It's Easier For the Government to Print Money Than to Spend It; Or, Monetarism Rulz!

Last Updated Apr 10, 2009 5:46 PM EDT

I view pre-crisis macroeconomics as embodying a broad consensus -- namely, use monetary policy to regulate aggregate demand and use fiscal policy when there is a project worth spending money on. I still agree with that approach.

Brad, you and I agree that aggregate demand is a problem (though probably you see it as a bigger issue than I do). But even if we play only on the turf of aggregate demand, and neglect sectoral shocks, we still don't totally agree. My response is to use monetary policy to keep spending high, to the extent that is necessary.

There is a common view that we are in a "liquidity trap" and that swapping cash for T-Bills won't have significant effects. In my view, inflating the currency is one thing the government is very good at. It's not that hard for government to print more money and get people to spend it, with or without a channel through short-term interest rates. If we have the will to enact an $800 billion fiscal stimulus, we have the will and the credibility to bring about mild inflation.

Or put it this way: it is easier to print money than to borrow it (and then raise taxes to pay it back). Note that if there is truly a liquidity trap, the fiscal multiplier also won't be very potent because the money will disappear into hoards; you can't have it both ways.

I would be very surprised if half of the people employed by the stimulus funds were otherwise unemployed; I'll guess 30 percent at best.

Parts of the stimulus plan consist of projects worth doing in their own right, whether in times of crisis or not. It doesn't make sense to oppose the bill in its entirety. But still I find a lot of wisdom in using monetary policy to regulate aggregate demand and evaluating government spending projects on their own merits.

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