There is no reason for Americans to worry about losing their jobs to foreign competition, or to robots, or to a new recession. We have known for decades how to keep our economy running at full employment with only modest inflation. And we know how to do this without increasing the national debt.
When we have significant unemployment – either during a recession or because jobs have gone overseas or been automated – it means our “actual economy” is operating at a lower level than our “potential economy.” The potential economy represents the highest level of output and job creation we could enjoy without generating significant inflation (over 2-3 percent).
Right now our actual economy is about $300 billion per year lower than our potential – the goods and services we would be producing if virtually everyone could find a full-time job. We are down to 5 percent unemployment, but only because many people are working part-time or have dropped out altogether. The situation in Europe and the rest of the world is much worse. Inflation is very low almost everywhere.
When our economy is operating below its potential, it’s hard for people to find replacement jobs if their employer moves to Mexico or if their plant introduces more automation. But when the economy is booming at its potential, like in the 1990s, people can usually find another good job if they lose the one they have.
There are many factors that can increase a country’s potential economy – better education and health, more capital investment, streamlining regulations or fixing the tax code. But there is only one way to ensure a country fully utilizes its potential economy – ensuring enough spending in the economy to put all its people and resources to work.
All over the industrialized world there is not enough spending by consumers and businesses. This is very dangerous because it means high unemployment and political instability.
To stimulate the global economy, more and more economists are talking about using an approach proposed by the famous conservative economist Milton Friedman. Only half-jokingly, he said if spending in an economy is below its potential, the central bank (our Federal Reserve) could just print some new money and throw it down to people from helicopters. People spending the new cash would stimulate the economy and get everyone back to work.
Ever since, this approach has been called “helicopter money,” and it is now being seriously considered all over the world. (See, “Money from Heaven” in The Economist, April 23, 2016, and “Helicopter Money” in Wikipedia.) Nobody suggests literally using helicopters, but central banks could create new money electronically by “marking up” the spending accounts of their governments. The governments (in our case Congress and the president) would decide whether to spend the new money on projects like rebuilding roads and bridges, or by returning it to people via tax rebates. In either case, the economy would get a boost, and the national debt would not be increased because the government would not be borrowing this money from anyone.
We do not have to tolerate job losses from foreign trade, increasing automation or another recession. The laws should be changed to allow the Federal Reserve to create new money and give it to Congress to keep our economy humming at full capacity. This will not cause inflation, because there remains so much slack in the economy. People getting a job for the first time in years do not hold out for a higher salary – they feel lucky to get an offer. As we get closer to full employment, we must cut back the extra spending. But this country is still a long way off from that happy day, and the rest of the world even further.