How to Combat Recession

This work analyzes all aspects of a new policy to combat recession: “stimulus without debt.” Fear of deficits and debt kept Congress from enacting a large enough fiscal stimulus to overcome the Great Recession that began in 2008, and this fear is likely to restrict fiscal stimulus in the next severe recession. “Stimulus without debt” is a new policy that would increase aggregate demand for goods and services in a recession without increasing government debt. Stimulus without debt consists of a transfer (not loan) from the central bank to the national Treasury (or to national treasuries in the case of the eurozone) so that the Treasury does not have to borrow to finance fiscal stimulus enacted by the legislature. In the United States, Congress would enact a fiscal stimulus package that consists mainly of cash tax rebates to households but also other temporary expenditures and temporary tax cuts; the fiscal stimulus would raise aggregate demand. The Federal Reserve would use new money to give a large transfer (not loan) to the Treasury equal to the fiscal stimulus package so that the Treasury does not have to borrow to pay for the package. Hence, there would be no increase in government debt.