The Aug. 28 Economy column by Cecil Bohanon and Nick Curott, “Stimulus packages hurt economy in the long run,” is simply wrong. The statements that “government spending … is financed by borrowed money that must be repaid by future taxpayers,” and “government cannot create purchasing power” are rooted in the age-old fallacy that the federal government is just like everyone else and over time must balance its budgets.
In fact, the federal government is unlike every other entity in that it actually makes our money—metaphorically it has the proverbial printing press in its basement. Thus, the federal debt is a meaningless figure because the feds have the ability to pay it off tomorrow simply by creating 23 trillion new dollars and paying its bondholders (with much of that debt actually owed to various federal agencies, i.e., itself). Of course, it should not do that because pumping that much new money into the economy would cause uncontrollable inflation, but that underscores that what should constrain the size of the federal deficit (or surplus) is not the debt, but rather how much money should be circulating at any given time in order to create just enough demand to achieve a full employment economy.
Too few dollars in circulation results in unemployment; too many dollars causes inflation. So, the only issue is whether and how much the government should add to (or subtract from) the money supply in order to achieve low inflation and full employment (in other words run a deficit or a surplus). Just reflexively opposing a federal deficit as bad, as Bohanon and Curott do, is misguided and inevitably leads to bad policy.
Their assertion that “Government stimulus does not have a successful track record” is also wrong. While one could write volumes on the history of fiscal policy, suffice it to say that some stimulus packages have not been fully effective at increasing demand because the new money created did not go to the right people and/or it was not infused into the economy fast enough. But without those stimuli it is undeniable that total demand would have been much lower and unemployment much greater. I shudder to think where we would be today were it not for the recent stimulus legislation, or that in 2009.
In short, federal deficits are not inherently bad and likely do not cause future tax increases. If demand is insufficient to promote full employment because there is an inadequate amount of money circulating rapidly enough, a federal deficit (a stimulus policy) is what is needed. It is important that Americans understand that the federal government is not like every family or business and that the only relevant issue is the appropriate size of the money supply.
Gary R. Roberts
Former dean, Indiana University McKinney School of Law