From the Onion (there’s a bad word used towards the beginning, but otherwise it’s safe). It’s a pretty effective parody, I think (I particularly liked the bit about “personal money holes”). But it did get me thinking: suppose that the government were to dump gasoline on a bunch of dollar bills in a giant hole and then just set it on fire.
Actually it already does do this, or at least the functional equivalent. Your typical $1 bill is only in circulation for about 18 months, after which it is “retired” by the Treasury Department. I don’t know whether they dispose of the bills by dumping them in a giant hole and setting them on fire or if they have found some more efficient use for them, but for macroeconomic purposes it wouldn’t matter much.
Money, after all, is not the same as wealth. If you burn up a little green piece of paper, you don’t make any cars or computers or hamburgers disappear. Instead, all that happens is that the value of all the other little green pieces of paper will go up a tiny bit. Burning lots of dollar bills, therefore, would have the paradoxical effect of increasing the strength of the dollar, ala General Westmoreland’s “we had to destroy the village in order to save it.”
The government does sometimes destroy things other than money; say, by blowing up buildings, or burning crops (and in case you’re too lazy to click on the links, I’m not talking about government activities in war). Yet these activities are not without defenders. Among some segments of the population they may even be seen as paradigm examples of good policy (I refer, of course, to the gasoline and dynamite lobby).
To the extent that the U.S. has a progressive tax system, the overall effect of burning tax dollars would be progressive, and might serve to counteract the normally regressive effect of a monetary expansion (monetary expansions, not being evenly distributed, tend to benefit those who get hold of the money first, and this generally does not include the poor). Then again, maybe not. To counteract any deflationary effect of the money hole, the Fed would have to increase the money supply even more, and I don’t know whether this would serve to wipe out the progressive effect of the hole or not.
The downside, of course, is that tax dollars sent down the money hole can’t be used for other purposes. To the extent that one considers the benefits from this spending to be greater than a straight redistribution of cash, this would tend to cut against having a money hole. On the other hand….
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