Why printing money makes sense


The US Federal Reserve building in Washington, DC
PHOTO/Jim Young/Reuters

Beneficent Counterfeiters and Economic Stimulus

President Reagan once famously quipped that everyone who is supports abortion has already been born. In the same vein, it is worth noting that all the policymakers who don’t think we should worry about 9.6% unemployment have jobs.

This simple fact cannot be repeated enough times because it explains a huge amount about current economic policy. For the tens of millions of people who are unemployed, underemployed or have given up looking for work altogether, we are in a crisis. The economy is an absolute disaster, ruining their lives and also jeopardising the futures of their children and grandchildren.

But that is not the way that the people paid to contemplate economic policy in Washington see things. This gang is busy congratulating themselves because things could have been worse. They point out that if they had been even more incompetent that we could be in a second Great Depression with unemployment staying in the double digits for a decade.

Instead of worrying about the millions of unemployed workers today, they are worried about their deficit projections for the years 2018, 2020 or even 2025. This crew, which could not even see the $8tn housing bubble that was about to wreck the economy, wants the whole country to genuflect before their projections of deficits for 10-15 years into the future. This situation really would be funny if it did not lead to so much unnecessary suffering.

Obviously, we have to teach some elementary economics to the geniuses who design economic policy. The basic problem we face is a lack of demand. Note that this is the exact opposite of the deficit fixation – budget deficits are a problem when we have too much demand.

To better understand this demand problem, suppose that we had a super-effective counterfeiter: someone who could make near perfect copies of $50 or $100 bills. Suppose this person printed up $2tn of counterfeit money and began to spend it on all sorts of items. Our counterfeiter buys up houses and cars. They pay for incredibly lavish parties and trips. They hire all sorts of servants, groundskeepers and investment advisers.

What would be the effect of this counterfeiting scam on the economy?

In the current situation, it would provide an enormous boost to GDP and create millions of jobs. After all, everyone thinks the money is real. It is no different whether the counterfeiter and his underlings spend $2tn of counterfeit money or if firms suddenly start investing their hoards of cash or households begin to spend again as though the housing bubble had never collapsed.

That may sound troubling, but this is because the current economic situation is so extraordinary. In normal times, the economy is, at least partially, supply-constrained. Collectively, we want more goods and services than the economy is capable of producing. If our counterfeiter manufactured his $2tn in normal times, it likely would cause a serious problem of inflation. There would be more demand for cars, houses and other goods than the economy was able to supply. This would push up prices and wages, leading to a cycle of inflation that would persist until policy measures were taken to slow the economy – or the counterfeiter was caught.

In our demand-constrained economy, however, there is no problem of inflation. The economy can produce more of almost anything right now. The reason that we are not doing it is simply the lack of demand.

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