Cheers fans might remember Kelly Boyd who dated Woody Boyd for a short time. During one Cheers episode, Woody tried to explain to Kelly that he did not have any money. She laughed and simply suggested that he go to the ATM machine. It seems Tom Nugent has found a similar way to pay for the Katrina-Rita cleanup:
Does anyone asking that question actually know how the government pays for anything? Essentially, the federal government pays for things in just one way – it credits a member bank account. Let’s review the process: The federal government writes a check to a construction company to pay for a bridge. The construction company deposits the check at a bank. When that check clears, the Fed credits the bank’s reserve account at the Fed, and then the bank credits the company’s bank account with “good funds.” Bottom line: Operationally, virtually all of the federal government’s spending per se consists of the Fed crediting an account – that’s all. The federal government doesn’t have any “box of money” that gets “filled” from tax collections and the proceeds from new Treasury securities and then gets “used up” by spending or lending. This is an operational reality. In today’s world of non-convertible currencies, spending is necessarily nothing more than “score keeping.”
Now pro-growth fiscal conservatives might be worried about such matters as crowding-out, but Tom counters:
Will private borrowers be crowded out? Impossible. The causation is “loans create deposits,” as taught on day one of every traditional money and banking class. The act of borrowing itself creates exactly that same amount of new liabilities (deposits). The process is “self funding” and circular, as a matter of accounting. The concept of a “pool of savings” that somehow gets “used up” by borrowers is a throwback to the time of fixed exchange rates and gold standards, and has no application in today’s floating-exchange-rate world.
To be fair, he continues:
The true economic cost of Katrina is the real, physical resources committed to repairing the damage that otherwise could have been used elsewhere to expand productivity or improve overall standards of living. But with today’s excess capacity in everything but energy, there is not going to be much of an opportunity-cost to rebuilding, apart from temporary dislocations of building materials and energy production. In other words, shortages of goods and services due to rebuilding should be temporary and modest.
But Tom – you have just described the crowding-out thesis. However, you have things backwards as usual. While it is true that there may be some degree of excess supply from Keynesian insufficiency of aggregate demand, business cycles are not permanent events.