also, note that since my proposal works through changing the timing of Federal Medicaid Contributions, the Federal Government can easily do it unilaterally, and the effective rainy day fund requires no state legislative or executive action in order to come into existence. 

Leading States in the Fiscal Two-Step

[Note on the cartoon:  My technical and blog etiquette expert Diana Kimball tells me it is proper etiquette to acknowledge the origin of photos by linking to the source.  I won’t go back and do that on all of my earlier posts, but I wanted to give you the link to this one because I found it early on, and then was frustrated that I couldn’t find it when it came time to post “Leading States in the Fiscal Two-Step."  I love this cartoon.  It is much better than the cartoon I previously had of Uncle Sam dancing with Lady Liberty.  Here is the link.  From the site, it looks as if you can ask people online to draw pictures for you pro bono–something useful for every blogger to know.  Has anyone had any experience with this?]

In his article "The Federal Reserve Turns Left,” Bill Greider tells how the Fed is currently one of the institutions arguing most strongly that the Federal Government should spend more now.  Since the Fed has not departed from its long-term recommendation that the Federal Government spend less in the future, this amounts to recommending that the U.S. Federal Government execute what I will call a “fiscal two-step”: spending more now, while promising to spend less later.

I have serious misgivings about this recommendation.First and foremost, I think it is politically very hard for a sovereign nation to do this:temporarily higher spending is likely to get built into the baseline.Second, even if such a fiscal two-step as usually envisioned is executed as intended, it will lead to a path for the national debt that is considerably higher over a substantial length of time (with all the risks that entails) than an alternative policy I have put forward on this blog of Federal Lines of Credit (FLOC’s) now combined with National Rainy Day Accounts (NRDA’s) down the road.

The combination of FLOC’s and NRDA’s effectively encourages people to do the individual version of the fiscal two-step.By providing lines of credit, people are encouraged to spend now if spending now is attractive to them.Later as part of the FLOC program they are required to repay this debt, and later still, they are required to save a modest amount each month by payroll deduction (or for the self-employed, in their quarterly estimated taxes) to go into their National Rainy Day Accounts–money that they are only allowed touse in the wake of a recession or other declared economic emergency or in case of a bona fide, documentable personal financial emergency of high order.With the combination of FLOC’s now and NRDA’s later, the FLOC’s now would provide stimulus now; while later on, in recessions down the road, stimulus would be provided by releasing some of the accumulated funds in the National Rainy Day Accounts.(If this combination of policies is followed, and it is a long time before the next recession, FLOC’s might only be needed once, since releasing funds from National Rainy Day Accounts could provide the needed stimulus in the future.But an additional round of FLOC’s would always be available as a backup policy.)

To give an idea of the possible magnitudes in National Rainy Day Accounts, suppose each adult were required to set aside $20 per month in NRDA’s.Then if it was five years between the institution of NRDA’s and the next recession, compound interest would mean that each adult would then have a warchest of more than $1200 in their NRDA , minus the amount that went to take care ofdocumentable personal financial emergencies.That amount would be available for release to fight that future recession.

Why am I repeating all of this, when I said it already?I am recapping all of this as background for a corresponding policy proposal for the states, which has a non-obvious name: Federal Medicaid Contribution Prepayment and Escrowing. The idea is to have the Federal Governmentgive the states more money now, while in effect requiring them to repay it later, then to build up a balance that would legally belong to the states, but remain in escrow until a recession, when some or all of the funds would be released.(Also, in situations where under current policies, a state might be bailed out–or otherwise rescued–with Federal money, the money in a state’s Medicaid Escrow Account could be released, so that at least the state was being bailed out or rescued with its own money.)

Interest would be assessed on the prepaid amount and earned by a state on the escrowed amount at the 3-month Treasury bill rate.Up to some target maximum for the Medicaid Escrow Accounts (specified in the original legislation), the interest would be paid as an addition to escrowed funds, but if a state’s account reached its target maximum, the interest would be paid to that state as unencumbered funds that the state could spend at will.The reason for insisting that the Federal Government pay the states interest in an unencumbered way once some predefined target maximumis reached is to reaffirm the states’ property rights in their Medicaid Escrow Accounts.Without ongoing reaffirmation of the states’ property rights in these Medicaid Escrow Accounts, the Federal Government would be very strongly tempted to confiscate the money at some future time in order to deal with its own fiscal problems.The Federal Government could always unilaterally cut its transfers to the states, but it is important that it be discouraged from penalizing a state for being especially thrifty with its Medicaid Escrow Account or for being slow to beg for a bailout or rescue.

Let me say with the utmost clarity that there is no real connection between this program and the purposes of Medicaid itself.I am imagining the rules of the Medicaid program itself to be totally unchanged.The only thing that would change is the timing of when the Federal Government pays its share, as defined under current law.

The main reason I am envisioning this program happening as a modification to the existing flows of Medicaid money from the Federal government to the state governments is simply for the sake of political plausibility.I think it is much more likely, politically, that the Federal Government would change the timing of its Medicaid contributions than that the Federal Government would explicitly set up the equivalent of FLOC’s and NRDA’s for the states.

The second reason for working through a modification of the existing system of Federal Medicaid Contributions is that this approach makes it easier to work around the balanced budget requirements in state constitutions.I do believe that macroeconomic stabilization is an appropriate use of the Federal Government’s power to regulate interstate commerce, and the Supremacy clause in the Constitution of the United States should allow the Federal government to override balanced budget requirements in state constitutions in any case.But with a policy of Federal Medicaid Contribution Prepayment and Escrowing, this can be handled simply by saying in the legislation

“This change in the timing of Federal contributions for Medicaid shall not be construed as borrowing or as saving when any State or Federal court interprets balanced budget requirements that states impose upon themselves.”

Thus, the policy would actually have the effect of tightening existing state balanced budget requirements in non-recessionary times, while loosening those requirements during recessions.

Along these lines, let me emphasize one more time the importance of the Federal Medicaid Contribution Escrowing down the line, as well as the Federal Medicaid Contribution Prepayment now.It is important for states to have the funds in those Medicaid Escrow Accounts to fight future recessions.And it is just as important to keep the states from overspending in good years as it is to encourage them to spend in bad years.

Why do I think the fiscal two-step will work for states, when I don’t think it will work for the Federal Government? Because fiscal discipline is hard for governments—so hard that most governments are not capable of fiscal discipline without balanced budget requirements that are so inflexible they cannot easily handle economic emergencies.Given the unpredictability of real-world events, it is not possible to fully define what constitutes an economic emergency in advance as flexibly as would be desirable, but in the absence of hard and fast, but inflexible rules, governments have a temptation to chronically declare economic emergencies.

The solution I am proposing here is to let a higher government(facing different political incentives) enforce the fiscal discipline in a way flexible enough to deal with recessions or other genuine economic emergencies. I think a government can lead in a fiscal two-step, and I think a government can follow in a fiscal two-step.  (Though they may do so clumsily, stepping on each other’s toes.)  But it takes two to tango, and two to dance the fiscal two-step.Almost no government can lead itself in such an intricate dance.

Noah Smith: "Miles Kimball, the Supply-Side Liberal" →

Very kind words from Noah, plus an excellent summary of several of my posts.

The existence of this blog is due in part to the encouragement I received from Noah and from my daughter Diana.  Thanks to both of them.  I learned blogging style from reading Diana’s excellent blog.  

National Rainy Day Accounts →

To back up the idea that there may be even better policies than FLOC’s, here is another proposal from my paper “Getting the Biggest Bang for the Buck in Fiscal Policy” in the  section: “3. Household Finance Considerations.”  

… in principle, national lines of credit in times of low demand could be superseded in the long run (at least in part) by a modest level of forced saving in times of high demand, with the funds from these “national rainy day accounts” released to households in time of recession (and also perhaps in the case of one of a well-defined list of documentable personal financial emergencies).  

In the long run, I like National Rainy Day Accounts much better than FLOCs.  But National Rainy Day Accounts seem politically harder to me than FLOCs, because National Rainy Day Accounts require action in advance of a crisis instead of after the crisis hits.  

The title of this post is a link to the paper.  

Reihan Salam: "Miles Kimball on Federal Lines of Credit" →

I want to endorse Reihan Salam’s statement that “FLOCs are best understood as a second-best alternative to counter-cyclical transfers, not as an ideal solution.”  There are probably better ways to stimulate the economy, but I think issuing FLOCs at the appropriate time is a feasible policy–well within the range of political possibility–that is much better than many things we have done in the past to stimulate the economy.  

Getting the Biggest Bang for the Buck in Fiscal Policy

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.