Slate's Matt Yglesias: Print Money, Give It To The States

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Well, you heard it last night: Both Joe Biden and President Obama, talking about their beloved Simpson-Bowles plan. (Austerity! Shared sacrifice!) But here comes economics blogger Matt Yglesias pointing out just how pointless all this austerity talk is during a time of massive unemployment (and is a variation of Atrios' suggestion to give free money to the people who need it):

Matt Welch at Reason makes the good point that none of the downballot mayors and governors who spoke last night at the Democratic convention grappled with the reality that a lot of them have been dealing with the thorny-but-necessary work of closing budget shortfalls, rolling back pension promises, and trying to wrestle with the limitations imposed by public sector labor agreements. He then concludes on a terribly wrongheaded note:

One of the great ironies of this convention already is that speaker after speaker denounces Republicans for being unable to tell the truth or get their facts straight. Meanwhile, one of the most important truths of modern governance—we are well and truly out of money—sits neglected in the corner. This might be a great way to rally the Democratic base, but it's thin gruel for the majority of Americans who think, correctly, that the nation's finances have spun out of control.

As Mark Schmitt wrote last year regarding a book from Welch and co-author Nick Gillespie, this assertion that America is "out of money" has become an all-purpose crutch through which Reason can push an ideological agenda of skepticism about programs without actually making the case in its particulars. But it's simply not true that we're out of money. Many states and municipalities are up against hard budget constraints, but the US government has the ability to create US currency in unlimited quantities. It hasn't run out of money and won't ever run out of money. It would be nice for people to understand this point separately from controversies over whether public sector programs are wise or just.

In principle, the US government could print up or borrow a ton of money, hand it to state governments, and then have all the money used to cut taxes rather than to finance programs. This would not be possible in a world where the US government faced a hard budget constraint but, fortunately, we don't face any such constraint. The possible downside to a policy of greater reliance on money-finance or debt-finance is that it might make holding dollar-denominated financial assets less attractive to foreigners. That, in turn, would make imported goods more expensive domestically and American-made goods cheaper on foreign markets. If the United States were already at full employment that would be a very bad tradeoff, amount to a decline in average American living standards.

But at a time of mass unemployment, it looks like a pretty good tradeoff that should raise per capita output and average incomes. It'd be a bad deal for me personally (or for Welch) since there isn't going to be a writing-on-the-Internet export boom, I buy lots of stuff that's made abroad, and the DC regional economy that Welch and I participate in has no meaningful manufacturing sector. But for America as a whole it could be a boon.

But whether you think that would be a good idea or not, the important thing is that the question of whether we should be borrowing more is entirely separate from the question of whether the borrowing should finance additional spending or lower taxes.

Also good reading: "Seven Ways To End The Deficit Without Throwing Grandma Under The Bus."

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