How To Get $3 Trillion in Economic Stimulus and $1Trillion in Deficit Reduction

I’ve had a lot of fun thinking about possible methods to better stimulate the economy. The old solutions, like expanding the money supply; lowering interest rates; government debt; consumer debt – all of these typical stimulative measures seem to be either tapped out or are not as effective as struggling economies around the world need right now.

Ideally, the best economic stimulus would-

  • Provide quick and strong economic stimulus
  • Not cost taxpayers anything
  • Create jobs
  • Increase government revenue
  • Make life fundamentally less stressful

…And not create too much inflation, please.

I’m here to suggest an idea which might just create what we need. It makes perfect sense to me; let’s see what everyone else thinks.

I’m going to talk about this idea in terms of how it might help America, but there are many countries in the world which could have an even greater need for a program like this.

I think the idea I’m about to describe can provide:

1. As much stimulus as is needed, most of it on the consumer demand side. It would create lots of temporary and long-term jobs.

2. If $3 trillion in stimulus is desired in the first year (in America, for example, that is probably what it would take to create full employment), the policy would generate revenues of approximately $600 billion for the federal government, and $400 billion for state and local governments.

3. No changes would be needed in the tax code, and very little government spending would be required. The economic growth would be almost 100% in the private sector.

4. Stimulus which can be precisely timed, with as much immediate or lasting stimulus as is needed.

5. No increase in the money supply. It would probably create some inflation, though, which also might disappear or reverse after the stimulus is finished.

6. The stimulus would be contained within national borders. The idea could also be adapted to provide stimulus contained entirely within state or local borders.

7. This form of stimulus would create a kind “universal basic income”. Every adult in America would have a a guaranteed minimal level of income as the catalyst for the stimulus, which would in itself help to set a higher threshold of universal opportunity and fairness.

8. It would be politically popular, and create a more well-resourced and lubricated economy in the post-stimulus period.

OK, time for me to try to back up these claims.

Prepare your mind for a fun thought experiment. Here’s how the idea would work, step-by-step, using America as an example (but this idea could be used in any country, so consider that as well):

1. The US Treasury would start by selling about $500 billion in 30 year Treasury bonds. This loan will be paid back with the exact same money that was borrowed to begin with.

2. The Treasury would partner with credit card companies to disburse these funds; every adult in America would have either $2500 added to a credit card they already own, or would be provided with a $2500 gift card which could be used like any other credit card.

3. Those with credit card merchant accounts are legally required to accept BISF (this would be easy to enforce), and should have no way of knowing whether or not they are about to accept BISF. This is to prevent anyone from discriminating against those wishing to make purchases with BISF. Also, this idea only works well if everyone is required to accept BISF.

4. Here’s where it gets interesting. Every day, a percentage of the BISF is withdrawn and returned to the Treasury. This percentage is set by the Treasury (or by whichever institution is regulating the stimulative effect- it could be the Federal Reserve, or some other body).

I would recommend a percentage of roughly .2% each day to start with. E.g., if nothing was spent on the first day, about $5 would be sent back to the Treasury.

5. The first-off-the-top principle: The first funds spent from a card are always these new “basic income stimulus funds”- (“BISF” for short)- even if there is preexisting credit on the card’s account. E.g., if over the course of a day someone purchased $5,000 worth of goods from a store (in electronics, furniture, whatever), the first $2500 worth of purchases would take the BISF off of the card, and the next $2500 would come from normal credit.

5. The credit card companies *must* keep track of where the basic income stimulus funds are, i.e. which accounts now have the BISF in them. And, no matter where the BISF exists, each day the appropriate portion of BISF must be sent back to the Treasury.

So, to continue the example: The store now has $2500 in basic income stimulus funds and, and if they don’t spend it right away, then the credit card company will send back $5 to the Treasury, from the store’s account. So, the store might immediately spend the $2500 on, say, inventory, or marketing, paying bills, supplies, rent, paying down debt, employee bonuses, employee overtime, hiring new employees, etc. I.e., whatever reasonable expenditure they can make right away.

Let’s say it took 1 day for the customer to make his or her purchases, and 2 days for the store to spend the BISF. Now it’s down to $2485, for whoever has the BISF now, and the new owners need to spend it right away, or the new owners will cumulatively pay almost $5 per day, too. And on it goes.

6. Basic income stimulus funds can only be spent on goods and services. BISF can’t be spent on liquid assets which could immediately be re-sold for a virtually identical price. So, BISF can’t be exchanged for bank deposits, paper cash, brokerage deposits, stocks, bonds, financial derivatives, casino chips, cryptocurrencies, gold bullion, etc.

None of the sellers of these things would consider it fair to receive BISF in exchange for what they are selling. Also, BISF is intended to stimulate the real economy, not create another financial asset bubble. We’ve had enough financial asset bubbles.

7. The cycle begins anew: every day, BISF which has been returned to the Treasury is then re-routed back to the original credit cards, proportional to how “empty” of BISF the credit card currently is.

So, someone who has spent all of the BISF which has come to them will have the largest possible amount added back on to their credit card, while someone who has $1250 of BISF on the card will only have half as much BISF added back on. So, if you spend BISF, you get it back. The cycle of stimulus would continue.

8. As less stimulus is needed (it is definitely possible for a nation to be economically over-stimulated), money would be kept by the Treasury, instead of being returned, and over time the bond would be repaid. So, there is no long-term debt created by this stimulus.

That’s it. In other words, everybody is given “use it or lose it” money. If you have BISF- no matter how many times it has already been spent- you must spend it, or lose it. The mechanism which returns the money to the Treasury, is precisely the mechanism which stimulates economic demand. And, we need more demand in our economy, much more than we need supply. This is a demand-side solution.

Ok, let’s revisit those claims I made. Then the section after this one discusses possible challenges.

1. The actual amount disbursed by the Treasury would be $500 billion. But, since everyone will have an incentive to spend BISF quickly each time they get it, I think that $500 billion will be spent many times over (in addition to whatever normal spending the BISF is merely replacing). My rough guess is that there would be a 6x multiplier on the initial $500 billion burst, giving us around $3 trillion in stimulus- but it might be a lot more or less than that.

The Treasury could always increase the stimulative effect by either borrowing more money, so there is more BISF circulating, or they could increase the rate at which it is returned to the Treasury, to increase the incentive to spend it. (To reduce the stimulative effect, they would just do the opposite).

$3 trillion in extra spending would add about 20% to America’s annual GDP. That would create tens of millions of jobs.

2. More economic activity = more taxes collected. The Treasury currently collects about 15% of GDP in taxes, but this ratio is higher when the economy is booming (as more income is collected at a higher tax rate), so 20% of $3 trillion would be about $600 billion in extra taxes collected. State and local governments, who actually need it the most, would collect another $400 billion or so.

This money could be used to pay down debt and make much needed investments in education, infrastructure, securing the safety net, and basic research.

3. The Treasury would probably have to spend a few billion to help orchestrate all this, and pay a few billion in interest payments on the bond, but that’s it.

4. Unlike the 2009 ARRA stimulus bill, which did invest in much-needed infrastructure (which unfortunately took a while to begin), this stimulus can be as immediate and front-loaded as is desired. Also, if it would be too big of an economic shock if consumers spent the initial $500 billion all at once, BISF could instead be slowly deposited on credit cards each month, creating a more balanced start to the stimulus.

5. Even though this does not directly increase the money supply, demand is still increased relative to supply, so inflation is likely to increase. But, given how much slack there has been on the demand side of the economic equation, it might not be a large effect.

There may also be a “Black Friday” effect, like the first day of the Christmas shopping season. Businesses may actually *lower* prices, at least initially, in an attempt to capture as much of the flood of money as they can.

However, if inflation is increasing too rapidly, the percentage of BISF being removed from the economy could be reduced, and no BISF cycled back onto the credit cards, to dampen down the inflation rate to a more appropriate level.

6. A generally attractive feature of BISF is that it is a form of stimulus which is least disturbing to underlying capital structures and social structures. Other forms of stimulus typically have one or more of the following side effects:

  • Change the size of the money supply
  • Shrink wealth with permanent inflation
  • Redistribute wealth
  • Increase government bloat and inefficiency
  • Require government oversight of spending projects
  • Change the tax code
  • Change interest rates
  • Start wars
  • Create debt
  • Create asset bubbles

…or require default, i.e. bankruptcy.

BISF shouldn’t have any of these problems.

7. Since the BISF would be restricted to people living within a particular political boundary, that’s what would contain the stimulus within those borders, making it possible to have localized implementations, too.

An example: if this type of stimulus were used in an economically troubled city like Detroit, then only accounts based in Detroit could receive and spend BISF, and so all of the direct stimulus would be contained within Detroit. This is superior to other kinds of stimulus, in which a lot of the basic income stimulus funds would quickly leave for Canada, the suburbs, and other places, instead of staying local.

One note: BISF would work better in large regions than in small ones. It’s harder for consumers and businesses to find efficient ways to buy everything they need within a city like Detroit, than to get everything they need within the whole of Michigan or America.

8. In a very obvious way, this is a universal basic income with a twist. It would guarantee every citizen some form of basic income, which would be higher in weak economies and lower in strong economies in which jobs are plentiful, and which would directly benefit the poor most of all, since they would be likely to spend the BISF right away, and thus receive more BISF in each following round.

9. Politically speaking, I’m sure it would be an extremely popular program, as long as there isn’t some kind of ultimate major unfairness or problem I’m not anticipating. The vast majority of the public wouldn’t have to do anything other than figure out how to spend $2500.

And, on the business side, it would increase profits substantially. They would still get all their normal sales from non-BISF money (i.e. regular money), sold at their normal price. And then the BISF basically makes it like they get increased sales on top of their normal revenue, in exchange for a 1-10% discount on those extra sales (depending on how quick the business can spend the BISF). Almost every business in America will *happily* accept that tradeoff; discounts offered in exchange for sales are normally 10-70%, anyway.

10. To the extent that people saved money and paid off debt by using basic income stimulus funds in place of their normal spending (and then used their normal funds for savings and debt repayments), those savings would create a reserve of funds to help keep people more financially secure in the future, and to have the ability to spend at a higher rate when that is necessary or appropriate in their lives. When a country has a higher savings rate, it acts as a buffer against future economic downturns.

Addressing concerns:

1. Like any kind of monetary policy, there is potential for misuse and abuse. Too much stimulus of any sort can be a bad thing (too much inflation, making the economy inefficient, unfair outcomes, overuse of environmental resources, overtired workers, etc.).

I also think it would be tempting for legislators to try to use BISF to win votes, which could be problematic. But, it’s the same slippery slope that already exists for legislators and their ability to tax, spend, and regulate. It’s also possible that having the Federal Reserve handle BISF policy (since the Fed is theoretically independent of political pressures), could be better.

This is the challenge for every kind of potentially good idea- to implement it wisely, not foolishly. Every power the Federal Reserve has, and Congress has, creates potential for abuse. But, it is generally better to have these powers and to try to use them wisely, than to not have them at all.

2. I don’t know which laws would need to be changed, nor how much of a political challenge it would represent to do so.

3. I’m not certain how willing and able the credit card companies would be to cooperate. Less debt creation = less interest payments for them in the future. The degree of extra accounting and re-engineering they would need to do appears minimal to me (which includes the question of when things clear, and from whose account the BISF should be sent back to the Treasury). But, I’m not an expert on the credit card industry.

However, I think it would be a boon for them, too. More transactions = more profit in fees. A lot of new merchant accounts would probably be created, and that’s valuable to their long-term interests. It might also help to rehabilitate their image, and get people in the mood to keep spending. And, if they suffered losses in service of the overall economy, to have the Treasury compensate them for their losses would be trivial compared to the benefits created on behalf of society.

Note: there are other ways to implement BISF which don’t involve credit cards. I just think this is the most immediately useful method for circulating basic income stimulus funds.

4. The main group at risk from this policy would be those companies which get paid in large amounts of BISF but without an increase in sales (i.e. because people used BISF as a replacement for their normal spending); particularly if these companies normally purchase little with credit cards. I think an electric utility *might* be an example of such a company.

This type of congestion in BISF would also unfortunately reduce the stimulative effect. However, there aren’t many companies likely to be in this position. And anyway, since the economy will be booming, companies should be able to find opportunities worth investing in, even if they have to invest outside of their normal scope of business.

Incidentally, this economic congestion wouldn’t be all bad: part of the long-term value of BISF would come from giving individuals and businesses a lot of practice in the art of “finding things worth investing in”, which is a very important skill, and a healthy economy is filled with individuals and businesses who are good at this skill.

6. Unknown problems, and miscellaneous problems. There could be something big I’m not seeing, and maybe there could be some kind of problem that hits small groups hard. I’m sure this idea isn’t perfect, but I think it would be a huge win in the present economic climate.

How you can help:

  • Do you know anything about relevant current laws, and/or how they could be changed?
  • Am I missing anything important, regarding the capacity and willingness of credit card companies to implement this?
  • Have I missed any potential major problems?
  • Do you have a better implementation in mind?
  • Has anything similar been tried before?
  • Is there a way I could improve the presentation of this idea?
  • Do you know any information, or have any personal experience, which would be relevant?
  • Do you know anyone else who would be interested in this idea, or might be able to help?
  • Share this with your friends!
  • Create an infographic or Youtube video
  • Get creative. Take charge.

Thank you for your time :). What do you think?

Version #59. [This post uses Engagement Publishing]

Coauthors/Acknowledgments: David Parsons, Edmund Yiu, Brian Rose

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