QUOTE: "Explaining why cutting government spending (or raising taxes, which is the functional equivalent) is such an idiotic idea in the midst of the worst recession since the Great Depression is actually relatively straightforward. The real challenge is dislodging the conventional wisdom that is already so deeply-seated in people’s minds (including those of both Barack Obama and Paul Ryan).
There was no technological reason, for example, for the suffering during the Great Depression. We had the ability to continue to produce output at the 1920s level; what was missing was sufficient demand to hire everyone willing to work. As a consequence, living standards collapsed. That’s where the system breaks down, as it did in October 1929 and December 2007.
Situations like the 1930s and today benefit no one. Unemployed workers would like jobs, employed workers would like not to have to support (formally or informally) the unemployed, and entrepreneurs would like to sell more output. There is an obvious solution: the federal government can supplement demand.
Whence comes the money the government uses to pay the soldiers, airmen, sailors, marines, librarians, teachers, police officers, firemen, social workers, and national park rangers? It could tax the private sector, but that’s not terribly effective since it raises demand in one place by lowering it in another. So, they should deficit spend. To keep with my desire for simplicity in this entry, let’s say the manner in which this is accomplished is direct borrowing from the Federal Reserve (something that is illegal at the moment but can be, and is, done via a less direct route). This means the Treasury sells its debt to another branch of the government, in exchange for which it receives the cash it needs to pay those workers. When the debt becomes due, they sell more. Because all US debt is owed in a currency we are legally permitted to print, it is impossible to face debt default. We can choose to default, but we are never forced to.
Nor is this inflationary. This is true for a variety of reasons, the most critical of which being that it does not represent more money chasing fewer goods since the quantity of the latter rose–that was the whole point of the exercise. We wanted to lower unemployment and produce more output. I have, incidentally, two longer entries on how inflation really works:" John T. Harvey, Forbes
Retired Monk - "Ideology is a disease"