Countries?

Chapter 10

Can Stimulus without Debt Be Used by Other Countries?

Thus far I have focused exclusively on the United States. What about other economically advanced countries?

An Economically Advanced Country with Its Own Central Bank

Stimulus without debt for any economically advanced country with its own central bank is the same as for the United States. In a recession, the central bank makes a transfer to the national government’s treasury, and the national government’s legislature enacts fiscal stimulus roughly equal to the transfer from the central bank. The largest portion of the fiscal stimulus should be tax rebates to households, but the legislature should also include other kinds of fiscal stimulus in the package. The central bank therefore sets the amount of fiscal stimulus that can be implemented without increasing government debt.

The national legislature sets the composition of the fiscal stimulus package and the national executive implements through the

treasury the enacted fiscal stimulus package. The national legislature can enact a fiscal stimulus that exceeds the central bank’s transfer to the national treasury, but then the treasury must borrow an amount equal to the difference. If a transfer from the central bank to the treasury in recession to finance fiscal stimulus is illegal under current law, the legislature should enact a law that makes such a transfer legal.

Stimulus without Debt in the Eurozone

In the eurozone there is one central bank, the European Central Bank (ECB), but many member countries, each with its own national government and legislature for setting government spending, tax rates, and fiscal stimulus. I propose that under a stimulus-without-debt plan for the eurozone, the ECB would use a formula to determine the transfer it would give to the treasury of each national government in a recession, just as the US Congress has used a formula to determine the federal transfer it gives to the treasury of each state government in a recession and also for nonrecession programs.

Under the stimulus-without-debt plan, both the ECB and the legislatures of each member government would play crucial roles. The ECB would make transfers (not loans) to each treasury, and each national legislature would enact a fiscal stimulus package roughly equal to the transfer it receives from the ECB. The largest portion of the fiscal stimulus should be tax rebates to households, but the national legislature should also include other kinds of fiscal stimulus in the package. The ECB’s transfer therefore sets the amount of fiscal stimulus that can be implemented by each national government without increasing its deficits and debt. Each legislature sets the composition of the fiscal stimulus package, and each national government implements through

its treasury the enacted fiscal stimulus package. A legislature can enact a fiscal stimulus package that is larger than the ECB’s transfer to its treasury, but its treasury must then borrow the difference between its fiscal stimulus package and the transfer it receives from the ECB.

The ECB needs to use a formula that determines the magnitude of the transfer that it would give to each national treasury for the purpose of financing fiscal stimulus in a recession. Suppose the ECB decides to give each country the same transfer per person (R*). Then each country’s treasury would receive a total transfer from the ECB equal to R*Ni, where Ni is the country’s total population. Of course, the ECB might want a formula that doesn’t give the same transfer per person to each country. For example, in a recession the rise in each country’s unemployment rate differs. If the rise in a country’s unemployment rate is above average, its transfer per person could be set above R*, and if a country’s rise is below average, its transfer per person could be set below R*.

An online column by John Muellbauer (2014), professor of economics at Oxford University, appeared with the title “Combating Eurozone Deflation: QE for the People.” He said that printing large sums of money and distributing it to the public would increase the demand for goods and services in a recession. But the ECB would have to find a way to ensure fair distribution. He noted that a simple solution would be to distribute the funds to governments and let the governments decide how best to spend them in their countries. But he contended that the EZ’s rule against using the ECB to finance government spending would prevent this simple solution.

Instead of calling for a change in the EZ’s rule, Muellbauer proposed that the European Central Bank give €500 to each person in the eurozone. He recommended providing all workers and pensioners who have social security numbers (or the local equivalent) with a payment from the ECB, which governments

would help distribute. He noted that another option would be to use the electoral register, a public database that the ECB could use independently of governments. Roughly 90% of the 275 million adults in the eurozone are on the electoral register. He contended that there is nothing in EZ law that forbids the ECB from undertaking such an independent action.

Muellbauer said there is an advantage to having the ECB implement this policy by itself: a central bank might be more responsible than politicians worried about winning elections. Elected politicians who control national governments might be tempted to boost spending on popular programs or cut taxes as an election approaches, thereby generating inflation and running up government debt, whereas the ECB wouldn’t be subject to such temptation and would be trusted by the public to set the magnitude of the transfer to hit its low inflation target.

I’m not persuaded by this argument. In my judgment, it is better to have a division of labor and checks and balances between the unelected central bank and the elected national legislatures. Have the central bank decide whether to give a large transfer to each national treasury in a recession, and if so, how much. Have each national legislature decide how much fiscal stimulus to enact in a recession, and what the composition of the fiscal stimulus package should be—the composition of spending, tax rebates, and tax cuts. The legislature can enact a fiscal stimulus larger than its transfer from the central bank, but then it must borrow the difference by selling new government bonds, thereby increasing its national debt.

If the ECB is prohibited under current regulations from making transfers (not loans) to member national governments, then I recommend, as I do for the United States, that a change be made in the regulations to permit such transfers in a recession.

In an online column entitled “Legal Helicopter Drops in the Eurozone” (February 24, 2016) Eric Lonergan (2016) asserts

that helicopter drops in the eurozone may be a legal obligation of the ECB. He says the rules governing the ECB are clear. The objective of the ECB is price stability, which the ECB has defined as a 2% increase per year. The ECB must act independently. Policies aimed at financing the budgetary policies of governments are prohibited. Finally, the ECB can use whatever monetary operations are consistent with these constraints.

Like Muellbauer, Lonergan recommends that the ECB implement helicopter money without the help of national governments. But in contrast to Muellbauer, who recommends having the ECB give transfers to households, Lonergan recommends having the ECB make loans. Why?

Lonergan is worried about the ECB’s balance sheet. If the ECB makes a loan, its net worth is unchanged, whereas its net worth falls (under conventional accounting) when it gives a transfer. But if households must pay back a loan they didn’t seek, they won’t spend it. To work—to get households to increase their spending in a recession—households must receive a transfer, not a loan. If they don’t have to pay the “loan” back, then it is really a transfer, and ECB accountants won’t count the “loan” as an asset on the ECB’s balance sheet. So Lonergan’s solution to the balance-sheet problem won’t work.

I discussed this central bank balance-sheet problem briefly in chapter 3 and more fully in chapter 7. Recall that my solution to the balance-sheet problem is to have the central bank order an amount of new central bank notes equal to its transfers to the national treasury or treasuries and to store these notes in the central bank’s vault; the central bank vault cash would clearly be an asset on the central bank’s balance sheet, and as a consequence of this new vault cash, the central bank’s transfers would not reduce its net worth. My solution to the balance-sheet problem applies whether the central bank gives transfers to national treasuries, as I propose, or to households, as Muellbauer and others propose.

Conclusion

Stimulus without debt can be implemented in any economically advanced country with its own central bank that it able to print its own government paper money. Stimulus without debt can also be implemented in the eurozone; it just requires agreement on a formula to determine the transfer to each national treasury in the zone. The US Congress has often enacted such a formula to determine the federal transfer to each state government, and the eurozone should be able to do the same.