Posted by WARREN MOSLER on January 30th, 2009
A rising criticism is that the Obama proposal has no exit strategy.
The Obama proposal IS the exit strategy from falling output and rising employment.
The target is the economy.
Fiscal policy is the tool to hit the target.
The mainstream notion of an exit strategy from budget deficits demonstrates a profound misconception about fiscal policy.
The right size for the Federal budget deficit is any size that supports output and employment.
Only government deficit spending can provide the equity/savings of financial assets needed to sustain aggregate demand.
Government finance has no solvency issue, and no sustainability issue.
All government spending is nothing more than data entry on the government’s own spread sheet.
Government spending does not ‘have to come from’ somewhere-
- Government borrowing does not take away savings.
- Treasury securities ARE savings that are added to total savings by government deficits.
Government spending is not operationally constrained by revenues.
Government policy that restricts our available savings by keeping the deficit too small depresses output and employment.
Increasing the deficit when the output gap is too large removes the fiscal drag that is depressing output.
The Obama plan is best thought of as removing fiscal restriction, not ‘adding stimulus’.
It is a step in the right direction, but probably insufficient to restore output and employment to even moderate levels.
If the President or any of his immediate advisors understood monetary operations and reserve accounting we would have seen a very different proposal, and seen it much sooner.