Why We Should Embrace the Deficit
In every presidential election, candidates do battle over the national debt and the national deficit, and this election is no different. Democrats use the $25 trillion debt to bash Trump’s competency, while Republicans use it to ridicule Democrats’ social programs as irresponsible spending.
But a growing group of economists – some of whom have become rock stars in their field and advisers to Bernie Sanders – are proponents of Modern Monetary Theory, which argues that these concerns are irrelevant.
Because the U.S. issues and controls its own currency, we can afford to spend on social programs as much as we like. (You can see the appeal of the theory.) The threat of inflation is controlled by carefully targeted spending and taxing away the money supply as needed. The mindset that we can’t afford to spend is, they argue, a legacy conversation from the gold standard era when the government couldn’t pay for things if they didn’t have enough of the metal.
Pavlina Tcherneva, a prominent MMT economist and author of the new book The Case for a Job Guarantee, spoke with us about why we shouldn’t fear the debt and how to liberate ourselves from a scarcity mindset when it comes to the economy. Here are six takeaways about the economy that may, in fact, make you feel better.
The government is not a household
A household must pay its debts and balance its checkbooks to protect its members from bankruptcy or poverty. The government works a little differently.
The U.S. government is responsible for the economy as a whole, so we have developed a financial system that gives it exclusive privileges: We have a sovereign monetary system and institutions that allow the government to issue currency. The government prints dollars (electronically, these days).
What this means in practical terms is that the government can never run out of money, since it can always issue more. “We have a Federal Reserve and a Treasury that coordinate to meet all government payments and to ensure no government check bounces ever,” says Tcherneva.
Spending does not automatically create runaway inflation
For many people, the idea of the government printing dollars as needed triggers fear of inflation – a rise in prices and fall in the purchasing value of money. “That’s an unwarranted fear,” said Tcherneva. The fear of inflation, she says, should only arise when you push the economy to capacity, which would mean full employment. Right now, “the Federal Reserve is keeping the economy below capacity to control inflation. They’re afraid of full employment.” Tcherneva points out that we could have full employment and use carefully targeted spending and, if needed, taxation to control the money supply and, therefore, inflation.
The old politics of scarcity can be undone
Tcherneva thinks there are some obvious culprits who’ve tethered our economic thinking to scarcity.
First, there are conservative economists. Paul Samuelson, an American economist who won the Nobel Prize in 1970, admitted that the need for balanced budgets was a myth, but one he supported keeping in order to keep ordinary people from getting too demanding and to prevent “anarchistic chaos and inefficiency. And one of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in a way that the long-run civilized life requires.”
Republican politicians have scaremongered about overspending, while, at the same time, spending freely whenever it’s politically expedient – on huge tax cuts for the rich or on so-called security. “The right has no problem periodically recognizing MMT’s main claim ...Trump saying we’ll print money,” Tcherneva says.
The Democrats don’t have a response because they’ve become fiscally conservative. “We are so fiscally prudent that we don’t have all of the tools to fight the battle – [meanwhile] the right will have no trouble running up deficits to give away tax cuts. I don’t think they’ll have any trouble building walls … so why is it that the left is refusing to do the good, public version?” Tcherneva asks.
Your children will not pay off the national debt
“Conventional wisdom says your children are going to pay off the debt,” says Tcherneva. “That’s not really the case.” Government debt is money that is put into the economy in the form of treasuries, that is, some of the money is used to buy government bonds. “There isn’t anything scary about having a bunch of treasuries out there – maybe they sit in your retirement portfolio or mine … they’re nothing more than dollars that are put into the economy and not taken back through taxes and used to purchase treasuries” she says. If we decide to sell our bonds back, the government will take them and give us dollars in exchange.
“The government debt is a private sector asset,” Tcherneva continues. “Your children are going to get your treasuries if they get your portfolios, so it’ll be something they own not something they owe.”
Yes, we can have nice things – like full employment.
“MMT says there is a way to produce full employment by targeting our expenditure with a laser-sharp focus on the unemployed. The idea here is we’re buying labor power that the private sector doesn’t want. And we’ll do some socially useful activity, which the private sector also is not doing.” Not only would this be work that’s good for our whole society – think the Green New Deal – if the government is paying $15/hour, that will create pressure on low-paying employers, raising the wage floor. And, according to this theory, the beauty of this system is when employment drops in the private sector, the government is always available to step in and maintain full employment.
We don’t need the rich to fund our social programs
One popular slogan of the left has been: Cut military spending in order to spend on schools. Tcherneva actually finds this counterproductive.
“The left unfortunately still acts within a scarcity framework – that we can’t have what we desperately need unless we shave off the budget of the military and police. Someone will always come along and say security is more important – you have already lost your battle.”
Therefore, she says, “understanding the public purse is very important, because then we can democratize it. Our ability to spend on key social goals is not limited by our spending on warfare.”
For example, she continues, “imagine what empowerment looks like if you suddenly are not tethered to the oppressors for funding your own programs. This whole business of ‘tax the rich to pay for the poor,’ that’s a way of giving power to the very people you wish didn’t have so much economic power. I think our conversation would be richer if we talked about the public purpose for a very large military industrial complex on its own, and we can make our moral claims separate from these scarcity complaints.”
For more on the importance of government spending in the era of COVID see our interview with economics writer Mike Konczal.