I hear many speaking about the vast reserves being “horded” by the private sector in the USA,  maybe some $2 trillion,  and not being used to stimulate economic growth, usually saying this should be used to create jobs.  On the one side we have those who argue that the government should increase taxes so as to provide the public sector more funds to spend on programs to create jobs.  On the other we hear that taxes should be held stable or even reduced and regulations should be relaxed so as to induce more  private sector spending. 

The first concern about this situation is that there is no guarantee that leaving more money in the hands of those who earn it will generate increased demand.   This is a reasonable assumption, but not a guarantee.  More importantly, private sector employers will not hire on more people simply because they have more funds.  They will hire more when demand for goods and services rises above what can be produced at present. 

The second concern is that funneling more funds through the public sector, i.e. raise taxes to generate more revenue to spend on public projects, runs counter to our intuitive belief that the public sector is less efficient, if not totally incompetent, to spend the money wisely.  Most of us are convinced that we as individuals know how to spend the money better .

The  Republicans argue for allowing the funds to remain in private hands and the Democrats call for channeling more funds through public expenditure.  I hold a middle ground.  I call for a return to inducing those “hording” funds to lend to those who would use them to spend, i.e. consumers.  This is essentially what we were doing until fear of shaky mortgages led to the “Great Recession.”  I continually call for a return to the “easy” credit policies that stimulated demand that drove our economy to the highest level ever.  And I insist that we will not get back to that record level until that “mountain” of “easy” credit is recreated. 

Of course I am opposed by those who say the “easy” credit is what caused the problem so let´s not  repeat the exercise.  This denies that things have changed.  The new Frank-Dodd law gives more control over this “easy” credit and, more importantly, makes it transparent.  The importance of this is that it was not the “easy” credit that caused the recession but our fear of what would happen to it caused by the absence of any understanding of the size, extent and nature of the credit pool.  With our new understanding of this credit gained by greater transparency and control we can return to those policies with greater confidence that this access to the “horded” funds will revive our economy.