Last week we explained why economic stimulus is the wrong paradigm for trying to mitigate the economic harms caused by the Covid-19 virus. Essentially, what we are experiencing is an “artificial” or government-induced economic slowdown, because the right things to do at this moment for the public health have the effect of slowing down the economy.
Trying to stimulate the economy while also trying to slow it down would be like pushing down the brake pedal and the gas pedal at the same time. It wouldn’t accomplish anything and just wastes gas.
The problem is, what Congress has chosen to do is “helicopter dump” a modest amount of money to just about everyone in the country. It’s something, but it’s not well-targeted. Everyone knows that $1,000 or $2,000 isn’t going to offset the harms caused by months of shutdown, shelter-in-place and quarantine orders. So money will be spent, but people who don’t need it will get too much, and people who desperately need it won’t get enough.
A far better idea has been suggested by economist Arnold Kling, and we described the proposal in an op/ed in the Wall Street Journal last week.
Kling argues that we have a personal and business liquidity problem to solve, and as a solution he proposes that every checking account in the country, personal or business, should have automatically added to it a line of credit, at low interest, guaranteed by the federal government. The credit line would be the sum total of the deposits made to the account in January and February.
Under this plan, people who need it would use however much they needed, and people who don’t need it wouldn’t use it. For some, this would mean a credit line of $8,000 to $20,000, or for some small businesses it might be $200,000 or more. But it would be based on verifiable deposits, and it would allow businesses to continue to pay their employees through the crisis, which would minimize employees’ need to draw on their credit lines.
The banks already know how to do this, and they have plenty of money that they need to loan out. If demand exceeds the banks’ reserves, the government would cover them.
As Americans repaid their credit lines, the banks would get their money back. The federal government would have to step in only to cover nonperforming lines of credit, instead of bailing out nearly every U.S. household and business. The incentive for repayment could be made very strong, and like any bank loan, failure to repay on schedule would be reflected in credit-agency reports.
This plan delivers the right amount of aid to the right people, and minimizes the eventual drain on taxpayer dollars. We hope Congress and the White House will include Kling’s idea in the inevitable next legislation designed to deal with the economic harms from the Covid-19 virus.
April 1, 2020