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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

Guest Post by Arpit Gupta: Federal Lines of Credit



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Miles Kimball has proposed a new mechanism for delivering a fiscal stimulus; personal credit cards that fill up with government loans in a counter-cyclically:

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.

As Reihan has noted, the idea resembles Steve Waldman’s proposal of publicly provided transaction credit. Waldman points to the fact that people have inconsistent time preferences and enormous discount rates applied in particular domains; combined with a limited ability to understand financial contracts. People start off with credit cards for purposes of transaction, and end up using them as revolving credit; resulting in enormous interest rates on short-term debt holdings that are repeatedly rolled over. This typically happens at the same time that people maintain longer-term investments at lower interest rates.

Forced savings plans like Social Security or 401(k) plans can actually make the household financial situation worse in this case. If households already have consumption pre-commitments, like rents, then higher forced savings can result in a greater imbalance between income and discretionary consumption, which winds up being filled by high-interest credit cards. A publicly provided card for transaction purposes could provide a valuable service from a household finance point of view. 

But rather than treating the cards as credit filled up with loans; another proposal would be to use in a debit capacity by using government-issued cards as a vehicle for monetary helicopter drops. Consider Ben Bernanke’s proposal for combined monetary-fiscal action for Japan in 2003:

My thesis here is that cooperation between the monetary and fiscal authorities in Japan could help solve the problems that each policymaker faces on its own. Consider for example a tax cut for households and businesses that is explicitly coupled with incremental BOJ purchases of government debt–so that the tax cut is in effect financed by money creation. Moreover, assume that the Bank of Japan has made a commitment, by announcing a price-level target, to reflate the economy, so that much or all of the increase in the money stock is viewed as permanent.9… 

Potential roles for monetary-fiscal cooperation are not limited to BOJ support of tax cuts. BOJ purchases of government debt could also support spending programs, to facilitate industrial restructuring, for example. The BOJ’s purchases would mitigate the effect of the new spending on the burden of debt and future interest payments perceived by households, which should reduce the offset from decreased consumption. More generally, by replacing interest-bearing debt with money, BOJ purchases of government debt lower current deficits and interest burdens and thus the public’s expectations of future tax obligations. Of course, one can never get something for nothing; from a public finance perspective, increased monetization of government debt simply amounts to replacing other forms of taxes with an inflation tax. But, in the context of deflation-ridden Japan, generating a little bit of positive inflation (and the associated increase in nominal spending) would help achieve the goals of promoting economic recovery and putting idle resources back to work, which in turn would boost tax revenue and improve the government’s fiscal position.

The Treasury could fill up $1000 on each government-issued card, and the Fed could buy up an equivalent supply of government bonds, commit to holding them to maturity, and remit all interest back to the Treasury. Ideally, debit payments would work in a rule-like fashion to hit the Fed’s target. 

I think this is actually the optimal instrument by which all government counter-cyclical management should work for a couple of reasons. Unlike traditional counter-cyclical policy, the rebates are neutral and don’t involve discretionary spending or distributional consequences. When debates get caught up in the usual partisan debates, you wind up with constituencies who attack the very logic of counter-cyclical stabilization. That’s why, if we want counter-cyclical stabilization to work, it needs to be done in as fair and neutral manner as possible for political economy reasons to generate maximum buy-in.

Traditional fiscal stimulus also pushes more debt in the future. Coordinating monetary policy with the fiscal transfer eliminates the fiscal cost, though generating an inflation cost. If we want more inflation though, that’s a great tradeoff to make. It also meets the typical criteria for fiscal policy — fast, cheap, targeted. It’s not subject to the typical fiscal policy critiques of Ricardian Equivalence, bridges to nowhere, etc. 

Unlike traditional monetary policy, this would alter monetary policy without working through the interest rate. This means the policy doesn’t run up into the zero-rate bound issue. Also, it doesn’t distort interest rates and long-run investment. Low interest rates during the 2000s made structural products more attractive to fund managers, possibly compounding the financial crisis. 



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