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how exactly can money printing increase employment?

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Maurizio Colucci posted on Fri, Oct 26 2012 1:03 PM


I should probably ask this in a Keynesian forum but I don't know any. Does someone know one?

My question is: could someone please explain to me in simple steps how money printing is supposed to increase employment?

I mean, what leads entrepreneurs to believe it is now profitable to expand production and hire more workers? Maybe (I am guessing) it is because they see that the price of their product has increased and the cost of production hasn't changed (yet)? So the quantity such that MR = MC has increased?

I am just trying to figure out the mechanism. Thanks

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Printing money cannot increase employment, as money is just a transfer of wealth not wealth itself. Increasing the money supply has the effect then of stealing a small amount of value from each existing bill and transferring it to the new bills.

The person who then spends the new bills, government, gets to spend these new bills before everyone else in the economy realizes that their money is now worth slightly less (which eventually become inflation). So, it constitutes a transfer of wealth from everyone in the economy to the guy now holding the new bills.

If the guy with the new bills needs to show job production, he simply loans this new money to whatever industry he's trying to prop up, and new jobs can be created in this industry, but it's at the expense of everyone in the economy, since no actual new wealth has been created, only transferred.

By this, a politician can claim to have created new jobs when the whole thing is a sham. And as that money gets spent, over time it too becomes devalued, as people realize and even out the new level of currency and prices adjust upwards to reflect the inflation, making everyone poorer.

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Printing money cannot increase employment

You probably should qualify this statement, by "in long term" or "productively". Even in your explanation, the employment was temporarily increased - the propped industry hired new people, while other industries didn't lose that many employees (yet).

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You seem to have the basic idea. The whole problem in the classic Keynesian (although arguably not Keynes') model is that wages are sticky so total spending doesn't warrant firms hiring the entire stock of labor. Therefore if we increase total spending by upping how much money everyone has to spend. Because wages are nominally, and not really sticky then people will accept jobs at either the old nominal wage, which is now a lower real wage, or a new higher nominal wage which is a lower real wage.

Therefore full employment is reached by increasing the amount of money people have to spend which in turn increases how much they do spend, increasing firm's demand for labor which is currently unemployed because wages are sticky.

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Answered (Not Verified) Bogart replied on Fri, Oct 26 2012 1:33 PM
Suggested by Wheylous

Ok simple steps:

1. Central Banks like the US Federal Reserve create money by adding money to member bank reserves.  (They create money in their account and write a check to the member bank.)

2. Member bank loan this new money while keeping a fraction in reserve.  It is the competition for borrowers:Other banks or individuals that has the Member bank lowering interest rates.

4. Critical Step: Entrepreneurs (People who are using current and future means to satisfy future customer demand) artificially see greater payouts for their projects than they would have absent the money created in 1.

5. It is these new activities started by entrepreneurs that create the new employment opportunities. (Keep in mind that the information available:The Interest Rate is not accurate.)  This is the source of the new employment.

6. This creates a boom as newly employeed people add to the purchases of stuff along with other consumers who like the entrepreneurs can purchase money from the future for less of a penalty.

7. All is good until it isn't.  At some time in the future either the entrepreneurs begin to realize that their projects can not be achieved (The recession of the 1970s), or the consumers find that they can not pay their bills then the whole system comes apart (The current depression).

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Suggested by Malachi

I would like to add to your comment that money printing can also get around minimum wages by making it possible to pay the same minimum in less valuable dollars. Thusly, hiring becomes more feasible for employers.

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In a country with powerful unions, wages aren't bargained on markets and are instead often more higher than the market wage. Politicians know that this is bad for economy, so they'll try to trick unions by lowering real wages with inflation. It worked for a while, but know when unions know about this it doesn't work anymore.

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Wheylous replied on Sat, Oct 27 2012 10:14 AM

Anenome may be right but he's not answering the question. The question was how does the maintream claim money printing increases employment. Bogart gets it "right" - increasing the money supply increases investment and by extension creates jobs.

I'm not sure that Austrians disagree - increasing the money supply likely will increase employment. Doesn't mean it's a good thing, but employment will go up.

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Malachi replied on Sat, Oct 27 2012 10:49 AM

I would like to add to your comment that money printing can also get around minimum wages by making it possible to pay the same minimum in less valuable dollars. Thusly, hiring becomes more feasible for employers.

This is the answer. Even krugman said so one time (which I am aware doesnt mean anything, krugman says ridiculous things frequently).
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