These are times that test men’s souls. This was the opening sentence of Thomas Paine’s acquaintance brochure published on December 23, 1776. I found myself thinking about it while reading the coverage of the debt ceiling in The New York Times.
It started a couple of days ago, with Peter Coy”What should America do with its growing debt?“. After noting the Congressional Budget Office’s (CBO) projections of a widening gap between government revenue and spending, Coy told readers:
Unless you subscribe modern monetary theory… something has to be done, and soon.
Similar coverage appeared this morning, with Jim Tankersley’s article, “How the US government ran up $31 trillion in debt“. Basically, it’s a whodunnit, where the “it” in question is “the growing debt of the United States.”
After a lengthy historical autopsy, Tankersley concludes that this is a bipartisan issue. Democrats and Republicans share roughly equal blame for our nation’s (worse) fiscal situation.
America’s rising debt is the result of choices made by both Republicans and Democrats. Since 2000, politicians of both parties have made a habit of borrowing to finance wars, tax cuts, increased federal spending, baby boomer care, and emergency measures to help the nation endure two debilitating recessions…
It is difficult to fully assign responsibility for total debt levels to individual presidents or parties, because policy decisions often influence each other. By rough measure, the debt has been a bipartisan pursuit: It grew $12.7 trillion when Mr. Bush and Mr. Trump, both Republicans, were in office, and $13 trillion under the Democratic Obama administrations. and Biden.
If you’ve already adopted the MMT lens, then feel my pain (pun intended) when you read articles like these.
On the one hand, I sympathize with those who write for a popular popular audience. After all, it is customary for government officials, as well as most economists, to refer to the sale of US Treasuries as “borrowing” and to call the outstanding stock of US government bonds “the national debt”. So these journalists are following the same.
But the words “debt” and “loan” seem like bad choices when you peel back the onion and trace the monetary transactions that result in the issuance of public securities.
Ask yourself, does a currency-issuing government ever need it? to borrow someone’s own coin? And if so choose offer bonds in exchange for some of their own previously issued currency, is it really?loan” in any meaningful sense of the word? It makes sense to say that the government is “going into debt” when it allows us to choose whether we want to store our dollars in the form of cash or bonds?
Think of it this way. The US government is the issuer of the currency Every year, the federal government pays a lot of dollars. This money will go to military personnel, civilian employees, health care providers, Social Security recipients, farmers, government contractors, etc., etc. To keep the numbers (and history) simple, let’s say Congress has authorized $5 trillion in annual spending. Now suppose that $4 trillion is collected in the form of tax revenue and other payments to the government. The difference between these two numbers is:unfortunately—called “public deficit”. And that makes almost everyone wonder again who is to blamebecause the word “deficit” has such a negative connotation.
In my opinion, it would be much better to simply call the resulting difference “net expense.” The important point is that when net expense is positive (G > T), tells us exactly how much income the government is adding to the financial positions of the non-governmental sector (domestic private sector + foreign sector) beyond (or net of) what is subtracted from their financial positions through taxation. This is a core tenet of the macro MMT framework, which is why I titled Chapter 4 of mine book “His red ink is our black ink.” On the other side of every government “deficit” is a non-government surplus of equal size.
As I explained to Chapter 3 in my book, Congress could dispense with the sale of US government bonds if it wanted to.
After all, no one demands to be paid in US Treasury bonds. The government could simply write checks to contractors, farmers, civil servants, etc., as it does now, and call it a day. There is no need to match net spending with newly issued bonds in the way that is done today.
Before 2008, this would have flooded the banking system with reserves, bringing the federal funds rate to zero. To avoid this outcome, the Federal Reserve would simultaneously draining reserves through open market operations until the overnight interest rate was reset to the Fed’s (generally positive) interest rate target.
Today, the Fed (like other major central banks) achieves its interest rate target by paying interest on reserves (IOR). So if net government spending added, say, a trillion dollars to the banking system, the additional reserves would simply earn whatever the Fed decided to pay for those balances. The point is that the Fed no longer relies on open market operations in US Treasuries to meet its overnight interest rate target.
Like Scott Fullwiler and me explained years ago, it all comes down to how you want to reach your interest rate target. The government doesn’t have to sell bonds if it doesn’t want to. He can always write the checks and let the dollars pile up in non-government sector bank accounts. It is not more (or less) inflationary by any means. as we have he wrote:
[B]because there is no difference between public deficits financed with bonds and with money, there is no reason for the government to sell bonds. Today we can stop. No more increases in debt and no unnecessary and counterproductive debt ceiling drama.
When we wrote our article, we weren’t necessarily making a policy recommendation to forgo bond sales. We were simply pointing out a basic operational fact. Selling bonds versus not selling bonds is not the issue how you want to pay the bills. And it’s not about “printing money” or “monetizing debt.” It is about WHO you want to pay the interest—the Fed or the Treasury.
Seen through the lens of MMT, bond sales are not really about “borrowing” to finance a “deficit”. It’s about how you want the central bank to achieve its interest rate target. You can’t avoid the interest if the Federal Reserve is free to target a positive overnight interest rate. And here’s the thing: There are no schools of economic thought (MMT or in another way), this will mean that one part of the consolidated government that pays the interest is more inflationary than another. A deficit may be inflationary, but the risk of inflation is not a function of who pays the interest.
I started this newsletter partly out of frustration. Not only do I enjoy writing for a diverse readership, but as an economist who has spent nearly three decades seeking to understand our monetary system and the mechanics of government finance, I feel an obligation to drive better narratives.
Old habits of thought are hard to break, and language is a powerful force. I know from my time working in the US Senate that politicians like to “stay on message”, even when the message reinforces pernicious myths about “deficits” and the so-called national “debt”.
Frankly, I don’t know if, if, there will ever be a radical change in our public discourse. Right now, too many people are committed to repeating inapplicable domestic metaphors and chasing headlines with stories of tax doom.
But because so much is at stake, I will continue to fight to improve public discourse. As Thomas Paine wrote that famous essay, “Tyranny, like hell, is not easily conquered; but we have this consolation with us, that the harder the conflict, the more glorious the triumph”.
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