At his newly-minted blog, University of Michigan economist Miles Kimball floats an intriguing idea. Targeted tax cuts are often deployed as fiscal stimulus measures. One potential problem, however, is that households will often save the money, particularly if they are pessimistic regarding their future economic prospects. While this might be seen as a good way to help households repair their balance sheets, any stimulative impact is greatly reduced. And of course the cuts reduce revenue. As an alternative, Kimball calls for “Federal Lines of Credit” or FLOCs:
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.
One of the cleverest aspects of Kimball’s proposal is that it can be reconciled with fiscal consolidation even in the near-term:
[I]t 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.
FLOCs merit close consideration. The proposal reminds me of Steve Randy Waldman’s (very different) Treasury Express concept, which reinvents basic transactional credit as a public good.
P.S. Wait a second, Reihan. Haven’t you argued that the federal government should get out of the consumer credit market? Yes, I definitely have. FLOCs are best understood as a second-best alternative to counter-cyclical transfers, not as an ideal solution.