What about Other Kinds of Fiscal Stimulus? | 97

cutting spending or raising taxes, so federal grants prevent a fall in spending by state and local governments and a fall in spending by consumers who would not spend as much if their state and local taxes were raised. So the grants prevent a fall in aggregate demand for goods and services.

In this book I explain how a temporary large fiscal stimulus can be implemented without any increase in government debt or inflation. I also present analysis and evidence that fiscal stimulus works in a recession—it increases aggregate demand for goods and services, which in turn leads to an increase in production and employment.

Stimulus without debt isn’t the only thing that must be done when a severe recession hits. The Fed, Treasury, and FDIC must perform financial rescues of key firms and inject funds into financial firms to keep credit from freezing up. These essential interventions are not addressed in this book. Some analysts believe that these interventions are all that’s needed in a severe recession. I strongly disagree. A severe recession always involves a plunge in aggregate demand for goods and services, and once that plunge occurs, it will not be reversed simply by rescuing key firms and restoring the flow of credit.

Several things are needed to make us truly ready for the next severe recession. First, a lot of economists, policymakers, members of Congress, financial market participants, and others must learn that it is possible to implement a large fiscal stimulus without any increase in government debt. Second, they have to be persuaded that fiscal stimulus—particularly, a tax rebate to every household—works. Third, they have to be convinced that a large transfer from the Federal Reserve to the Treasury during recession won’t be inflationary. Fourth, Congress must enact an amendment to the Federal Reserve Act empowering the Federal Reserve’s Open Market Committee to decide whether to make a