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DeLong Smackdown Watch: Josh Hausman on Federal Lines of Credit

Getting the Biggest Bang for the Buck from Fiscal Policy: Federal Lines of Credit: Miles Kimball Should Talk to Josh Hausman Department

Miles Kimball writes:

Getting the Biggest Bang for the Buck in Fiscal Policy: Last week, on Monday, May 14, I was one of ten outside academics invited to present a briefing to the Board of Governors of the Federal Reserve on the topic of consumption…. I proposed an addition to the toolkit of fiscal policy: “Federal Lines of Credit” or FLOC’s…. Imagine that the economy is in a recession…. 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?… [B]ecause taxpayers have to pay back whatever they borrow… 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….

Austerity and traditional fiscal stimulus can only be reconciled by the difficult two-step of spending more or taxing less now while promising to spend less or tax more in the future.  By contrast, it 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….

The interesting thing is that we have done this before. In 1931 and 1936 the Congress (over the objections of President Hoover in the first case and President Roosevelt in the second) gave World War I veterans the option to borrow against the WWI Veterans' Bonus that they were going to be paid in the future:

Joshua Hausman:

The Veterans’ Bonus of 1936 (Work in Progress): Conventional wisdom has it that in the 1930s fiscal policy did not work because it was not tried. In fact, this paper shows that fiscal policy, though inadvertent, was tried in 1936, and a variety of evidence suggests it worked. A deficit-financed veterans’ bonus provided 3.2 million World War I veterans with cash and bond payments totaling 2 percent of GDP; the typical veteran received a payment equal to annual per-capita personal income.

This paper uses time-series and cross-sectional data to identify the effects of the veterans’ bonus. I exploit four sources of quantitative evidence: a detailed household consumption survey, cross-state regressions, aggregate monthly time-series, and a previously unknown American Legion survey of veterans. The evidence paints a consistent picture in which veterans quickly spent the majority of their bonus. Spending was concentrated on housing, cars, and other durable and semi-durable goods. Contemporary narrative accounts support these quantitative results.

Because the bonus was paid to veterans and only veterans, Josh has substantial cross-section identification off of the different proportions of veterans in the several states. The (preliminary) figures and regression results are, to my eye, awesome: a cash-flow multiplier that looks to be 0.8 or so.

Federal Lines of Credit are an extraordinarily effective recession-fighting policy when mental accounts or liquidity constraints are important, and it looks as though they were very important in the 1930s.

Note, also, Josh Hausman's other depression-era paper in progress: an estimate that an adverse supply shock--the refusal of the governors of the midwest to turn the firehouses on sit-down strikers--reduced U.S. real GDP growth in 1938 by 1.2% points…