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The flaws in Keynsian borrow and spend

Listed author(s):
  • Musgrave, Ralph S.

Borrow and spend is a policy with several weaknesses. 1, it involves government borrowing something, that is money, which government can create in limitless quantities any time. 2, the “borrow” part of borrow and spend is deflationary: the opposite of the desired effect. 3, borrow and spend may result in interest rate increases and crowding out. To get round this, governments print extra money and buy back government securities. This is a charade: governments here are engaged in “print and spend” while pretending to effect “borrow and spend”. 4, when borrowings are paid back, the initial reflationary effect is reversed, thus borrow and spend does not have a permanent effect, whereas print and spend does. 5, one of the ways that borrow and spend works is that it supplies the private sector with additional assets (bonds which pay interest). This reduces “paradox of thrift” unemployment. But the private sector actually NEEDS or WANTS these assets, thus there is no need to pay interest to induce the recipients to accept those assets. Put another way, governments should issue zero interest bonds (i.e. cash) not interest paying bonds. 6, Borrow and spend expands the national debt, some of which will be held by foreigners. Paying interest to foreigners when no interest needs to be paid makes even less sense than paying such interest to natives. For the purposes of influencing unemployment and inflation, print and spend is a superior policy to adjusting interest rates because the latter is distortionary.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 25434.

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Date of creation: 25 Sep 2010
Handle: RePEc:pra:mprapa:25434
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  1. Hillinger, Claude, 2010. "The crisis and beyond: Thinking outside the box," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 4, pages 1-61.
  2. Kellermann, Kersten, 2007. "Debt financing of public investment: On a popular misinterpretation of "the golden rule of public sector borrowing"," European Journal of Political Economy, Elsevier, vol. 23(4), pages 1088-1104, December.
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