Friday, March 6, 2020

Stimulus or stimu-lend?

Jason Furman wants stimulus:
Congress should pass a simple one-time payment of $1,000 to every adult who is a U.S. citizen or a taxpaying U.S. resident, and $500 to every child who meets the same criteria. 
Here's a better idea. The IRS should allow anyone to borrow up to $10,000 against future tax payments, with interest. The IRS has an excellent collection mechanism.

The medicine should fit the disease. Jason's logic seems to be good old aggregate demand -- the answer is the same, only the questions change.

As I think about a pandemic, shutting down the economy is most likely to cause liquidity problems. The key is to keep businesses alive and not force them to formally fire people, so they're ready to start up again. My version put more money in the place where it's really needed,  measured by people's  willingness to pay it back.

If you believe money  doesn't grow on trees, deficits must eventually be repaid, and that money should go where it is needed, this seems like a better idea.

Update: Paul Kupiec advances a similar idea


  1. As you mentioned in an earlier blog post, in a situation where supply is curtailed, increasing demand through fiscal measures or 'helicopter drops' of currency (notes) will not address the root cause of the problem. Congress has authorized $8 billion of new spending to find measures to contain the spread of, or seek a vaccine for, the Wuhan virus. Is this 'targeted' spending not more beneficial than the blank dispersion of $350 billion ($1,000 per capita) that J. Forman advocates in the (forlorn) hope that the 'helicopter drop' cash will find its way to the right hands courtesy of Adam Smith's "invisible hand" of the market? Alternatively, repaying $8 billion of borrowed funds should be somewhat easier than repaying $350 billion, or so one would think.

    As to borrowing from the IRS, one needs to consider that the Internal Revenue Service is all about creating revenue for the department of the Treasury. It can be done, of course, with penalties, but potentially up to $1.5 trillion dollars' worth (150 million x $10,000)? The politicians on either end of the political spectrum would have a field with that--on the Left pounding for debt forgiveness, on the Right for Old Testament debt collection efforts.

  2. Hi Professor Cochrane,
    Your proposal looks like it would be more likely to miss the lower income/more vulnerable population that the broader measure would hit.
    1- lower income groups already have lower cognitive bandwidth due to other pressing survival needs. Adding an additional hoop for them to jump through in the form of trying to figure out how to apply for an IRS loan likely would result in a low uptake of loans among those who need it most.
    2- if the stimulus is in response to a negative macro shock, offering someone a chance to lever up in the face of that seems.. like something any moderately risk adverse person would not want to do?

    I agree that the broad $1k to every person and $500 to each child is very broad and doesn't focus on those that need it. However, for that broadness, it does hit the population that needs the stimulus. I feel the inefficiency of the broader offering is a better trade off than a narrower offering that has increased frictional costs to enter into but risks alienating the population that needs the stimulus in the first place.

  3. Stanley Fischer, former governor of the Bank of Israel and former Vice Chairman of the US Federal Reserve Board, has come out in favor of helicopter drops.

    I think the best mechanism is a holiday on Social Security payroll taxes, aka FICA taxes. The Federal Reserve can digitize money and send it to the Social Security trust fund to make up for lost tax receipts.

    This would be a tax cut, but only on productive people or employers.

    For those of you with a sense of humor please review this:

  4. The IRS does indeed have an effective collection system: confiscation of property, prison, preventing international travel.

    $1,000? Chump change.

    Bloomberg spent $500 million on his campaign, enough to give every person in the country over $1,000,000. I'd have voted for him for only half that much. ;-)

    I guess knowing how to make money doesn't mean you know how to spend it well. He'd be a perfect fit for government, which knows how to take money and doesn't know how to spend it well.

    Tongue planted firmly in cheek.

    1. Michael, there are more than 500 people in the country. Assuming 325 million is closer to the actual number, this is about $1.53 per person, not $1,000,000. But, what's 5.8 orders of magnitude among friends? :-)

    2. I assumed he meant county. Though I am too lazy to look up the county's population.

  5. Well, if nothing else, before people hunker down and taper down going outside the house, this is way to give a small shot to consumption before it nose-dives, assuming fear takes over.

  6. If r < g as it currently is now, why does the deficit have to be repaid?

  7. This comment has been removed by the author.

  8. What about this proposal for helicopter drops using the McCallum rule when at the ZLB?

  9. It's hard to beat loaning people money vs. giving it to them when there are other worthwhile causes and money doesn't grow on trees. More generally, what's the chance that the optimal level of subsidy for a particular good is precisely 100% of its price?

  10. The solution is a Job Gty as part of a Full Employment Fiscal Policy.
    1) The US government is unlike a:
    a. state,
    b. municipality,
    c. business, or
    d. household,
    in that it can issue its own currency.

    2) A sovereign (Treasury combined with the Federal Reserve Bank), like the US, that:
    a. issues,
    b. borrows in, and
    c. floats
    its own currency, can NEVER run out of cash.

    3) The sovereign, like the US, can:
    a. issue currency to spend and buy anything the economy produces,
    b. up to the productive capacity of the economy (adjusted for turnover/velocity),
    c. without creating inflation.

    In other words the US government can issue currency and hire any and all unemployed and underemployed folk. The constraint is the productive capacity of the economy, as measured by wage inflation. If prices do rise above an acceptable level, they can be controlled by i) selling government securities, ii) raising interest paid on deposits at the fed, iii) raising taxes across the board (on income, sales/vat, and asset values), or iv) a cut in spending.

    The JG/GND law should include automatic across-the-board tax increases that kick in when certain monthly wage inflation target are hit-say for 6 months in a row. These can include:
    a) Income Taxes,
    b) Sales/VAT Taxes
    c) Asset Value (or Wealth) Taxes
    That'll cool things off pronto.

    4) The US government debt is not a problem in any way shape or form. In fact, it can be repaid tomorrow without a negative repercussion. That would simply involve replacing government bonds with deposits at the Federal Reserve Bank with similar interest and maturities. The similar or even better risk/reward terms assure no change in investor savings/spending preference or desire to hold dollars. Not recommending this course of action, just pointing out that it is possible.

    1. Oh no, the "Do Deal" cancer is now on this site.

  11. There is a nice very recent multi-country DSGE model, "The Global Macroeconomic Impacts of COVID-19:
    Seven Scenarios" ,
    McKibbin and Fernando that is well worth reading.

  12. Your idea is good, as income tax crushes people's ability to accumulate the sort of wealth needed to weather a storm. Wealth is the "personal safety-net". The IRS collects taxes from those struggling to pay off debt, pay tuition, get health care etc. in other words, poor people.

    Yet the most important part of your blog is your observation that the IRS could enable people to borrow against taxes with a low interest rate because they are the IRS, and nobody can escape them.

    Why not apply this more broadly: Anyone can defer tax payments to the IRS at a cash-neutral interest rate that would simply offset the cost to the IRS. This would enable people to pay less when thy need to, and pay more in times of surplus.

    This would enable people to save for retirement, pay for healthcare and education instead of paying taxes. This would effectively translate income tax into a manageable wealth tax. And, if you want to tax the wealthy --- just tax wealth.

  13. The proposed plan means to lend directly to businesses, bypassing banks. Great idea when banks can get interest on their deposits. An extension of Bagehot's rule to discount freely in bad economic times. :-)

  14. I think neither option is as good as just letting the Fed do (what ought to be) its thing. Get rid of IOR, buy and sell assets in whatever amounts that it's evolving model tells it will keep NGDP growing at a constant rate and explain its actions in those terms. This would give banks an incentive to extend credit to firms to maintain payroll.

    If we gave a holiday on FICA (always a good idea to reduce a tax on wages) the Fed's model would presumably tell it to buy more government and less of other assets.


Comments are welcome. Keep it short, polite, and on topic.

Thanks to a few abusers I am now moderating comments. I welcome thoughtful disagreement. I will block comments with insulting or abusive language. I'm also blocking totally inane comments. Try to make some sense. I am much more likely to allow critical comments if you have the honesty and courage to use your real name.