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Fighting the liquidity trap
If you don't like public spending you could do it this way: Give every voter a federal debit card. And put the money in their accounts. Tell them if they don't spend it this month, the government will take it back.
Some people will try to cheat and find ways to save the money, but probably not many.
Some people will use the money to pay down their credit cards. That's good. The less they pay in interest each month the more they can spend.
That's J Thomas from the MR comments and you can think of it as Silvio Gesell plus some modern technology. I'm not recommending this policy, just noting that in terms of stimulating aggregate demand it both vanquish a liquidity trap and it would outperform government spending or what I call "raising taxes in the future."
Posted by Tyler Cowen on November 17, 2008 at 11:02 AM in Economics | Permalink
Comments
I don't think I understand how this would be an improvement over a simple tax rebate considering money is the ultimate fungible good. ie, if my desire is to save any extra income, I will just use the debit card plus whatever fraction of my regular income is required on all my already budgeted expenses and save the remainder. The end result is no still no change in consumer spending. The only way I can see this having any effect is if the debit card limit is greater than my budgeted spending for the month.
Posted by: vm at Nov 17, 2008 11:13:11 AM
How would this reduce (or eliminate raising) taxes in the future? This is still coming from the federal budget, so it's basically just spent on something different. No?
Posted by: Brian at Nov 17, 2008 11:24:22 AM
I would use mine to buy any high liquidity asset to evade the restriction.
Posted by: Yancey Ward at Nov 17, 2008 11:35:37 AM
I don't think I understand how this would be an improvement over a simple tax rebate considering money is the ultimate fungible good.
Exactly -- I don't see how it would help either since it's simple enough to spend the debit card and save the equivalent amount of income. Now if the government gave me a debit card that was good for $2000 off a new car and I was going to lose it if I didn't spend it, that would be a different story, since I currently have no intention of buying a new car but might be persuaded if the subsidy was large enough.
Posted by: Slocum at Nov 17, 2008 11:39:42 AM
If I had to spend it on a conumption good, I would buy something then return it for cash later.
Posted by: Matt C. at Nov 17, 2008 11:40:26 AM
Cowen is correct to cite Geselle.
The solution to the liquidity trap is to let nominal interest rates become as negative as necessary to clear markets.
That means that zero-interest currency is the problem.
Make a break between currency and the banking system. If people want to hoard old federal reserve notes that are no longer legal tender at a variable price--let them.
To the degree that it is possible to do without hand-to-hand currency, nominal interest rates can fall as low as needed.
While giving up on paper currency and coins is pretty drastic, it would be possible to privatize this activity.
Banks, of course, will only issue banknotes and tokens with call provisions if interest rates can become negative.
If they are negative to any appreiciable degree, then persumably they would be sold at a premium and then start drepreciating after a few days. Currency would be used for "change" and rapidly deposited.
Of course, maybe it would be easier to have the governmet borrow at interest rates no more negative than the cost of storing currency and make transfers.
But making all money redeemable in zero-nominal interest currency is the source of the problem.
Posted by: Bill Woolsey at Nov 17, 2008 11:42:18 AM
This reminds me suspiciously of a Richard Pryor movie:
http://www.imdb.com/title/tt0088850/
Posted by: Corey at Nov 17, 2008 11:46:46 AM
You could find ways to save the money. But US savers are not the big problem right now, are they? You guys are special.
US consumers are far more likely to reduce their credit card debt than find ways to save. The effect is similar, but not the same -- americans who save their money when the patriotic thing to do is spend, are being traitors to the nation. ;) (Just in case anybody didn't notice, I'm being kind of sarcastic here.) But americans who reduce their debt when they're in a recession and their jobs are at risk, are doing good. They'll bounce back better that way, they won't lose as much while they're unemployed and might even come out of the recession with their credit ratings intact.
The biggest problem I have with the proposal is if 50% of the money goes straight to WalMart and then straight to china. It doesn't help our economy much at all if we try to stimulate consumption and mostly stimulate imports.
Posted by: J Thomas at Nov 17, 2008 12:33:12 PM
Oh, the improvement over a tax rebate is that it's completely clear you get the money this month.
A side benefit is you get an elaborate vote-fraud detection. All the debit-card fraud detection is available.
And it could be developed further at some expense. Put federal ATMs in all the post offices, and let people deposit their cash and checks into their federal accounts if they like. Then phase out FDIC.
Posted by: J Thomas at Nov 17, 2008 12:46:09 PM
We are not in a Liquidity Trap! The Real Economy did not see any dollar of the FED expansion. The problem is that the transmission channel (banks loans) doesn't work so at the end we are not be able to know if a 'traditional monetary policy' works.
We could say that we are in a liquidity trap if and only if the credit channels work fine. But this is not the case. Banks do not lend money, not for a liquidity preference, they do not lend for risky reasons.
Thanks,
Posted by: El del 0.33% at Nov 17, 2008 12:59:26 PM
Spread the word that Obama wants to end the sale of cars (or whatever). It's working with guns.
Posted by: John B. Chilton at Nov 17, 2008 1:03:17 PM
Tyler, when you say you're not recommending this, do you mean you think there's a better way to engage in Keynesian pump-priming? Or are you doing the equivalent of posting one possible way to kick yourself in the crotch?
Posted by: Bob Murphy at Nov 17, 2008 1:05:41 PM
But, is it for sure that the usa are in a liquidity trap already?
Please, can someone confirm this? If it is so, we may be going to a Japan style crisis and no summit will save us.
Posted by: ortega at Nov 17, 2008 1:18:01 PM
My first thought was the same as others, this wouldn't change my spending habits at all compared to a tax rebate. I'd use this card and save my cash. I think we had the $300-type rebate in mind.
But perhaps J Thomas has a much bigger rebate in mind. Krugman has thrown out 600 billion, so for 110 million households they'd be spending $5,450 in a month. With a large stimulus package, this would have a more stimulating effect than a tax rebate.
Posted by: Charlie at Nov 17, 2008 1:23:22 PM
What happened to helicopters?
Posted by: Michael at Nov 17, 2008 2:22:03 PM
Last year or so I heard a Treasury official explain that they tried to do this for the last "stimulus" checks, but couldn't meet the technical requirements.
This is a great idea, though. The spending can even be targeted so that, for example, you can only use your debit card to buy manufactured goods.
Then they can do another tax refund and require that you leave the money in the bank so that banks have fresh deposits and can start making loans again.
Then you can do another one and require people to invest in stocks to shore up the DOW.
All Treasury has to do now is hire a few more PhDs and I'm sure they can glue the economy back together.
Posted by: jj at Nov 17, 2008 2:28:13 PM
How exactly does such a trick do any good after the month when the cash is spent?
Public-works projects at least have some temporal stretch.
I think the whole "throw a wad of money into retail" gimmick is dubious.
Posted by: Anderson at Nov 17, 2008 2:31:55 PM
I understand the desire to "fix the American system" - that is to prevent a complete collapse of it - but personally, I hope no solution comes to stem the sinking of the Titanic that is the US.
I see it as necessary to affect an extreme change along the globe. I see it as important to let the ring-leader fall out first.
Of course, some will find this uncomfortable and even more around the neo-liberal table will shift in their seats, and it's understandable. The comfort of millions is at stake here. The system works for some Americans, for now, but it means misery and destitution for the rest of the world.
Take it at its whole. The US should collapse for the utility of the rest of the planet - minus the few oligarchs in suits at the top of the American pyramid.
Posted by: Niccolo at Nov 17, 2008 3:20:50 PM
This is a solution to a non-problem. If money saved is saved in a bank or invested in a stock or bond, it's not the same as hoarding gold coins in a hole in the back yard or stuffing cash in a mattress. The money is still in circulation. Supply creates its own demand.
Posted by: Tom Hanna at Nov 17, 2008 3:34:00 PM
While I agree the U.S. is not in a liquidity trap at this time, it is simply false to claim that there has been no increase in money or bank credit. It is true that banks have increased their reserve ratios by a huge amount, banking lending and the M1 and M2 measures of the money supply have increased.
And, of course, interest rates have decreased as the Federal Reserve has lowered its target.
Krugman is claiming that the lower interest rates are not going to stimulate spending and cutting them to zero (his assumed lower limit) will not stimulate spending enough either.
While it is pretty obvious that short term low risk securities (like T-Bills) could have slightly negative nominal interest rates, (the downward limit being the cost of storing currency,) that isn't much below zero.
Posted by: Bill Woolsey at Nov 17, 2008 3:42:27 PM
If people spend the stimulus check to buy down debt, how much does that differ from the Fed buying bank stock. Both would help the bottom line of banks, and assuming that the banks are having a solvency crisis, wouldn't making the banks more flush thus encourage them to lend.
If I don't have a good investment to make with my stimulus check, what is wrong with me giving the money to a bank who can lend it to someone with a desire to invest.
Assuming that some people will invest, some will save, and some will buy down debt: in the end does it really matter that much. If GM decreases production while Toyota increase production in this country don't we all gain if Toyota is the more effective user of resources. In the same way, isn't it in our interests to let people decide what is the most effective way to use their stimulus check.
We are in the process of reallocating resources in our economy, from an over investemnt in housing to an investment in something else. That something else is still unseen at this point. But when people start to see opportunities in some area, they will start to place resources into that area. Assuming that we do not do what Hoover and FDR did, i.e. spend and tax which removed resources from the private sector.
Posted by: DanC at Nov 17, 2008 4:28:39 PM
I suggested this exact thing at my blog called "The Dangerous Economist" last January. Here is the link
http://thedangerouseconomist.blogspot.com/2008/01/is-electric-helicopter-drop-feasible.html
The entry was called
Is An Electronic "Helicopter Drop" Feasible?
Posted by: Cyril Morong at Nov 17, 2008 7:22:49 PM
Please.
Everybody spends money every month. They just need to spend it out of one account instead of another and they can avoid spending any new money.
Spending and borrowing are not the answer to the current crisis. Neither is funding every piece of pork ever conceived.
Stabilize the dollar. Once people know where the bottom is, they will start buying things again. Otherwise, the smart people are waiting until the bottom is clear.
Remember when inflation began to ramp up and people stockpiled bags of rice in anticipation of inflation. During deflation the exact opposite occurs. People defer consumption and investment until the prices are no longer falling.
The cure for both situations is a stable dollar. This is the government's primary failure.
Posted by: Alan Brown at Nov 17, 2008 8:39:30 PM
Keynesian economics created this mess. It is not the answer.
Posted by: Alan Brown at Nov 17, 2008 8:42:01 PM
I'm not a social crediter, but as a libertarian I have to say this would be an improvement over the current system of fiat money.
If we're going to have money created out of thin air, nothing could be worse than letting banks lend it into existence at interest. Social credit or a greenback system wouldn't be any more of a fiat money system than we've got, and they'd be free of a major injustice of the present system: the power of banks to charge interest on money they created out of thin air. If we're going to have a fiat system, it's at least a tad more libertarian to have one whose yoke weighs less heavily on us.
Posted by: Kevin Carson at Nov 18, 2008 2:42:53 AM
