February 5, 2009 — Eight Years to the Day — An Argument in Favour of Stumulus

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To the day, eight years ago, Bill Mitchell defended the fiscal stimulus undertaken in Australia — a nicely concise collection of arguments in favour of macroeconomic boosting by the government, and a reference point to which I shall return in future posts:

But I also want to comment on this recurring theme that giving people money will not stimulate the economy because they will save some of it or pay of[f] debts. 

First, it is true that people will use the funds to restructure their balance sheets (pay off debt; create some net assets; save etc). That is a good thing given how precarious the household sector is with respect to its debt holdings. This reduces their vulnerability to losing their homes and enables the households to better withstand any possible (and likely) joblessness.

Second, this also establishes a fundamental point about how monetary economies operate. Budget deficits provide the funds for the non-government sector to build assets and net save. Public deficits finance private surpluses. When the government runs persistent surpluses, they squeeze private savings and wealth. If they persist for long enough you see the situation we are in now – which is a fundamental cause of the crisis – the non-government sector dissaves overall and experiences wealth reductions.

Third, if people did save a proportion of the injection – good – and what it means is that the Government’s stimulus was not large enough – that is, in terms of the spending gap that must be filled to maintain existing employment levels (and further create new jobs to soak up the huge pools of underutilised labour already existing). It means that the next stimulus has to be that much larger.

There is no problem with that. It is just what the Federal government as the monopoly issuer of the currency should be doing by way of responsible fiscal management.

The source: Fiscal stimulus effects ...