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Less Stimulus, More Overdraft Protection

Wall Street Journal

Far and away the best policy solution I’ve seen to the economic hardships created by our response to the Covid-19 pandemic is a proposal by economist Arnold Kling. His analysis is that the U.S. has a personal and business liquidity problem, not a typical business-cycle recession that requires fiscal or monetary stimulus. Nor is it a bank liquidity problem, such as during the 2008 financial crisis. The immediate problem is that people and businesses are being forced into an unnatural cash crunch and loss of income to do the right thing for society. 

If that’s right, then tax cuts and delayed filing deadlines, however nice, don’t address the core problem. And while even I, a limited-government conservative, now support the federal government going big and sending checks to households, $1,000 or $2,000 isn’t going to be enough for many people to get by, let alone to ward off the worst unemployment and bankruptcy crisis since the Great Depression. 

Mr. Kling’s proposal would get substantial help directly to the people and businesses who need it, without sending money to those that don’t need it. It would also minimizes the drain on the federal budget—unlike most of what’s being considered in Washington. 

Here’s the idea: Every bank account in the U.S., personal or business, would have added to it a line of credit, at low interest, backed by the federal government. The credit line would be the sum total of all deposits made to the account in January and February. This bases the credit line on account holders’ pre-Covid-19 revenue streams, not their bank balances or creditworthiness, allowing them to borrow as needed. It would work like government-backed overdraft protection. 

This plan would calibrate aid quite nicely. Struggling businesses or individuals would use however much of their credit line they need. Those that don’t need to likely wouldn’t use it, since it has to be repaid with interest. The aid would also be direct, keeping waste to a minimum. 

A person who deposits two paychecks a month of $1,500 would expect a credit line of $6,000 plus whatever else was deposited in the account. For some small businesses it might be $200,000 or more. But it would be based on demonstrated income or revenue, and it would allow businesses to pay their employees through the crisis, which would minimize employees’ need to draw on their credit lines. And it’s better for employees to retain their jobs than be forced onto the unemployment rolls. 

The banks already know how to do this and have all the necessary regulatory relationships. Banks are awash in money that they need to loan out, but if demand were to exceed their reserves, the government would cover them. 

As Americans repaid their credit lines, the banks would get their money back. The federal government would have to step in only to cover nonperforming lines of credit, instead of bailing out nearly every U.S. household and business. The incentive for repayment could be made very strong, and like any bank loan, failure to repay on schedule would be reflected in credit-agency reports. 

This plan eliminates the need for mortgage forgiveness and abrogation of contracts. It requires devices and institutions already in place. And it targets the specific problem of household and business liquidity more precisely and efficiently than any other coronavirus policy response being considered at the federal level. 

Elected officials should take up Mr. Kling’s ingenious idea and turn it into law. There’s no time to waste before the next wave of bankruptcies and layoffs, and before the federal government takes on more debt than necessary.