According to this morning’s News & Observer (from AP), the combination of increased taxes and expiring unemployment benefits will “suck $165 billion out of the economy next year.” I can see the vacuum cleaner right now, sucking that money into non-existence. Just where it goes outside of the economy is anyone’s guess.

Unfortunately, the reporter’s loose use of words typifies the equally loose thinking found in many news sources. So let’s clarify the outcome, just briefly.

In the case of tax increases, government officials will transfer more money from taxpayers to themselves. Although better off with the people who earned it, the money remains available for expenditure.

Regarding the expiration of unemployment benefits, if it actually goes ahead, it will reduce the federal government’s deficit spending. Since current borrowing is heavily financed by the Federal Reserve system, it comes by way of an expansion of the money supply—a tax via inflation.

A reversal of that would both reduce the inflation tax and the rate of federal debt growth. While there would be nominally fewer dollars in circulation, the purchasing power of those dollars would be greater. So the real impact would be one of allocation, and allocation, not a mystical exit, would also account for any secondary impacts on economic output and asset values.