Federal Stimulus Reserve Book

Federal Stimulus Reserve Book

Federal Stimulus Reserve & Notes On the General Theory and Other Thoughts

(First Draft)

By

Fernando Giannotti

 

This work is not intended to repudiate or criticize John Maynard Keynes or his theories.  This work is intended to propose new ideas to modify and make the execution of Keynes theories better and update them for our current time in the early 21st century.  We are all prisoners to some degree or another to the time and place in history that we are alive.  Keynes was writing during his time and solving the problems of his time.  I am currently a prisoner to my current time and place.  I doubt anyone will ever read this, but if they do, I hope they enjoy the ideas and if they are in a future time, they will judge this work by the time and place that I wrote

 

I hope many of the ideas contained within are original, but without doubt, outside influences and ideas have crept in and may be contained within as well

 

This is a first draft; it is not in its final form or close to being in its final form.  The ideas presented here will be improved and modified in the future.  This draft is meant to roughly spell out the Core Ideas of a Federal Stimulus Reserve, it needs to be iterated on and improved

 

 

 

 

 

 

  

Dedicated to John Maynard Keynes

 

Who thought to help humanity on such a large scale and who continues to inspire and echo throughout history

 

 

 

 

 

Contents

Introduction

Federal Stimulus Reserve

New Mechanisms of Fiscal

Automated Fiscal Policy Beyond the Short Run

Asset Management for the Federal Reserve

National Debt

 

 

 

 

 

 

  

 

 

 

 

Introduction

     

Human Civilization is in a constant state of change.  New technologies, business practices, and demographics inevitably arise and fall.  Ideas put into practice need to be updated.  John Maynard Keynes’s ideas from his 1936 work, The General Theory of Employment, Interest, and Money have been very influential throughout the 20th century and into the 21st century.  They have had a profound influence on economic, financial, and governmental thought for almost a century.  While still relevant in the 21st century, nearly a century after first proposed, I believe there is a need to modernize and expand on the ideas Keynes's put forth in The General Theory.  Not only has new technologies and business practices effected Keynes theories, I believe it is also important to note that criticism existed in his time as well and to address certain criticisms from his time.  From my analysis, there are two main issues with Keynes theories that need to be addressed.  The first issue is an old issue and the second a new issue. 

The first issue is the decrease in efficiency of the Keynesian multiplier due to changes in the world that Keynes did not or could not foresee, for example the vast increase in and use of international supply chains as well as factories being moved abroad.  These forces have reduced the effectiveness of each dollar spent on fiscal stimulus in a crisis.  For example, when citizens are given money in a fiscal stimulus to spend, they may very well go out and purchase items with their stimulus money, but those purchases items may not be made in the United States, so the money from the purchase goes to support workers abroad not in the United States.  In Keynes time, substantially more items where manufactured domestically, so an item purchased with stimulus dollars would support the factory workers who manufactured it in the United States.

The second issue deals with relying on elected officials to author legislation and make policy, especially when required to create and implement politically unpopular, but responsible economic policy.  Keynes grew up during the height of the British Empire, when the United Kingdom ruled over a quarter of the world’s landmass.  In order to effectively manage, regulate, and govern such a sprawling empire, the United Kingdom created a large and exceptionally effective civil service and bureaucracy to oversee and administer policy over the empire. The United Kingdom of Keynes time also had a famous and very well-established social hierarchy with many politicians coming from the well-educated upper class of British society of which Keynes was a prominent member.  During Keynes time in the United Kingdom, Keynes could count on a wealthy and well-educated political class of elected officials to create responsible policy for the benefit of the nation.  He could also count on perhaps the world’s best civil service and bureaucracy to carry out policy.  A key component of Keynes ideas in a practical sense was to rely on elected officials to enact the correct economic policy.  Keynes was criticized during his time for his perhaps optimistic view of elected officials being able to act in the best interest of the nation and not in their own individual best interests.  Noted economists of the time like Joseph Schumpeter expressed their skepticism. 

Keynes’ trust in elected officials is critical.  For his policies to work he needed them to not only author and enact economic stimulus legislation in a crises which required deficit spending, but once the economy was stabilized and the crises over, to pursue responsible budget policy in the aftermath.  He was criticized by many economists during his time.  Their criticism was that one could not count on elected officials to be fiscally responsible after a crisis, to undergo spending cuts or higher taxes to repay the deficit spending during the crises.  They argued that politicians would mostly choose their own narrow self-interests over that of the nation at large.  A common response to that by proponents of Keynes is to quote Keynes, “in the long run, we are all dead,” to show the importance of the short run crises over long run budget issues. 

Given the political landscape in the United States of America in 2023, it would be difficult to believe that elected officials will act at all, let alone act to put the interests of the United States at large ahead of their personal interests and what will help get them elected again.  The 2008/2009 bipartisan fiscal stimulus law, The American Investment and Recovery Act, created in response to the 2007/2008 financial crisis, is a prime example.  The overall monetary size of the bill was too small, too small a proportion was spent in the first year, and much of the spending was determined by political motivations instead of economic facts.  In the years following, when the crisis was over and economy back on sure footing, fiscally responsible policies were not pursued.  It seems unlikely that responsible behavior will return to the United States government.  We have already recognized this fact with the independence of the Federal Reserve because it would be unwise to give elected officials control of monetary policy because they would be motivated by short term political forces like getting elected instead of what is best for the country.  The independence of the Federal Reserve is a central pillar of the price and economic stability enjoyed by the United States post-World War II.  It is not a one to one comparison, but Fiscal Policy should have some degree of independence from elected officials to help ensure the stability of the United States economy, especially in the long-term.      

My solution to these two issues is to create a new entity in the United States of America called the Federal Stimulus Reserve which will include automated budgeting legislation.  The Federal Stimulus Reserve will be modeled after the Federal Reserve system with a degree of independence from Congress that will allow it to act swiftly and correctly during an economic crisis.  The Federal Stimulus Reserve will be tasked with monitoring the economy and keep up to date research and models about best methods and ways to stimulate the economy during a downturn, that maximize public money spent and the Keynesian Multiplier’s effect.  It can also send fact based economic and fiscal legislation to Congress for approval, so that economic and fiscal legislation can be enacted based on facts and not corrupted by the personal goals of elected officials.  I will explain in more detail my ideas for the Federal Stimulus Reserve.  I have also included my thoughts on Asset Management for the Federal Reserve and my thoughts a practical and responsible methodology for eliminated the National Debt of the United States of American in two additional essays.

        John Maynard Keynes thought of solving incredibly large problems.  The General Theory seeks to do nothing less than tame the Business Cycle and smooth over the downturns.  While I do not think it is possible to remove downturns from the Business Cycle, I do believe we can drastically decrease and smooth out downturns.  By so doing, improve the economic friction that billions of people experience with economic recessions.  I remain optimistic about the future and our ability to make it better.     

 

 

 

 

 

 

 

 

 

Federal Stimulus Reserve

 

Idea: Create an Independently Administered Financial Reserve used for Fiscal Stimulus

 

Problem: Speed matters, when combating an economic crisis that can become a recession.  The two instruments the government uses to combat a recession are Monetary Policy and Fiscal policy.  Monetary Policy is provided by the Federal Reserve and Fiscal Policy is provided by Congress.  The Federal Reserve has proven able to respond to economic crises with great speed and creativity to meet new challenges, especially during the financial crisis of 2007/2008.  The Federal Reserve acts without political considerations and makes decisions based on economic facts.  While a modest fiscal stimulus was passed by Congress in response to the 2007/2008 financial crisis, it was not big enough or passed in a timely manner to prevent a recession.  In general, Congress takes a great deal of time to act, often politicizes stimulus funding, and allocates funding based on politics not economic need.  During times of economic crisis, the economy needs money injected into trouble areas quickly and with precision.  The Federal Reserve can do much of this, but only within the confines of monetary policy.  Economic Crises require a coordination between monetary and fiscal policy that focuses on economic need.

Description: To create independence, the Federal Stimulus Reserve should be modeled after the Federal Reserve System, including its own fiscal stimulus related mandate.  While not necessary, it could have a central location in Washington DC and regional branches like the Federal Reserve. 

To provide funding for the Federal Stimulus Reserve, the profits of the Federal Reserve’s open market operations can be sent to the Federal Stimulus Reserve.  The Federal Reserve makes a profit on its open market operations (buying and selling treasures) because it does not have normal financial operations costs and does not have to pay taxes.  Given that recessions very generally happen every 7 to 10 years, the profits from the Federal Reserve's open market operations, added up each year for 7 to 10 years, can provide the basic funds for fiscal stimulus when an economic crisis happens.  Once the crisis has been stabilized, the process of adding up the Fed’s open market profits can begin again.  Congress can also allocate funds to further bolster or replenish the Federal Stimulus Reserve.    

The stimulus funds can be used to combat a variety of economic crises and help buttress the efforts of the Federal Reserve.  For example, if a crisis originates from a supply side shock, like oil shortages in the 70s, the Federal Stimulus Reserve can buy oil and sell it to outlets that sell it to consumers.  The Federal Stimulus Reserve can give out small business loans, buy excess supply, etc...

The Federal Stimulus Reserve will also have a heavy focus on research, perhaps with a focused branch similar in function to the St. Louis Federal Reserve Bank.  The Federal Reserve Stimulus and its research will constantly monitor the economy and its changes in order to determine the best methods and ways to stimulate the economy.  Especially considering how best to maximize the Keynesian multiplier within the United States of America, in other words, keep as much stimulus money as possible in the United States benefiting US workers.   It will also research new methods for fiscal stimulus and the best way to stimulus effectively into the economy. 

Another component of the Federal Stimulus Reserve will be to provide congress with fiscal and budget recommendations based on economic facts after a crisis that involves deficit spending, so that Congress has a framework for responsible fiscal policy in the intermediate and long runs.  These recommendations could be in the form of a publicly available recommendation or in a draft bill to Congress that is filled in with the correct numbers and without any political “fluff.”  Hopefully this will give politicians the cover to enact responsible fiscal policy that is unpopular in the short run and address a central criticism of Keynes ideas, that deficit spending is not followed by responsible fiscal policy afterwards.

 

 

 

 

 

 

 

New Mechanisms for Fiscal Stimulus

 

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 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, that 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 1940s than they are today in 2023.  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 2023, 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 decreases 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 purpose 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 stimulus 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 spend money 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 people to actually go out and spend 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 be accepted at certain places and for certain items.  Vendors must 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.  The technology exists with credit cards to determine in real time or near real time if a purchase is eligible for cash back due to it being in a cash back category.  This same technology can be used to ensure stimulus money is spent in effective places.  Perhaps citizens could receive a first stimulus payment they could spend anywhere, but if they spend stimulus money on approved items, then they earn cash back which is added to their second stimulus payment. 

Automated Fiscal Policy Beyond the Short Run

 

Short termism and personal gain are inevitable with elected officials, we must acknowledge, design, and account for it with policy and institutions.  Elected officials rarely do the necessary and responsible, but unpopular actions and policies, especially after deficit spending to fund fiscal stimulus.  They deficit spend to stimulate the economy, but then do not implement fiscally responsible policies afterward, as any hint of austerity would be unpopular.  It's the nature of survival for elected officials.  It would require a level of patriotism and sacrifice that doesn't seem to be apparent now.  We cannot assume responsible action or behavior from Congress or the President.  The solution is building automatic mechanisms into the Federal Stimulus Reserve that make responsible fiscal policy in the aftermath of deficient spending to solve a crisis much easier to implement. In essence, making it much simpler for Congress to approve of the right policy and giving less opportunity for nonsensical add-ons.  An example could be when the Federal Stimulus Reserve deploys its reserve capital, then sends to Congress a prearranged or prewritten bill template filled in with the amount of fiscal stimulus that data and experts at the Federal Stimulus Reserve say is needed.  Congress then votes up or down on the bill to release the funds.  When the crisis is over, the Federal Stimulus reserve sends a bill to Congress which can vote up or down on the fiscal policy to take in the aftermath, in a similar manner to during the crisis but for intermediate fiscal budgets.  The numbers in the bill will depend on the crises, but the policy is the same.  This way all Congress must do is vote yes or no.  It dramatically simplifies the process and can focus public pressure on them to do the correct thing.  Hopefully this will further professionalize fiscal policy the same way we professionalized monetary policy with the Federal Reserve.

 

 

  

 

 

Asset Management for the Federal Reserve

 

Idea: Create an Asset Management Division within the New York Federal Reserve Branch to Expand the Federal Reserve's Ability to Directly Support: Credit Markets, Housing Liquidity, Corporate Bonds, and Corporate Assets During Economic Downturns

Problem: The Federal Reserve was created by the Federal Reserve Act in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system.  The Federal Reserve Act was designed to address the problems of the financial system in 1913.  Since 1913, technology and finance have evolved in ways not envisioned.  In response to the global Covid-19 pandemic and corresponding economic downturn, the Federal Reserve has expanded its Open Market Operations beyond buying and selling US treasury bonds.  The Federal Reserve has interviewed directly to support the credit markets by buying newly issued corporate bonds, existing investment grade bonds, and exchange traded funds (ETFs) that are based on highly rated debt.  Lacking the effective ability to quickly buy and manage these new purchases, the Federal Reserve contracted the work to the asset management firm, BlackRock.  BlackRock will oversee three debt buying efforts.  Putting such an important aspect of the Federal Reserve in the hands of one private firm is dangerous and should be done by the Federal Reserve itself during the next crises.

Description: An Asset Management Division of the Federal Reserve Bank of New York should be created to facilitate and management the purchases that the Federal Reserve makes to support the credit markets, which involve purchasing newly issued corporate bonds, existing investment grade bonds, and exchange traded funds (ETFs).  These asset types are becoming increasingly important to stabilize the financial system and our real economy.  Purchasing and managing new asset types that are beyond the Federal Reserve’s typical operations is and will be important in combating future economic downturns.

Additionally, the Federal Reserve should create a system for monitoring its assets and potentially the assets of the entire economy like BlackRock built with their Aladdin system, so the Federal Reserve can monitor the financial system.  This will be a truly monumental undertaking and be very difficult to accomplish, but the reward for success could very well be avoiding an economic depression.  It would be an incredibly valuable tool.

 

     

 

 

 

 

National Debt

 

        Most conversations revolving around the United States’ national debt and any plan to pay off the national debt are influenced too heavily by political considerations and do not take into effect enough economic or long-term thinking.  While this is understandable, it is not productive for the United States reducing its debt burdening in an effective, responsible way.  Too often conservatives boldly speak of paying down the national debt only made possible with truly draconian spending cuts, while liberals fail to give any significant attention to the United States’ ballooning national debt.  I will make several general proposals that will constitute the basic framework for a plan to responsibility pay off the national debt of the United States within a reasonable time frame.

        The United States should set a 50 or 100, year timeline for paying off its national debt.  By taking 50 or more years the United States will be able to pay off our national debt in regular manageable installments that still give us the financial flexibility to invest in key areas of concern; education and infrastructure for example.  If we were to set a 10-year time span, the payments the United States would have to make would be very large and require truly draconian cuts to public spending that would make any investment in education and infrastructure unfeasible.  Liken a payment time frame to a home mortgage an individual may take out to purchase a house.  That individual could pay off their house, a rather large sum of money for the vast majority of American citizens, in a ten-year time span, but the monthly payments would be oppressive for that individual.  They would not be able to afford to pay for virtually any recreational activity, take a limited vacation, utilize furniture, or have any creature comforts.  The bulk of their income would be dedicated towards making payments for their house.  By spreading their mortgage out to 30 years, they are able to make payments on their house and to live a more comfortable life; taking vacations, going to the cinema, attending sporting events, eating a wider range of food, and so on.  By creating a 50 or 100 year plan to pay off our national debt, the United States can make the payments necessary to pay off our national debt and still have the financial flexibility to pay for spending on education and infrastructure.  The United States as an entity has a much longer time horizon than a single human life.  So 100 years or more makes sense.   

            Adopting a logical, credible plan to pay down our national debt is all that is needed to restore what investor confidence the United States lost in political debt ceiling standoffs.  The United States was downgraded from its AAA bond rating not for any financial inability to pay off our existing debt, but because of a perceived lack of political will to pass a workable solution to pay off our debt.  While I have my concerns with the rational for the downgrade; mainly that rating agencies are taking an inherently objective problem, does the United States have the ability to pay its debt obligations, and applying a subjective lens, will the United States pay its debt obligation, it is undeniable that the United States has suffered a loss of credibility in the international world.  Simple enacting a credible debt reduction plan will increase the credit rating of the United States.  The United States has the ability to pay off our national debt; the only question is will the United States pay off our national debt.  With the passage of a credible plan, the question is answered.  The United States is not Argentina, who seemingly every decade threatens to defaults on their debt obligations and forces investors to take a haircut on their bonds.  Argentina is a country that is not perceived to always honor their debt obligations.  The United States is one of only four countries to never miss a debt payment, along with France, Canada, and Australia.  The United States is well respected in the international community and the international community has full confidence the United States will meet its debt obligations.  Again, the United States is not Argentina.  If we submit a plan to reduce our national debt to reasonable levels, the international community will be satisfied.

        I believe a concrete, rational 50 to 100 year plan to reduce the national debt of the United States will be a responsible way for the United States to reduce its national debt while still giving the United States the financial flexibility to invest in education and infrastructure.  It will restore any lost confidence in the United States from an international financial market perspective.  The United States would do well to adopt a logical plan under the general framework proposed in this essay to reduce its national debt.