Those who don’t learn from Bob Rae’s mistakes…

Deficit spending didn’t even work for FDR: war, not the New Deal, ended the depression


Those who don’t learn from Bob Rae’s mistakes...

It is a piquant irony that, just as Bob Rae is being urged on all sides to admit his past mistakes, everyone else is about to repeat them. Rae nearly bankrupted the province of Ontario in the last decade trying to spend his way out of a recession, a fiasco from which he claims to have drawn the appropriate lesson. Yet it seems he’s the only one who has.

All across the world, leaders are drawing up plans for “fiscal stimulus,” in amounts that astound and terrify. China: $586 billion. Japan: $275 billion. Britain: $180 billion. And topping them all, the United States, where Barack Obama is preparing to add another $600 billion or so in “stimulus” over two years, notwithstanding a deficit that was forecast to exceed $1 trillion as it was—on top of the trillions of dollars the Federal Reserve has already pumped into the system. (A trillion here, a trillion there, pretty soon you’re talking real money.)

Here at home, Stephen Harper has gone from denying any possibility of a deficit during the election, to conceding, post-election, that it was indeed possible, to warning it was probable, to shrugging it off as unavoidable in the circumstances. But all of that was only prologue. Under fire from the opposition, who suggested it was not the economy but his government’s extravagant spending that was to blame, Harper went one step further at last week’s APEC summit in Peru. No longer was the deficit an unpleasant consequence of an economic downturn. Rather it was an “essential” instrument in fighting it. What was once a bug is now a feature.

So, to add to his ever-lengthening list of jaw-dropping about-faces, the former deficit hawk has become a believer in fiscal stimulus. How convenient.

If only it actually worked. Yet neither theory nor evidence gives us much reason to believe it will. However many times it may be invoked these days, and whatever its appeal as an economic cure-all (just add spending and stir!), it remains a fact that deficit spending has never actually worked as advertised. It didn’t work for Rae in 1991. It didn’t work for Marc Lalonde in 1982. It didn’t work for the Japanese in the 1990s, the French in the 1980s, the British in the 1970s, or the Americans in the 1960s. For that matter, it didn’t work for Franklin Roosevelt. (It wasn’t the New Deal that finally ended the Great Depression, but the war.)

The reason it does not work is that an economy is not so simple as the highly restrictive assumptions of Keynesian models would pretend: raising government spending does not, beyond the very shortest of terms, increase aggregate demand, but merely alters its composition, the public sector expanding at the expense of the private. It turns out you can’t get something for nothing, even in macroeconomics: the money the government spends has to be extracted from elsewhere in the economy, a process that rapidly unwinds any transitory gains in output.

Either it is taxed, which obviously cancels out most of the “stimulus,” or it is borrowed, leaving that much less for the private sector to borrow and invest. (What about Keynes’s famous “liquidity trap,” wherein banks refuse to lend no matter how much money is sloshing about? Isn’t that the situation we are in now? Perhaps in other countries: but in Canada, bank lending is up 11 per cent over last year’s pace. And in any event, there are other ways to inject money into the system besides the banks.) Such “crowding out” can be mitigated by borrowing abroad—but since foreigners can only lend us the dollars they gain from trading with us, that means imports have to rise, and exports to fall, far enough to generate the required trade de?cit. Again, this mutes any initial stimulus.

There is one other alternative: governments could order central banks to finance their deficits. But any resort to the printing press must eventually lead to higher inflation, and since markets know this, tends to be reflected almost instantaneously in higher interest rates. Serious buzz killer.

So the results of this latest Harperite conversion, assuming he means it, can be predicted. It will have little or no impact on the economy. It will, however, drive us deeper into debt. To a point, that might seem tolerable: even if the deficit were to hit two per cent of GDP, the debt-to-GDP ratio would soon resume falling under any reasonable growth scenario.

But suppose that “reasonable” scenario does not materialize for some time. Or suppose that, when the economy does at last revive, central banks are too slow to withdraw the liquidity they have been stuffing into the economy, as they always are, and we get a surge in inflation coming out of the recession, and the spike in interest rates that goes with it. Then the debt really starts to compound—just in time for the first wave of the baby boomers to reach retirement age, with all the strain that that will eventually impose on the public finances.

We are at serious risk of repeating the mistakes of the 1970s, ’80s and ’90s, in other words. Only this time we might not be able to avoid hitting the wall we seem so determined to hurl ourselves against.


Those who don’t learn from Bob Rae’s mistakes…

  1. as if WWII was paid for up front

    you’re losing it

  2. Some obscure guy who writes for the New York times and just won the Nobel Prize in economics, disagrees with your take on the Depression. Sorry Andrew, I have to go with the Nobel winner this time.

  3. This whole thing is not about stimulating the economy even if it would work. It is all about the elimination of the government subsidy of $1.95 per vote. The opposition parties are portraying their disapproval of the economic update based on the lack of action to stimulate the economy but the real reason is the elimination of the subsidy.
    The Liberals had better be careful here. They are already known for wanting to be entitled to their entitlements. To go into another election with Dion as leader would be a disaster of monumental proportions. None of the parties have the money to fight another election. This no more so than the Liberals.
    I suspect their will be a standoff at the Ok corral but in the end the Liberals will ensure that a few of their members will be absent for the confidence votes. They have no choice.
    To think the GG would agree to a so called plan to form a coalition government with a Separaist party as part of the coalition will have a significant negative reaction by the public.

  4. When times get tough [or even if they aren’t] everyone should pay their own bills, including political parties. If these so-called leaders aren’t willing to be responsible, why should anyone else? It’s time to show a little responsibility. At least I know who I wouldn’t want managing my finances, or governing this fine country.

  5. “When times get tough [or even if they aren’t] everyone should pay their own bills, including political parties. If these so-called leaders aren’t willing to be responsible, why should anyone else? It’s time to show a little responsibility. At least I know who I wouldn’t want managing my finances, or governing this fine country.”

    You going to plough your own roads, perform your own surgery, etc?

  6. Ah, here we go again. Suggest that some parasite should wean itself off the public teat, and someone comes along to roll up all the roads on us.

  7. Drivers aren’t parasites? They use lots of lavish, grotesquely expensive infrastructure all while paying hardly anything for it.

    But, roads are in the public interest. So are opposition parties.

  8. “Opposition parties are in the public interest”

    yup,… but paying them isn’t.

    It seems to me that the marketplace of ideas works just as the economy. Supply and Demand runs through all facets of life.

    Ideas will always be there. always new ones coming and old ones going. But the subsidization of current ideas stagnates the process. Old ideas don’t move on if they are paid to stick around.

    By taking away the subsidy many people (mostly the ones who benefit from the subsidy) argue that it is taking away their right to survive. maybe. But should those ideas survive if noone believes in them? Or should they just be pushed on down the road?

    The Liberals, the NDP, the Bloc, the greens and even the Conservatives…. they all raise money from small contributors. Some more than others. One can almost gauge the strength of the belief by what one is willing to do for the cause. The tories have many donors, the liberals few and the bloc almost none for example. So with such a disparity in how people care for their cause…. why should we fund all of them equally if the people who care aren’t willing to? (and before someone whines about not having… there is always ways to scrimp and save for something you consider a priority)

    Ideas that are past their time should be allowed to die rather than being kept on life support. Did the original 2 parties require that 40-80% of their funding be extracted from the government? Did the new parties that sprung into existence since? Can you really tell me that the progressive party, the so-creds, the reform, the NDP….. that none of them actually came into being because none of them were funded to the tune of millions by the taxpayer dole? No, they were new ideas, they were good ones, people believed in them and worked and donated to see them happen. Some of them were only good ideas for a short time and have faded away to be replaced by other ideas.

    The laws of nature are as basic to life as the laws of economic supply and demand. Nature abhors a vacuum and something, some idea will always rise to fill a void, (witness the dozens of parties who participate in the election, most without funding).

    If the ideas are good… the party will prosper, if the ideas are bad, stagnant or just unwanted/uninspiring,…. they will fade away.

    Some may wave their arms around in the air and call it an attack on democracy… like when Harper callously called an election to see what the people think… that kind of attack. In my mind tho. Harper has actually restored democracy and the balance of new ideas incoming and old ideas fading. Harper restored the most basic law of economics and nature…. supply and demand.

  9. Barcs, maybe that argument has merit. Unfortunate, any merit the idea has evaporated when the sole motivation for the change became securing the government’s hold on power for the next four years.

    Phase out the subsidy over 5 years. I’d vote for that. Eliminate it completely in three months? That makes the move solely political.

    Beyond that, I’m not sure crushing the Bloc is in the CPC’s interests, considering the Bloc is fairly leftist, the leftist vote is going to flood to the Liberals before the CPC in Quebec. Can the CPC afford the Liberals winning 30, 40, 50 seats in Quebec?

  10. Why should the canadian taxpayer fund a party that wants nothing more than to separate from the rest of Canada? Not a national party, do not run candidates other than Quebec. Why.
    And why should the NDP not support this proposal…the Greens would probably not survive…they would go to the NDP. The Greens, who were given a platform on the debates, no seat in the HofC, no elected representatives. I am sure you all watched the debates where it was four against one. Also in the HofC where it is daily 3 against 1. Ridiculous. If we are ever to get a majority gov’t in this country where something can get done for a change in Parliament, then we need to get rid of some of these leftist parties. Just MHO.

    • I think a lot of people in Quebec would turn around and ask why their tax dollars should fund parties that don’t represent them. That’s kind of the whole justification for the Bloc’s existence. Since only voters for the Bloc result in them getting funding, & they’re all in Quebec, I think it’s hard to argue anyone else is paying for them. Quebecers pay taxes, too. Unless all Bloquists are unemployed they’re funding this schmozzle too, and unless their opinions & votes are worth less than “proper Canadians”, they’re as entitled to this funding as any other party. It’s called democracy.

      Personally, I like having a party that further splits the Great Lake votes. That gives the rest of the country a chance to get represented.

  11. The sole motivation for alot of things comes from the primary responsibility of an MP.. and that is to keep their job. You might remember Chretien calling early elections about 10 mins after the reform elected their party leader… and the same 4 years later. Maybe Mulroney asking for the senate to be temporarily increased in size to get enough votes… Trudeau/Mulroney on deficits, Chretien/Martin holding on to Freetrade and the GST after promising to abolish them, Martin’s spending spree as PM, Martin ignoring a pseudo confidence vote until stronach crossed the floor, Harper forcing the last election a month before the opposition parties.

    All motivated not for the good of the country…. but for self preservation. You are naive if you believe it started with this government…… or in the last century even.

    I agree with you the move is solely or nearly solely political, but that does not automatically mean the results will be bad and it should be entirely discounted as without merit.

    I do suppose we could phase it,… sorta like Chretien phased in the current system (needing only a vote from only his party to implement by the way)….. which means imposed right now basically. But I might allow for the possibility to push it out a few extra months or 2 years even. I would not trust that if the government should fall in 2 or 4 years that the next governing party would simply continue with the plan that reflects negatively on their finances… Haste is unfortunately a requirement of any proposal in a minority or even near the end of a majority term like Chretien was.

    Sure the leadership of the bloc is somewhat left leaning, but you need to check your history too. Mulroney swept to one of the largest majoritys ever on the back of Quebec, and the BLOC was formed not from left leaning NDP voters but from caucus members from the liberal AND tory camps. The party is not so much left leaning as soveriegntist leaning with left leaning leadership. I would not expect the liberals to pick up all of the bloc voters, nor given the funding of the bloc would either the tories or the liberals benefit from fundraising from the voters they did pick up. Without the Bloc intervening I think Quebec is much like the rest of Canada… with the heavily urban seats leaning left and the more sparsely rural areas leaning right. (at least that is the evidentary breakdown now given the location of the tory/liberal seats, not to mention polls from the start of the 2008 election).

    In the current political climate I believe the bloc disappearing is at best a draw for both the Tories and the Liberals.

  12. I am not sure I can agree with the numbers argument barb.

    I do remember Martin vs Harper/Layton/Duceppe in 04 and 06. 3 vs 1 in the debate.

    Likewise I also remember Chretien vs reform/conservatives/NDP/Bloc… 4 vs 1 in the house… and the debates.

    The governing party is always going to have such odds stacked against them when they speak, and in the case that there isn’t enough political opponents there is sure to be a dozen lobby groups lined up to tell you how the government isn’t taking their issues into account and should be stopped. (watch the news on the next budget day. That’s a good example).

  13. Well done on “at Issue” tonight Andrew.

    The key point is that none of the hullaballoo that we have seen in the last day happens if the party grant system isn’t in play. No question SH is playing hardball and hitting the opposition where it really hurts and where they are weakest. He took a page right out of Jean chretien’s play book in doing what he did.

    But, as you emphatically made clear the government is on the brink of falling because the Opposition partys are acting in their own self-interest – protecting their own entitlements – not because of the steady-as-she-goes economic statement as Gregg insists (based on the HOC debate?! how long has been in Ottawa anyway?)

    So, the question now is:

    Will the oppo parties vote to bring down the government and trigger an election or try to maneuver themselves into creating a coalition BQ+ND+LP and asking the GG for the opportunity to govern?

    Their strong rhetoric has already begun to box them into a corner – to abstain/call-in sick would really make them look like a bunch of chickensh$ts. And it won’t stop the CP from cutting the funding and thus their throats in the short-term (in the long-term I agree with others that this might be a good thing if they learned to actually be real partys rather than political welfare bums).

    Triggering an election on this issue seems like political suicide. First they have (less-than)zero money whilst I think the CP base is energized more than it has ever been (i’ve certainly been getting lots of calls from fellow cp supporters). Money will come pouring in if there is an election.

    Second, the electorate will punish them severely for causing one on such self-centered and issue. And the overall economic issue doesn’t seem to be as pressing as it once was – the cp seems to be taking a cautious go slow approach – IOW they are showing mature rather than chicken little leadership.

    Third, if they lose again they will still loose their funding and likely any chance at 24 sussex for at least 4 yrs.

    Which brings us to the third option, or rather the third-rail option – getting into bed with the biggest political welfare bums of all the successionist BQ. How far would the stockmarket plummet if the oppo partys were to do such a thing? The looming recession will be made far deeper if these looney tunes get to be in charge – and they will clearly be the ones to blame.

    What will Iggy and Bob Rae do with Stephane presumably the PM?

    How long could they keep the coalition together?

    How badly would the ROC punish the LP and the NDs for getting in bed with the Bloc?

    How would the LP base in Montreal react?

    The aftermath could be far worse than it was for Peterson hooking up with Bob Rae – 12 yrs-plus of Stephen harper as majority PM.

    I confess that parliamentary procedure and precedent in non-confidence situations is not one of my strengths – perhaps someone who knows more (andrew?) could enlighten us on the possibility of the oppo partys forming a coalition.

  14. Barc:

    “In the current political climate I believe the bloc disappearing is at best a draw for both the Tories and the Liberals.”

    If so, then it means solid conservative majorities for years to come as they have a political fortress west of the Ottawa River excluding hyper-urban Toronto and some heavily unioniized ridings.

  15. Great post, Andrew.

    At first, I thought it was about fiscal policy and the economic downturn (boring!), but judging from the comments, it’s clear that you, like everyone else today, were actually discussing the far, far more important issue of public subsidies for political parties. And you did so without even mentioning the issue once. Touche.

  16. Great post, Andrew! Spot on. Well said.

    I’ve read this very same treatment at least one hundred times in the last year, and it gets better each and every time.

  17. Is Andrew Coyne the last sane man in the western media?

  18. A pleasure to read.

    This is going to be long and very very ugly.

    Where is all this borrowed money supposed to come from?


  19. Derek: Where is all this borrowed money supposed to come from?

    You got any kids, Derek? Today’s western societies hereby request that you make some, quick, because we are hell-bent on stealing from them. Hey, at least we all learned something from our parents’ generation.

  20. Andrew, you refer to Keynes’s “liquidity trap” that we are in now. If bank lending is up, why has shipping ground to a halt? Our exports of raw materials to China and imports of textiles, toys, and tv’s from China are down to a trickle. I know that Canada is only a small player in this, but the BDI (Baltic Dry Index) is down from 6929 three months ago to 715 today.

    It appears to me that while Paulson and company are shoveling money without strings attached into banks to strengthen balance sheets, the U.S. banks are not lending. At least the Brits, by buying into some banks, can force them to open the spigot.

    Two of the best performing capital equipment manufacturers and exporters I work with have no orders, and are laying off half their employees at the end of this month, with more to come if things don’t improve. So we don’t need protectionism to push us into a depression.

    And there’s nothing our government should be doing? And I don’t mean bail out the car companies!

  21. Isn’t war a stimulus to the economy? A vast investment in domestic manufacturing and employment?

    Okay, let’s call it war, then, and invest in infrastructure, families, education, medicine, and environmentally friendlier cars instead of in weapons and the training, outfitting and support of an army.

  22. Mr. Coyne – you can confirm this. Doesn’t Mcleans get a taxpayer subsidy?

    $1.95 is pretty cheap to support the party of your choice and keep the corruption and brown envelopes out of elections and funding. Very cheap indeed.

    If we’re going to whine and moan and the public purse – perhaps certain media companies – CTV, CBC, Global and certain magazines should be taken off.

  23. It’s a given that a ‘government stimulus package’ only means ‘make someone else pay’, in this case if it has to be by running a deficit, our kids (anybody remember Trudeau and Mulroney and what Paul Martin had to do afterward?). I’m not hearing any discussion at all about the platforms or the abilities of the gang of buffoons sitting on the East side of the House. So let’s see, they take over government and immediately impose a carbon tax (L) and an increase in Corporate Income Tax (NDP) and an increase in spending in Quebec (BQ)… Huh? That sucking noise you hear is your future going down the toilet.
    Suggest that you drop a note to the GG info@gg.ca and let her know that if the clown show decides to bring down the government that we want to go back to the polls and do something decisive

  24. This token savings that Harper has proposed (Gutting the per vote funding of the political parties) couldn’t buy every Canadian a small Timmy’s – $28 million is small potatoes in Canada’s Federal spending – If Harper had just left the wage controls on the Public and elected sector that would have been enough – He could save $80 Million/yr but cutting out the Gun Registry – Another failed election promise from the previous mandate. And I am not sure how the public sector agreed to the terms of the no-strike and wage increases – Did Harper offer guaranteed jobs? That might not be so good – Have them go out on rotating strikes if they do not like thier wages – Doesn’t cost us a nickel when they are on the picket line. Maybe a wage freeze should have been in order! – There are many that now rely on the minimum wage to go up for their wage increase – Some manufacturing companies have clawed back wages and benefits and the Public sector has a guaranteed increase?

  25. I don’t know if you can or cannot spend your way out of a recession. But i do know that it is politically untenable to be seen as not doing anything to help people feel safe in order to restore confidence.

    What i suggest is:
    1) for the government to guarantee loan to companies that need to spend for capital purchase that will increase productivity in the long term.

    2) to decrease corporate taxes so when the economy starts rolling again Canada will be attractive to direct foreign investment

    3) increase E.I payment to the unemployed who accept to go back to school to upgrade their skills.

    These simple measures would not bankrupt the public purse and would eventually lead to a more prosperous country.

  26. Just $30 million? Harper could have saved $300 million in not having called the last election, and another $300 million for not provoking the next one.

  27. Let’s be real: this is bad economics. I’m honestly disappointed. I liked Coyne, but I think he’s become a little too sure of his own opinions.

    There are some economic facts in this article, but from the jumble he’s made of them, it’s quite difficult to tell what’s real from what’s not, and what’s not is too glaring. I don’t expect you to take my word for it, but please, review the economics here before taking it seriously.

    I with I had the time to spell out all the errors in here, but it’s five and I’m not doing Maclean’s work for them.

    Please, just get the facts right next time.

  28. Mr. Coynes’ point is that any benefit from deficit pump priming is questionable or nonexistent but the debt incurred is a real and unpredictable cost. Nobody knows when economic recovery will allow Ottawa to increase taxes in order to pay interest on this new debt, and increase taxes even more to start paying down principal. Interest rates are low now but in the early 1980s–and maybe in our not too distant future–rates were around 20% and at that rate debt doubles in less than 5 years.

    Debt has to eventually be repaid and the interest has to be paid every year. Unless the deficit spending generates real economic growth which Ottawa can tax and thereby pay the interest and repay the principal, borrowing and spending the money is a losing investment.

    In October 1994 Paul Martin’s Dep’t of Finance released several discussion papers. In “A New Framework for Economic Policy” he notes that by 1993-94 total federal and provincial debt had reached $700 billion and annual interest payments were $56 billion dollars per year, which = $2000 per year for every Canadian. Will anyone argue that $2000 per year per person interest payments is prudent management of taxpayers’ money? The document continues,

    “The debt statistics are beyond real comprehension and thus have probably lost their power to shock. But in the context of policy to promote economic growth and job creation, does it really matter?
    Deficits, and the debt from which they now derive (*my explanation: like Quebec today with its $123 billion debt, Canada in 1993-94 would not have run deficits if it weren’t for the interest payments on all the old debt), matter a great deal for several reasons.
    -chronic debts cause taxes and the expectation of future taxes which discourages investors and entrepreneurs
    -debts and deficits cause real interest rates to increase once the level of debt becomes viewed as excessive by financial markets; high interest rates deter investment since they increase its cost
    -interest payments on accumulated debt crowd out government spending on programs Canadians value”

    Paul Martin was a good Finance Minister who understood the perils of deficit spending and the uncontrollable debts that borrowed money can create if interest rates rise fast. Ottawa had better be pretty sure it invests any ‘stimulus’ money into productivity enhancing ventures or the deficits and debt could be a decades long drag on the Cdn economy.

  29. I accept your point that government, especially our government, can’t but us out of a recession. Given the lack of concensus though, it seems that the exiting Conservatives and the emergent CPsofC had/have a major communication challenge. Maybe they should just act like parents: put their wallets back in their pockets/purses, cajole us to spent and say “Do as I say not as I do”.

  30. Coyne’s claim that deficit spending didn’t help Roosevelt bring the US out of recession is disputable. According to the US Bureau of Economic Analysis the US GDP in 1929 was $103.6B (billion). In 1933, before Roosevelt’s programs really got going, it was $56.4B, a drop of 54% over four years. From 1933 to 1940, the year before the US entered the war, it was $101.4B, a growth rate of 8.5%. These days that is a rate that only China can manage. Over the same period unemployment went from 24.9% to 14.6%. It is hard to avoid the conclusion that Roosevelt’s deficit policy had some significant positive impact on the economy.

  31. Please, Mr. Cohen, explain to me how WWII was NOT “deficit spending.” It has been said, countless times, that WWII brought us out of the 1930s Depression. If that is true, it seems to me then, all that needs to be done to lift us out of this Mini-Depression is for the government to spend on—highways instead of hummers—trains and transit instead of tanks—buses instead of ballistic missiles—schools instead of submarines—hospitals, health and healthcare instead of high-explosives—bridges instead of bombers —fighting famine instead of feeding greed.

  32. Sorry, its Mr. Coyne!

  33. Saying something countless times doesn’t make it true. Especially if economists are split on the matter.

  34. I am astounded that people can’t understand what the three stooges are trying to do. They are engaging in a mischievous and dangerous game of ganging up on our Prime Minister just for the sake of getting him out of office. In the heated exchanges that are taking place things are said that is poisoning the electorate; thereby destroying the goodwill that has taken years to establish. They should lose the $1.95 per vote subsidy; if they are as popular as they think they are finances shouldn’t be a problem. Instead of working for the common good they are engaging in nothing more than a mischievous plot – shame on you! PDF

  35. All Harper wants is an election-Harper does not like the minority position he is in , especially in this financial environment.

    Why do you think he call the last election?- This works great if you can take the opposition for causing the election being called, Harper does not thing without calculating the that he can win- He just did not expect a 3 option a collision. (ups).- Eugene

  36. Such fiscal stimulus may work on some level when the economy is so far down the tubes, like America’s economy, that hardly anything that government does could make it worse. But Canada is doing much, much better than the U.S. If we try to outspend the Americans on this one, we’ll be digging our own graves. Any stimulus packages, or bailout measures, must be moderate and carefully thought out. Tying any measures in Canada to those taken in America, even on a proportional basis, would be extremely foolhardy. In fact, we could really wreck our economy big time – but it would be our politicians’ fault, and not due to the global economic crisis.

    Besides, what Canadians really need is substantial income-tax relief. With the average Canadian household losing 45% of its annual income to taxes, there is no doubt that Canadians find themselves in a permanent “recessionary state” as is.

  37. Andrew, I don’t understand why the government has to borrow money at all. The government has the power to create money. Banks, thanks to their government-decreed bank charters, also have the power to create money out of thin air (that’s what happens every time a banker makes a loan to some client). So if a government borrows money from a bank in order to inflate the money supply (“stimulate the economy”), it creates the same inflationary pressure as would the government’s simply creating the money as fiat money and spending it directly into the economy on useful, wealth-creating projects (e.g. building a national HVDC electriicity grid to enable a massive expansion of renewable energy production, or ordering huge government-paid-for wind farms to be built by the private sector on a competitive-bid basis). The only difference: If government borrows the money from banks as long-term borrowing, it has to pay interest, requiring it to pay the banks two or three times the nominal value of the loan, depending on the term of the loan’s maturity. Also, every time a bank loans money into existence, it increases its asset base, and through the magic of fractional reserve banking, it acquires the right to create roughly another ten dollars, thus further inflating the money supply. In short, there is no reason whatsoever to believe that a government’s borrowing money into existence is less inflationary, in comparison to a government’s spending it directly into existence. The third alternative, of course, is for governments to borrow money from investors who already have existing money. What this does, as you point out, is suck assets into public spending rather than private spending, which may or may not create a stronger stimulus (depending on the details of how the money would be spent either privately or publicly), and also, it creates a long-term obligation to transfer wealth from the average future taxpayer to those well-off people, corporations, or foreign central banks that are wealthy enough to lend money to our government now. In other words, it’s a tax on the less wealthy which is paid to the more wealthy. This doesn’t seem like a great strategy, either. If we want wealth-creating stimulus that does not burden and impoverish future taxpayers, why don’t we simply set a target — say 2% of GDP (this is a random guess, name your best estimate) — for the government to spend money directly into existence on wealth-creating (hence non-inflationary) infrastructure projects, and forget about borrowing the money?

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