Saturday, October 09, 2010

Brad DeLong points to this post by Karl Smith.
Really quickly, this Brian Westbury quote is brilliant because it is so perfectly, delectably wrong. Its the kind of thing you dream a student will say so that you correct the entire class’s misunderstandings in one fell swoop.
Money for stimulus programs has to come from somewhere and he argues that stimulus spending is similar to the old adage: “borrowing from Peter to Paul.”

“They (the government) either had to tax it from somewhere or borrow it from somewhere," says Wesbury and “by moving resources out of one sector into another you have now messed up the natural order of things and you’ve influenced it in a negative way."

Wesbury says THAT is the mistaken belief about government stimulus.
Different professors will approach this different ways but I prefer to go at it like this:

You’re exactly right Brian. The money has to come from somewhere. However, remember money and production are not the same thing. In the case of money, we have a technology known as the printing press which allows us to print money—as much money as we want. So creating money is no problem.

Won’t that cause inflation?

Yes, but we are below inflation targets right now, not above. We want more inflation. Right now the Fed is trying to get more inflation but is having trouble. Stimulus spending will help them out with that.

But, you can’t get something from nothing, can you?

No, you most certainly can’t. However, we aren’t getting something from nothing. We are getting something by combining together unemployed workers and idle factories. Remember a recession is a time when we have increasing unemployment and declining capacity utilization.

We have factories without workers and workers without factories. Those are resources that could be used to produce things but are not being used. If we can get those resources to work [we] will be able to make more things.

Unfortunately, we can’t, and ultimately it's because the economy doesn’t have enough money. Luckily we can print as much of that as we need.

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