Preliminary Economic Paper

The impact of economic deleveraging on our nation's growth has long been perceived as prohibitive and worrisome. As consumers and the private sector withdraw unto themselves (reducing aggregate spending and growth), the threat of deflation becomes a real and present danger. It is certainly an infallible truth that the proper remedy to economic stagnation is to increase the overall money supply. Printing and placing money in the hands of economic agents is an established method of incentivizing overall growth; however, the problem lies in the distribution of said money. Empirically we have settled on fiscal solutions to this dilemma and thus we have government-based measures such as bailouts and tax cuts. The inherent drawback in each of these methods is that any fiscal solution in which the government cherry-picks recipients of money or tax relief lends itself to uneven distribution and/or a perception of unfairness. Inevitably, aside from the massive political challenge of legislating a sound solution, one can expect a sizable political backlash from targeted interest groups, inefficiencies in the cost and overhead of implementing such a full-scale project, uncontrollable inflation following the fiscal measure, and even the pursuit of consumers seeking a free bailout through government aid(rent-seeking behavior). In light of these structural barriers, I humbly propose the following:

Allow every taxpayer to receive a loan from the Federal Reserve the amount necessary for that individual to pay his federal taxes at a specified interest rate set by the Federal Reserve.

I will henceforth refer to this program as the "Reserve Loan Program" (RLP). It is well-substantiated that monetary policy offers the ability to radically alter economic climate for at least a temporary period of time, and it is on this principle that RLP resides. Briefly, low interest rates increase monetary base, lower each bank's cost of funds, and thus provides an incentive for consumers to borrow given their decreased long-term cost of taking out a loan. In a stable economic environment, this process lends itself to an increase in money velocity and a stimulant to the overall economy. However, when the risk of severe recession is high, banks grow weary of issuing loans at a lower risk-free rate borrowers are willing to accept as illiquid assets available to them potentially hold more (resale/rate of return) value than new loans banks may issue. In addition to dramatically increasing credit spreads in an environment in which capital market liquidity is already low, banks feel a need to hoard money when the threat of deflation looms as each dollar they hold will presumably increase in value.

RLP avoids such shortcomings by supplying credit directly to consumers rather than through banking intermediaries. It also has the added benefit of leaving no permanent mark on the government's current fiscal budget. While the implications of reducing Federal debt a non-negligible amount is beyond the scope of this proposal, it is at the very least popular with the political public and decreases our obligations to nations and financial institutions we are indebted to. Furthermore, when governmental mechanisms such as bailouts are introduced, an egregious amount of money is shoved into the economy with no way of retrieving it, implying a future threat of soaring inflation following the economic recovery. As a self-correcting calibration tool, RLP automatically restructures itself depending on the current economic climate. When the economy is slumping, and consumers' need for immediate money is high (with banks unwilling to issue out loans at rates borrowers will accept), individuals are likely to accept a loan for their taxes; conversely, when the economy is overheated, the demand for immediate money is low and rational borrowers have little need to request a loan.

Finally, RLP should also function as a substantial source of government revenue if the interest rate is determined at a sufficient and fair rate, as consumers will be paying interest on their taxes should they choose to borrow. Some might argue that RLP further perpetuates the current crisis because individuals and agencies are already indebted and defaulting on current loans. However, it is critical to recognize that RLP is inherently fully scalable: those with the largest incomes (and thus greatest impact on economic climate and government revenue) are the ones receiving the largest loan amounts. In addition, this is not an explicit reason to prefer government spending over RLP; any bailout or government spending mechanism will be implicitly backed by future tax revenue. In the worst case scenario in which consumers default on their tax loans under RLP, future government spending will be implicitly backed by past tax receivables rather than future revenue with no unfavorable externality.

It is my humble belief that RLP can be implemented in a pragmatic manner without endless political negotiation or upheaval. Details such as administration methods, determination of the interest rate placed on RLP loans, and maximum loan amounts can be determined in a manner that is relatively similar to status quo methods by academic professionals. Another objection that might be raised is that RLP necessitates a multi-layered bureaucracy in order to be fully implemented. A simple solution to this might be to merely add an option at the end of a tax return if the taxpayer wishes to take out a loan, thus reducing the need for additional government employees or structuring.

I sincerely wish that RLP may be implemented not only for the current administration, but sets a precedent for future administrations to come. My hope is that this policy can spread even outside the United States to regions such as Latin America where the fiscal remedy to crises often leads to rampant hyperinflation. With the advent of a reliable, stable, and efficient monetary system in recessionary times, governments can focus on larger-scale issues such as global warming, health care, or energy independence.