Today’s geyser of federal spending may have some people thinking of buried bottles, and others of hovering helicopters. They really should be thinking of the Connecticut Yankee.
“If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines . . . and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again . . . there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.”
Besides, building houses would take more time than burying and excavating bottles, for which the government would get the excavators’ immediate gratitude. So, bottle stimulus would advertise government’s confidence in its ability to guarantee the right amount of aggregate demand, and would serve the perennial goal of democratic politics — instant gratification for voters.
Milton Friedman, Keynes’s rival for the title of the 20th century’s most influential economist, offered this thought experiment: “Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.”
But why would they think that today? Even in pre-pandemic normality, 72 percent of the federal budget was transfer payments. Today, America’s skies are darkened with government checks flying hither and yon, blotting out the sun, each trillion-dollar tranche of spending considered a “down payment” on the next.
In 2002, Ben Bernanke, then a Federal Reserve governor, said, “A money-financed tax cut is essentially equivalent to Milton Friedman’s famous ‘helicopter drop’ of money.” By “money-financed” he presumably meant its revenue loss covered by borrowing. Bernanke also said:
“But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”
Perhaps this explains current government policy. Or the explanation might be that Democrats have been reading “A Connecticut Yankee in King Arthur’s Court.” In Mark Twain’s novel, a 19th-century American is transported back to Britain in the year 528. Condemned to death, he remembers that an eclipse occurred on the date of his scheduled execution, so he amazes everyone and saves himself by vowing to extinguish the sun, and then promising to let it shine again if his demands are met.
Today, a post-pandemic boom, powered by pent-up demand for everything, is almost as predictable as a solar eclipse, so Democrats are promising to create the boom by showering freshly created money on a grateful nation. Perhaps Democrats remember Paul Samuelson’s prediction. In the grim war year of 1943, Samuelson, a future Nobel laureate and co-author of a widely used economics textbook, thought peace, too, would be grim: He anticipated “the greatest period of unemployment and industrial dislocation which any economy has ever faced.” Any economy. Ever. What happened is known as the Postwar Boom.
The Federal Reserve promises to continue stimulative policy — near-zero interest rates — and its median growth estimate for 2021 is 6.5 percent, up from its 4.2 percent estimate just three months ago. Low rates mean that servicing the national debt this year is projected to cost only $378 billion, a sum equal to almost 25 percent of last year’s federal personal income tax revenue. Marc Joffe of the Reason Foundation says, “If interest rates return to the levels we saw during the 1980s, debt service costs would suddenly consume half the federal budget or more.”
Most economists say rates will remain low for the foreseeable future. In April 2008, most economists’ foreseeable future did not extend to September.