[Ed. note: What do you think? Is the national debt really one of the most urgent things on the To-Do List?]
Earlier this month, Thomas Geoghegan wrote a piece for The Nation telling the Democrats the ten things they could do to really get the base excited, and at the same time do good things for the country. Here’s his list.
1. Raise Social Security to 50 percent of working income.
2. Let’s extend Medicare to people 55 to 65.
3. Make it a civil right to join, or not to join, a labor union.
4. Put in a usury cap of 16 percent.
5. Set up small government banks like the German Sparkasse.
6. Give everyone the right to six days of vacation — six consecutive paid working days.
7. Let employees sue corporate officers for breach of fiduciary duty to the corporation.
8. Pass a College Bill of Rights.
9. End the filibuster.
10. Get the country out of debt.
Well, I might disagree with one or two of the first nine items. For example, I’d go for Medicare for All, and I’d also put in a usury cap of 6 points over prime, since a cap of 16 percent would still leave the banks with enormous profits on credit costs of near zero for them right now. But where I think Geoghegan is way off base is on getting the country out of debt. I’d like to keep this post as short as possible, so I’ll focus on just a few of his views. He says::
Finally, we have to take back the GOP’s big issue, the federal debt. Indeed, for every kind of debt — government, consumer, trade — the Democrats have to be the party that gets the country out of debt. That’s the only way to bring back a fair and just economy that lifts the middle class. As debt piles up, even our base is freaking out. Deep down, people grasp that America got into this mess with too much private debt. "Hey, if we’re all trying to get our own debt down, how does it make sense for the government to run it up?"
This statement conflates a number of different problems under the same heading — “debt.” But these “debts” are very different, and Geoghegan doesn’t explain either their differences or their relationships. He only assumes that “debt” is a bad thing, and that we have to get rid of it to please the base. But what are the three kinds of “debt” and how do they differ? Well, first, Federal debt is that part of the deficit (the difference between tax and other revenues of the Government, and Federal spending) that the Federal Government has matched with the sum of its outstanding debt instruments. Second, non-Federal debt is the sum of loans outstanding incurred by other Government entities in the United States, and by private sector entities: individuals, corporations, and other organizational entities. . . .
Third, Geohegan isn’t clear about what he means by “trade debt.” I assume that he’s not referring to the USD held by foreign nations in their reserve (“checking”) accounts at the Federal Reserve, but that he’s referring to the debt instruments they hold in their securities accounts, and is particularly worried about the USD we owe to other nations when our debt instruments become due. Or, perhaps he is just referring to the trade deficit, and is just saying that he wants the US to run a trade surplus, rather than a trade deficit.
With this as background, let’s look at an accounting identity that is at the center of Modern Monetary Theory (MMT), which I’ll express here as: Private Sector Surplus – the Current Account Balance – the Government Deficit = Zero.
That accounting identity tells us something important about what Geoghegan proposes we do. It tells us that if we want to pay down the national debt, and reduce private sector debts by increasing savings, and also reduce our trade deficit by cutting imports, we would have to run a trade surplus that was greater in value than our private sector savings. Only then could the Government deficit become less than zero, a budget surplus, without that surplus reducing private sector savings.
In other words, private sector savings and Government spending are inversely related. This isn’t surprising because Government creates surpluses by taking USD away from the private sector through taxing; and also creates Government deficits by providing USD to the private sector through spending. Assuming that the current account deficit is constant, an increase in Government spending adds to private savings, and a decrease in the Government deficit reduces private savings. Also, letting the current account balance vary, the identity tells us that if the public wants to save and does so, then the only way the Government can avoid a deficit without reducing private sector savings, is if the trade deficit disappears and the current account balance becomes sufficiently positive that it exceeds private savings.
Now, think about that for a minute, Geoghegan is advising us to reduce debt in all three areas of: non-federal, including private sector, debt; Government sector debt; and also trade debt. But the only way this can be done, is for the trade deficit to not only disappear, but for a trade surplus to be greater than non-Government savings. And he also wants us to do this in a world where the Europeans, the Japanese, the Chinese, the Indians, the Canadians and the major nations of Latin America all want to do the same thing, where USD is the primary reserve currency, and other nations are actually pegging their currencies to USD so that the exchange rate of their currencies relative to the dollar is favorable to their ability to export.
In short, what Geoghegan is asking us to do is impossible in the short run, or in the foreseeable future. We may be able to reduce our trade deficit gradually over some years relative to other nations, but as long as we have a current account deficit, we will also need to run a Government budget deficit to accommodate the savings of the private sector. Right now, for example, the desire of people to save, resulting from the recession and its attendant insecurity, is producing a private sector surplus. The current account balance is negative because we’re still importing a lot more than we’re exporting, and also because foreign nations very much want to get USD in return for their real wealth. So, the Government deficit has to be high to make things balance out at zero; or if it is reduced this would probably mean that both private savings and imports would be reduced.
What if the Government tries to drive down the deficit by cutting spending, raising taxes, or both, as the deficit hawks and doves recommend over different time frames. Then either exports, or private sector savings, or both will have to decline. Or perhaps automatic stabilizers associated with the social safety net will drive spending up in unanticipated ways despite the Government’s targeted spending cuts. In any event, however, in the current situation it is very unlikely that we will be able to follow Geoghagen’s advice and get rid of “debt” in all three areas anytime soon.
The trade deficit seems the most immovable of the “debt” areas, unless we deliberately restrict imports, and if we do that other nations are sure to retaliate. In the area of savings, the destruction of so much wealth in the crash of 2008, has made people anxious to save all over the world. For nations with negative trade balances like ourselves, that means that the only way to support the increased savings is to run Government deficits. These however, will increase our national debt, and also increase the USD debt that foreign nations are holding, unless we change our normal practice of dealing with deficits.
There is a way out of increasing both our national debt and our debt held by foreign nations, if we change our practice of issuing debt against Government deficit spending dollar for dollar. There’s no constitutional requirement that we do this, and issuing debt in this way seems to be a hangover from gold standard days. If we stopped issuing debt, we would still have deficits rather than surpluses, but our national debt would no longer increase, and our debt instruments held by foreign nations and others would be mostly paid off in a few years, except for very long-term debt.
In addition to worrying about all kinds of debt and getting out of it, Geoghegan is also very concerned that:
. . . at some point even Washington is tapped out. What happens then?
But “Washington” can never be “tapped out.” As a Government with a fiat currency system owing no debts in any foreign currency, and with the constitutional authority to issue as much currency as it needs to in order to meet its obligations, it cannot be forced into insolvency. I repeat, the US Government has no solvency risk, because it can always make more money to pay for what it wants. These days it doesn’t do this by “printing money.” What it does is to mark up accounts electronically. It can’t run out of keystrokes, of course.
At this point readers may wonder why, if the US can always make more money, it issues debt instruments to get money back from holders of USD? That’s a good question. The effect of not issuing debt instruments wouldn’t be to bankrupt the Government; but just to drive down overnight and short-term interest rates to close to zero. Sometimes the Federal Reserve doesn’t want that to happen. But, in addition, we issue debt instruments because doing that was necessary in the days of the gold standard, and we’ve never adjusted our practices to the establishment of our fiat money system in the 1970s. But with the consent of Congress we could do that instantly, and no longer issue debt. Failing that, the Executive Branch alone has the authority to issue debt and have the Federal Reserve buy it at rates the Treasury wants to pay. Profits made by the Federal Reserve, after expenses, are remitted to the Treasury. So this practice would result in perpetually rolling debt and paying near zero interest on it.
Geohegan also worries that:
When we have a big trade deficit, the feds can’t run up a debt just to re-employ Americans. As long as we’ve so much trade debt, we have to figure that a distressing amount of any stimulus will go ultimately to re-employ the workers in China, Brazil, Japan and even Europe, who fill the gap between the "demand" we pump up and what we actually "supply." When we have a big trade deficit, it means that the more we prime the pump, the more we drain out this distressing amount of our national wealth.
I think this reflects a number of confusions. First, our financial assets are not “national wealth.” They are made of paper, or are electronic abstractions resulting from computer keystrokes. When we have a trade deficit, we have net goods and services, real wealth, coming into this country, that has been exchanged for paper or spreadsheet markups. In the short run, and other things being equal, that’s good for us in the aggregate. There are issues of distribution of the imports, of course. And there are also issues related to the impact imports have on American business and workers that have to be dealt with. Nevertheless, imports of real wealth, in return for paper and/or abstractions make us richer; not poorer.
Second, the important thing to recognize is that US Dollars are only as scarce as we care to make them. Just because we send a bunch of them into the accounts of foreign nations at the Federal Reserve doesn’t mean that we can’t make more if we need to do so for the needs of our own economy. Third, one day, maybe soon, other nations that have been suppressing domestic consumption and encouraging exports to us, in part by manipulating their currency against USD, will realize that they have been getting only a little paper, along with a huge amount of abstraction in return for real goods and services, and they will ask themselves if that deal is worth it. When that happens, they will want to export less, and they will allow their currencies to freely float against ours and our trade deficit will begin to decline.
Fourth, since there’s no scarcity of USD except what we impose on ourselves, why can’t we ”. . . run up a debt just to re-employ Americans”? Or better still why can’t we just deficit spend without issuing debt in order to re-employ Americans? Geohegan says that much of any stimulus spending will go to China, Japan, Brazil, or the Eurozone. That’s true, because more imports will bleed off private sector financial assets that can be used here. But so what? And how much of Government spending will go for that purpose? Let’s say, for the sake of argument, that it’s even as much as 20%. So? Just do that much more Government spending to bring private sector savings up by the amount necessary to create full employment. Who cares if workers in other nations are also put to work? Isn’t that good for us, if they’re sending a good part of what they produce to us, in return for getting their Federal Reserve Bank accounts marked up?
Well, what about the fact that all those imports are killing our own industries? I think that can and should be handled with an industrial policy. Let’s figure out which industries and businesses we want located in this country, and protect those from foreign competition, or subsidize them so that can compete. We may want some here for reasons of maintaining our national security. Others we’ll want because they make 21st century products we want to have a continuing capability to produce. Still others we’ll want to protect because they have cultural value for us. We may have to adjust treaty agreements to get this done. But, so what? It’s clear that the present arrangements are not working well for us and our workers. So let’s change them and move on.
What about inflation? Isn’t there a limit on the fiat money the Government can inject into the private sector beyond which we will have inflation, and perhaps even hyperinflation? Sure, there is. Is there any reason to believe there’s very much danger of that right now? No, nor is there any likelihood that we will get any inflation to speak of prior to our reaching full employment, unless there is a price shock in a commodity area like oil, which is another problem entirely, having nothing to do with Government efforts to reach full employment.
And, what about US interest rates in the Bond Market going sky-high because everyone thinks our efforts to reach full employment are fiscally irresponsible? Let’s be entirely clear about this. The Bond Markets don’t control the interest rates we pay on Government debt. We do. All we have to do to ensure that our interest rates remain low is to stop issuing debt, or to issue it only to the Federal Reserve at the interest rates Treasury wishes to pay (which later will be remitted back to Treasury anyway).
Finally, Geohegan’s article, illustrates an important pattern visible among progressives that greatly undermine their efforts to build a just society. Like him, they’ll put forward all kinds of ideas to create a more just and equal society. Then they’ll do two things that undermine the practicality of their proposals.
First, they’ll express an unwillingness to get rid of the filibuster in the Senate because they think that someday progressives will need it. Thankfully, Geoghegan doesn’t fall into that camp.
And second, like Geoghegan, they’ll get freaked out by the debt, because they don’t see the difference between the Government and a household. They don’t see the difference between entities that use currency; and entities that create currency. An entity that creates its own legitimate currency, and owes no currency in any denomination except its own, can never run short of its currency unless it constrains itself. There are no budgetary constraints on the US Government except self-imposed ones. None of them are worth the job of a single American who wants to work.
Let’s do what we need to do to get: everybody employed who wants to work, everyone the health care they need by passing Medicare for All, and everyone educated to their full potential. Let’s also solve all the rest of our serious national problems, and let us cease to worry about deficits, debts, or GDP ratios. The only danger is inflation, which we can stop, if and when it occurs.
And let’s forget about Geoghegan’s tenth thing to do, because if the private sector wants to reduce its historic levels of debt anytime soon, then we need to have the Government deficit-spend. And whether or not the Government decides to accompany that spending with further debt issuance, there are two key points to keep in mind.
- Either way the Government has no solvency risk.
- And also every dollar of deficit spending by the Government adds to non-Government, including US private sector savings, whether or not the Government issues debt.
So, an increase in public debt = an increase in non-Government sector savings dollar for dollar. The National Debt Clock is also a World (including US private sector) USD Savings Clock if only we choose to look at it that way.