New Mechanisms for Fiscal Stimulus

New Mechanisms for Fiscal Stimulus

May 3, 2020

Idea: A Direct Payments System to Eligible Citizens with Built in Spending Conditions. Essentially, direct payments to individuals that can only be used to pay for services and certain goods. Creating greater control over what people spend their money on, allows for targeting of sectors and products to maximize each stimulus dollar and promote a greater multiplier effect for each dollar.

Problem: Ideas around Fiscal Stimulus by the government are based and built off of the ideas of John Maynard Keynes, specifically the idea of the Keynesian multiplier. In a gross oversimplified explanation, Keynes’s main goal was to jump start consumer spending to aid the economy. Keynes advocated for the government to spend when consumers could not or were unwilling to spend. Government spending would employ more people or keep more people employed and earning an income. They would intern spend the money they earned on goods and services therefore supporting business and industries, who intern employ people. So when a person buys a shaving razor or a radio, purchase helps the company making that item and the American workers they employ to make that item. This is the basic logic of the Keynes multiplier, government spending with have a multiple effect on the economy. Keynes' ideas worked very well for decades.

Two main changes in the American Economy have diminished the effectiveness of Keynes' ideas and policies.

1. Keynes’s ideas and policy prescriptions were created in the 1930s and 1940s. Economic conditions and the makeup of the economy was very different in the 1930s and 1940 than it is today in 2020. In the 1930s and 1940s the service sector was a small part of the American economy while manufacturing and farming accounted for the two biggest industries, accounting for over 60% of American employment. In 2020, manufacturing and farming account for less than 20% of employment.

2. International Supply chains have developed at an incredible scale in the post-world war II decades, with many consequences. The movement on a large scale of manufacturing outside of the United States is one prominent trend. Many items Americans buy in stores are no longer made in the United States and their purchase helps support the jobs of workers in foreign countries.

The result of these two main changes is that the Keynesian multiplier has been reduced. Government stimulus spending will not have the same ripple effect as before because when consumers buy goods, they are supporting workers in foreign countries, not their fellow American workers. Furthermore, service industries now employ the majority of Americans which reduces the effects of the consumer spending on goods even more. Generally during economic crises, spending in the services sectors decrease as people become more conservative with their spending habits.

The ideas of Keynes need to be updated for our current economic realities to better stimulate consumer spending, with a much renewed focus on service sector spending and supply chains that are primarily based in the United States

Description: The purposes of fiscal stimulus is to get spending going again. In order to increase spending on goods that are made in the United States or have significant supply chain components in the United States, new fiscal stimulus mechanisms must be created. A direct payments system to eligible consumers with built in spending conditions should be created. Essentially, direct payments to individuals that can only be used to pay for services and certain goods. Creating greater control over what people spend their money on, allows for targeting of sectors and products to maximize each stimulus dollar and promote a greater multiplier effect for each dollar.

One aspect of determining a person’s eligibility should be annual income for which will be a means test. The system will send money to consumers that meet eligibility requirements and only have the ability to be spent at eligible vendors and on eligible items. Eligible vendors and eligible items will be selected for several factors that include but are not limited too: products made in the United States, products that have significant portions of their supply chains in the United States, and service vendors that meet employment requirements for economic stimulation.

In order to incentives that people actually go out and spend these stimulus checks, there should be a second round of stimulus checks with a condition that to receive the second round of checks, individuals must spend the entirety or a certain amount of the first stimulus checks.

A model for implementing this new system, can be roughly based on the EBT system, either digitally or with physical EBT cards. In general, EBT funds and cards are only able to get accepted at certain places and for certain items. Vendors have to go through a certification process to make sure they meet the requirements for EBT funds and cards. Vendors that meet the criteria set forth to be a stimulus vendor, can apply with the government for certification the same way vendors do to accept EBT. They can receive a tax break for getting certified. Individuals should also be able to create an account online or by mobile app and use the app to pay in stores with NFC like Google pay or apple pay. During a crisis or recession, vendors can advertise that individuals can spend their stimulus money at their business. The stimulus app could have a map of the places that accept stimulus money and a search function. This allows the government to have greater control and more accurately target how stimulus money is spent. It allows the government to target the service sector which is very difficult to do. With these restrictions on stimulus spending, it ensures that individuals will purchase items and services that they would have not bought regardless of stimulus money, a cup of coffee for example