There are about 200 Million adult American citizens.
Suppose in 2008 the US government just credited every single one of them with $100K and floated $20 Trillion in debt to cover it. A few questions
Okay now but you would have a huge increase in government debt. Looking at 2008 levels we would have gone to just under 30T in government debt
Assuming that a huge stimulus and a repair of US balance sheets fixed the recession we would be looking at a GDP of around 17 Trillion today and so a debt-to-GDP of 175%.
However, given the huge income boost that had just come, it would have been feasible to let the Bush tax cuts expire on everyone. That combined with lower public assistance and a larger tax base should have tipped the US towards budget balance.
This means that the Debt-to-GDP ratio would begin falling fairly rapidly. At a rate of about 5% per year.
If we look at the total debt in the year 2030 would we it be higher or lower for having pursued this strategy? Its not clear that we would be higher.
I am not arguing that this would have been workable politically or otherwise, but just as a theoretical exercise it seems interesting.
We might want to ask though: how could we get something from nothing? How could we borrow a bunch of money and still owe less.
The two part answer would be
A) that we are employing resources that were idle
B) We are exploiting the fact that the US government can issue credit at lower cost than the US people collectively, even though the government is the people. Indeed, at lower rates than essentially any individual American.
Interesting stuff.
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Monday ~ May 23rd, 2011 at 4:06 pm
Yeah, recapitalizing the people and letting the banks benefit from trickle-up effects always seemed superior to recapitalizing the banks directly, to me…
Monday ~ May 23rd, 2011 at 4:41 pm
I think it would be an interesting way to stimulate the economy giving money directly to consumers. I think though that 100k for everyone would cause some serious incentive problems and the amount would have to be much less to not have a damaging effect. There would be a lot of inflation, probably hyper inflation in that scenario. How many of the poor and middle class would quit there jobs immediately if they were given this amount of money. I think that easily 10-20% of the service sector workers would quit their jobs immediately. I think you’re being too generous when it comes to what people would save too, think of the people you hear who win the lottery and are bankrupt after a few years. So now you have hugely increased aggregate demand and massively restricted aggregate supply. A recipe for disaster! Perhaps it works in theory but human nature would make it ineffective.
Monday ~ May 23rd, 2011 at 5:00 pm
You are leaving out exchange rate considerations. The value of the dollar would fall precipitously with attendant consequences. Also, what would happen to inflation expectations when everyone has $90,000 in the bank and everyone sees a recovery?
Monday ~ May 23rd, 2011 at 5:36 pm
” how could we get something from nothing? ” it’s in the US constitution isn’t it? The US government can print money out of thin air. And you are right this is not going to be inflationary because we will be using idle resources, because we are far from full employment. The initial Market reaction most likely will be a USD selloff but once people realize that the actual inflationary effect will be not that substantial while US growth will look much better, the demand for US assets will be huge relative to the rest of the world and USD should stabilise.
Tuesday ~ May 24th, 2011 at 12:05 pm
When I thought over a stimulus-to-the-people, my version was a no-interest loan to everyone that wanted it only useable to pay off existing debt, and the funds would be paid directly to the creditors, so that individuals didn’t have access to that money. It would have the effect of resetting consumer interest rates on existing debt. The repayment terms would be dependent on the employment status of the borrower, etc.
http://findingourdream.blogspot.com/2009/02/how-to-get-recovery-faster.html
But I see no reason not to add something like an additional amount of cash to everyone, in a situation like that of 2008 or 2009, at the end of a financial bubble.
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