Thursday, January 24, 2008

Sense of Events: The government has no money of its own

Decades ago, economist Miltion Friedman explained that "found money" does not alter people's spending habits significantly. A tax rebate does not make people wealthier, leading them either to pay down debt with it (which is "stimulus" neutral) or put it into savings (also neutral).

For people to spend more, Friedman explained, they have to increase their regular income. They have to make more money over time, not just once.

The central fact to remember when assessing any government monetary policy is this: The government has no money of its own. Therefore, the government has no money to stimulate the economy. All it can do is return money that it took away from the economy to begin with.

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