What if we just let the government print money?

Great Debates
1

I have wondered if it wouldn’t be simpler and more efficient if we just allowed the federal government to print a certain amount of money each year, say 20% of the previous year’s GDP, in lieu of collecting income tax and possibly even payroll or other taxes. I know that offhand this sounds terribly inflationary, but it may not be as bad as it seems. If workers did not have deductions taken out of their pay, they might settle for lower wages, allowing companies to lower their prices. Companies also would not have to pay some federal taxes, also helping to control inflation. I’m not sure if the government would still be allowed to borrow money; right now all this borrowing has, or will have, a strong inflationary effect. Lots of money could be saved on accounting, and we would no longer have to file income tax returns. If inflation did tend to suppress buying power, at least the burden would be shared by those in the underground economy, who pay no taxes now. This system might also be more fair than the present system in terms of the burdens (through inflation) put on the rich vs. the middle class and poor. Some allowance might have to be made for assets already accumulated, on which income tax has effectively already been paid, and for low-income people. Congress would no longer be constantly quibbling about taxes, and could concentrate on how to spend the money allotted each year. A system like this could even be extended to states. They could do away with income tax and other taxes and instead be given a portion of the money the federal government printed, perhaps based upon population.

Even if this system led to a yearly inflation of 20-25%, it might work out just as well as what we have now. It would mean that wages would go up by 20-25% each year, but we would lose 20% of this buying power through inflation, and the government would be funded. Right now we lose 20-25% of our buying power through taxes. So, aside from the accounting difficulties associated with a constantly changing dollar, things would probably work out the same, with a much fairer and simpler tax (or non-tax) system. I don’t think there would be “runaway” inflation, in the sense of hundreds of percent per year.

Recall that a significant portion of the federal budget now comes from increased borrowing; for every dollar the government spends, it borrows an additional 30 or 40 cents. Although the bonds get paid off when mature, the total debt keeps increasing and it is unclear if we will ever get it under control. This is almost like the government printing a lot of money each year, in the form of bonds, and so far it hasn’t led to runaway inflation.

I would appreciate comments on this. Obviously it would have to be fine-tuned, but I think it is not as impractical or calamitous as it might seem at first.

2

This idea is just plain silly. And your assertions are unfounded and countered by simple analysis of history.

Where do you think government expenditures go?

Much of it (eventually) goes to pay people’s salaries. Either directly (civilian and military employees) or indirectly (contracting companies, capital expenditures, etc).

What are the biggest expenditures now? Defense, Medicare/Medicaid, and Social Security. Those expenses are necessarily tied to inflation.

You state that current policies are necessarily inflationary? 20-25%? WTF? That’s more than 10 times the current rate of inflation. There’s no evidence that our current spending policies will create a significant amount of inflation. Our economy is depressed, not the reverse.

Runaway inflation of hundreds of percent? Again, WTF? If inflation reached 20-25% in real terms for a protracted amount of time, that would be an unprecedented level of inflation, or at least for the last 100 years.

Also, globalization. The dollar is one of the safest currencies in the world. If you want a global financial meltdown, this is a pretty damned good way to create it.

3

That would cause an enormous amount of inflation, making the dollar worth a lot less than it is now worth. It would deeply screw up the economy as people on fixed income would not be able to eat and those who had invested in debts would be paid back with worthless paper.

4

Could you start by fine tuning that glaring contradiction?

5

Not to mention that too many of us don’t get deductions out in the first place.

6

I seem to be getting the responses I expected, that letting the government print money would lead to runaway inflation similar to that in 1920’s Germany. However, there are some factors that should be kept in mind:

  1. The amount that could be printed would be limited, to a fixed fraction of previous GDP (except in wartime, etc.). The government wouldn’t just keep printing more and more money each year.
  2. What the government printed, it wouldn’t be taking in in taxes, so its spending power would not be higher than before.
  3. Since taxes were no longer taken out of income, workers would probably settle for lower wages and therefore businesses could lower prices.
  4. The money the government printed would, after all, go for government services and so would be a form of income back to the people. It wouldn’t be the same as a private individual counterfeiting money.
    So I’m not sure that there would be a large amount of inflationary pressure, and the burdens of deciding upon taxes and keeping excessive records would be lifted. I think it might take an economist to analyze in detail what would happen. Perhaps this situation could be modelled on a computer.
7

You are proposing the economic equivalent of cold fusion.

It’s been tried (in various scenarios) since fiat currencies were established and has never ended well, cause if it did work then everybody would do it.

8

I got this far, and could tell you were in over your head. You want workers to make less money in an inflationary economy?

Well, no, you don’t. You want them to keep more of the payroll. That’s laudable. But it’s risky to build such a high rate of inflation into the currency. It will devalue, and it will get dumped. Hence taxes to fund spending.

9

OK, let’s stop right there. Why would businesses lower prices if there is more money chasing the same amount of goods?

10

Limited by who, exactly? History teaches that we can’t trust a national government to put limits on its own power. One can dream of the American people being attentive to politics and voting out politicians who didn’t keep the money supply in check. History teaches that we can trust that approach either.

There are two problems with this assumption.

First, consider me. I have to pay about one thousand dollars a month on my mortgage. Right now I earned just about two thousand dollars after taxes each month, while the federal taxes eat up about five hundred dollars per month. Imagine if the federal taxes were abolished and I accepted a 20% pay cut. Then I would still be earning two thousand dollars after taxes and I’d still be paying one thousand on my mortgaged while keeping one thousand dollars. But because of inflation, the thousand dollars that I keep each month would be worth a lot less, so to me it would look like a really raw deal.

Second, businesses could lower prices by the amount that they saved on American labor costs. They could not lower prices that are based on raw material costs, on foreign labor costs, or on other costs that would not change.

Government money does not go back to the people individually. It goes mainly to those people who are able to hire lobbyists to get themselves some government money. In other words, it goes to the rich, or in today’s parlance to the “one percent”.

11

There’s numerous reasons why this is a terrible idea, but perhaps rather than arguing macroeconomic principles, let’s examine the effect of high inflation on individuals.

With high inflation, stores will have to raise prices on items on a near-continual basis. After all, if inflation is 30%, that doesn’t mean that a can of beans is $1 on January 1st, and then jumps to $1.30 twelve months later. That can of beans will be $1 on January 1st, $1.02 on January 25, $1.05 on February 4th, $1.08 on February 22nd, and so on. Stores will have to reprice everything continually.

As workers, the same principles apply. You will see prices going up continually; are workers going to settle for only getting cost of living adjustments once a year? As in, for 2012, they will make $50,000, but come January 1, 2013, they are due a 30% COLA?

If I’m making $50,000 a year, and I see prices going up all around me on a continual basis, I’m not going to be happy to sit and wait until next January for my next raise. I’m going to be scared about inflation and what it is doing to my pocketbook. I’m going to be demanding raises several times a year – and trying to negotiate with my employer to get bigger raises to reflect that costs are going to go up between my raise in January and my attempts to get another raise in March.

It’s also going to effect how I invest. Since the value of things is not going to go up in a predictable manner as in cases when there is low inflation, I’m going to be more reluctant to trust banks with my savings, and I’m also going to be less likely to invest my retirement savings in things like stocks that hold the potential for greater losses. Ultimately my savings goal will be to just do a little better than inflation – a nice 35% return ought to do it, and as I age, I will worry more and more about my retirement savings being eaten away when I am no longer able to work.

Although the OP hypothesizes about a “stable” 20 or 30% inflation per year, which he supposes people could get used to, the fact is that high rates of inflation are inherently destabilizing – not just because of the economic system, but also because high inflation scares the living shit out of everyone out of fear for their financial well-being.

Think about it, OP: do you really want to negotiate raises with your employer several times a year while having great uncertainty that inflation will remain constant at 25%, and not jump to 30, 35, or 40% for the next fiscal quarter? Seems like a nightmare to me.

12

In a word: globalization!

The dollar would continually be worth LESS compared to foreign currencies. That means foreign goods would be continually priced at higher and higher dollar amounts.

So, even if the rest of this crazy scheme works (and there’s no rational reason it should), the price of imported goods would skyrocket (in US dollar terms, if not in ‘real’ terms).

For example, if the supply of oil and demand for oil held relatively steady, the price of a barrel of oil would necessarily have to increase as OPEC nations would need to keep making the same amount of money, in real terms.

So, prices for oil and anything that relied on oil (transportation, plastics, etc) would inflate each and every year. That includes stuff like imported foods, clothing, electronics, etc.

Electronics? Clothing? Same deal. A lot of our goods are produced overseas. Those companies don’t pay their workers (or themselves) in US dollars. If the dollar inflates, they will necessarily need to charge more, in dollar terms, for the same goods to keep their own profits coming in. I suppose we could start producing more stuff locally, but that’s several years of makeup work and lost productivity. Not to mention a likely collapse of the global economy.

What the government printed, it no longer takes in taxes, so it’s spending power is the same? That’s complete hokum. Anything that involves a foreign component would necessarily cost more, in US dollar terms.

All this is very tautological. The government’s spending power can only stay the same if everybody agrees to play by these rules. Multinationals can just start pricing in Euros or Yen or something and let the dollar fall in value compared to foreign currencies. Then, they magically have a cheap American labor force that suddenly can’t afford all those (now) expensive imported goods.

13

I’m curious about something. This always comes up when talking about high inflation countries, that they can’t just print money due to inflation. But honestly, who would know? Let’s just say the government says they’re going to do the OP’s plan. Print some money to pay its debts, pay workers, fund things, etc. Who’s going to know that the money came from the printer in the basement rather than legally earned through taxes or something else?

14

Of course, the biggest problem of all is that if you think you can have your financial problems solved by having the government print more money, and inevitably that process causes bigger financial problems, so you have the government print even more money, and…well, you see where I’m going with this. Time to break out one of these.

15

Thing is, paper money is worth what people think it’s worth. Inflation is in part caused by the expectation of inflation. And even if no one knows that paper money is flooding into the economy, it will make itself felt because people will find that they have all this extra money sitting around, and so they want to buy more, which means higher demand, which means higher prices, which means inflation. A company that finds that they sell out their product at price $X is going to raise prices to $X+Y to maximize profits. And then they’re going to buy more materials and hire more workers to produce more widgets. But they find that their suppliers are raising prices, becuase they were selling out at the lower rates. And workers are demanding higher wages because everyone wants workers.

So even though nobody ever held a press conference and announced that they were increasing the money supply by $X, that extra supply of money makes itself felt. And once people realize that the government is just printing money to cover their debts, they stop treating the pieces of paper as money.

Money is a particular kind of good, and it is subject to the laws of supply and demand like other goods. Increase the supply of money and the value of money drops. Increase the demand and the value of money increases. And money that rapidly changes in value isn’t very good money, because it doesn’t work as well as a medium of exchange, store of value, or unit of account. If high unpredictable inflation makes people stop using dollars as a medium of exhange, or a store of value, or a unit of account, then dollars aren’t money anymore, just pieces of paper.

16

3 questions, and I think the first may require some speculation

  1. How much money would be needed to have a tangible effect? We’re not Zimbabwe, our economy is huge, so there should be more money we can print until it has an effect, right? Payment to a few hundred thousand Federal employees is a tiny percentage of the debt, so it seems like in order to preserve jobs, we should do whatever is necessary to create this money to pay them

  2. So what about foreign debt? I know that we’re an international global economy now, but surely there is less inflationary effect if we simply printed money to pay off our foreign debts

  3. I understand the basics of inflation theory, but how does it hold up when you look at the time when everyone was rich (or at least not in the middle of a recession) back 4 or 5 years ago? People had more money then, but how come when there is (lets call it "real) real money around, there wasn’t a fear of inflation and if we printed “fake” money, there is?

And if there is a significant difference, what if we did this?: All wages for employees are raised by 300%. To make up that money, the government prints it and gives it to the companies to pay their employees. So the money is “real” in terms that its earned through effort, but not real in terms of its being fake. But it would be as if every company just got richer and paid their people more. What’s the downside?

17

Well, we have created boatloads of new money during this recession, that’s what the stimulus was. It hasn’t resulted in inflation because the money mostly wasn’t spent. And it wasn’t spent because of the recession–you don’t want to open new factories and hire new workers if there’s not going to be demand for your products, and consumers don’t want to spend money during a recession because they’re afraid, which means companies cut back, which means fewer workers.

It’s a classic case of a positive feedback loop. Lack of demand means less pay which means less demand which means less pay, and so the economy contracts. And during an expansion it’s the opposite–everyone is buying, so companies hire which means more money for consumers and more confidence, which means more buying which means more hiring.

So the problem right now isn’t that there isn’t enough capital to build factories and hire workers. The country is awash with capital. Companies have lots of money available to expand production, but they don’t want to because there isn’t any demand for that increased production. And that’s because we’re in a recession, and that’s why we’re in a recession.

As for the notion of the government simply handing out checks to everyone, well, that’s been proposed, and if we want to stimulate the economy it would probably work a lot better than easy credit at the banks. Milton Friedman famously imagined dropping the money from a helicopter, but we’d probably end up mailing everyone in the country a check.

Inflation is caused by too much money chasing too few goods and services. But right now there are plenty of goods, and plenty of idle capacity that could be engaged to create a lot more goods and services, if only people wanted them. So if everyone had extra money tomorrow it could probably be swallowed up without creating too much inflation.

But of course, you don’t make everyone three times richer just because you triple everyone’s salary. There is still the same amount of stuff in the world, so all you’ve done is cut the value of everyone’s money to 1/3rd, which is another way of saying that all prices triple. But “rising prices” isn’t the best way to conceptualize inflation. It’s not that everything costs more, it’s that one good–money–is worth less.

And money that rapidly changes in value isn’t very good money, because it requires a lot of effort to keep track of. It isn’t a good store of value, because a dollar that can buy a loaf of bread one day can only buy half a loaf the next day. It isn’t a good medium of exchange because businesses have to constantly change their prices to reflect the new value of the money. And it isn’t a good unit of account because a dollar today doesn’t have the same value as a dollar tomorrow.

18

Say what now? How is it that you think the stimulus “created” money? The stimulus was funded by issuing government bonds. Bonds are not money.

Plus, $737 billion of the roughly $800 billion price tag of the stimulus has been spent.

I’m not sure where you are getting your facts.

19

This is technically correct, but the last couple rounds of quantitative easing were basically monetary stimulus. To the tune of over $1 trillion (maybe $2 trillion?).

So, while bonds aren’t technically money, the money to buy those bonds basically were created out of whole cloth.

Still didn’t create much inflation, despite many predictions that it would.

20

Quantitative easing is “a” stimulus, but it is not “the” stimulus. They are completely different things. But I take your point that Lemur was indeed probably talking about the Fed’s policies rather than the stimulus bill.