Last week, my good friend Curtis “Ovid” Poe posted a blog entry in which he
suggested that the UK’s recent decision to print more money as a way of
stimulating the economy is a fundamentally bad idea. While I personally don’t
know whether or not it is actually a bad idea, Ovid’s post didn’t convince me
that it wasn’t, because, as I said in a comment, “I’m quite certain that people
spending more right now is a bloody good idea. So if printing more money gets
people to spend more, then good, because that will encourage credit to start
Ovid kindly took the time to leave me an extended reply, to which I wrote a
rebuttal, which LiveJournal decided was too long and rejected. So I’m posting it
here on my blog, instead. It’s an interesting discussion anyway, and so
deservers higher visibility than a LiveJournal comment, I think.
So, on with my reply. Ovid, you wrote:
So the town council decides to print money money as a “stimulus” and give
everyone an extra $10.
I note that in the original post, you did not say that the UK government would
be giving everyone a check. You just said that that they were going to print
more money. These are not the same things.
First, if things get really bad the people know that this might be a one-time
deal, so they may simply hoard the money and not spend it, meaning that the
council has wasted resources.
Although your example is overly simplistic (necessarily so, given this medium),
I agree that just giving money to people may not stimulate the economy very
well. This is why Bush’s “stimulus” failed last year: A lot of middle- and
upper-class families got checks for $600 per adult, and since these people
weren’t having much trouble paying their bills, they just saved it. The Obama
administration is trying to do it a bit differently by giving more money to poor
people, who will have little choice but to spend it to alleviate debts and put
food on the table, which is obviously more stimulative. Conservatives hate it,
because such people don’t pay income taxes, but as they do pay payroll taxes,
it’s the smart thing to do to help out responsible people in need and to
stimulate the economy a bit at the same time.
So while I agree that saving a stimulus check is not stimulative, if you give
the money to people who spend it, it will be more likely to be stimulative. I’ve
no idea how bad off the people are in your hypothetical small town of 100.
Further, many people, seeing that money is simply being printed, now realize
that the value of their currency is diluted. Where there was once $2,000,
there’s now $2,200, meaning that each dollar is now worth about .91 cents
(particularly when you realize that money is a proxy for labor and the amount
of labor is a constant at any point in time).
I think that you’re overestimating how much people pay attention to such things.
In a town of 100 people, they may notice it, but in a country like the UK, most
folks won’t know that more money has been printed, and even if they did, are
unlikely to think that it dilutes the value of the money they have unless there
is inflation. It’s inflation that people will notice — how much their money can
buy — not the quantity of pounds sterling in circulation.
But let’s say everyone has an extra $10 dollars from the council’s actions and
rushes out to spend money on clothes. The two tailors now have to spin up
production again, but there might be a high enough demand that they can’t
supply everyone with new clothes because the tailors have limited supplies.
They can try to ration the clothes to “first come, first serve”, but in
practice, this isn’t what happens in economies.
Leaving aside the fact that there will be 1000s of other ways for people to
spend the money, you’re assuming that there is no inventory. But I think part of
the problem with the current economic situation is that companies have inventory
that they’re unable to move. If people start spending more money, some of the
inventory can clear out, and this will have a ripple effect, too.
In reality, the tailors would simply charge more for their clothes because of
the higher demand.
In your hypothetical small town, perhaps this is true. But I think that,
macroeconomically speaking, if a company can’t keep up with demand, they’ll be
happy to have that problem. But again, I suspect that there are inventory
build-up issues that would need to be alleviated, first.
Even if they didn’t want to, the people who want clothes first or want to
ensure that they get any clothes due to limited supply (since more people are
now demanding clothes) might offer more money, thus driving up prices again.
You’re assuming that the stimulative effect of the one-time distribution of
money would create greater demand than there was before the recession started,
which is unlikely. Given that you think that people are more likely to hoard
anyway, this example of going to the other extreme (the extra money causes huge
demand, more than there was before) seems gratuitously extreme. Honestly, the
problem with the current stimulus plans is that they are insufficiently
stimulative; no one thinks that they will be too stimulative. Indeed, as
Krugman writes, it is much more dangerous to under-stimulate than to
overstimulate, given the current situation.
You can’t provide unlimited amounts of cloth, so the tailors offer more money
to ensure that they’re the ones who can sell or, at the very least, that
they’re the ones who get the cloth first. This is a bad economy so they want
to sell while they can. This knock-on effect pushes prices up throughout the
Who’s talking about unlimited amounts? The distribution in your example will
have a limited stimulative effect, not unlimited. This could be a problem if the
government gave everyone £100M, but that wasn’t your example (or even remotely
in the realm of possibility).
This is what printing money does.
You have not demonstrated that. You’ve shown an example where distributing money
to people is either insufficiently stimulative, because they hoard it, or far
too stimulative, because people suddenly demand virtually unlimited supplies of
things. While the hoarding is more likely — especially if you give the money to
people who don’t need it — the latter is a straw man.
Besides which, “printing money” != “sending stimulus checks to people.”
What would have been better for the council is to start a jobs program.
Oh, I’m in complete agreement with you on that one. Creating jobs will be the
single best way to stimulate the economy. No question. My point is just that,
while I don’t know enough to say whether or not printing more money will or will
not be problematic, you are not convincing me that it is problematic. You may
well be right, but you’re not making a convincing case as far as I’m concerned.
Also, bear in mind that these are not normal times. Normal stimulative
approaches, such as lowering interest rates, just are not feasible. So
governments must find other ways to be stimulative. Jobs programs are the best
approach, as long as they start to approach the scope of job loss due to the
recession. But I’m not surprised that governments are looking for other ways to
try to stimulate the economy, even those that normally are frowned upon, such as
deficit spending. In Krugman’s words, the only way out of the current crisis
is for the government to “credibly promise to be irresponsible.”
Update 2010-2-15: Krugman has blogged about this.
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