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July 27, 2010

Where does the money come from?

Some people are calling for a second federal stimulus plan to help the economy. But wouldn't borrowing money for more government spending simply cause private spending to fall resulting in a no-net effect on the economy?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, this is the issue that economists call crowding out. And it is used by those who argue against federal government spending to help the economy. And the real question is, as you phrase it, ... well, where does the money come from when the government does have a stimulus plan and they don't have the tax revenues to support it?

"Well, obviously the government has to go borrow the money. Now is it a matter that that money is immediately taken out of private hands, which would have been spent anyway? Well, maybe and maybe not. Some of it could, but there also are other sources of money: In fact, there are about three.

"One obvious way is for the federal government to borrow from foreign lenders. And in fact we have done that: About half of the money that has been borrowed by our federal government over the last couple of years has been borrowed from foreign lenders.

"A second way is for the federal government to borrow money in our country that we would say is idle. Cash -- people that have a lot of cash around sort of keeping it in their sock drawer or in their safety deposit box -- if the federal government can borrow that then obviously that's not taking those funds away from any other investment.

"And then lastly the federal government can effectively borrow money by having the Federal Reserve print the money. So the Federal Reserve prints the money, and then that money is either used directly by the Federal Reserve or when the money gets into the private sector it is used by private people to buy the government bonds.

"So those are three ways that the federal government can raise money. Now they all have long-run implications, many of which we are now worrying about today."

Posted by deeshore at July 27, 2010 08:27 AM