The Guardian had a feature “Dear George Osborne, it’s time for Plan B say top economists: Seven leading economists on what Chancellor George Osborne should do to revive the ailing UK economy.” That inspired this post with my advice to the United Kingdom on the Independent’s blog, which I reprint here. Thanks to Ben Chu, Jonathan Portes and David Blanchflower for encouragement. (The links below open in the same window, so use the back button to get back.)
Dear Chancellor of the Exchequer,
Since I am an American citizen, it might be argued that I have no business giving advice to the government of the United Kingdom of Great Britain and Northern Ireland. But the economic troubles we face are worldwide and I believe are amenable to a common solution if any major nation will show the way with a new tool of macroeconomic stabilization that has fallen into our hands.
The basic problem is that fear is causing many households and firms in the private sector who could spend to cut back on their spending, while others who would be glad to spend more cannot get access to credit. Much of the advice from economists has been for governments to spend more. But even governments that have had good credit ratings and have made some attempt to increase spending have felt limited by the addition to national debt that would result from the amount of extra spending that might be needed to restore economic health. For example, in his excellent Atlantic article, “Obama Explained,” James Fallows wrote:
If keeping the economy growing was so central for Obama, why was the initial stimulus “only” $800 billion? “The case is quite compelling that if more fiscal and monetary expansion had been done at the beginning, things would have been better,” Lawrence Summers told me late last year. “That is my reading of the economic evidence. My understanding of the judgment of political experts is that it wasn’t feasible to do.” Rahm Emanuel told me that within a month of Obama’s election, but still another month before he took office, “the respectable range for how much stimulus you would need jumped from $400 billion to $800 billion.” In retrospect it should have been larger—but, Emanuel says, “in the Congress and the opinion pages, the line between ‘prudent’ and ‘crazy spendthrift’ was $800 billion. A dollar less, and you were a statesman. A dollar more, you were irresponsible.”
What is needed—mainly for genuine economic reasons, but also for political reasons—is a way to provide a large amount of stimulus without adding too much to the national debt. In my new academic paper “Getting the Biggest Bang for the Buck in Fiscal Policy,” and on my blog, I propose and discuss a tool for macroeconomic stabilization that can do exactly that. The proposal, which I call “National Lines of Credit,” (or “Federal Lines of Credit” in the US case) is to send government-issued credit cards to all taxpayers that have a substantial line of credit attached—say £2,000 per adult, or £4,000 pounds per couple. The interest rate would be relatively favorable, say 6%, with a 10-year repayment period so that most of the repayment would happen after the economy is back on its feet again. But the government would insist on eventual repayment, except for the very-long-term unemployed or disabled. Insisting on repayment would make the ultimate addition to the national debt small compared to the stimulus provided by these National Lines of Credit.
The paper provides many more details of how National Lines of Credit might work than I should try to include here, but I should mention that a key detail is requiring each household not only to pay down its debt, but also to build up a reserve of savings after the economy has fully recovered. That reserve of savings would be there to help deal with any more distant future crisis. Also, let me say that, depending on the exactly how they are implemented, National Lines of Credit are either distributionally neutral or tend to favor the poor; by contrast, the Bank of England has estimated that its program of buying gilts (which might also be necessary) has had immediate benefits tilted toward the wealthy.
Perhaps just as important as the stimulus provided by a program of National Lines of Credit would be the value of demonstrating that this kind of approach works, if it does, or gaining a greater understanding of the workings of the economy if it doesn’t. The best existing evidence- historical evidence based on the decision to allow World War 1 veterans in the U.S. to borrow against their veterans’ bonuses – suggests that the stimulus effect can be substantial. But the politics of many nations will require more evidence before National Lines of Credit can be implemented there. (Many nations in the Eurozone need a program of National Lines of Credit even more than the United Kingdom does.) Some nation must blaze the trail. If the United Kingdom is willing to take the risk of going first in trying out this new stimulus measure, and it works, it will not only have helped to solve its own economic troubles, it will have earned the gratitude of the world, in a small but still significant echo of the way in which it earned the gratitude of the world by standing against Hitler.
Miles Kimball is an economics professor at the University of Michigan who studies business cycles and the effects of risk on household consumption. He blogs about economics and politics at supplysideliberal.com.