Pieces of Paper

"Fiscal Conservatives" imagine that it's impossible to create wealth by printing pieces of paper. That's true, but the way that you distribute those pieces of paper is important--and you can stimulate the economy in ways that actually do create wealth by doing that.


It's true.  Adding printed money, or the electronic version of the same, to the economy only dilutes the wealth that is out there.  But the way you do it matters.  For example, if you give it all to a few people, in exchange for nothing, those people have now captured an accordingly large share of the wealth in the society, for doing nothing.  If those people just store it away and don't spend it, the effective influence on the economy is small--the people who got the new money are richer, but the functioning economy isn't.  The people who didn't get the money are poorer than they were before: they have the same number of dollars, but those dollars have less buying power.  Only a little though: the rich people have kept most of the dollars out of circulation.  Distributing money this way can prop up an economy at risk of deflation: if the rich people are scared enough, they'll take money out of circulation, which makes individual dollars worth more, but it means employers can't afford to hire and consumers can't afford to spend...a very bad situation for an economy.  Many economists regard deflation as the indicator that defines a depression.

If, however, you give the pieces of paper to people who are having trouble getting work , this can overcome a demand problem.  Lack of demand is a vicious cycle: Employers can't sell their products, so they cut back on workers, who now don't have enough money to buy stuff, so they cut back on spending, further reducing demand.  Giving money to unemployed people can break this cycle.  It does dilute the value more immediately, because poor people tend to spend their money right away.  But this creates demand, encouraging employers to hire and invest, which can create real wealth.  And at least at first, it increases the buying power of those who get it.

The Bush and Obama administrations mostly did the wrong things: giving the pieces of paper to banks, and cutting taxes.  Since poor people don't pay much in taxes to begin with, tax cuts, even if they're mostly directed towards poor and middle class people, tend to favor the rich.   A 2 percent tax cut for a middle class person may be sufficient to create 1/50th of a job, so it's not nothing, but a 2 percent tax cut for a rich person may be enough to create several jobs.  But rich people don't need to spend the money right away, so they tend not to--and if the economy is bad, they're especially prone to saving the money.    The government would have been much better off creating the jobs directly: spending on infrastructure.  This would have directly impacted the construction industry, the one hurt worst by the crash in the housing bubble, and it would have left behind new roads and transit for all of us to use in the future.  Even giving the money to banks, as was done with TARP, could have been done in a better way.  By requiring recipients to lend in ways consistent with what they'd done before the bubble, they could have boosted the construction industry and the economy as a whole.  Probably not enough to reverse the crash, but enough to slow it some.  Instead, the banks just pocketed the money--redistributing upwards, and ending the bank panic, but not slowing the wider crash at all.