Can Stimulus without Debt Combat Secular

simply orders the printing of the amount of paper notes required to give the tax rebates. As explained in the previous section, paper money issued by the government and held by the public is not government debt. Thus, to combat the recession, the benevolent ruler implements “stimulus without debt.” The ruler keeps paying out tax rebates with new paper money until the economy approaches full-employment output. As this happens, consumer and business confidence gradually rises, enabling the ruler to gradually phase out the tax rebates.

The ruler’s adviser concedes that the ruler’s policy (stimulus without debt) has worked, but points out that when other governments have faced a similar situation, some have printed money and used the money not for tax rebates but to buy government bonds from the public in “the open market.” These are bonds the public previously bought from the government but which some members of the public now want to sell. These governments have called this bond buying “open-market operations” and asked their central bank to carry it out.

The ruler replies that using new money to buy government bonds in the “open market” is a much less efficient to way to increase aggregate demand for goods and services than using new money to give tax rebates to households. The reason, says the ruler, is that in a recession households will very likely spend a larger share of the tax rebates they receive than bond sellers would spend. Why? When a household receives a tax rebate, the household knows it can spend some of it, save some of it, and use some of it to pay down debt; the household instinctively realizes that the tax rebate has increased its wealth, enabling it to do more of all three. By contrast, when someone sells a government bond, the seller instinctively realizes that his wealth hasn’t changed: the seller knows he now has more cash, but he also knows he no longer has the government bond. Why did he sell the government bond? Although his wealth is the same, he