Increase the Money in Circulation

More

What's the single best idea to jumpstart job creation?

To understand the current employment crisis, you only need to know one thing: America's economy is operating below capacity. There's a $750 billion gap between what America is able to produce and what it's actually making. That gap explains the bulk of the employment problem, and the blame for that gap falls, more than anywhere else, on the Federal Reserve. The single most effective thing that could be done to create jobs would be for the Fed to return total spending in the economy to its pre-recession trend level.

The Great Jobs Debate: An Atlantic/McKinsey Report

How can it do that? Quite easily, actually. To increase spending, the Fed needs only to increase the money in circulation. It can do this by creating dollars and using them to buy things: Treasury bonds, as it did on a modest scale with its quantitative easing (QE) programs, or other securities. As money in circulation rises, so too will the value of spending.

Won't creating money like that spark inflation? In normal times, it would. But with lots of spare capacity in the economy, any price increase encourages firms to bring new production online -- and hire new workers. Not until the economy bumps up against its structural limitations will price increases accelerate. At that point, there's nothing more the Fed can do, and it must act to bring inflation under control. But at that point, many millions more Americans will be working.

The best way to create jobs is for the Fed to increase the money supply.

What's the downside? The Fed could overshoot a bit, allowing inflation to temporarily rise above levels it would prefer. But even that has its benefits; some prominent economists argue a temporary bout of inflation would help households pay down debts. There's a remote chance of a loss of faith in the dollar. But alternative reserve currencies are scarce, and a stronger economy would attract investment, supporting the dollar.

In fact, this monetary strategy has a long list of backers, from Milton Friedman to Paul Krugman. Ben Bernanke also embraced it when telling the Japanese how to escape their Lost Decade. So why isn't the Fed acting? Central banks are conservative and reluctant to make big policy changes. And the Fed faced fierce criticism for its QE2 purchases, which would grow if the Fed were more aggressive. The Japanese understood what to do and struggled to do it. Bernanke can surely empathize. Unfortunately, the cost of his timidity is sustained, high unemployment.

Follow the debate here.

>

Jump to comments
Presented by

Ryan Avent is The Economist's economics correspondent and the primary contributor to Free Exchange, an economics blog

Get Today's Top Stories in Your Inbox (preview)

Adventures in Legal Weed

Colorado is now well into its first year as the first state to legalize recreational marijuana. How's it going? James Hamblin visits Aspen.


Elsewhere on the web

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

Adventures in Legal Weed

Colorado is now well into its first year as the first state to legalize recreational marijuana. How's it going? James Hamblin visits Aspen.

Video

What Makes a Story Great?

The storytellers behind House of CardsandThis American Life reflect on the creative process.

Video

Tracing Sriracha's Origin to Thailand

Ever wonder how the wildly popular hot sauce got its name? It all started in Si Racha.

Video

Where Confiscated Wildlife Ends Up

A government facility outside of Denver houses more than a million products of the illegal wildlife trade, from tigers and bears to bald eagles.

Video

Is Wine Healthy?

James Hamblin prepares to impress his date with knowledge about the health benefits of wine.

Video

The World's Largest Balloon Festival

Nine days, more than 700 balloons, and a whole lot of hot air

Writers

Up
Down

More in Business

Just In