Moreover, if households decide to hoard the bits of paper (i.e. deleverage) rather than spend them, the fact is that this means unemployment.

This is not to deny that Austrians have a point, i.e. that without a money supply expansion the economy will in the long run self correct. But I suspect Keynes was right when he said that “in the long run we are all dead”. Nor is this to deny that there are risks in a money supply expansion: the risk is that governments and central banks are so incompetent that they will fail to take anti-inflationary measures when the expanded money supply begins to stoke inflation.

The text book explanation of deficits is that they are an injection into an economy (or a net increase in aggregate demand). I.e. deficits work for much the same reason as increased demand for a country’s products would raise demand in the country concerned.

In contrast, the supply side argument, as I understand it, is that reducing personal taxation, particularly on the rich or on entrepreneurs, gives everyone (particularly entrepreneurs) added incentive to create jobs, produce more, seek out orders, sell more etc etc. A “supply sider” would argue that a personal tax reduction would work even if aggregate demand is initially not affected (e.g. if the reduced personal taxation were matched by reduced government spending).

I also think there’s an argument to be made that the economy runs a demand deficit more often than people think, and that it’s not just during depressions or recessions. In the 40s, 50s, and 60s it was basically conventional wisdom among mainstream liberals that government had to keep spending more to prevent recessions and promote growth.

“The notion that governments could raise more money by cutting rates is, indeed, a glorious idea. It would permit a Pareto improvement of the most enjoyable kind. Unfortunately for all of us, the data from the historical record suggest that it is unlikely to be true at anything like today’s marginal tax rates. It seems that, for now at least, we will have to keep paying for our tax cuts the old fashioned way.”