Saturday, February 9, 2008

Fiscal Stimulus

A fiscal stimulus to the present weak economy is a good idea. To finance it with a projected $168 billion addition to the deficit over two years is not. Interest on the public debt is already consuming a huge portion of the Federal budget. There is an alternative. When an economy is not performing anywhere close to its capacity, there is no need to have part of the economy save (and make loans/buy government bonds) in order to put other parts of the economy to work. If our banking laws enable banks to create money by making loans, the government can enable the U.S. Treasury to do the same. When private business is discouraged by inadequate aggregate demand, they do not want to borrow to make new investments, leaving many human and plant resources unused. Government loans to citizens without any interest or repayment obligation can replace bank loans to business to sustain aggregate demand.

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