Where is the money going to come from?

Megan represents responsible economic management, which means that she follows more-or-less textbook micro and macro and has the concerns common amongst DC-centric administrators. It's a mix of Chicago-style modeling with upstate New York pragmatism and the sweep of a DC policy wonk.

Recently she wrote a reasonable piece about why worrying about growth was not enough, you also need to worry about the deficit:

So why are people focusing on the tedious and painful business of austerity, when growth would be so much better?  For the same reason you've probably opted to pay off the Mastercard, rather than waiting until you have time to publish a bestselling novel: it's not so easy to deliver robust economic growth on demand.  Whatever you may have heard, no one has a plan in their pocket to increase the trend rate of economic growth--indeed, so far we've failed to get it back to the levels that preceded this "one time factor".  Telling budget wonks that "we need more growth" is a bit like telling a cancer patient "you need more health".  I mean, yes, Dr. Insight, but can you be more specific?

To be sure, we do know how to boost growth in the short run: borrow a bunch of money and throw it into the economy.  But this is exclusively a short term strategy.  Moreover, stimulus doesn't fix our budget problems; it increases them.  The current federal tax take is somewhere south of 20% of GDP.  That means that for stimulus to pay for itself, budget-wise, it needs to have a multiplier of 5--which is to say that every dollar the government spends must generate $5 worth of GDP growth.  Recent estimators of the multiplier during the Great Recession were more like 1.5, which means that for every dollar we spent on stimulus, we generated an additional 10 cents in tax revenue.  This is not a financing strategy that can be kept up forever.  A lot of liberals seem to be thinking of stimulus the way that some conservatives think of tax cuts: as a sort of perpetual motion free money machine.  There is no such thing.

This is all reasonable and responsible and something that people from both sides of the political aisle would broadly agree with. It is also, however, wrong. Currently, the output gap in the US is not coming because we aren't inventing new iPhones, it's coming because of a lack of aggregate demand. We have a lack of aggregate demand because the private sector's savings desire is not being met. The private sector's savings desire is not being met because the Government is not printing the money people want to put in their bank account, so they are trying to save from each other and, of course, as a sector cannot. The Government is not printing the money people want to put in their bank because it thinks it 1) cannot, 2) if it does, it will inevitably result in inflation, and 3) even if it does, it will need to pay it all down someday and the number is already so big.

None of this is true. Fiat currency is a marker of sovereign power, and a sovereign which chooses to tax needs to supply currency the same way that a sovereign which chooses to imprison needs to issue laws. A failure to print (and unprint) is a failure to rule, and is ultimately the irresponsible position to take.

Today's bad GDP number provoked another article, where Megan sees the aggregate demand problem but does not see the solution which sits between her two pieces.

The good news, such as it is, is that personal consumption spending and investment were humming along, growing 2.2% and 8.4%, respectively.  The boost in personal spending was driven mostly by durable goods, which probably means that people are reaching the limits of hoarding--they've pushed the old car along an extra five years, put up with the oven that doesn't always work, and gone without a dishwasher, but they're now having to replace some stuff.  

In theory, that can touch off recovery, as production eventually ramps back up, and rising confidence ripples through the economy.  (Paul Krugman had a great explanation of this a while back, but I can't find it.  Curse your prolific output, Professor Krugman!)  But in the context of an otherwise lackluster GDP report, this is worrying in the short term: people aren't buying because they have more confidence in their future, but because they feel they have absolutely no choice.  We don't want to be in a place where people reluctantly pry open the piggy bank only because the old clunker is finally lying smoking in the driveway; we want an economy where people feel that it is safe to buy a new car, because they are likely to have a job in three years.

Businesses hire when they have customers. Business have customers when the customers have money they are willing to spend. Customers have money they are willing to spend when their piggy banks are nice and full. Their piggy banks become nice and full when the Government prints money to put in their piggy bank. Cannot come from anywhere else.

(To the pedants out there, and you know who you are, note that I am speaking in the context of the US case, and by "money" I mean net financial assets (equity) denominated in US$, by "Government" I mean the US Government and am assuming that the Treasury and Fed can act in tandem with each other and that Congress will govern, and by "business" and "customers" I mean and non-US Govt sector which would include non-US businesses and individuals who wish to transact in US$ as their specie of choice).