Saturday, November 23, 2013

This Is How You Fight Austerity and Grow Your Economy

You give money to the people who will spend it.

From Firedoglake:

- “President Evo Morales decreed Wednesday that an extra month’s wages should be paid as a special Christmas bonus to all salaried workers in Bolivia, at state agencies, in the military and police and in the private sector.
Or as Ryan Cooper calls it, the Free Money Solution:
Adopting some kind of change to give our central bank more traction to fight unemployment will very likely be critical in the coming decades, as America’s economy continues to evolve.

My preference is this: enable the Federal Reserve to send newly printed money to every citizen. Sounds strange, I know.


Handing out money addresses all these problems by working in a much more mechanical fashion. If people have more money then they will spend it, or pay down debt, leaving them less credit-constrained. If people worry that the policy will create inflation, then they will move their money from cash and savings to durable goods purchases. All this coordinates in the same direction: more spending, fuller capacity utilization, and thus more jobs. There are also some salutary social justice effects. Gigantic asset purchases from the Fed probably increase the wealth of rich people, and little makes it down to the median worker. Handing out money to everyone makes sure everyone gets a piece of the stimulus.

But won’t just handing out money create skyrocketing inflation? Not so long as there is slack in the economy. In a full-employment economy, printing money increases prices (inflation) because everything is already being used, and people use new money to bid goods and services away from other people. But in a depressed economy like we have now, there are lots of idle resources (e.g., a huge pool of unemployed people), and new spending just moves those resources back into use. Therefore, we can hand out money (say, $1000 to every citizen, every month) until inflation starts to creep up past 4% or so. Then we’ll know we’re getting close to full employment, and we can back off slowly.

The major objection for this policy is that it will reduce people’s incentive to work, which might by addressed by tweaking the policy here and there. But you know what also reduces the incentive to work? A years-long spell of mass unemployment. The critical thing should be to end the unemployment crisis as soon as possible, then handwring about possible negative downstream effects afterwards.

Probably the biggest barrier to adopting this policy is that it sounds silly. Elite pundits tend to unconsciously shape their writings around what they deem politically probable, and the free money solution is highly unlikely in the short term. But how else is one to change the bounds of the possible? Some kind of change is badly needed, and at the very least, it’s time to start talking.
Giving money to the rich through tax cuts, subsidies and bailouts harms the economy by taking that money out of circulation. Taking money away from the rich and giving it to the non-rich is the only way to create jobs and grow the economy.

No comments: