The Economic Hole -- What's the fastest way out?

I continue to believe that the fastest and best way out of the current economic crisis is for the government to put about $1.5T into the private sector immediately.

Government spending is NOT the right way to do it. It is extremely wasteful of human and natural resources. Resource allocation (i.e. spending) by politicians, lobbyists, and government bureaucrats is an economic evil. Sometimes a necessary evil, but an evil nonetheless. If it can be avoided, it should be avoided. In this case, most economists agree the goal is to put money into the private sector. Additional government spending is not necessary to do this -- all you need are net government transfers, which can be accomplished by cutting taxes or giving people checks.

I agree with Warren Mosler (http://www.moslereconomics.com) that the most efficient way to stimulate aggregate demand is to have a wage tax holiday. I think an income tax holiday may also be necessary to get enough money into the private sector. Cutting taxes on economic activity is obviously a good thing in general because it removes impediments to economic activity. Cutting taxes on wages and income is best of all because it incentivizes that very activity (i.e. production) which makes us all wealthier (in the standard of living sense).

Democrats won't accept an income tax cut, let alone an income tax holiday. For them it is a "giveaway" to the rich, as Democrats believe in redistribution of wealth as a desirable goal. I don't agree with them, but there is no right or wrong on the issue. It is an axiomatic difference between Republicans and Democrats, and right now the Democrats are in control.

The next best thing is to give every (and I mean "every") permanent American resident a check -- a big check. A check for $5,000. Bill Gates gets a check for $5,000. So does his wife and each of his kids. The President gets a check, as well as every member of congress. The CEO of GM gets a check and the CEO of Citigroup too. But also the elementary school teacher and every one of the kids in her class. The woman on welfare who hasn't worked in 5 years gets a check. The 100 year old great, great grandmother who has been on social security for 40 years. The newborn baby of illegal immigrants, as well as every newborn in the maternity ward in the poorest hospital in Alabama. Everybody serving in the armed forces, every college student, everybody. Even members of the Al Qaeda sleeper cell who have been here 5 years and have already earned their green cards.

Democrats should love this because it is redistribution of wealth in purest form. There is no so-called "taxpayer" who is paying for this. Whether or not you paid taxes in the past has nothing to do with whether this is on balance good or bad for you personally. In theory, this is on balance bad for people who have substantial net financial wealth (which includes foreign central banks holding lots of Treasuries) and good for people who have zero or negative net financial wealth. It diminishes the value of each dollar by creating more of them. It directly stokes inflation by driving aggregate demand higher while not directly increasing the capacity of the economy to produce goods and services. In normal times, it would be unfair and perhaps destabilizing to do this.

However, the problem we have today is deleveraging, deflation and falling aggregate demand. It is a vicious cycle that weakens creditworthiness and discourages investment and consumption, leading to more deleveraging and deflation. On balance, wealthy people too will benefit from an injection of money to fight deflation, spur aggregate demand and stabilize creditworthiness.

The beautiful thing about giving money directly back to the people is that there is no waste of resources whatsoever. No politician or lobbyist is directing thousands of workers to build schools in Milwaukee which nobody will use. No government bureaucrat is going to direct thousands of workers to toil away building a zero-emissions coal plant before the technology is ready. Those resources will be available to be allocated by the private sector -- by hundreds of millions of people making billions of economic decisions each year. This sounds like a novel idea, but it is called capitalism, and it is a distinctly more efficient economic system than what the Soviet Union created in the 20th century.

You may wonder, and the talking heads on CNBC will certainly ask, "How can the government pay for this huge handout? How can the government sell enough debt? Will the Chinese keep buying it? How can our children pay it back?"

The short answer is that the government owns a dollar printing press and doesn't need to borrow money from anybody. In fact, the bonds the government issues are no more debts than the dollars in which they are denominated. Government bonds are best thought of as liquidity sponges that soak up excess dollars and create a positive interest rate floor on savings. And if the Chinese want to hold their dollars, they have a choice between interest bearing Treasuries and non-interest bearing dollars at the Federal Reserve. If they don't want to hold their dollars, then they have to sell them to somebody else who will now have them.