Money Doesn’t Grow On Trees, But The Government Has An Unlimited Supply Of It

Yesterday on Twitter, I gave the short version of my theory of fixing the economy: “If people had more money, they’d buy more stuff, and more people would have jobs.”

I spelled out why I think giving people more money would lead to more spending and more employment here, but that Tweet prompted a telling objection from Sam Sherraden who asked “How about starting with ‘if ppl had more/better jobs they’d have more money.'”

His way sounds commonsensical to people, but it’s actually wrong. It’s true that if any given unemployed person had a job that he would have more money. It’s also true that if any given employed person got a higher paying job, he’d have more money. But it’s false that if the unemployment rate were lower, people in general would have more money overall. Society as a whole would have more real goods and services if there was less unemployment and more work happening. When people do useful work, that creates real output. But it doesn’t create money. The government creates money. Which is why the correct policy analysis starts with the observation that if people had more money they would buy more goods and services and more people would have jobs. More money would, in other words, lead to more output of real goods and services.

This is very unintuitive, I realize, and it’s actually one reason I try not to spend too much time speculating as to why Washington doesn’t do anything about unemployment. Part of the reason, I suspect, is that lots of important politicians, interest group leaders, media celebrities, etc. don’t understand this correctly. But if you have a country with lots of able-bodied people who aren’t working, lots of retail spaces and office buildings that are vacant, lots of construction equipment that’s not in use, and lots of factories that aren’t running at full tilt, then you can increase real output by putting more cash into people’s hands or by decreasing their indebtedness.