The Case For Higher Government Spending (Fiscal Stimulus) – Draft January 2013 (Formatting Updated to be more user-friendly: May 2013)

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Table of Contents Quicklinks:

1. Background on Current Deficit
2. Background on Current Debt Situation
3. The National Debt: Is it even a problem?
4. The Real Problem In The Economy: Not Debt or High Spending, but Unemployment/Low Growth
5. How to Battle High Unemployment/Stagnant Production
6. Why Austerity (Spending Cuts) is Counterproductive -- Update April 2013: Flagship austerity study by Harvard Economists Reinhart & Rogoff debunked.
7. How to Boost Demand if Supply isn't the Problem
8. The Failure of Obama's Last Stimulus Plan: An Analysis
9. Risk of Inflation: The Boy Who Cried Wolf
10. Fiscal Stimulus Plan Specifics
11. Conclusion

In one week, President Barack Obama will be inaugurated for his second term as head of the executive branch of the United States. Economically, the news surrounding Washington is currently focusing on debt ceiling gimmicks, fiscal cliff drama, and cabinet appointees that would be uncontroversial in any normal political environment. However, the Washington consensus that steers the bi-partisan “mainstream” ubiquitously referenced in pundit banter is pushing one key economic policy: deficit reduction.

Congressmen, particularly Republicans, are pushing the mantra that big government regulation and spending is causing our present economic strife ( and our increasing debt levels are going to “turn us into Greece” ( Sadly, we're hearing similar rally cries from Democrats, who are insisting that both tax revenue increases and spending cuts be part of a plan for shrinking the deficit ( Again, the question still lingers, why is the deficit a problem and how did we even build one? More importantly, why are both sides telling us we need to cut the deficit, and how will this help us address the problems that Americans are really concerned about, namely: growing inequality, high unemployment (8% conservatively, 22% in more aggressive measures), and low levels of production/incom?

In this essay, I will go into a detailed discussion of why the deficit and debt are not currently a problem for the United States, why the current economic slowdown is a demand-driven phenomenon not supply-side, and why we need a fiscal spending stimulus, not austerity, to boost the economy out of the current rut.

Background on Current Deficit

In an analysis by the non-partisan Center for Budget and Policy Priorities, we can see that the year that Obama came into office, 2009, with Bush's budget and spending bills in place, there were massive deficits of nearly $1.5 trillion. Additionally, there's a breakdown of what the composition of the deficit is, that is, what expenditures were NOT budgeted for by increasing taxes to correspond to higher spending to constitute a “fully-funded policy”.

The biggest driver right now is probably a tie between Bush's tax cuts that were not passed with offsetting spending cuts (making them not “deficit neutral”) and with the economic downturn. In an economic downturn, the projected tax revenues to be captured from economic activity drop (due to lower activity than expected) and spending for emergency social measures go up higher than expected (things like food stamps and unemployment support). With the fiscal cliff deal leading to an increase in the top tax bracket, part of the Bush tax cuts driving the deficit will be eliminated, but the loss of revenue from lower taxes for the middle class also contribute to the deficit. So the current track for the deficit is to be quite manageable if there are no other shocks to the economy in the coming years. But what about the so-called “disastrous debt” that policymakers are telling us is mounting up with this new trend of piling up annual deficits?

Background on Current Debt Situation

The most common argument that comes from those concerned over national debt, is typically along the lines of “look at how much it has been growing,” or “look how much debt we have,” and it's usually accompanied by a scary graph like this:

By the looks of a graph like this, completely without context, a normal person would react with some degree of alarm to such a perceived trend of never-ending debt creation. But every American knows that a dollar today isn't the same as a dollar 30 years ago, because the nature of our fiat system of constantly-inflation of the money supply. So, let's put this debt into context, by comparing it to another nominal figure, GDP:

So we see that there's a still a trend for national debt to be increasing at a pace that's a little faster than our growth in national production. Is that a problem? Are we going to end up, as Lindsay Graham likes to predict, like Greece? With high interest rates, creditors questioning whether or not we'll pay, et cetera?

The National Debt: Is it even a problem?

The answer, if you've been ignoring the news for the past 4 years, is no. Our money supply is expanded when the Federal Reserve prints dollars in order to buy US Treasury Securities issued by the government when spending exceeds revenues collected. It also expands the money supply to buy government debt on bank balance sheets and other assets, but Treasury bonds only exist if there is a persistent deficit that necessitates the issuance.

That means that in order for the money to stay in the system and promote growth, the debt must continue to expand and leak into the economy through constant growth in government spending. In this sense, paying debt off without financing new spending by issuing new debt, is contractionary policy for the macroeconomy, which means less money to go into your family and friends' hands to help clear markets where there's plenty of supply in both capital and labor.

Because we run the Federal Reserve, and Congress can order it to create funds to meet obligations under any circumstance, that means there is no real solvency problem in the “national debt”, Social Security, or essentially any dollar-denominated obligations.

On its face, this might seem lilke an absurd idea. I can already hear the cries of “What about Weimar!? Do you want us to be like Zimbabwe???” I know, it sounds totally crazy and goes against a lot of principles that we conduct our personal, household, or business finances. But let's put this in perspective, does printing money in mass quantities really always lead to hyperinflation?

Historically, we've always tied the value of our money to gold, which constrained our supply of money by how much gold was out there. But, thanks to Nixon (our last liberal president), these days, money doesn't have any pegged value to any commodity, and thus modern money has taken on a completely new use and place in the economy.

The graph above illustrates one example where the Federal Reserve has created over $2 trillion in the span of only the past few years, and yet borrowing costs of the government have been close to 0% in the short-term, and less than 1.5% in 10-year maturities, and inflation has been non-existent in consumer prices. If we have a problem of spending and creating too much money, where's the inflation that people are saying would happen? Where's the skyrocketing cost of debt from lack of confidence? Nowhere to be found. Perhaps investors know that there is no real default risk, and have no reason to fear insolvency, thus demand for US Treasuries is still at very high levels.

That point aside, if you're still not convinced that rates on debt won't shoot up and inflation won't come crawling up on us, let's analyze the composition of the ownership of the national debt and examine the various scenarios under which a spike in interest rates could occur.

For some background, the vast majority of our debt is owned by the Federal Reserve and other banks and federal institutions statutorily limited in their ability to sell the bonds. Also, because we don't have a gold standard or a hard peg to any foreign currencies, we have total freedom in creating dollars to make good on Treasury obligations. The only concern of high debt would logically be that if rates go up, then financing of new debt would lead to higher interest payments which could become hard to sustain going forward.

How would rates jump? Well, the single, sole mechanism for rates to go up is a market selloff of US Treasuries which would lead to a bidding down of market price, and a corresponding increase in market yields. The incentive to sell off government bonds comes when the general economy is growing and there are viable opportunities for returns in excess of the low, safer yield of Treasuries. In a depressed economy, there really is not much of an alternative, and risk-aversion is high, so people are more willing to hold safe assets.

As mentioned before, the vast majority of debt is held by domestic institutions and investors who are holding to maturity. That leaves the roughly 1/3 of all outstanding US Treasury Securities that are owned by foreign investors. That means, for rates on the bonds to go up, these foreign holders would need to rapidly sell off their holdings (dropping prices and leading to higher market yields), which would devastate their currencies. Reducing their holdings of the dollar would flood the foreign exchange market with cheap dollars which would strengthen currencies like the Chinese Remnimbi and the Japanese Yen. This would be a disastrous policy for either China or Japan (the two largest foreign Treasury holders) to undertake, since their economy relies so heavily upon American demand for their cheap exports. With stronger currencies relative to the dollar, their selloff would hurt them, but it very well could lead to higher rates.

But even this near-impossible scenario would easily be managed by a bit of finagling by the Fed. Because of all the rapid money-creation by the Fed under the QE programs, there's now currently nearly $2 trillion sitting in Federal Reserve accounts paying currently 0.25% to banks who own the accounts. The reason why the Fed is paying this rate to them is so that banks won't just throw all their money into Treasuries, sinking rates even lower! So if the Chinese and Japanese even dare to make such a foolish decision to sell off our Treasuries in order to spike rates, we'll easily be able to absorb the demand shortfall by adjusting the interest paid on reserves to change the incentives of banks by channeling it into Treasuries to suck up the securities sold by the foreign holders.

Additionally, as seen in the figure above, our current "national debt burden" is not much of a burden at all. Our interest expenses on the debt as a percentage of GDP are at the lowest level in decades. So when and if rates do begin to normalize at higher levels, the expense burden will still be well within a healthy historical range. It's also worth noting that the only reason rates would really return to normal would be if the economy was growing and there was an inflation risk. If that were the case, GDP would be growing and thus would make any debt or interest expenses even more manageable on a relative basis.

In summation, we can't default on obligations that are issued in dollars when we actually print dollars. And we know the Fed has printed lots of dollars in the past few years, which didn't lead to Weimar inflation or really high borrowing costs. And we know that rates can only go up if there's a selloff in the market, which could only be done by the foreign holders who don't have an obligation to hold to maturity (as most domestic holders through federal programs do have). And if they try that, we can easily absorb the demand to reduce rates by changing the incentive structure of member banks of the Federal Reserve. True increases in rates will likely occur only in the face of economic growth, which would make any load less cumbersome.

But then there are some who say that the United States is just a unique, once-in-a-lifetime case because we have the reserve currency and we have benefited from a flight to safety, and that maybe there won't be a selloff but that's only because we are so huge and dominant. But this phenomenon isn't unique to us,, there's another economy out there who doesn't have any hard-money constraints (no gold standard, foreign debt, etc.) and also can print their own currency: Japan.

Japan provides the perfect alternative example of a non-reserve-currency monetary sovereign that has enormous debt levels which are having absolutely no effect on their cost of borrowing (which Japan's has been stuck at 0% for well over a decade now, despite skyrocketing debt).

Why haven't Japanese debt costs jumped in the face of this piling on of debt? Because Japan will never default on their debt since the Bank of Japan creates Yen at the direction of the National Diet, which they've had no problem doing. And it's precisely because the newly created money isn't merely frivolously thrown into the economy beyond the supply-market-clearance and full employment levels that there isn't any inflationary effect.

High debt levels and persistent deficits don't have disastrous solvency or liquidity consequences for economies that have a fiat sovereign currency, regardless of reserve status and regardless of size, as long as the supply end of markets aren't constrained.

This differs from countries like Greece and Spain, who can't print their own euros and are instead stuck paying debts based in a currency that is controlled by Germany essentially.

The Real Problem In The Economy: Not Debt or High Spending, but Unemployment/Low Growth

The pundits and policymakers on K Street, along with banker and corporate interest groups like “Fix The Debt” and “Third Way's” have warped the view of what the problem in the economy is by screaming as loudly as possible that our debt levels and high government spending are the causes of our economic problems.

But those two issues aren't problematic per se, and given the operational reality of the American sovereign monetary system, we know that not only is the deficit and debt sustainable, but so is higher levels of government spending, with the only constraint being inflation after near-full-employment has been reached (a metric we are very far from currently)..

Given that nearly all of us have the common goal of building an economy with full employment as well as stable growth meeting our potential and productive capacity, we can focus our collective energy on rectifying core imbalances in the economy, namely: low GDP growth and high unemployment.

How to Battle High Unemployment/Stagnant Production

At this point, the argument for the deficit or debt being a problem is looking less and less credible. We know that the US can meet any dollar-denominated obligations and make up for any sell-off in Treasuries with some incentive adjustment in the banking system, so the risk of defaulting or interest rates spiking if we do NOT change the deficit/debt situation is very low.

Given this reality, how can we battle the real economic problems of low growth and high unemployment? There are two general schools of how to explain why an economy would be growing slowly and why people can't get jobs:

  1. The supply-side argument (Reaganomics) – the argument that constraints in the supply of goods are causing a shortfall in production.

  2. Aggregate demand shortfall – the argument that there is adequate supply, and the only shortfall in the economy is enough demand to clear markets supplied by businesses.

I'll address the first point of whether this is a supply-side problem in the economy by producing a few basic statistics that illustrate the current phenomenon of “slack” in the economy.

First, we can see by cost of capital (close to 0% right now) and by capacity utilization rate (currently at 77% compared with normal levels of 85-90) that there certainly isn't a constraint on the supply side, but that capital is overly accomodative in supply right now and there's no demand to meet it.

Then what about labor? We know unemployment is high and there's plenty of adequate supply in sheer quantitative terms, but maybe a skills shortage is to blame, thus there's an inadequate supply of certain labor? This doesn't quite match the macro trend of wages:

In relative terms to GDP, wages have been on a constant decline since the 70's (with a brief respite in the 90's boom). If there was a supply shortage that required supply-side loosening policies, why are wages not rising to reflect the market friction? Instead wages and household income are dropping, and there's all this wasted productive capacity that goes un-tapped so businesses bid prices down..

The case for a demand shortage is highlighted by an analysis of potential GDP relative to actual GDP:

The concept of Potential GDP comes from a calculation of what our annual production would be if we had adequate demand to meet all of the productive capabilities of our stock of capital and labor. In other words, what would GDP be if all those unemployed people would be out there helping people or producing goods and adding value into the economy, and all the machines were running to reasonably close capacity.

If the supply-side of the market is adequately fulfilled in availability, and GDP is falling short of theoretical potentials of our economic capacity, then the slack in the economy is caused by an aggregate demand shortage.

Why Austerity (Spending Cuts) is Counterproductive

There's clearly a shortfall in demand leading to an output gap that is leaving a sea of unemployed Americans, while the rich get richer.

But why do we have such high unemployment still? And why can't the private sector alone bring us out of this mess, given that there is enough money out there that is just not being spent?

In the graph above, you can see that during the bubble Bush years, household debt was increasing astronomically, and this was a trend that could not be sustained, especially after the house of cards fell. Thus, since 2008, American private households have been reducing spending in order to service debt. The reduction in private spending then leads to a reduction in GDP because instead of individuals consuming or investing, they service debt which disappears into the coffers of the capitalist which was already expected as a stream of income.

In the GDP accounting identity, we know that:

GDP = (Private Sector Spending) + (Public Sector Spending) + (Exports – Imports)

Since GDP and employment have a fairly consistent positive correlation, the goal would be to minimize the reduction of GDP and its corresponding effect on employment. If we know the private sector spending is hurt because of the debt over-hang from the banker-lead financial crisis, we would be looking to offset that negative effect on GDP somehow to minimize loss.

Some people look at this problem and suggest that public sector spending cuts would actually boost confidence in the system that would spur more spending in the private sector or set a foundation for future growth. This is counter to the intuition of the accounting identity presented above. In fact, in the modern American economy, it's a policy that would compound the negative effects that private sector cuts/debt service has on GDP and employment.

But, to indulge the point, what would be the effects in the American economy if Republicans got their wishes for unilateral spending cuts (austerity)? What is it that austerity (government spending cuts) would achieve given the current economic environment?

If the private sector is deleveraging and consequently reducing its spending, GDP and employment are already hurting, and since exports aren't boosting because the world economy is slow in general, then austerity policies (public sector cuts) would only worsen the downward spiral. Austerity (government spending cuts) will just decrease GDP even more and cause higher unemployment and lower growth than would otherwise occur in the absence of such public sector cuts.

The contention that austerity would improve the debt position of the government and spur confidence in the private sector doesn't hold water theoretically or empirically. Think for a second if you're a business, do you really care if government is paying down debt? Would that boost your confidence and spur hiring and investment? Of course not, as a business what you care about is sales, DEMAND. And if the government is reducing spending alongside the private sector, you should be more worried about demand being further hurt by austerity, not bolstered.

This all sounds good in theory, but maybe you're still not convinced. You may still think the economy is operating on a completely different level where public sector spending cuts sets the stage for a new era of growth for an economy that has gone through a financial crisis that left a massive debt overhang. Luckily, we have numerous current examples of economies that have experienced similar phenomena of financial crises that were convinced they should cut government spending in order to solve.

An example of the failure of government spending cuts to lead to any growth or improvement in relative debt positioning, is found in Italy, Spain and Greece currently in the Eurozone. As a condition on receiving emergency funds from the IMF and the European Monetary Union, all three nations engaged in harsh austerity policies aimed at improving their balance sheets to impress investors and improve credibility. This meant large tax increases coupled with spending cuts.

The effects were disastrous to the Eurozone economy. In fact, the negative results were such a surprise to the IMF's predictions of how growth and employment would react to spending cuts in a time of private deleveraging, that they have overhauled their models of how they assume economies react to differing fiscal policies under various states. ( Oliver Blanchard, chief economist at the IMF, details this in the IMF report “Growth Forecast Errors and Fiscal Multipliers”.

This means that not only do we have solid theoretical reasoning against the wisdom of engaging in public sector deleveraging through spending cuts, but we have our very own natural experiment across the pond in Europe, where nations engaging in private sector deleveraging also tried government spending cuts and the result was higher-than-expected unemployment and lower-than-expected growth.

How to Boost Demand

Since austerity won't boost demand under any sensible model, and we know that we have an aggregate demand shortfall, how can we boost demand? It can be achieved through a handful of actions, over which we have complete control:

  1. Monetary policy – Fed actions to boost demand, which traditionally is the go-to tool for economic management.

  2. Fiscal policy – tax cuts or government spending. Which put money directly into consumers hands to spend and increase demand.

  3. Currency devaluation leading to more competitive exports which lead to foreign demand boost of US production.

Clearly, after we've completed now the third round of Quantitative Easing, and the Federal Reserve has rates at 0% for financing of new capital for banks, monetary policy looks to be out of gas. The Fed has a limited framework in which it can induce demand in the economy, and it's essentially reached the end of the road.

That leaves fiscal policy and currency devaluation. Given that QE and a permanent zero-interest rate policy are extremely loose monetary policies that would bring down the value of the dollar, but the foreign exchange value of the dollar isn't budging, As seen above, all this loose monetary policy hasn't helped much in terms of making American exports more competitive, since every other country is doing their best to devalue their currency to boost their own competitiveness.

The last tool we have is government. Government can boost aggregate demand by cutting taxes or by boosting spending. Taxes are a much less direct method of demand boost, and in the current environment of a private debt overhang causing pressure on American household balance sheets, any tax savings would likely go to debt service not get spent into the real economy. We saw this under Bush when the “cash stimulus” sent to every tax payer ended up being nearly useless in terms of giving a real economic boost. Additionally, the wealthy and corporations have plenty of cash available, they aren't suffering from onerous levels of taxation, they are merely on the sidelines waiting for sales to boost to spur investment and consumption activity on their end.

The more direct form of fiscal policy is government spending. As one of the major components of the GDP accounting identity, we know that increased government spending will lead to higher GDP, and if we direct the spending towards those who are unemployed by giving them jobs, this will necessarily lead to lower unemployment and higher aggregate demand, because the marginal propensity to consume for an unemployed individual is very high (if you're unemployed you likely spend most of your income on basic needs).

Now this seems too easy to be true, right? Our government can borrow money at 0% in the short-term, and we have plenty of unemployed people whose skills are being wasted simply because there's not enough money or demand in the economy to warrant a business hiring them. So, we could just borrow money for free essentially and put the unemployed people to work fixing infrastructure or taking care of the needy in society (such as the rising population of the elderly). It seems too easy, but it really can be done, and should be done, but there's two things that are blocking this policy:

  1. The widespread misconception that we just can't afford to borrow and spend anymore.

  2. The concern that government spending would “crowd out” the spending of private businesses and households.

Point number one has already been addressed earlier. As the sole issuer of the dollar, we can afford to pile on more “debt” since we can always meet obligations by printing more money, and that won't lead to inflation as long as there is still slack in the economy (adequate supply available in the market) as there is now.

Point number two is a valid concern, but only in a normal, non-0%-interest-rate economy where private productive capacity is adequately fulfilled. Right now businesses and wealthy individuals are saving money and avoiding spending and investing. Businesses make decisions based on growth in demand, and without that, they won't take the risk of hiring new people or making new investments. But since there is clearly such a shortfall in what we could be producing given the wide output gap, there doesn't seem to be a concern that government spending would be taking up activity that private businesses normally would. Instead, there's a lot of spending that private businesses could be doing right now, but they're waiting for higher sales to have a reason to do so. Until they do, government spending would not in any way be offset by smaller private sector activities, it would actually be growth-multiplicative.

Thus, the only way to mobilize this cash on business and some household balance sheets is by directing government spending into the economy that will produce the demand for businesses that will then finally give them a reason to pull the trigger on building projects and hiring people to grow the economy. With the markets demonstrating enormous demand for US Treasuries, this can be seen as the “invisible hand” incentivizing, nay, begging the government to take advantage of the conditions by borrowing at 0% to spend into the economy so that there are more workers receiving needed money that can then be spent into businesses.

Such a directed spending effort would be as much a stimulus to unemployed individuals as it would be to the businesses that get new customers from these people.

The Failure of Obama's Last Stimulus Plan: The American Recovery and Reinvestment Act of 2009

When the suggestion for a stimulus comes up, people immediately point to the perceived failure of the 2009 stimulus, which totaled $787 billion in a combination of spending and tax credits.

This deserves a little context. Christina Romer, who was in charge of crafting the plan for Obama as the incoming head of the Council of Economic Advisors, had initially offered a stimulus plan of $1.8 trillion ( This was a figure that Larry Summers knocked down to $1.2 trillion, which was further cut down by Republicans to the final $787 billion, which was barley even half of what the estimated output gap was in 2009.

Thus, the stimulus plan that was passed in the end was a beaten-down and cut up version of the original stimulus plan that Dr. Romer had presented. The CBO, in an analysis of the effect of the stimulus, which was smaller than most wanted, concluded that up to 3.3 million jobs were saved, and up to 2% of GDP growth were salvaged annually in 2009/2010. So the criticism of the stimulus is valid, insofar that it was too small to adequately address the severe demand shortfall facing our economy in 2009. But that doesn't mean that it's axiomatic that fiscal stimulus is useless, but that in the case of the Obama 2009 stimulus, the amount wasn't sufficient to shock the economy into normalcy.

As a result, we still have a persistent output gap that is estimated at around $800 billion.

The Risk of Inflation From Excessive Spending

At this point, it has been demonstrated that the US economy is suffering from an aggregate demand problem leading to unemployment, there is no debt or deficit or spending problem (contrary to what public officials are insisting), and that government spending is just about our last hope at battling the current economic problems.

So the only risk left to be mindful of if we conduct this fiscal stimulus is inflation. The scenario under which this could be possible is after the boost in demand from the government spending is pushed through the economy, the capacity of both labor and capital begin to reach full employment.

Once full employment in key inputs is reached, then we'll have exhausted the supplies in various markets, and there will begin to be pressure from excess demand by consumers to bid up the price of limited quantities of supply, leading to inflation. This is something that would not likely pop up out of nowhere, but there would be signs of this early on in bond markets that would allow the Federal Reserve to respond by cooling down inflation with bond sales into the banking system which would mop up liquidity.

Ergo, by the time inflation becomes a problem, we'll already have solved the initial economic imbalances leading us to engage in the fiscal stimulus, so when we have to cool down the economy, we won't be actually hurting. In fact, moderate inflation would serve as a form of relief for the millions of Americans suffering from a large debt overhang from predatory lending and activities by banks.

Fiscal Stimulus Plan Specifics

Now we have a good idea of what imbalances exist in the economy and how we can address them. The output gap is estimated at around $800 billion, so a round stimulus figure of around $1 trillion would, in my opinion, be adequate to address short-term unemployment and bring GDP back to a level in line with our productive capacity.

How much growth would we get multiplied by this kind of directed spending toward the unemployed? Well, we have a fairly good proxy, thanks to analysis by Macroeconomic Advisors and the IMF ( ,, of what kind of multiplicative effect the macroeconomy would experience from such a directed stimulus under the current state of a large output gap. Using their fiscal multiplier for the expansion of Unemployment Insurance benefits, we can deducate that not only would the $1 trillion in stimulus pay for itself, but it would add a buffer of an additional $800 billion in added demand to carry through to the economy over the next couple years. This would more that adequately cover the output gap so that we are producing at full potential and would bring unemployment down as individuals take part in the works program.

The logical question is, what kind of jobs would there be? The simple answer is, look around you! There's countless infrastructure jobs that can be created to address the maintenance needs of all the physical structures that we take for granted and use daily in our routines. Additionally, there's always jobs to be created to meet the needs of caretaking for our aging population, childcare for single mothers, or any number of socially beneficial services which are in demand, but where there's no cash for those to pay individuals to provide.

Given the slack in the economy indicated by the high number of unemployed, the risk-averse behavior of banks and corporations, and the low capacity utilization and price of capital/labor, we don't have to worry about government spending distorting markets or causing any sort of “overheating” in the economy in the short-run. However, a medium-term risk of inflation is something that should be addressed.


Given the current dynamics in the American economy, a government spending shock of $1 trillion is necessary to adequately fill the output gap. Stimulatory monetary policy tools are nearly exhausted and with businesses and households unwilling or unable to spend money into the economy, the government is the last entity with the cash and will to jolt the economy out of the liquidity trap, leading to stable growth and full employment while maintaining price stability.