Wednesday, July 29, 2009

A better stimulus package than sponsoring work with debt

The flaw in that plan is that by pumping more dollars into the economy we devalue the dollar itself, in other words causing inflation and generally causing prices to rise. The theory behind sponsoring public works and employment programs is that, on top of putting people who are unemployed to work, it will lead to a higher output of industry, which will erase some of the inflation. Then, people would have dollars that could be spent on real goods, so the supply of money would parallel the supply of goods, whereas inflation has commonly been described as too many dollars chasing too few goods. The only problem is that there's no guarantee that the one will truly offset the other. A better way would be to redistribute wealth.

If we taxed the rich heavily, and used the money to fund the public works and employment programs, there would be no new money created. Instead, money that was likely being underutilized would be in the hands of people who are very likely to spend all or most of it. This would "prime the pump" of industry and cause it to start functioning at a higher rate. Because of the different utilization patterns more money would be chasing more goods. The trick would be to continue the wealth redistribution and not end it once the recession was over.

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