The Magic Of Zero

It certainly seems to be the case that the number zero has a slightly magical impact on people’s thinking. One salient way we see that is that borrowing money to stimulate a depressed economy is widely considered to be a counterintuitive notion.

But imagine a small country that never borrows money. Alongside funding its normal operations out of tax revenue, it sets a little bit aside each year in an investment fund looking forward to the time when there’ll be enough money in the pot to build a giant monument to the country’s founder. Then along comes a recession—unemployment rises and revenue plummets. Under the circumstances, deciding to skip a year or two of contributions to the Monument Fund in order to maintain regular levels of public services is the most intuitive thing in the world. What would sound strange would be the idea that economic growth could be maximized by reducing spending to cut the deficit in order to “restore confidence” by making full contributions to the Monument Fund. Who cares about the Monument Fund?

Back to the actual situation, the basic logic of “deficit spend in a recession if you can get away with it” holds just as clearly whether you have a Monument Fund or a budget deficit.