A better way to cure recessionsChecks for everyone — no debt needed. Matthew Yglesias

A better way to cure recessions

Checks for everyone — no debt needed

Matthew Yglesias

4 hr ago

Welcome to the first week of our new paywalled life together. Please feel free to share the joy with others if you like what you see.

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Friday’s post on “The Real History of Race and the New Deal” led several readers to recommend some related scholarship that I wanted to pass on to you:

Race and Social Welfare Policy: The Social Security Act of 1935 [Gareth Davies and Martha Derthick] is about, well, exactly what the title says.

On Race and Policy History: A Dialogue about the G.I. Bill [Suzanne Mettler and Ira Katznelson] considers the racial equity impact of the G.I. Bill’s education provisions, and I think Mettler by far gets the better of the debate.

But on to today’s real topic — macroeconomic stabilization.

Specifically, I want to talk about why, despite the new consensus among economists in favor of fiscal stimulus, it’s still hard to do in practice. And ultimately I want to talk about why there’s a much better way that could make recessions a thing of the past: direct money creation, placed directly into the hands of the American people.

The “new view” of fiscal policy

Fifteen years ago, virtually all mainstream economists were dismissive of the role of fiscal policy in stabilizing a modern economy. In a 2003 American Economic Association Presidential Address, Robert Lucas literally said that the “central problem of depression prevention has been solved, for all practical purposes, and has in fact been solved for many decades.”

After the Great Recession of 2008-2009 that began to change, but it was a deeply controversial change. Today, as Noah Smith argues, there is much less theoretical argumentation among academic economists about the utility of fiscal support, even as government policy has gotten much bigger than the Obama stimulus. If you’re interested in pursuing the economic theory arguments around this, I’d recommend a recent paper by Larry Summers and Jason Furman titled “A Reconsideration of Fiscal Policy in the Era of Low Interest Rates,” or you could watch this whole symposium that the Hutchins Center at Brookings put together.

That said, one thing that happens when paradigms shift is that people sometimes forget what the old debates were actually about.

There was (and continues to be) a school of economists who, under the banner of Real Business Cycle, deny that there’s anything useful the government can do to stimulate a depressed economy. But Summers, Furman, Olivier Blanchard and others who are leading the charge for the new view of fiscal policy never believed that. Rather, what they believed was that stabilization was best accomplished through monetary policy and thus should be left primarily in the hands of the Federal Reserve. And while some aspects of that belief were grounded in abstract economics, a big part of the skepticism was always rooted in political economy considerations. And the political economy problems haven’t really gone away.

Why Congress can’t stimulate

The current disagreement in Congress around the idea of sending $1,200 to every adult captures a lot of the problem here:

Universal $1,200 checks poll well, but the “bang for the buck” is low because most Americans aren’t in dire financial straights right now and won’t necessarily rush out and spend the cash in a stimulative way.

A more targeted program like a boost to Unemployment Insurance is much more efficient, but business owners don’t like the incentives created by very generous UI, and it doesn’t have the same kind of broad political support because of course most people don’t get anything out of it.

The left view is Why Not Both?, but doing both is expensive, and as the tab adds up, Congress starts to get sticker shock.

In the abstract, an appealing way out of this bind is to say that the stimulus should take the form of spending money on useful projects the way people think they remember the WPA as having worked in the 1930s. That’s the rhetorical inspiration for the Green New Deal and also drove a lot of Barack Obama’s thinking in 2009.

But this runs into its own set of problems.

Obama called for “shovel-ready projects,” but under the current American legal paradigm, there’s really no such thing. At best you have a lawsuit-ready project, where you could be shovel-ready except the moment you start digging you’re bound to get sued. And big infrastructure projects aren’t necessarily well targeted. The construction industry is actually doing fine right now, and it would be a huge undertaking to train unemployed servers and bartenders to go work on major civil engineering projects.

For political sustainability, the un-targeted direct checks are by far the best. But the price tag of doing them on the scale needed to accomplish what needs accomplishing is prohibitive. And it’s critically important to acknowledge the tradeoff here.

Un-targeted checks are very poor stimulus

Senators Josh Hawley and Bernie Sanders have been championing the idea of another round of $1,200 checks, which has caused a lot of leftists who are cranky about the Democratic Party to become very enthusiastic about this idea.

It’s critical to understand, however, that Hawley is not arguing for a larger overall program. He’s arguing, in the context of a bipartisan agreement to spend about $908 billion, that less money should go to unemployment assistance and more to un-targeted checks.

Alice 🪓🌹 

@AliceFromQueens

Josh Hawley breaking GOP austerity norms on social welfare merely in order to PULL THE WOOL OVER OUR EYES AND GET ELECTED BWAH HA HA HA might nonetheless result in a less austere policy.

December 11th 2020

3 Retweets137 Likes

Jeffrey Sachs 

@JeffreyASachs

@AliceFromQueens Yeah, a less war-mongering, more pro-social support GOP is unironically a good thing.

December 11th 2020

23 Likes

Alice 🪓🌹 

@AliceFromQueens

@JeffreyASachs people want it to be more complicated than that, but it's not

December 11th 2020

18 Likes

The reason this doesn’t work very well is pretty simple. A lot of Americans are people like me. I did not lose my job during the pandemic. My family didn’t go to Texas to visit my in-laws. We haven’t taken the train to New York to visit my dad. I’m buying fewer fast-casual salads for lunch and making more at home. My wife has not gotten her hair cut in ten months. We haven’t been on any date nights or hired any babysitters.

As a result, the personal savings rate has risen to an unprecedented level.

And unlike during the Great Recession, the 67 percent or so of the public who owns a home and the 55 percent of Americans who own stock have seen their net worth rise.

It can be hard to keep this in mind amidst stories about overwhelmed food banks from San Antonio to Miami and beyond. But we are not living through a story of mass immiseration while a handful of billionaires get rich. Instead what’s happening is that most people are seeing savings pile up even as a minority of the public suffers intensely.

So the problem with Hawleyism is that while obviously everyone would like $1,200, for most of us the bulk of that money is going to go into the “fun stuff we’re gonna do when the pandemic is over” envelope rather than recirculating through the economy now.

But there are about 11 million unemployed people in the country right now, a fairly small share of the overall population, but still a lot of people.

There are about 250 million adults in the United States.

To give all of us $1,200 costs about $300 billion. By contrast, if you spent that same sum of money on the 11 million unemployed people, you could give them each over $27,000. And not only does targeted relief address a more urgent humanitarian need, it does more to support the economy. An unemployed person getting a relief check is going to keep current on her rent and utilities and avoid disrupting economic relationships. She’s also going to buy food and clothing and other normal stuff to keep retail businesses healthy. And she’s going to reduce her reliance on places like food banks and keep them more able to serve their normal population.

Targeting your relief also frees up money for things (like avoiding a mass transit death spiral) that have long-term advantages.

That’s not to deny the political appeal of universal checks. But to do them on the scale necessary to provide the relief needed gets very hard. Ilhan Omar wrote a bill to give every adult $2,000 per month. To do that for two months costs $1 trillion with a T. There’s no way the political system will sustain that. But it also won’t sustain what the center-left wonks want to do.

Invisible stimulus doesn’t work

If you told Democratic Party economic policy wonks they had to stay within a $900 billion spending cap but could otherwise go wild, they would come up with something like this:

A boost to Unemployment Insurance (though maybe $400 per week instead of the $600 in the now-expired CARES Act) that automatically tapers down when job openings rise.

An increase in the FMAP formula that gives the federal government money to offset states’ Medicaid expenses.

A boost in Title I money to low-income school districts.

Some mass transit money.

This is all very “high bang for the buck” stuff that would do a great job of stabilizing the economy. But Republicans don’t like any of these ideas, because three of them are about propping up programs they believe in their hearts should be cut and the first one annoys business owners who want jobless people to be desperate for work.

And of course, politically speaking, the vast majority of Americans don’t see any direct benefit. There’s a reason that Obama wanted ARRA to include some kind of iconic project like national high-speed rail. And there’s a reason that the most social media savvy politicians on both the left and the right love the $1,200 checks. People like it when the government helps them in a tangible, visible way. If we had a Westminster-style political system where the Prime Minister could basically force anything through the legislature, a $900 billion invisible stimulus would probably be fine because:

It would pass quickly and even if the voters found it confusing they would hear the top-line message that it’s supposed to fix the economy.

Under today’s circumstances, a $900 billion invisible stimulus plus the vaccine rollout really would fix the economy, so you can claim victory.

In the American system, it’s just a formula for gridlock.

But there is a way to make the Omar multi-trillion stimulus vision happen.

“Helicopter money”

The solution to this problem is a very boring and technical change in how the Federal Reserve’s relationship to the Treasury works, which has been given the fanciful sounding name “helicopter money” thanks to an old Milton Friedman essay that isn’t really even about this. I’d like you to put images of helicopters out of your mind, however, and consider the following law:

Every adult will receive a $2,000 Christmas Bonus check from the federal government in late December.

Another $1,800 check arrives in January followed by $1,600 in February then $1,400 in March then $1,200 in April (we assume that by May normal economic activity will be resuming).

These checks will count as taxable income, so the disbursements are progressive and also provide fiscal support to state and local governments that collect income taxes.

That’s a total of $2 trillion in new federal spending that will be financed by the issuance of $2 trillion in new federal bonds.

At the same time, the Federal Reserve is directed to embark on a $2 trillion program of Quantitative Easing — i.e., to go buy $2 trillion in federal debt — and to hold the bonds until maturity.

So what happens?

Well, just like in the targeting scenario, people suffering from unemployment get money. That avoids a humanitarian tragedy and also bolsters local businesses as they shop. And because the program is universal, nobody falls through the cracks due to clunky UI systems. Also people who aren’t unemployed but happen to have suffered some other financial misfortune for whatever reason get timely help.

The rest of us probably splurge a bit (I might get the AirPods Max to do my part to stimulate the economy, maybe some of you would subscribe to a few more Substacks) but mostly save the money. Since right now the economy is running well below the Fed’s inflation target, they don’t need to do anything to adjust their discretionary policymaking. Come springtime, vulnerable populations have been vaccinated, it’s comfortable to do things outside, and the economy is booming. In my scenario, it booms a bit harder than in the baseline case because everyone’s savings buffers are a bit larger. The Fed, in its new Average Inflation Targeting paradigm, will supposedly keep interest rates at zero until after inflation rises above the 2 percent target. It remains to be seen how they will implement that in practice, but my way the economy will boom a bit harder so the rate increase probably comes a bit sooner.

The federal government needs to pay interest on the bonds, but that interest becomes Fed profits which are rebated to the Treasury so there’s no actual cost.

Of course, the total federal debt will go up, but the more important “debt held by the public” will not since the extra debt will, by law, be perpetually held by the Fed rather than by the public.

Will printing all this money touch off hyperinflation like in Zimbabwe?

No. The money will mostly be saved and not impact much of anything. The increased spending on the part of those in dire need will be modestly inflationary, but inflation is currently running below the Fed’s target so that’s not bad. At some point next year the Fed will have to raise interest rates, but interest rates are currently zero so there’s no problem there.

Everyone who needs help gets help.

It’s politically popular because everyone gets equal treatment.

There is no increase in the national debt.

So will Congress do it? Of course not. It’s too weird. And it violates the precious norm of central bank independence to mandate bond purchases in this way. Maybe someone will forward this to Janet Yellen and she’ll talk Biden into it. But I’m not going to hold my breath.

That said, sometime in the future we will make a change to the banking system that makes this mechanism feel less weird and end recessions forever.

Banking for all and the end of recessions

Here’s a funny thing on the Fed’s FAQ:

Does the Federal Reserve maintain accounts for individuals? Can individuals use such accounts to pay bills and get money?

No. The Federal Reserve Banks provide financial services to banks and governmental entities only. Individuals cannot, by law, have accounts at the Federal Reserve.

A recent hoax circulating on the internet asserts that the Federal Reserve maintains accounts for individuals that are tied to the individual's Social Security number, and that individuals can access these accounts to pay bills and obtain money. These claims are false. The Federal Reserve does not maintain accounts for individuals, and individuals should not attempt to make payments using Federal Reserve Bank routing numbers or false routing numbers. Individuals who attempt to pay bills or conduct other transactions using a Federal Reserve Bank routing number may face penalty fees from the company they were attempting to pay, or the suspension or closure of their commercial bank or payment service provider accounts. Law enforcement, including the Federal Bureau of Investigation (FBI), is aware of this scheme, and individuals who participate in such schemes could also face criminal charges.

Some day America will change this law and things will work the way the hoax says they work. Every individual will have a bank account maintained by the Federal Reserve and linked to their Social Security number. The Fed accounts won’t pay interest or offer any interesting services, but you’ll be able to put money into them if you want and use your Fed account to pay bills or transfer money to other banks. You’ll get an ATM card and a smartphone app and retail services will be provided at the Post Office’s physical locations.

Social Security benefits will appear directly in your Fed Account and so will other cash payments made by the federal government. There won’t be any “unbanked” people anymore, and things like bikeshare programs and mass transit systems won’t need workarounds for the unbanked.

And for our purposes, any time Congress wants to give $1,000 to every adult they can pass a law simply stating that every adult’s Fed Account balance shall rise by $1,000. No bonds need to be sold, no QE programs need to be launched, nothing needs to be done at all. There are just computers that keep track of how much money is in everyone’s account, and they’ll all add $1,000.

Now obviously if you just did that for no reason at all in the middle of a healthy economy, you’d see inflation — that was Friedman’s point about money from helicopters. But sometimes inflation is below the Fed’s target, in which case there’d be no downside to giving everyone $1,000 and the upside would be that everyone has more money. If you wanted to take this out of Congress’s hands, you could make it something the Fed is authorized to do. Or if you wanted to make it an automatic stabilizer you could have it be something that is triggered by an objective indicator like the Sahm Rule.

The point is you wouldn’t need to worry about targeting because there would be no hard cap on the total amount of money and no increased debt to worry about. In fact, the national debt would go down because of increased tax revenue.

You heard it here first.