Why does government spending stimulate the economy? Where is that money coming from?



I understand that it is better for individuals to have money to spend in the market, but I don’t understand how the government get the stimulus money. If people are making less and paying less in taxes (plus tax cuts), isn’t the government low on cash too?

Bonus: how insulated are government jobs during economic turns?

In: Economics

Imagine you are making $300 a month. You’d be pretty poor, need a few roommates, eating rice and dried beans a lot, walking everywhere.

Now imagine VISA sends you a credit card with no limit. You go buy a car, move into a luxury condo, eat at fancy restaurants every day, and when the bill comes, you just take a cash advance and send in the minimum payment. You are living a lot better than you were, and creating jobs at the restaurants, so they are living better too.

That’s exactly what the government does. It borrows the money and just pays the interest – with borrowed money. Spending more than you have makes your life better, for now. The US is already spending a trillion dollars that it doesn’t have every year. Notice that no one is talking about that deficit spending, or how it has been propping up the economy. But watch what happens when a Democrat is in the White House. The GOP that created this deficit with its tax cuts for the rich will talk about nothing but the need to reduce the deficit, because they know that will kill the economy and make the Democrat look bad. Watch and see.

Short answer: they don’t. It’s debt spending.

Unlike the average person or company, governments often don’t worry about running a balanced budget. It’d be great, but the reality is that *debt-spending* (spending money they don’t actually have) is the way a lot of governments stay in operation. Basically, it’s like running up your credit card and never paying it off.

For example, at present, the US is over $21 trillion in debt. (That’s 21 thousand billion.) Would your credit card ever let you run up a debt like that? Absolutely not, but that’s because as an individual person, you’re unlikely to A) ever be able to pay that off, and B) will probably die long before that could even have a chance of happening, meaning that debt will be unpaid forever. Governments, however, are a different case. Their annual income is in the trillions of dollars, and the US government has been around for over 240 years, so it’s expected to still be around 240 years from now. It’s a safer bet that the money will be repaid… eventually.

So, governments are essentially writing those stimulus checks against money they don’t have. It’s like charging stuff to your credit card when your bank balance is zero; you’re just pushing that debt to the future to use the money right now.

In short: the central bank makes more money by issuing bonds. People buy those bonds with money upfront and get repaid over time with interest. We can basically keep doing this for a long time provided:

1. our economy is growing over the long term,
2. we pay our bonds on their schedule,
3. we maintain social order, and
4. we collect taxes

If any of those four things stops happening, then the interest rate on our debt will go up, meaning it’s more expensive for us to borrow. But right now, it is essentially free for us to borrow money, so it’s borderline irresponsible for us *not* to do so, even excluding the incoming economic meltdown from COVID-19. There are so many infrastructure projects and other responsible investments this country could be making with a trillion dollars of free debt that would pay themselves back and then some that we’re just not doing.

The US government sells debt in the form of Treasury Bonds to raise money. People buy those bonds because they are a super-safe investment. At the moment the interest rate on bonds is crazy low, and demand is very high, so the government is actually profiting quite a bit from it’s “debt”

No government that fully controls its money supply can run out of money. Essentially the US government borrows and pays back in USD which it can create out of essentially nothing. There are good reasons why no government would risk the stability of its currency (by irresponsibly managing it) because most of the social order and “real” productive capacity within its borders would fall apart should the currency be subject to hyperinflation.

There is also no particularly good reason for a government not run a reasonable deficit as long as the economy grows. (essentially borrowing to spend today what future citizens will produce and gets taxed against). In a crisis, it also makes sense for a government to issue more debt and issue funds in areas that it would typically not directly interfere with.

There is no “rule book” on how insulated government jobs are. Most government jobs are not for a profit seeking motive – law enforcement, managing the affairs of govt, postal services, maintaining critical infrastructure, air traffic control, education, social services, regulating certain companies and defending their borders. Most of these functions will need to be maintained even (and maybe especially so) during an economic downturn.

Imagine you are hungry, like really really hungry and your parents are too. Because they have just lost their job. So hungry that only thing you can do is lay down and be hungry. Your parents cant go to work, you can’t go to school. Too hungry to do anything. Your parents write out to your president (Trump) that they cannot work anymore and need help so that they can, so Trump looks into his closet and finds a food making machine that has the potential for making infinite food (The central bank). *Just as long as you give similar amount of food back at some point* (and the interest rate), you can have infinite food. (But there is a warning: If you use this too much there will be no food for anyone anymore)

The reason why the warning is there is because the machine is actually a time machine and it takes the food from the good crops of future. As a loan. And if you don’t replace those crops in time, then the future will have no food. Even with good crops.

So now your parents and you have food and can work harder, but the future is dimmer for the time period the food is transferred from. And if more food than needed is transferred from the future then the future people will need to use the machine again and again until there is no future crops to go to.

A rumored tale also tells about a machine that is able to save surplus of food of today for future, that they used to use for situations like this. But that machine has long time since been lost.

For a government that controls their currency, money is a tool, it has no actual value to them the way we value a $1 bill.

They use this tool to maintain the appearance of value in a tight range in order to prevent the appearance of value from going too far in one direction. Because when that happens, society begins to breakdown.

So essentially what we see as money is a tool used by the government to keep their society orderly by making everyone think their net worth is really worth what they think it’s worth.

The government prints it out of thin air the same way when we pay taxes, it goes back into nothing. The reason the government keeps track of their budget and gives us the appearance that they’re trying to keep it balanced is because they need a way to measure how much is flowing in and out of the system. If too much is flowing in one direction, then they know how to counter it.