The Trillion Dollar Fix

A parable of money

Evil Daemon

One night, an evil daemon came and took away all the money.

When people woke the next morning, every wallet was empty. Every bank account was zeroed. There was no money anywhere in the entire world.

Immediately, there was chaos and confusion, not to mention wailing and gnashing of teeth. After a bit, things settled down, and then people started trying to figure out what to do next.

In the country of Republitania, people thought mostly about the money. Employers saw that they had no money to pay their workers, so they laid them all off. Workers saw that they had no money and no jobs, so they stopped buying things. In the end, everyone stayed in their homes and starved to death. What else could they do? They had no money.

In the neighboring country of Demostan, people didn't think so much about the money. Instead, they looked out across the land. They saw crops growing in the fields. They saw factories with machines and assembly lines. They saw roads and bridges, dams and canals, trucks and trains, ships and planes, power plants and power lines, refineries and pipelines. They saw every thing they needed to run their economy...except money.

Granted, the money was a big problem. But they didn't sit in their homes and starve. They looked at each other and they said:

"We would be fools to leave our crops rotting in the fields, just because there is no money."

"We would be fools to leave our factories to rust, just because there is no money."

"We would be fools to sit at home idle, when we are willing and able to work."

All the stuff was still there; they just needed the money. So they turned to their government, and said, "Create money. Put it into circulation."

And the government did. The government didn't create the same kind of money that they had before, or the same amount of it. As the money entered circulation, it didn't always go to the same people who had it before. Some ended up with more; some with less; many were annoyed; some were very angry.

But the money entered circulation, their economy picked up pretty much were it left off, and they didn't starve.

Banking Crisis

All the money in the world didn't vanish in a night, but one trillion dollars did a few years ago, and it didn't even take an evil daemon to do it. All it took was a banking crisis. The 2008 banking crisis took $1T out of the U.S. economy. You might think that money can't just vanish like that, but it can. Talk to an economist; they can explain how it happens.

The U.S. economy runs at around $15T/year, so $1T is one dollar in fifteen, or about 6% of the money. By an amazing coincidence, 6% is the fraction of the labor force that lost their jobs in the aftermath of the banking crisis. Unemployment is always 5% anyway, so adding 6% on top of that pushed it up to its current 11%.

Tragically, our response has been driven mostly by Republicans, who think first about the money. We have no money, they say, so those unemployed workers will just have to sit at home and...well, they're not actually starving (yet), but they are losing their savings; their homes; their careers—it's really bad out there.

The trillion dollar fix

So how do we put $1T back into the economy? It isn't hard.

The states

The states can't run budget deficits. When a recession hits, their tax revenues go down and their expenses go up. When they run out of money, they lay off workers. This is a Bad Thing. We want them to not do it.

The easiest way to make the states not lay off workers is to give them money. Say, $1K per capita. Total cost: $312B.

Homeowners

The banking crisis was precipitated by the collapse of a housing bubble. This left many homeowners stuck with mortgages that they can't afford and can't refinance. Their mortgage payments are sucking money out of the economy. We want that to stop.

We can reduce their mortgage payments by refinancing or restructuring their mortgages. The homeowners have already taken big losses on their houses. The government comes to the table with $333B. The banks accept a restructuring (i.e. lower interest payments) and the bond holders take a haircut. There is enough pain to go around, if that matters to you.

The end result is homeowners with lower mortgage payments and more money to spend in the economy.

Infrastructure

Infrastructure is things like roads and bridges. Much of our infrastructure is in poor repair. Right now would be an excellent time for the government to spend $333B on repairs and new construction.

Spending on infrastructure would put money into the economy, create jobs, and—when it's all over—we'll have some shiny new roads and bridges to show for it.

Stimulus Plan

states $312B
homeowners $333B
infrastructure $333B
postage & handling$22B
Total $1T

Inflation

But what about...INFLATION?

Republicans who claim that we have no money frequently cite the specter of inflation. The usual statement is that too much money causes inflation. Surely, if we put $1T into circulation, then the result will be inflation; possibly even hyperinflation.

It turns out that this isn't quite true. The real cause of inflation isn't too much money, but rather, too many jobs.

We have many problems, but right now, too many jobs isn't one of them. Under these conditions, injecting money into the economy will create jobs but not inflation.

Deficit

But what about...the DEFICIT?

Republicans who claim that we have no money howl incessantly about the deficit. It is hard to credit their concern on this: they never cared about the deficit when they were creating it.

But the deficit is big, and we do have to pay back the money some day. If Republicans really want to bring it down now now now, they could do so through tax reform. Here are some helpful suggestions.

If that doesn't bring in enough revenue, they can raise tax rates on the upper income brackets, say, back to where they were during the Regan administration.

Notes

create money
The Congress shall have Power [...] To coin Money, [and] regulate the Value thereof [...]
—U.S. Constitution, Article I, Section 8
one trillion dollars
That's trillion, with a T and 12 zeros
took $1T out of the U.S. economy
More precisely, it reduced aggregate demand by $1T/year. Which is actually worse. $1T is just $1T, but $1T/year is a loss that keeps on losing.
11% unemployment
The current official unemployment rate is 9% and change, but if you add in underemployed and discouraged workers, it is easy to justify a true value of 11%.
our response has been driven mostly by Republicans
and Democrats who unaccountably insist on parroting Republican talking points
We have no money
Actually, they say the deficit is too big, which amounts to the same thing. Never mind that it was Republicans who created most of the deficit.
postage & handling
and earmarks to bring recalcitrant legislators on board
too many jobs
When there are too many jobs, employers bid up wages to attract workers. Then they have to raise prices to cover their increased labor costs, and we're off to the races.

Steven W. McDougall / resume / swmcd@world.std.com / 2011 Jul 14