The helicopter drop
A number of economists are concerned that the Federal Reserve can't on its own stimulate demand. I am skeptical here, but with unemployment holding steady at 10 percent I am more than willing to consider alternate strategies.
The most straightforward would be what economists nicknamed the Helicopter Drop. At its core this means that Federal Reserve would print money and the IRS would mail that money to people as checks. It would be as if we dropped money on the nation from helicopters.
In practice, this would likely function through a payroll tax cut funded by issuing long-term bonds that are then bought up by the Federal Reserve.
Most people pushing back against this idea seem to be worried about the long-term solvency of Social Security and that cutting payroll taxes would gouge the Trust Funds assets. At its heart this is an accounting issue that I don't think anyone should be concerned about, but if you are, there is a simple solution: the payroll tax credit.
Under this plan you continue to pay your payroll taxes, yet you receive a tax credit exactly equal to your payroll tax contribution. As with the making-work-pay tax credit we'll reduce withholdings so that workers will see the benefits each week in their paychecks.
I'd be in favor of crediting both the worker portion and the business portion of the payroll tax because it would relieve strain on small businesses and simply pump more money into the economy. Yes, some of that money will wind up on the balance sheets of already cash-heavy corporations. However, a broad simple cut for all workers and businesses means that everyone who cash short gets relief and the government does not have to get into gory details of picking some businesses over others.
Larry Summers famously favored stimulus that was targeted temporary and timely. I favor that which is simple, bold and clear.
Karl Smith is an assistant professor of economics and government at the University of North Carolina and a blogger at ModeledBehavior.com.
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