The bailout money handed to financial firms was supposed to relieve the credit constraints of the economy. Perhaps this prevented a greater crash, but the effects have been relatively minor. Some of the bailout funds will be used by banks to pay dividends, bonuses, and to buy out other banks rather than lending it to credit-starved customers.
One cannot blame the bank chiefs from seeking to maximize gains to themselves and their institutions. One can blame the government for subsidizing the financial industry rather than focusing directly on the credit constraint.
The trillion-dollar bailout will have the consequence of a sharp increase in the federal debt, on top of the already large deficit. The borrowing will also crowd out global private investment. Congress got scared into a speedy adoption of the bailouts, without considering other options.
The economy’s credit constraints can best be relived with the ultimate credit, cash. Congress can authorize the U.S. Treasury to print $1,000 bills, and then give each legal resident six of them. Each citizen resident in the United States and each non-citizen legal permanent resident would obtain a lump sum of $6,000 in currency. Cash in their hands would have a psychological impact greater than a credit to their bank account.
The $6,000 would be a significant stimulus. If people spent the funds, that would stimulate business to replace the goods sold. It would at least temporarily halt the decline in retail sales. Some recipient would use the funds to pay down debt, and that would be good also, as one of the problems has been too much debt. Some homeowners would use the funds for mortgage payments, which would reduce the amount of foreclosures for a while. If the cash is deposited in a bank, that would help put capital into the banking system. Funds invested in stocks would help end the market’s financial waterfall.
With a population of 300 million, the total amount of funds would be $1.8 trillion. By printing the money, this program would not increase the federal debt. It would cause inflation, but that would decrease the real value of the debt. True, creditors would suffer some loss, but there is no free lunch solution. The issue is one of comparative analysis, of which plan has the least economic damage.
“Money to the People” has the advantage of being egalitarian. A poor person would get as much as a rich person, and the poor would have a relatively greater gain in utility, since a lump sum of extra money is more important to the poor than to the rich. An equal distribution of cash would also avoid the moral hazard of bailing out failure.
With calls now for a new stimulus package, a pure cash distribution should be considered among the other options. “Money to the People” may well be the least worst of the stimulus options.
Fred Foldvary teaches economics at Santa Clara University, California.