Obviously, if federal lending can be used to stimulate aggregate demand at a much lower cost than fiscal stimulus, it’s something to consider. However, there are some potential drawbacks.
One potential problem is that when the government lends to lots of individuals, it changes the relationship between citizens and their government. The Treasury will want to make sure that as many people as possible repay their federal loans, since deficits look bad politically. But since the government also controls policy regarding loan repayment, this gives leaders an incentive to make defaulting on debt much harder.
This is happening with student loans. The federal government -- which owns most student loans -- has proven to be a ruthless debt collector. When you borrow from a bank and can’t pay it back, the government can step in to protect you with personal bankruptcy law. When the lender is the government, such protection may not be forthcoming.
A second, related problem is fairness. If the government is lenient in collecting debts, then people who pay back their loans may feel cheated when their neighbors fail to repay.
So there are serious political problems with using national lines of credit. But the evidence shows that it can give a big boost to demand, so the challenge is to find ways to minimize the political problems. Not only are national lines of credit a potential tool for recession-fighting, but they might even be useful for boosting growth to higher levels in a sluggish economy like the one the U.S. now is experiencing.