To the Editor:
Are we on our way to an economic crisis brought on by excessive deficit spending and a growing national debt? The nonpartisan Congressional Budget Office wants us to think so and tosses around unfathomable numbers to stake its case. Their prophecies of fiscal doom have achieved near-consensus status in D.C. Nonetheless, this consensus reflects little understanding of the differences between public and private debt, why deficits have grown, or what consequences they have had.
In a recent New York Times piece, Stony Brook University economist Stefanie Kelton, a leading proponent of modern monetary theory, has initiated what ought to be a fundamental re-examination of that issue.
“Suppose the government spends $100 into the economy but collects just $90 in taxes, leaving behind an extra $10 for someone to hold,” Kelton wrote. “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 … . The problem is that policy makers … see the budget deficit, but they’re missing the matching surplus on the other side.
“When there’s a deficit, some of that new money can be traded in for a government bond. What’s often missed in the public debate is the fact that the money to buy the bond comes from the deficit spending itself.
“What isn’t missed is … government pays interest on those bonds. Lawmakers are obsessed with this line item in the budget, as if it’s … taking a bigger and bigger bite out of your household budget. It isn’t. Unlike a household, the government doesn’t have to trim other parts of its budget to make ends meet. Congress can always create more room in the budget by adding rows or widening the columns to put more resources into education, infrastructure, defense and so on. It is purely a political decision.”
Kelton recognizes that “there are real limits to what can be done. No country can commit to large-scale infrastructure investment unless it has the available labor, machinery, concrete and steel. Trying to spend too much will cause an inflation problem. The trick is to adjust the budget to make efficient use of the people, factories and raw materials we have … the risk of overspending is inflation, not bankruptcy.”
I would add that the emphasis on bankruptcy induces a kind of hysteria that prevents discussion of how careful targeting of investments would reduce the risk of inflation.
The quality of spending matters more than quantity. Spending on Medicare and Social Security, the very programs deficit hawks attack, makes far more efficient use of our resources, and their expansion would leave citizens with more resources to spend in other areas.
Of course, any time a political leader or an economist reminds us that nations in control of their own currency can spend their way out of crises and even foster sustained growth, images of Germany come to mind. There, hyperinflation triggered by excessive spending led to the rise of the Nazis. In point of fact, as Brown University political economist Mark Blyth shows in “Austerity: The History of a Dangerous Idea,” the German government intentionally devalued its currency to hurt those who had imposed the draconian post-World War I reparations on it.
That policy was essentially successful and was turned off. A new currency was established, and Germany prospered in the years leading up to the Great Depression. During the depression, Germany abandoned countercyclical government spending. Subsequent austerity — not spending — led to massive unemployment and gave the Nazis, the only party that prioritized employment and rejected austerity, its opening.
Just as mistaken is failure to recognize that private debt is often more significant than public. Private citizens cannot print money. They can only retrench if they have fallen on hard times. As they retrench, their decisions adversely affect fellow citizens, and deflationary pressures increase burdens on all debtors.
Cutting government spending in a recession makes deficits and debt grow, not shrink. Even creditors eventually suffer as their borrowers default. At this point, even some fiscal conservatives come to recognize that only government spending can break this vicious cycle.
In that interim, however, forces of the hard right gain momentum. Often their path to power is the one fiscal stimulus favored by the corporate establishment: military spending.