Utilizing the Transactional Efficiencies of Contingent Loans — A General Framework for Policy Application

The administrative costs of government-provided contingent loans are likely to be substantially lower than the costs of providing traditional financial products via the private banking system. Elaborating on the notion of “transactional efficiencies” (Stiglitz 2014), this paper argues that recent technological developments have increased opportunities for governments to extract economies of scope and scale from the tax and transfer systems of a developed nation state by extending its information, administration and debt collection assets to provide a wide range of low-cost loans to individuals. The ability to recover debts at low cost from future income allows governments to design loan repayment schedules contingent on income levels, which the private sector have proved unwilling to provide and which are welfare enhancing at both the individual and macroeconomic levels. This paper considers the broader range of “contingent” loans and provides examples from multiple countries where tax and transfer systems are already being effectively used as a “bank” to provide such financial services. Where previous discussions have focused on providing positive spillovers or addressing market failures, this paper argues the transactional efficiency of “administrative banking” is itself welfare enhancing. The main barriers to making greater use of the low transaction costs associated with “administrative banking” are likely to be ideological rather than economic.