What Is Stimulus without Debt? | 17

recession as long as it assumed that fiscal stimulus must increase government debt.

The stimulus-without-debt proposal, however, is not simply a tactic for getting a large fiscal stimulus enacted in a severe recession. It is certainly better for stimulus to be implemented without a large increase in government debt. Large government debt— that is, government debt that is a large percentage of GDP—may generate negative economic consequences and risks in the future. If government debt becomes a high percentage of GDP, the government may incur a heavy interest burden if interest rates rise, forcing cuts in worthwhile government programs or tax increases. Moreover, as I will explain later, there is a possibility of an anxious reaction by financial investors around the world to US government debt that is high and rising as a percentage of GDP, which may lead to a US recession or a financial crisis. Thus, I have two reasons for proposing stimulus without debt. The first is political: a large fiscal stimulus is unlikely to be enacted by Congress if it causes a large increase in government debt as a percentage of GDP. The second is economic: government debt that is large and rising as a percentage of GDP may have negative economic consequences and risks.

Fortunately, the assumption that fiscal stimulus requires an increase in government debt is false. In fact, it is astonishingly easy to implement even a very large fiscal stimulus without any increase in government debt. All it takes is this: When Congress enacts fiscal stimulus, the Federal Reserve can decide to make a transfer (not loan) to the Treasury roughly equal to the fiscal stimulus so the Treasury doesn’t have to borrow. That’s it. Moreover, the large stimulus would be phased out as the economy approaches full employment, so it would not be inflationary.

But isn’t the paper money injected by the Fed also government debt? The answer is no. Paper money is not counted in official government debt. Nor should it be. Government paper money