By Marshall Auerback, a market analyst and commentator. Originally published at Alternet
Another day, another temporary government shutdown and then finally a long-term “bipartisan compromise” so beloved of the punditocracy is reached. Early last Friday morning, the president signed a new funding bill that was narrowly passed in Congress only a few hours earlier. All told, the deal authorizes about $300 billion in new discretionary spending over the next two years.
“While neither side got everything they wanted, this compromise provides critical funding that will go towards improving the VA, CHIP, the opioid epidemic, and infrastructure spending,” said Senator Thom Tillis, a North Carolina Republican. “I look forward to now working with my colleagues on a solution for DACA, border security, and immigration policy.”
Yes, there were enough goodies to avoid a long drawn-out shutdown. But the most striking thing about the agreement was how few alarms were raised about the estimated increase in the budget deficit, even by the vaunted Tea Party wing of the GOP, whose rise allegedly came about in protest to the “unsustainable” growth in public spending. Certainly, there were a few deficit scolds here and there, who decried the latest “spending spree” and the “unsustainable” growth in the nation’s debt. But for the most part, those voices played little factor in the moves to prevent a lengthy cessation of government operations.
That was clearly not the case a few weeks earlier when the Trump tax cuts were passed and Democrats in particular vociferously sounded off on the dangers of increasing the federal debt to the tune of $1.5 trillion. Nothing from Chuck Schumer; even less from Nancy Pelosi, who several weeks earlier had tweeted, “A GOP tax bill that explodes the deficit by $1.5 trillion means dumping $4600 in debt on every man, woman & child in America.”
Well, it’s great that Ms. Pelosi can do basic arithmetic. But at a time when the Republicans have been (hypocritically) abandoning deficit terrorism to advance their own political agenda, it’s uninspiring that the Democrats could do no better than reinforce the ‘deficits are bad’ meme.
Because the truth is, there is nothing insidious or inherently sinister about these deficits per se. As the economist Stephanie Kelton argues:
“Government spending adds new money to the economy, and taxes take some of that money out again. It’s a constant churning of pluses and minuses, and their minuses become our pluses. When the government spends more than it gets in taxes, a ‘deficit’ is recorded on the government’s books. But that’s only half the story. A little double-entry bookkeeping paints the rest of the picture. Suppose the government spends $100 into the economy but collects just $90 in taxes, leaving behind an extra $10 for someone to hold. That extra $10 gets recorded as a surplus on someone else’s books. That means that the government’s -$10 is always matched by +$10 in some other part of the economy. There is no mismatch and no problem with things adding up. Balance sheets must balance, after all. The government’s deficit is always mirrored by an equivalent surplus in another part of the economy.”
Obsessing about government budget deficits is as absurd as an accountant only paying attention to one half of a balance sheet ledger when conducting an audit. And the public, frankly, is more interested in the ways in which we spend, rather than whether we should spend at all.
It is obvious now that the GOP cynically used deficit hysteria as a means to kill off the Obama agenda at birth during the latter’s presidency, as Jonathan Chait recently noted. Even in the last days of the Obama administration in 2016, Senate Majority Leader Mitch McConnell was describing the national debt as “dangerous and unacceptable.” But let’s recall that previous Democratic presidencies were also complicit in perpetuating the narrative of an out-of-control national debt. Bill Clinton has long boasted about paying down public debt during his presidency (as did his wife during her presidential campaigns). Both Clintons trumpeted the policy “achievement” of running budget surpluses (even as a dangerous private debt buildup was developing to offset the resultant contraction in government spending). And within two months of being elected to the White House (and despite being in the midst of the gravest financial crisis since the 1930s), President Obama was arguing that that the nation’s long-term economic recovery could not be attained unless the government got control over its most costly entitlement programs. He went to convene a “fiscal responsibility summit” and then later set up the Simpson/Bowles Commission on “entitlement reform” (which is usually code for cuts to Social Security and Medicare).
The point is certainly not to absolve the Republicans for their blatant cynicism, or lay the blame on either Obama or Clinton, but merely to highlight that when one accepts a prevailing (and profoundly misguided) paradigm on deficits, it opens the door to all sorts of political mischief and bad policy-making. Implicit in the idea of “unsustainable public spending” is the belief that public debt is invariably an evil, the consequences of which must be stopped at all costs.
In reality, the financial crises of the past several decades have clearly demonstrated that excessive private sector debt buildup has played a far more destabilizing role in the global economy than fiscal profligacy. But it’s very hard to make that case if we focus incessantly on public debt and thereby perpetuate the notion that government deficits per se are the root of all economic evil. In many respects, the argument over deficits and public debt echo the prayers of St. Augustine on chastity: “Oh Lord give me chastity, but do not give it to me yet.” The Democrats’ problem (from the point of view of the debate on government deficits) is that they have long conceded the virtue of “fiscal chastity,” which therefore makes it virtually impossible to construct a strong argument in favor of government fiscal stimulus programs to combat unemployment, the health care crisis, or decaying infrastructure. Framing the budget issue within the Augustinian framework makes the question of budget cuts an issue of when, not whether. And that has given the Republicans the political initiative in terms conveniently invoking the cudgel of budget cuts whenever they feel like it.
In truth, politicians of both parties should stop weaponizing the deficit in this manner. We have to look at the entire economic pie (the government sector, private households and corporations, and trade—exports and imports) before pronouncing on the wisdom of a certain kind of fiscal policy approach. And we also have to look at the economic context, rather than approach the problem with some vague pre-existing notion of what is “fiscally sustainable.”
In fairness, some economists are doing this, such as Jason Furman. Furman, who was the chairman of the White House Council of Economic Advisers during the second term of the Obama administration, has estimated that the overall effect of the Trump tax bill and the recent spending deal to avoid a government shutdown roughly equates to 1.25 percent of GDP for this calendar year, and two percent for the next. Those are not insignificant numbers, and Furman expressed the concern that, given the magnitude of the impending surge in spending at the stage of the economic cycle, the U.S. economy could ultimately experience significantly greater inflationary pressures (as well as a more hawkish monetary policy response from the Federal Reserve).
Is Furman right? The unemployment rate has dropped to 4.1 percent, which at first glance seems to imply that we are pretty close to a full employment economy. But outside the cocoon of Wall Street or Silicon Valley, GDP growth and re-employment have still not transmitted to material wage growth for the entirety of the recovery. Furthermore, the employment-population ratio for prime-aged workers remains depressed. Economic commentator Doug Henwood writes: “If the same share of the population were working now as at the 2006 pre-recession peak, 8.4 million people more would be employed.” In other words, there is still an army of underemployed workers to be drawn back into the workforce, which likely moderates wage pressures going forward.
As for the much-hyped average wage gains of last week, which is cited as the reason for the recent fall in equity prices, it has gone overwhelmingly to managerial workers (it goes without saying that wage stagnation for most Americans the last 30 years has undermined the capacity of households to maintain consumption growth without recourse to private debt). And a large chunk of the latest tax cuts still goes to groups with the largest propensity to save, rather than spend. Finally, the bulk of the new expenditures used to avoid another government shutdown will simply go to expand the defense budget, with correspondingly little multiplier impact in the civilian economy.
In truth, this whole debate about fiscal profligacy and “getting one’s house in order” are red herrings used to mask the fact that wage shares have fallen and more and more national income has been concentrated toward the top tier, giving us an economic model that is both inefficient (because the marginal propensity to save is higher amongst the “rentier class” than it is amongst lower income groups), and politically unsustainable (especially as it relies on perpetual wage stagnation to sustain profits). The real questions surrounding deficits are not ones of affordability or solvency, but whether we are deploying the stimulus dollars productively. Do we use the deficits to generate more employment (and, hence, bring more taxpayers into the system who contribute revenue to the federal government); do we use the dollars injected to rebuild our decaying infrastructure; can we structure tax cuts in a way that helps to reduce income inequality (thereby putting the economy on a more sustainable footing as it means less reliance on credit and debt)?
With those questions in mind, the answer appears to be a resounding no. The recently passed tax “reform” and the funding agreement to reopen the government appear to channel the benefits disproportionately toward corporations, high-income earners, and the military, whilst providing little relief for low-income Americans, who have been enduring cuts to welfare and flat wages growth for years (and possible cuts to Medicare, despite repeated promises to the contrary by Trump). Unemployment and underemployment remain a big problem. Our national infrastructure is falling apart and damaging productivity. Many communities are struggling without access to basic services, including health care. Simply recognizing that our sovereign government cannot go bankrupt does not solve those problems, but it does make them easier to discuss and resolve them honestly. Unfortunately, if the recent debates are anything to go by, we are still a far way off from having that kind of a discussion, let alone reforms that would address the problems directly.
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Both parties buy votes. They don’t want the other party to be successful in this. They each have a different policy on how to do this vote buying. The D-party is more direct leaning toward social programs. Both parties also compete to keep the Elite on their side. What is not to like?
The federal government, being Monetarily Sovereign, never can run short of its own sovereign currency, the dollar. It creates dollars at will.
What then does “spending too much” mean for a government having the unlimited ability to pay its bills? And what is the purpose of taxes for a government that creates it sovereign currency at will?
Sadly, the public does not understand the differences between Monetary Sovereignty and monetary non-sovereignty, so the people fall for the notion that federal “debt” is “unsustainable” and a “ticking time bomb.”
Not only is federal debt neither of the above, but it isn’t even debt. It’s interest-paying deposits in T-security accounts — deposits that could be paid off today, simply by returning the dollars in those accounts.
The entire federal “debt” is a gigantic con-job, the sole purpose of which is to convince the public that social spending must be cut. And the purpose of that is to widen the Gap between the rich and the rest. Period.
Money has three mysterious characteristics:
1. System of credit (with or without interest)
2. Store of value (with or without interest)
3. Patronage system (rewarding friends and punishing enemies)
Any system you propose, has these three characteristics. My post was about #3.
The ills of the monetary system are just a reflection of the ills of the larger political-economy.
Yes! Why is it that so few are able to grasp this idea, my guess is it has something to do with FoxNews flashing a graphic of the national debt alongside a household budget ever 15 minutes for 8 years, but that’s probably a simplification of the situation.
The most simple explanation to the layman, who’s going to hold you to your debt? In the case of the individual, debt is scary, the bank can and will take your car, house and likely your job and your ability to become employed thereafter. In the case of a world power like the U.S., what? Who’s going to hold us to our debt?
Deficit and debt are just words that have been weaponized to make it ok for you to celebrate keeping the poor poor while taking away the few table scraps they were still getting.
I think that’s wrong, because the concept of government debt being the same as an individual’s debt which has to be paid off goes back to before the Genoese merchants funding the operations of England’s government. Kings were borrowing and repaying rich liegemen by the fall of the Empire. The great genius of issuing long-term bonds, which the English discovered in the late seventeenth century was the the debt never has to be repaid! ! The idea that the “value” of money depended on the amount of metal of a certain kind in the coins was obviously wrong. Throughout the history of coinage, coins have always had an exchange value greater than the market price of the metal they contained (well, there have been exceptions, as when the U.S. had to withdraw all silver coins because they were being melted down for their silver content). I remember reading that FDR had to overcome demands for a balanced budget (one of his campaign promises in 1932) by spreading the slogan, “We owe it to ourselves.”
well let’s see, the ACA is a giveaway to the HIC, SNAP is a giveaway to big Ag, Simpson Bowles were trying to cut social security, so which social programs were/are the dems leaning towards? Unless I guess if you consider the payroll of the clinton foundation social spending then maybe. Both parties slavishly serve the same master. The parties don’t try to keep the elite on their side, the elite is the head of the monster, and the parties are it’s two hands.
One can divide by class, or admit what Pogo admitted long ago … the enemy is us.
Youe sooo right! I hope more people will realize this.
Dems? Social programs? Which ones? Not since the days of Lyndon Johnson. Remember Bill Clinton bragged about welfare cuts and government surpluses. Obama created the Presidential Commission on Deficit reduction in mist of the worst financial crisis since the 1930’s. Dems buy votes with trendy virtue signaling and promises to permanently keep immigration/cheap undocumented labor pipeline open.
i do remember. After losing the WH in 1980, 1984 and 1988 … the Dems became Repub-Lite. Let the Dems clean up their own cess-pit. Nobody put them there, they put themselves there. Like the AMA giving up control of medical care, but letting insurance companies act as intermediaries. The AMA needs to fix that too.
I once heard Andrew Weil call the AMA a very ineffective organization. Because whatever it opposes comes to pass.
It started earlier than that. Al From started the Democratic Leadership Council in 1983, and leading Dems had been getting together for years to plot taking the party rightward.
I am thinking that both political parties are now going along with the belief that deficits do not matter just like Dick Cheney once said. I note that after the Pentagon got their budget that both parties turned around and without debate gave them another $50 billion and then shortly after gave them another $135 billion, just like that. It seems that the only time both parties make noise about deficits is when they want to bash the other party over the head with it. Being able to summon up all this money you would think that they could finance vital infrastructure projects at will.
At the risk of being dumped on by people financially way more literate than me I am going to say that this may not be such a great idea. Those people that decide such things must have gone to a different church than I did. My own one says that deficits are OK – even vital – but you must be able to eventually generate the revenues to pay this down eventually, even if it is replaced by other debts. I would say that there is no possibility of America ever being able to pay back the sorts of deficits that it is creating, even if they could just dial-up the amount of credit needed being a sovereign nation.
It did not have to be this way. When we moved to this State about 25 years ago it was notorious for the government of the day being lubricated by brown paper bags full of the good stuff. Nevertheless, they did have one idea which I respected and it was this. If they wanted to build a police station or hospital they used the revenue from taxes to do it with. If they had to borrow money, it was usually for a project like a highway that you could have toll booths on that could generate a revenue to pay this debt back with. Now they run the State like every other State so of course we have serious debts.
Rev,
Could you give me a link to the “Dick Cheney said”? Thanks.
Google it.
No worries, beth. He said it back in 2004 (https://en.wikiquote.org/wiki/Dick_Cheney) to Paul O’Neill and the full quote was : “You know, Paul, Reagan proved that deficits don’t matter. We won the mid-term elections, this is our due.”
Rather than thinking of deficits as debts to be paid back, it may be helpful to think of them as investments. As such they should be evaluated by the quality of the investment and the effect it has on the economic health of the nation.
For example, deficit spending in order to provide windfalls to wealthy investors or senior executives, who then stash the bulk of it in secret offshore accounts, is going to have little or no effect on the real economy and is likely to be a drag on growth. Conversely, deficit spending in order to lift people out of poverty and make them into productive members of society is likely to generate significant positive outcomes and economic growth relative to the amount spent.
If you are a Republican, of course, then you will believe that the wealthy will use the money to invest in businesses and grow the economy, while the poor will blow it all on drugs, so you advocate the reverse. But this is at least the right conversation to be having, and these are measurable predictions that can be falsified. (Try reading Marshall’s second to last paragraph in this context). Looking at the Federal deficit in a vacuum is going to result in a blinkered and inaccurate view of the world. It’s like saying the Amazon rainforest gets too much rain and the planet is going to run out of water if we can’t find a way to reduce the rainfall there.
‘Suppose the government spends $100 into the economy but collects just $90 in taxes, leaving behind an extra $10 for someone to hold.’ — Stephanie K
If we’re talkin’ FY 2018, it’s gonna be more like “Suppose the gov spends $100 but collects just $80 in taxes …”
As to the remaining $20, it gets borrowed. The lender hands over $20 (which she got by the sweat of her brow, not as a gift from govie tooth fairy) and gets a keystroke Treasury note in return.
Governments which pile up debt over 100% of GDP impose feeble growth on their
victimssubjects. Look (if you dare) at eurosclerotic wrecks like Italy and Belgium.Reportedly ol’ Ray Dalio is shorting Italy till the pips squeak, betting that years of fiscal incontinence finally are taking their toll. Back in the Heimatland, Moody’s still rates the US as a triple A credit but strongly implies that it won’t last, as trillion-dollar deficits as far as the eye can see send federal debt spiraling toward an Italianate 125% of GDP.
UMKC’s radical economic gospel of free money, free beer and free love only works till the kegs run dry and the hot chicks drift away to marry rich Silicon Valley tech lords. :-(
Jim, you may be critical or unaccepting of MMT on the whole, but do you think there is no difference between a state that issues its own currency and a state that is dependent on an outside currency source? Whatever happens to states constrained to a Euro currency they have no control over is not an indication of what will happen in the monetarily unconstrained U.S. with full control of its own currency. It’s apples and oranges.
Which doesn’t make your conclusion wrong necessarily, but the argument that Euro states are evidence for what must happen in the U.S. is wrong, necessarily.
It would be an interesting exercise to parse the sovereign debt vs GDP growth dataset, based on degree of monetary sovereignty. But I suspect it would end up being merely a footnote. When debt goes over 100% of GDP, growth slows to a crawl under any monetary regime.
Some evidence suggests that peeps go on reproductive strike in response to their dimming, indebted future. Italy is the test lab for this aversion to conception. SocGen’s Albert Edwards thunders brimstone from the pulpit in the Church of Fiscal Rectitude:
Just wish my recalcitrant old Uncle Miltie were still around to pelt and pummel the R party’s drunken wastrels with hobnailed brickbats.
Japan has been running deficits in excess of 100% of GDP for quite some time and it shows in their growth, doesn’t it?
What is this “sovereign debt vs. GDP growth” dataset of which you speak? Reinhart and Rogoff?
I have seen some of the evidence you refer to, and I can accept Italy as a bellwether in that regard. But I struggle to comprehend what you mean by ‘debt’. Is it not true that every ‘debt’ is both a liability and an asset? It seems meaningful to say, “when liabilities exceed 100% of GDP bad things happen” but it does not seem reasonable to say, “when assets exceed 100% of GDP bad things happen”. I would suggest that ‘debt’ as an operational term is meaningless without specifying who is liable to whom. In the second line above you seem to refer to the personal debt of individual reproducers, while in the line above that you may or may not be referring to the debt of governments. If MMT is right, the debt of governments is your and my spending and savings accounts. And if we are saving more relative to what we are producing it is, perhaps, axiomatic that the economy will be “slow” (compared to if we were producing more relative to saving) but it is not at all clear that we would be worse off under those conditions.
Better to think of national “debt” as bank debt. If you have a bank account, that’s your asset, but the bank’s liability (i.e. debt). How often have you heard about depositors picketing their bank because the bank’s debt (i.e. their assets) was too large, would crush their grandchildren, impair their economics, etc? Never…because you don’t bank at the Bank of Crazy.
So the common name for the dollar financial assets circulating in the economy is “National ‘Debt'”… Reducing that “debt” (in quotes because it’s nothing like household debt) reduces those assets.
The actual, recorded consequence of significant “debt” reductions is that a Great Depression-sized hole in in the economy follows. Currency is just checks made out to “cash” in fixed amounts, and appears on the Federal Reserve’s books as a liability…like your checking account appears on your bank’s books as a liability.
The bad consequences of “debt” reduction make a lot of sense, too. If you reduce the dollar financial assets of the population (which is the consequence of reducing national “debt”), then you inject fragility into the economy. If people don’t have savings with which they can pay their obligations, then they tend to default. Sure enough, those significant “debt” reductions are–100% of the time–followed by waves of defaults, asset forfeitures and foreclosures.
The entire Reinhart/Rogoff meme that debt-to-GDP ratios somehow correlate to an economy’s performance is thoroughly debunked (see here, for one example)
Italy gave up currency sovereign when it joined euro.
For six years fed bought more treasuries than treasury issued. Treasury paid fed the interest, fed gave it back to treasury. A legal work around allowing gov to print the diff between receipts and spending.
What about the inflation from all that printing? Yes, it remained too low, never meeting the fed target during the period.
Maybe fed allows treasuries to roll off… or they could simply shred them, relieving treasury from paying it back…
No limit to what sovereign gov can borrow from itself… or print…
As usual deficit hysteria and deficit lies abound. Just read this doozy in a NYT story about California-
“For California and the nation, there is a long list of things that could go wrong. A surging budget deficit could stoke higher interest rates. ”
I’m no Econ professor but I’m pretty sure the Fed controls interest rates not some doomsday machine deficit meter. If there is a connection between interest rates and government deficits it’s exactly the opposite. Higher interest rates can stifle the economy which reduces tax receipts, not the other way around.
What is wrong with this country? Why is government spending so universally reviled and vilified while homeless pile up in our streets and our vital infrastructure crumbles from age and budget starvation? All of our elite institutions seem hellbent on turning the US into a backwards Central American banana republic. It’s so depressing to watch. Returning home from trips abroad are becoming increasingly painful each passing year.
The recent tax cut for the wealthy wasn’t reviled. It was celebrated, and the peasants got a salty cracker out of it too, until the terms aren’t met in a decade, when the cracker get’s taken away.
I would prefer my taxes go up by a cracker and see the rich pay millions moar instead of millions less.