

Low Interest Rates
Low Interest Rates

Lehman Brothers’ bankruptcy on Sept. 15, 2008 marked the height of the financial crisis. It is more than four years later, and still the economy is limping along. Economists debate why, but surely political paralysis in policy response has played a role. Two kinds of politics are at work: bitter politics in Congress about the long-run direction of the country—and the ballooning national debt—that have prevented a stronger fiscal policy response, and politics inside the Federal Reserve that have prevented a stronger monetary policy response.

With the Fed’s announcement last week of QE3—purchases of long-term Treasuries and mortgage-backed assets until the economy looks up—it may appear we are already set for enough stimulus, but given the low power of quantitative easing tools, the promised purchases ($85 billion per month through the end of the year and $40 billion per month thereafter) are actually small relative to the task at hand. What seems like dramatically decisive action is really a half measure that nevertheless represents a big win for the doves in the Fed given the strength of the opposition they have faced from the hawks.

To avoid these political landmines, what is needed is a new tool to get the economy moving. I propose something revolutionary: Let’s give the American people some money. Not free money, though.

In a recent academic paper “Getting the Biggest Bang for the Buck in Fiscal Policy” and on my blog,, I outline a proposal to provide $2,000-lines of credit to every taxpayer, accessed through a government-issued credit card. The interest rate would be 6% per year, the money could be paid back over the course of 10 years, and the credit limit would gradually fall as the economy recovered and the stimulus from this extra borrowing power was no longer needed.

Compare these “Federal Lines of Credit” (FLOC’s) to tax rebates. Every dollar of a tax rebate is a dollar added to the national debt. But most of the funds people borrow using these government-issued credit cards would eventually be repaid—particularly since the government can enforce repayment through payroll deduction. The unemployed would have their payments deferred, but once the economy is moving again, most people would have jobs with paychecks so they could repay. A few still wouldn’t be able to repay, but the total amount of stimulus (the “bang”) for each dollar ultimately added to the national debt (“the buck”) would be much greater than with tax rebates.

One of the closest historical precedents was the veterans’ bonus of 1936, which was in part a loan to World War I veterans. This has been analyzed recently by Berkeley Ph.D. student Joshua Hausman. Hausman finds that the bonus had effects as large as those usually associated with tax rebates. The circumstances were not identical, but if the results carry over, Hausman’s analysis suggests that the stimulus effects of Federal Lines of Credit would be at worst only a little smaller than the stimulus from a $2,000 per person tax rebate. (Economic theories of how tax rebates get their oomph from the effects of ready cash suggest the same thing.) The trouble with a $2,000 per person tax rebate is that the U.S. government can’t afford it. But if 90% or more of everyone eventually repays, a $2,000 per person line of credit would ultimately cost less than $200 per person. With a good deal like that for getting the economy back in gear, maybe even Republicans and Democrats can agree on it.


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