Does The Money Have to Come From Somewhere?

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On Twitter I recently unveiled my jobs program, namely that the government should spend a bunch of money to hire unemployed people to do some stuff. Useful stuff would be ideal. Harmful stuff should be avoided. If some of it is only very slightly useful or some of the money is wasted, that’s not so terrible. The important thing is to locate people who are currently not working but who are open to the idea of doing work in exchange for money, and then to give them some money in exchange for doing some work.

This naturally prompted some smart-ass retorts about how the money has to come from somewhere. A fallacy that’s so commonsensical that even reasonable well-informed conservative economists sometimes fall into it. The problem, I think, is that because one of the functions of money is to serve as a unit of account we tend to measure wealth in terms of its dollar value, which leads people to confuse money and wealth. We say things like “Bill Gates has a lot more money than your average NBA player” when what we actually mean is that Bill Gates owns a ton of valuable Microsoft stock not that he carriers more cash around in his pockets or is pointlessly stockpiling billions of dollars in checking accounts. But valuable resources and money are actually different things.

To see the relevance of this, imagine what happens if you’ve got a country with full employment, and suddenly some guys show up with suitcases full of really good counterfeit money looking to buy stuff. Well, since people mistake the counterfeit for money, they’re happy to exchange goods and services for it. But the mere arrival of counterfeit hasn’t increased the quantity of goods and services the country can produce. The counterfeiters want a maid, so they need to find someone’s existing maid and offer her higher wages to go work for them. The counterfeiters buy some shoes, so there are fewer pairs of shoes for everyone else. What “has to come from somewhere” in this case isn’t the money (which is fake) it’s the maids and the shoes. There are only so many to go around.

But suppose the counterfeiters come to a country that’s fallen into recession? Here it’s a different situation. If they want to hire a maid, they can find one who was laid off a month ago. If they want to buy some shoes, this creates a very temporary shortage and the shoe-factory quickly un-cancels that extra shift. Then the guys at the shoe factory have higher wages and celebrate with a night out at the bar. Suddenly, the brewery needs more manpower and the bar needs to re-hire that waitress they had to let go. It’s the miracle of counterfeiting.

But still, that’s counterfeiting. We can’t just counterfeit. The money still has to come from somewhere, right? Well, yes, literally speaking any money spent doing anything has to have an origin. But the government can do something even better than counterfeit—it can create real money. And if banks are holding excess reserves, the government can adopt policies that discourage them from doing so. If banks aren’t holding excess reserves, the government can adopt policies that reduce the quantity of reserves they’re required to hold. And if people have money that’s just sitting around because they like safety and liquidity, the government can offer to sell them safe & liquid treasuries and then redeploy the money for other purposes.

Long-term economic prosperity is determined by how much value a country is capable of creating. America can create a lot more value per person than China can, and China can create a lot more value than India. But in the short-term, gaps can arise between what could be produced and what’s actually being produced. If that gap is small or nonexistent, efforts to “stimulate” production will lead to inflation or mere shifting of resources around. But if the gap is large, then policy needs to induce people who are currently not doing anything to start producing goods and services again. This requires money and the money does have to “come from somewhere” but it’s easy enough to obtain, and obtaining it can increase the overall quantity of wealth in the economy.