HOW TO COMBAT RECES SION How to Combat Recession Stimulus without Debt Laurence Seidman 1 Oxford University Press is a department of the University of Oxford It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide Oxford is a registered trade mark of Oxford University Press in the UK and certain other countries Published in the United States of America by Oxford University Press 198 Madison Avenue, New York, NY 10016, United States of America © Oxford University Press 2018 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, by license, or under terms agreed with the appropriate reproduction rights organization Inquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above You must not circulate this work in any other form and you must impose this same condition on any acquirer Library of Congress Cataloging-in-Publication Data Names: Seidman, Laurence S., author Title: How to combat recession : stimulus without debt / Laurence Seidman Description: New York, NY : Oxford University Press, [2018] Identifiers: LCCN 2017053675| ISBN 9780190462178 (hardcover : alk paper) | ISBN 9780190462192 (epub) Subjects: LCSH: Recessions—United States | Monetary policy—United States Classification: LCC HB3743 S45 2018 | DDC 339.5/20973—dc23 LC record available at https://lccn.loc.gov/2017053675 1 3 5 7 9 8 6 4 Printed by Sheridan Books, Inc., United States of America CONTENTS Introduction | How Would a Benevolent Ruler Combat a Recession? | What Is Stimulus without Debt? | 17 Do Tax Rebates Work in a Recession? | 58 What about Other Kinds of Fiscal Stimulus? | 97 Would Stimulus without Debt Be Inflationary? | 127 Would Stimulus without Debt Weaken the Fed’s Balance Sheet? | 137 Would Stimulus without Debt Undermine the Fed’s Independence? | 150 Can’t Monetary Stimulus Overcome a Severe Recession? | 157 10 Can Stimulus without Debt Be Used by Other Countries? | 173 11 What Have Others Written about Stimulus without Debt? | 179 v vi Contents 12 Can Stimulus without Debt Combat Secular Stagnation? | 195 13 Would Stimulus without Debt Work in a Plausible Model? | 200 14 Are We Ready for the Next Severe Recession? | 211 R EF E R E NC E S | I NDEX | 227 221 HOW TO COMBAT RECES SION Chapter 1 Introduction Are we ready to combat the next severe recession? We can be, but we’re not A severe recession always involves a plunge in aggregate demand for goods and services that compels producers to sharply cut back production and employment To recover from the recession, aggregate demand must be boosted all the way back up to normal Economic analysis and experience shows that waiting for the free market to reverse the plunge in aggregate demand takes much too long—usually half a decade to a full decade Monetary stimulus—cutting interest rates to zero—is much too weak to induce a huge boost in demand because experience shows that sensible consumers and business managers aren’t willing to go deeper in debt by borrowing to spend in a severe recession Fortunately, a huge boost in demand can be achieved by a large fiscal stimulus—a temporary large increase in tax rebates for households, federal grants to state and local governments, tax credits to partly reimburse firms for purchases of capital goods, and government spending on infrastructure maintenance projects References 225 Sahm, Claudia R., Mathew D Shapiro, and Joel Slemrod (2010) “Household Response to the 2008 Tax Rebate: Survey Evidence and Aggregate Implications.” In Tax Policy and the Economy, vol 24, edited by Jeffrey R Brown, 83–109 Chicago: University of Chicago Press Samuelson, Paul (1948) Economics New York: McGraw-Hill Seidman, Laurence (2001) “Reviving Fiscal Policy.” Challenge 44(3): 17–42 Seidman, Laurence (2003) Automatic Fiscal Policies to Combat Recessions Armonk, NY: M.E Sharpe Seidman, Laurence (2006) “Learning about Bernanke.” Challenge 49(5): 19–32 Seidman, Laurence (2009) “A Temporary Cut in Income Tax Withholding to Deliver Stimulus.” Tax Notes, September 28 Seidman, Laurence (2011) “Great Depression II: Why It Could Happen and How to Prevent It.” Challenge 54(1): 32–53 Seidman, Laurence (2012a) “Keynesian Fiscal Stimulus: What Have We Learned from the Great Recession?” Business Economics 47(4): 273–84 Seidman, Laurence (2012b) “Keynesian Stimulus versus Classical Austerity.” Review of Keynesian Economics, Autumn, 77–92 Seidman, Laurence (2013) “Stimulus without Debt.” Challenge 56(6): 38–59 Seidman, Laurence, and Kenneth A Lewis (2002) “A New Design for Automatic Fiscal Policy.” International Finance 5(2): 251–84 Seidman, Laurence, and Kenneth A Lewis (2015) “Stimulus without Debt in a Severe Recession.” Journal of Policy Modeling 37: 945–60 Shapiro, Matthew D., and Joel Slemrod (2003a) “Consumer Response to Tax Rebates.” American Economic Review 93(1): 381–96 Shapiro, Mathew D., and Joel Slemrod (2003b) “Did the 2001 Tax Rebate Stimulate Spending? Evidence from Taxpayer Surveys.” In Tax Policy and the Economy, vol 17, edited by James M Poterba, 83–109 Chicago: University of Chicago Press Shapiro, Mathew D., and Joel Slemrod (2009) “Did the 2008 Tax Rebates Stimulate Spending?” American Economic Review Papers and Proceedings 99(2): 374–79 Siegel, Jeremy (2013) “Fed Must Revert to Tested Reserves Policy.” Financial Times op-ed, March 27 Summers, Lawrence (2016) “Secular Stagnation and Monetary Policy.” Federal Reserve Bank of St Louis Review 98(2): 93–110 http:// dx.doi.org/10.20955/r.2016.93-110 226 References Taylor, John (2008) “Why Permanent Tax Cuts Are the Best Stimulus.” Wall Street Journal op-ed, November 25 Taylor, John (2009) “The Lack of an Empirical Rationale for a Revival of Discretionary Fiscal Policy.” American Economic Review Papers and Proceedings 99(2): 550–55 Taylor, John (2011) “An Empirical Analysis of the Revival of Fiscal Activism in the 2000s.” Journal of Economic Literature 49(3): 686–702 Turner, Adair (2013) “Debt, Money, and Mephistopheles: How Do We Get out of This Mess?” Group of 30, Washington, DC, May Turner, Adair (2015) “The Case for Monetary Finance: An Essentially a Political Issue.” IMF Jacques Polak Research Conference, November 5, International Monetary Fund Whelan, Karl (2015) “On Central Bank Balance Sheets.” Economic Policy 29(77): 79–137 Wilson, Daniel (2012) “Fiscal Spending Jobs Multipliers: Evidence from the 2009 American Recovery and Reinvestment Act.” American Economic Journal: Economic Policy 4(3): 251–82 Wood, Richard (2012) “The Economic Crisis: How to Stimulate Economies without Increasing Public Debt.” Center for Economic Policy Research Policy Insight No 62, August https://www google.com/#q=Wood%2C+Richard+(2012).+%E2%80%9CThe+E conomic+Crisis Woodford, Michael (2013) “Helicopter Money as a Policy Option.” Interview, May 20 Vox http://www.voxeu.org/article/helicopter- money-policy-option Wren-Lewis, Simon (2014) https://mainlymacro.blogspot.com/2014/ 10/helicopter-money.html Oct 22 Wren-Lewis, Simon (2015) https://mainlymacro.blogspot.com/2015/ 02/helicopter-money-and-government-of-html Feb 22 INDEX “Accounting for Sovereign Money” (Dyson and Hodgson), 143 Akerlof, George, 48 American Jobs Act proposal (2011), 110–11 American Recovery and Reinvestment Act (ARRA, 2009) accelerated depreciation of business investments and, 110 Council of Economic Advisers’ analysis of, 108–12 Democratic Party support for, 89, 103, 107, 109, 111–12 emergency unemployment compensation and, 109–10 empirical studies of, 111, 117–22 estimated impact of, 107–8, 111–12 federal deficit and, 153 government spending provisions in, 53, 89, 109 inflation and, 130–31 infrastructure provisions and, 109 Making Work Pay credit and, 62, 84, 89–92, 103–5, 110 Medicaid funding and, 99, 109–10, 119–21 need for additional stimulus following, 53, 55, 108, 212 Republican Party opposition to, 53, 84, 89, 103, 107, 112 size of stimulus in, 52–53, 108 state balanced budget requirements and, 119 statutory funding formulas in, 117–18 tax cuts and, 53, 109 teaching jobs prioritized in, 109–10 transfers to state and local governments under, 53, 99–100, 117–21 unemployment and job creation addressed in, 52–53, 108, 111, 118–21 Arbess, Daniel, 182–83 Archer, David, 145 Ash, Michael, 32 Auerbach, Alan, 115–16 “Avoiding Default” (Olney), 164 balance-sheet recessions, 166–69 Ball, Laurence, 200 Bank of England, 189 227 228 Index Bank of Japan (BOJ), 184–85 Barro, Robert, 88–89, 114–15 Bear Stearns, 77, 80 Bernanke, Ben on Federal Reserve interest rates for bank deposits, 135 Great Recession recovery efforts and, 153, 155, 185 helicopter money and, 184, 193 on Japan, 183–85 on the portfolio rebalancing effect, 161–63 stimulus without debt proposal and, 185–88 Blanchard, Olivier, 31 Blinder, Alan, 48, 81, 169–71 Blyth, Mark, 189 Broda, Christian, 58–59, 62, 86–87, 95 Buiter, Willem, 192 Bush, George H. W., 154 Bush, George W., 51, 63–64, 72, 107 Caballero, Ricardo, 182 Carlino, Gerald, 121–22 Caruana, Jaime, 145 central banks See also European Central Bank; Federal Reserve accounting equity and, 145 balance-sheet problems and, 177 commercial banks compared to, 142, 145–46 government bond purchases by, 167–68, 191 in Japan, 184–85 monetary stimulus and, 88 stimulus without debt proposal and, 173–74, 177–78, 191 transfers to households during a recession and, 187–90, 193–94 transfers to Treasuries during recessions and, 177, 181–83, 191 Chodorow-Reich, Gabriel, 119–21 “Combating Eurozone Deflation” (Muellbauer), 175 Congress elections (2010) and, 110 Federal Reserve and, 5, 42–46, 54, 138–39, 150–53, 156, 186–87, 218–19 Great Recession recovery and, 52, 54–55 proposal to allow unilateral money creation by, 37–38, 191–92 standard fiscal stimulus and, 2–4, 20, 185, 197, 211 stimulus without debt proposal and, 5–6, 15, 18, 21–23, 27, 29, 32–34, 37–38, 40, 44–45, 147, 150, 186–87, 190, 192, 214–15, 218–19 tax rebates and, 4, 18, 22, 25, 29, 37–38, 46, 63–64, 90, 96, 182–83 temporary tax incentives and, 38, 101 consumer demand consumer confidence and, 23–24 Great Recession and, 17–18, 53, 78, 80, 82, 167 helicopter money and, 192, 194 household debt and, 164–65 housing bubbles and, 48 income inequality and, 196–97 inflation and, 10, 127–30, 135–36 interest rates and, 28, 36, 47–48 Keynesianism and, 13–14, 48 marginal propensity to consume (MPC) and, 67–69, 81–83, 94 portfolio rebalancing effect and, 157–58 production output linked to, 10–11, 18 recessions and, 1, 5, 10–11, 13–14, 25, 38, 159, 164, 219 Index secular stagnation and, 195–99, 217 slow population growth and, 197 small business survey data regarding, 50 standard fiscal stimulus and, 5, 18 stimulus without debt proposal and, 17, 23–24 stock market declines and, 10, 21, 48 tax rebates and, 11–12, 21, 24–25, 30, 50, 58–62, 65–72, 75–91, 95, 100, 171, 192, 215 Corbyn, Jeremy, 193–94 229 need for additional stimulus following, 52–53, 107–8, 212 size of, 51, 53, 72, 107–8 tax rebates and (see tax rebate of 2008) European Central Bank (ECB) balance sheet of, 177 inflation targets and, 152 Longeran’s proposal regarding helicopter money and, 176–77 Muellbauer’s proposal regarding quantitative easing and, 175–77 prohibitions against financing fiscal stimulus enacted by national legislatures via, 194 stimulus without debt proposal and, 174–77, 217 Eurozone countries (EZ), 17, 174–78, 217 demand-induced secular stagnation See secular stagnation Democratic Party American Recovery and Reinvestment Act supported by, Federal Deposit Insurance 89, 103, 107, 109, 111–12 Corporation (FDIC), 5 economic stimulus debates in federal grants to state governments Congress (2009–10) and, 46 American Recovery and long-term tax cuts opposed by, 106 Reinvestment Act and, 53, payroll tax cut (2011–13) and, 92 99–100, 117–21 spending on long-term programs conservative criticisms of, 99 supported by, 106 Medicaid matching rates and, 99 Dillon, Douglas, 142 objective numerical formulas Douglas, Paul, 142 for, 98–99 Draghi, Mario, 193–94 phasing out of, 100 Dyson, Ben, 143 political pressure to avoid severe spending cuts and, 123, 125 Economics of Control (Lerner), 14 recession of 2001 and, 100 Economics of Employment (Lerner), 14 state balanced budget requirements Economic Stimulus Act of 2008 and, 57, 119, 122–23 bipartisan support for, 45–46, state government borrowing 72, 107 contrasted with, 123–25 bonus business depreciation states’ accounting rules provision in, 46, 51, 53, regarding, 56–57 101, 106–7 stimulative effect of, 4–5, 98–99, economic impact of, 52, 107–8 122–26, 216 230 Index Federal Reserve See also central banks accounting rules regarding government bonds held by, 19–20, 33, 38–39, 41, 143, 190 accounting rules regarding paper money held by, 3–4, 137–43, 146–49, 212, 217 asset creation by, 143–44 balance sheet of, 23, 41–42, 45, 137–49, 153, 217 bank deposit rates at, 135 Board of Governors of, 151–52 “bond-burning plan” and, 39–40 Congress and, 5, 42–46, 54, 138–39, 150–53, 156, 186–87, 218–19 credit liquidity and, 5, 27–28, 47, 157–58, 168, 219 Federal Open Market Committee (FOMC) and, 5, 27, 33, 44–46, 152, 186, 212, 218–19 Federal Reserve Act amendment of 1977 and, 151–52 Federal Reserve Act of 1913 and, 5, 22, 43–46, 54, 151, 153–54, 213, 218–19 fiat money system and, 140, 144 funding sources for, 151 government bond purchases by, 15, 19, 23, 28, 35–36, 133–35, 137–38, 146, 153, 156–57, 159, 161–63, 169–70, 183, 214 Great Recession recovery policies and, 153, 155, 158, 168–69, 185 housing bubble of 2007 and, 158 independence of, 42–43, 150–56, 186–87, 217 inflation targets and, 23, 29, 33, 42, 151–55 interest rates set by, 27–28, 42, 47–48, 135, 151–52 lender of last resort role of, 27–28, 47, 157 mortgage-backed securities purchased by, 134, 162 paper money held by, 15, 23, 29, 41–43, 45, 137–40, 143–44, 146–49, 214, 217 president of United States and, 151 rescue of financial firms and, 28, 158, 168, 219 stimulus without debt proposal and, 27–28 transfers to Treasury under stimulus without debt plan and, 3, 5–6, 11–12, 15, 17–18, 21–22, 26–27, 29, 32–35, 37, 40–41, 43–46, 55–56, 96, 133, 136–38, 146–47, 150, 152, 156, 171, 180–82, 185, 192, 198–99, 203–5, 208–10, 212–15, 217–19 transfer to households proposal and, 36–37 unemployment targets and, 23, 29, 33, 42, 151–52 Feiveson, Laura, 119–21 Feldstein, Martin American Economic Association presentation (2009) by, 75 standard regression analysis by, 78–79, 81–82 tax rebate of 2008 analyzed by, 61, 74–84, 90 Wall Street Journal op-ed (2008) by, 74–77, 82 fiat money See under paper money fiscal stimulus See standard fiscal stimulus; stimulus without debt proposal Ford, Gerald, 63 Friedman, Milton helicopter money parable of, 34–35, 179–81, 184, 193 portfolio rebalancing effect and, 162 on raises versus tax rebates, 88 functional finance, 14 Index 231 Gorodnichenko, Yuriy, 115–16 consumer demand and consumer government bonds See also confidence during, 17–18, 53, government debt 78, 80, 82, 167 accounting rules regarding Federal credit liquidity and, 28, 168 Reserve holding of, 19–20, 33, federal deficit and, 153, 155–56 38–39, 41, 143, 190 Federal Reserve’s role in “bond-burning plan” and, 39–40 recovery from, 153, 155, 158, portfolio balancing effect linked to 168–69, 185 Federal Reserve purchases of, household debt levels preceding, 157–58, 161–63 36, 159, 163–66 sellers’ motivations and, 12–13, 30 housing bubble and, 17, 28, 48, 78, tax rebates compared to Federal 80, 158, 165 Reserve purchasing of, 29–30 interest rate cuts during, 28, government debt 158, 172 anxieties regarding standard fiscal Keynesian models and, 170 stimulus and, 2–3, 20, 30–32, Lehman Brothers collapse (2008) 54–55, 171, 211, 218 and, 17, 28, 52, 107, 165 Blanchard’s warnings regarding, 31 Meltzer on, 153–56 Federal Reserve-held Treasury monetary stimulus and, 51, 130, bonds and, 19–20, 33, 38–39, 41, 155–56, 158–59, 170–72, 185 143, 190 recommendations regarding interest rates and, 3, 20, 213 fiscal stimulus following, investor confidence and, 3, 54–55, 133–34 20–21, 31, 213 rescue of financial firms and, 28, negative economic consequences 52, 158, 168 of, 3, 20–21, 31–32, 213 secular stagnation and the slow paper money contrasted with, recovery from, 196 7–8, 19–20 standard fiscal stimulus and, 2, 31, Reinhart and Rogoff’s warnings 49, 51–53, 88, 116–17, 170–71, regarding, 31–32 185, 196 standard fiscal stimulus and, 2–3, stimulus without debt proposal 18–19, 29–30, 33 and, 27, 32, 54–55, 133–34, Great Depression 136, 156, 171–72 asset price decline during, 167 stock market declines and, household debt levels preceding, 78, 80, 82 36, 164 subprime mortgage crisis interest rate cuts and, 47, 172 and, 78 Great Recession (2008–10) See tax rebate proposals also American Recovery and and, 54, 171 Reinvestment Act unemployment and, 2, 52–55, Blinder and Zandi’s analysis 108, 130–31, 158–59, of, 169–71 162–63, 170–71 Congress and, 52, 54–55 Greenspan, Alan, 144, 154–55 232 Index Hansen, Alvin, 196 Federal Reserve’s mandate helicopter money regarding, 23, 29, 33, Bernanke and, 184, 193 42, 151–55 Buiter on irredeemable nature of full employment economies and, fiat money and, 192 10, 14–15, 127–29, 135 consumer demand and, 192, 194 helicopter money and, 35, 180, 191 Draghi and, 193 interest rates and, 132, 135, Friedman’s parable of, 34–35, 154, 156 179–81, 184, 193 paper money and, 10, 14, full-employment economies and, 141, 143–44 35, 179–81 in recessionary economies, 127–32 inflation and, 35, 180, 191 stimulus without debt proposal Lonergan on the European Central and, 5, 13, 40–41, 127–36, 180, Bank and, 176–77 191, 209–10, 212, 216–17 monetary stimulus and, 181 infrastructure repairs, 102, 126, 216 stimulus without debt compared Inman, Robert, 121–22 to, 34–35, 180–81, 190 interest rates Wren-Lewis on, 190–91 bank reserve requirements Herndon, Thomas, 32 and, 135 Hicks, John, 48 consumer demand and, 28, “High Debt, Default Risk, and Vicious 36, 47–48 Cycles” (Blanchard), 31 Federal Reserve’s authority to set, Hodgson, Graham, 143 27–28, 42, 47–48, 135, 151–52 “Household Expenditure and government debt and, 3, 20, 213 the Income Tax Rebates of Great Depression and, 47, 172 2001” (Johnson, Parker, and Great Recession and, 28, 158, 172 Souleles), 70–72 inflation and, 132, 135, 154, 156 House of Debt (Mian and Sufi), 163 monetary stimulus through “How about Quantitative Easing for the lowering of, 1, 13–14, 18, 21, People?” (Kaletsky), 189 27–29, 31, 36, 47–50, 76, 151–52, 158–63, 166–72, “The Inadequacies of Monetary 197, 217 Control of the Business Cycle” quantitative easing and, 36 (Samuelson), 47 retirees and, 161 “In a Recession, Think Tax Rebates, small business survey data Not Across-the-Board Cuts in regarding, 50 Taxes” (Seidman), 63 Taylor rule and, 155 inflation International Accounting Standards American Recovery and (IAS), 143 Reinvestment Act and, 130–31 International Financial Reporting consumer demand and, 10, Standards (IFRS), 143 127–30, 135–36 International Revenue Service (IRS), 36, definition of, 127 73, 93–94 Index Japan central bank in, 184–85 government spending during recession in, 167 Mankiw on, 188 public debt in, 167 real estate market decline (1990s) in, 166–67 recession (1990s) in, 166–67, 183– 84, 188, 193 Johnson, David tax rebate of 2001 analyzed by, 58, 60, 62, 69–72, 85, 95 tax rebate of 2008 analyzed by, 58, 62, 84–86 233 size of, 62, 89, 104 taxpayers’ awareness of, 91, 110 tax withholding reduction mechanism for, 62, 84, 89–92, 104, 110 Mankiw, N. Gregory, 188–89 marginal propensity to consume (MPC), 67–69, 81–83, 94 McClelland, Brendan, 58, 62, 84–86 Medicaid, 99, 109–10, 119–21 Medicare, 93 Meltzer, Alan, 153–56 “Memo to Tokyo: Cut Taxes, Print Money” (Mankiw), 188 Mian, Atif, 49–50, 163–66 Miran, Stephen, 81 Kaletsky, Anatole, 189 Modigliani, Franco, 48, 88, 162 Keynes, John Maynard, 13–14, monetary stimulus 48, 196 balance-sheet recessions Klein, Lawrence, 48 and, 166–69 Koo, Richard, 166–68 Friedman’s helicopter parable Krugman, Paul, 48 and, 181 government debt and, 19, 190 Larrain, Felipe, 140–42 Great Recession (2008–10) and, “Legal Helicopter Drops in the 51, 130, 155–56, 158–59, Eurozone” (Lonergan), 176 170–72, 185 Lehman Brothers collapse (2008), 17, inflation and, 192 28, 52, 107, 165 interest rate cuts and, 1, 13–14, Lerner, Abba, 13–14, 212 18, 21, 27–29, 31, 36, 47–50, Lewis, Kenneth 76, 151–52, 158–63, 166–72, plausible economic model testing 197, 217 of stimulus without debt in Japan (1990s), 184 and, 200 Keynesianism and, 48 tax rebate of 2001 analyzed limits of, 1, 13–14, 18, 28–29, 31, by, 67, 79 36, 47–50, 76, 157, 159–61, tax rebate of 2008 analyzed by, 163, 166–69, 172, 185, 193, 61, 79–82 197, 217 Liscow, Zachary, 119–21 New Classical economists and, Lonergan, Eric, 176–77, 189–90 49, 160 New Keynesianism and, 49, 160 Making Work Pay credits (2009–11) phasing out of, 23 Republican Party’s push to private debt and, 21 eliminate, 92, 105 quantitative easing and, 36 234 Index monetary stimulus (cont.) quantity theory of money and, 48 recessions addressed through, 1, 51, 130, 155–72, 185 tax rebates compared to, 50, 76, 161 Taylor rule and, 155, 202, 205, 208–10 monetization of debt, 33, 35, 191 Money-Financed Fiscal Program (MFFP, Bernanke), 185–87 “Money from Heaven” (Economist article), 193 mortgage-backed securities (MBSs), 134, 162 Moser-Boehm, Paul, 145 Muellbauer, John, 175–77 multiplier effect of stimulus programs definition of, 113 Keynesianism and, 116–17 mistakes in estimating, 97, 112–17 recession economies versus full-employment economies and, 113–16 tax rebates and, 51 unemployment levels and, 115 World War II and, 115 temporary payroll tax cut (2010–13) and, 53 Olney, Martha, 164 Open Market Committee See under Federal Reserve “Out of Ammo?” (Economist article), 193 paper money Federal Reserve’s holding of, 15, 23, 29, 41–43, 45, 137–40, 143–44, 146–49, 214, 217 as “fiat money,” 140–44, 192 government accounting rules regarding, 3–4, 8–10, 12, 19, 137–43, 146–48, 192, 212, 217 government debt contrasted with, 7–8, 19–20 inflation and, 10, 14, 141, 143–44 lack of guarantees for, 4, 8–10, 19, 139–42, 192, 212 previous gold guarantee for, 4, 8–9, 19, 140–42, 144 tax rebates as means of providing, 11–12 Parker, Jonathan tax rebate of 2001 analyzed by, 58, 62, 69–72, 85, 95 tax rebate of 2008 analyzed by, 58– 59, 62, 84–87 National Federation of Independent tax rebate research of, 87–89 Businesses (NFIB), 49–50, 166 payroll taxes New Classical economists, 49, 88, employer payroll taxes and, 94 116, 160 Medicare payroll tax and, 93 New Keynesian economists, 49, 88, recommendations against 116–17, 160–61 temporary cuts to, 104–5, 126, 216 Obama, Barack regressive nature of, 93 American Jobs Act proposal (2011) Social Security Trust Fund and, 62, and, 110–11 92, 105 American Recovery and temporary cut (2011–12) to, 62, Reinvestment Act and, 84, 92–93, 105, 110 107, 109–10 Pelosi, Nancy, 72 Making Work Pay Credit and, Pollin, Robert, 32 92, 103 Index portfolio rebalancing effect, 157–58, 161–63 “Print Less but Transfer More” (Blyth and Lonergan), 189–90 quantitative easing (QE), 35–36, 170–71, 189, 194 See also Federal Reserve: government bond purchases by quantity theory of money, 48 Reagan, Ronald, 63 recession of 1990, 88 recession of 2001, 63, 100, 107 recessions See also Great Recession (2008–10) balance-sheet recessions and, 166–69 benevolent rulers’ approach to combating, 7, 10–14, 16 consumer confidence and, 23–24 consumer demand decline and, 1, 5, 10–11, 13–14, 25, 38, 159, 164, 219 credit liquidity and, 5, 27 financial crises and, 168 household debt and, 164 housing market declines and, 23, 166 in Japan (1990s), 166–67, 183–84, 188, 193 monetary stimulus and, 1, 51, 130, 155–72, 185 stock market declines and, 21, 23, 166 tax rebates as means of addressing, 4, 25–26, 33, 59, 95, 97, 103 tax revenue declines during, 2, 98, 119, 153 Reinhart, Carmen, 31–32 Republican Party American Recovery and Reinvestment Act opposed by, 53, 84, 89, 103, 107, 112 235 economic stimulus debates in Congress (2009–10) and, 46 election of 2010 and, 110 long-term tax cuts supported by, 106 Making Work Pay Credit and, 92, 105 payroll tax cut (2011–13) and, 92 spending on long-term programs opposed by, 106 Ricardian equivalence, 89 Rogoff, Kenneth, 31–32 Romer, Christina, 78 Sachs, Jeffrey, 140–42 Sahm, Claudia, 61, 83–84, 90 sales taxes, 93–94 Samuelson, Paul, 47–48, 160 secular stagnation chronically insufficient demand as a cause of, 195–99, 217 introduction of the term, 196 slow growth in potential output as cause of, 195, 198–99 stimulus without debt proposal and, 24, 195–99, 217–18 Seidman, Laurence on accounting rules regarding Federal Reserve-held government bonds, 38–39 Great Recession stimulus recommendation by, 108 Making Work Pay credit analyzed by, 90 plausible economic model testing of stimulus without debt and, 200 “Stimulus without Debt” article (2013) by, 32–33, 182 tax rebate of 2001 analyzed by, 67–68, 79 tax rebate of 2008 analyzed by, 61, 79–82 tax rebate proposal for 2001 by, 63 236 Index Shapiro, Matthew American Economic Conference presentation (2009) by, 83 tax rebate of 2001 analyzed by, 60, 65–72 tax rebate of 2008 analyzed by, 61, 74, 83–84 Shiller, Robert J., 48 Siegel, Jeremy, 135 “The Simple Analytics of Helicopter Money” (Buiter), 192 Slemrod, Joel American Economic Conference presentation (2009) by, 83 tax rebate of 2001 analyzed by, 60, 65–72 tax rebate of 2008 analyzed by, 61, 74, 83–84 Solow, Robert, 48 Souleles, Nicholas tax rebate of 2001 analyzed by, 58, 60, 62, 69–72, 85, 95 tax rebate of 2008 analyzed by, 58, 62, 84–86 standard fiscal stimulus assumptions regarding bank lending and, 49–50 Congress and, 2–4, 20, 185, 197, 211 consumer demand and, 5, 18 effectiveness of, 1, 4–5, 169–72 federal deficit and, 197, 199, 210–11 government bond purchases and government debt increases in, 2–3, 15, 18–19, 29–30, 33 government spending and, 1, 18, 32, 56 grants to state governments and, 1, 4, 56–57 Great Recession and, 2, 31, 49, 51–53, 88, 116–17, 170–71, 185, 196 inflation and, 192 in Japan, 183–84 Keynesian perspectives on, 88 monetization of debt and, 33, 35, 191 New Classical economists perspectives on, 88, 160 New Keynesian perspectives on, 88, 160–61 stimulus without debt compared to, 18–20, 29–30, 32–33, 35 tax cuts and, 1, 56 tax rebates and, 1, 4–5, 11, 18, 21, 25, 32, 181 Taylor’s criticism of, 122–23, 125 Stiglitz, Joseph, 48 “Stimulus without Debt” (2013 journal article by Seidman), 32–33, 182 “Stimulus without Debt in a Severe Recession” (Lewis and Seidman), 200 stimulus without debt proposal Bernanke’s proposal regarding, 185–88 “bond burning” proposal contrasted with, 39–40 Congress and, 5–6, 15, 18, 21–23, 27, 29, 32–34, 37–38, 40, 44–45, 147, 150, 186–87, 190, 192, 214–15, 218–19 consumer confidence and, 12–13, 23–24, 41 consumer demand and, 17, 23–24 in countries other than the United States, 173–78, 217 economy below full employment as a stipulation for, 10, 12–16, 35, 41, 129–30, 180 Eurozone countries and, 174–78, 217 federal grants to state governments and, 38, 46 Index Federal Reserve balance sheets and, 23, 41–42, 137–39, 143–44, 146–49, 217 Federal Reserve independence and, 42–43, 150–56, 186–87, 217 Federal Reserve transfers to households compared to, 36–37, 187–90 Federal Reserve transfers to the Treasury under, 3, 5–6, 11–12, 15, 17–18, 21–22, 26– 27, 29, 32–35, 37, 40–41, 43–46, 55–56, 96, 133, 136–38, 146–47, 150, 152, 156, 171, 180–82, 185, 192, 198–99, 203– 5, 208–10, 212–15, 217–19 government deficits and, 55–57, 185–86, 199 government spending and, 13–14, 21, 23, 33 Great Recession (2008–10) and, 27, 32, 54–55, 133–34, 136, 156, 171–72 growth rate of potential output and, 51 helicopter money compared to, 34– 35, 180–81, 190 inflation and, 5, 13, 40–41, 127–36, 180, 191, 209–10, 212, 216–17 monetization of debt compared to, 35 phase-out period and, 3, 13, 23– 24, 41, 127, 129–31, 133–36, 212, 216–17 plausible macroeconomic model testing of, 200–210 potential court challenges regarding, 44 president’s role in, 15, 33–34 private debt and, 21 quantitative easing compared to, 35–36 237 secular stagnation and, 24, 195–99, 217–18 separation of powers in, 15, 22, 33–35, 37–38, 176, 180, 187– 88, 192, 214–15 standard fiscal stimulus compared to, 18–20, 29–30, 32–33, 35 tax increases following, 13, 23 tax rebates and, 5–6, 12, 16, 21– 24, 26–27, 29, 33–34, 36, 46, 138, 188, 198, 214–15 temporary nature of, 23–24 temporary tax incentives for business investment and, 21, 38, 46 unemployment and, 14, 16, 181 Sufi, Amir, 49–50, 163–66 Summers, Lawrence, 196–97 supply-side economics, 63 tax cuts of 2001, 107 tax rebate of 1975, 38, 63 tax rebate of 2001 amounts dispersed to households in, 64, 74 Congress and, 38, 63–64 consumer spending and, 58–60, 62, 65–72, 85 Democratic Party opposition to elements of, 63 disbursement schedule for, 59, 64–65, 67, 69–70, 74, 79, 88 economy’s performance following, 65 Johnson on, 58, 60, 62, 69–72, 85, 95 Lewis on, 67, 79 paper check format of, 59–60, 64–65, 70, 74, 90, 92, 104 Parker on, 58, 62, 69–72, 85, 95 presidential election of 2000 and, 63 recession of 2001 and, 63 238 Index tax rebate of (cont.) cutting withholding of taxes Seidman on, 67–68, 79 compared to, 89–93 Shapiro on, 60, 65–72 effectiveness of, 4–6, 25, Slemrod on, 60, 65–72 58–96, 215 Souleles on, 58, 60, 62, Federal Reserve purchase of 69–72, 85, 95 government bonds compared tax rate cuts accompanying, 64 to, 29–30 tax rebate of 2008 government spending bipartisan support for, 45–46 following, 13, 23 Broda on, 58–59, 62, 86–87, 95 long-term spending increases Congress and, 37 compared to, 25–26, 103 consumer spending and, 58–59, long-term tax cuts compared to, 61–62, 75–87, 90 25–26, 103, 106 disbursement schedule for, paper money provided 59–60, 73–74, 79, 85, 88 through, 11–12 electronic fund transfers (EFTs) raises from employers and, 73, 91–92, 104 compared to, 88 Feldstein on, 61, 74–84, 90 recommendations regarding Great Recession and, 33, 72 size of, 54 housing bubble and, 72, 78, 80 recommended future designs Johnson on, 58, 62, 84–86 for, 93–96 Lewis on, 61, 79–82 standard fiscal stimulus and, 1, 4– McClelland on, 58, 62, 84–86 5, 11, 18, 21, 25, 32, 181 paper checks and, 73–74, standard monetary stimulus 89–90, 92, 104 compared to, 50, 76, 161 Parker on, 58–59, 62, 84–87 stimulus without debt proposal Sahm on, 61, 83–84, 90 and, 5–6, 12, 16, 21–24, Seidman on, 61, 79–82 26–27, 29, 33–34, 36, 46, 138, Shapiro on, 61, 74, 83–84 188, 198, 214–15 size of, 72–73, 85, 93, 106 tax increases following, 13, 23 Slemrod on, 61, 74, 83–84 temporary nature of, 25–26, 215–16 Souleles on, 58, 62, 84–86 Treasury and, 4 subprime mortgage crisis and, 78 Tax Reduction Act of 1975, 63 Taylor on, 61, 74–84, 90 tax withholding tax rebates See also tax rebate of Making Work Pay credits via 2001; tax rebate of 2008 reductions in, 62, 84, 89–92, bipartisan support for, 26, 216 104, 110 Congress and, 4, 18, 22, 25, 29, 37– recommendations against 38, 46, 63–64, 90, 96, 182–83 temporary cuts to, 103–4, consumer spending and consumer 126, 216 demand impacted by, 11–12, 21, taxpayers’ awareness of small 24–25, 30, 50, 58–62, 65–72, changes to, 91 75–91, 95, 100, 171, 192, 215 tax rebates compared to, 89–93 Index Taylor, John American Economic Association presentation (2009) by, 75 standard fiscal stimulus during recessions critiqued by, 122–23, 125 standard regression analysis by, 78–79, 81–82 tax rebate of 2008 analyzed by, 61, 74–84, 90 Taylor rule and, 155, 202, 205, 208–10 Wall Street Journal op-ed (2008) by, 74–75, 77–78, 82 Temin, Peter, 164 temporary tax incentives for business investment bonus depreciation provisions and, 100–101 business pressure to establish permanence of, 101 Economic Stimulus Act of 2008 and, 101 investment tax credits and, 100 stimulative effect of, 100–101, 126, 216 stimulus without debt proposal and, 21, 38, 46 Tinbergen, Jan, 48 Tobin, James, 48, 162 Treasury of the United States “bond-burning” plan and, 39–40 bond payment obligations and, 39 credit liquidity and, 5 rescue of financial firms and, 28, 158, 219 standard fiscal stimulus and, 18 239 tax rebates and, 4 transfers from Federal Reserve under stimulus without debt plan and, 3, 5–6, 11–12, 15, 17–18, 21–22, 26–27, 29, 32– 35, 37, 40–41, 43–46, 55–56, 96, 133, 136–38, 146–47, 150, 152, 156, 171, 180–82, 185, 192, 198–99, 203–5, 208–10, 212–15, 217–19 Turner, Adair, 183 unemployment American Recovery and Reinvestment Act (2009) and, 52–53, 108, 111, 118–21 Federal Reserve’s mandate regarding, 23, 29, 33, 42, 151–52 Great Recession and, 2, 52–55, 108, 130–31, 158–59, 162–63, 170–71 stimulus without debt proposal and, 14, 16, 181 Volcker, Paul, 154 “Voodoo Multipliers” (Barro), 115 Whelan, Karl, 142 Wilson, Daniel, 117–21 Wood, Richard, 191 Woodford, Michael, 191 Woolston, William Gui, 119–21 Wren-Lewis, Simon, 190–91 Zandi, Mark, 169–71 .. .HOW TO COMBAT RECES SION How to Combat Recession Stimulus without Debt Laurence Seidman 1 Oxford University Press is a department... implemented without debt and without causing inflation Chapter 3 What Is Stimulus without Debt? Stimulus without debt is a policy that would increase aggregate demand for goods and services in a recession. .. government debt Without the stimulus- without- debt plan proposed in this book, a fiscal stimulus large enough to combat a severe recession would cause a large increase in government debt and