“The way to make monetary policy effective is for the central bank to promise to be irresponsible,” McCulley wrote in a July commentary posted to Pimco’s Web site, citing a 1998 paper written by Princeton University economist Paul Krugman.
If consumers and businesses continue to hoard cash, monetary policy makers may need to boost inflation until prices are as high as they would have been without deflation, McCulley wrote.
Stop right there. McCulley makes valid points. But he does not say how or where the government spending should be targeted.
The most effective way to free up funds is to hit the area where Americans devote the largest parts of their budget - health care spending. Health care is the black hole of both public and private finance since costs continue to rise year in and year out. But if the government is able to free up funds by removing the biggest variable cost from consumers' lives then that leaves more room for consumers to load up on flat screen tv's, x-boxes, leather sofa sets, and gas guzzling SUVs. Then there is at least some hope that the government will receive a return on its investment through stronger tax receipts and avoid the costs of paying for negative externalities like combating higher crime rates or increased workfare costs.
By the way, wishing for inflation is never a good idea as you might just get it:
Prices paid to U.S. producers rose in June by twice as much as anticipated, led by surging gasoline costs, a Labor Department report showed yesterday. The 1.8 percent increase in prices paid to factories, farmers and other producers followed a 0.2 percent gain in May, the department said. Excluding food and fuel, so-called core prices rose 0.5 percent.