As I’ve blogged many times before, I don’t think there is a “fiscal sustainability problem” as the people who are presently deluging us with exhortations to bring the national debt and the debt-to-GDP ratio define it. That’s because I define “fiscal sustainability” in a different way than they do, as I’ve explained in another post. In this one, however, for the sake of argument, I’ll accept the deficit hawk/dove notion of “fiscal sustainability” and offer a different and, I think, much better solution to that problem than any of the deficit-reduction Commissions, groups, and individual members of these bodies are proposing to us now.
Fiscal Sustainability according to the deficit hawk/doves refers to: the annual Federal Deficit (the gap between Federal Spending and Federal Tax Revenues), the public National Debt (the accumulated inflation adjusted sum of deficits and surpluses since the inception of the Republic), and the debt held by the public to GDP ratio. People who write about this see things this way: continuing and growing deficits are a sign that fiscal sustainability is going down; continuing and growing increases in the national debt are a sign that fiscal sustainability is going down; an increasing debt-to-GDP ratio is a sign that fiscal sustainability is going down, and the problem of fiscal sustainability must be solved by at least stabilizing, and eventually, decreasing the debt-to-GDP ratio over time.
When they explain why they see things this way, they say that the Government can only fund its spending by either taxing to raise revenue, or borrowing to fund deficit spending, and that if too much is borrowed too fast, so that the debt-to-GDP ratio grows too rapidly, this will result in the bond markets losing confidence in the Government’s ability to repay its debt, which, in turn, will cause these markets to demand higher interest rates on Treasury Securities, increasing the cost of interest on the debt over time, until, eventually, the interest payments on Federal Debt are so high that they squeeze out other Federal expenditures and programs, and leave no space for spending we need to do to solve vital problems.
The concern about the bond markets and the pressure on the dollar they can bring to bear is so great that some have reported that President Obama’s primary reason for creating the National Commission on Fiscal Responsibility and Reform was to try to get a long-term deficit reduction plan through Congress in order to convince them that the United States is serious about bringing its debt problems under control.
There are many things wrong with the reasoning I’ve just laid out, and in past months I’ve blogged about its various flaws. But let’s put that aside for this post. Let’s assume that the narrative is correct. If so, then the problem of rising interest costs is caused not simply by deficit spending, but by our need to borrow to fund it.
If we didn’t need to do that anymore, then we’d be able to avoid increasing the national debt, and the debt-to-GDP ratio, and, eventually, there’d be no Federal interest costs at all, since we’d be gradually paying down our previous debt as it came due. By 2025, the date when current projections suggest that our debt-to-GDP ratio will reach 120%, we’d actually have a debt-to-GDP ratio of zero, because we’d have paid off the national debt.
So, the simplest and most direct solution to the so-called “debt crisis” is simply not to issue any more debt when the Federal Government deficit spends. Why can’t the Government do that now?
The answer is that when the nation went off the Gold Standard in 1971 and adopted its fiat currency system, Congress didn’t repeal its mandate, very appropriate when our currency was convertible to Gold on demand, in least in theory, requiring that the Government back all its deficit spending with already existing borrowed dollars whose convertibility was covered by our holdings of Gold. The mandate to borrow funds, however, has no useful function today, and the interest income it provides for mostly wealthy investors and foreign Governments who buy Treasury Securities is simply a form of welfare for the rich, and any positive effects it produces are vastly outweighed by the bad effects of having to cope politically and economically with the concerns of people who believe that the increases in the debt, and the debt-to-GDP ratio give us a fiscal sustainability problem whose priority outweighs everything else.
So, let’s make the deficit hawks and doves happy and remove all their debt, and debt-to-GDP ratio worries with the following solution. Congress: repeal the mandate forcing the Government to issue debt instruments on a dollar for dollar basis with deficit spending! The mandate has no useful function now, other than to provide welfare for the rich and foreign nations. If you repeal it we’ll:
– cease to provide that welfare,
– gradually pay off the Federal debt entirely,
– have rapidly decreasing Federal interest costs over the next decade until they entirely disappear,
– have no further need to worry about what the bond markets think or are going to do, or
– about our debt or deficit spending being “fiscally unsustainable.”
C’mon Congressfolks, you can solve the deficit hawk/dove’s version of the fiscal responsibility and reform/fiscal sustainability problem very, very easily, and also quit having to worry about those difficult votes on increasing the debt limit. All you have to do is get rid of that mandate to issue debt, and the whole political mess these deficit reduction Commissions and interest groups are making goes away.
You won’t have to raise the Social Security Retirement age and get young people angry at you, or piss off Seniors because you’re committing to cut their Medicare, or get people frosted because you’re going to cut the heart out of a program they really, really like. You know you really, really, really don’t want to take that vote the President, Bowles and Simpson, Alice Rivlin, Pete Peterson, and all their friends, are setting you up for. So don’t! Get rid of the mandate, get on with the real problems facing the country, like jobs, education, a new energy foundation for our economy, and real health reform rather than an insurance company bailout, and tell the bond markets to go to hell!
(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).



13 Comments

Damn, I wish it weren’t too late to nominate you as one of the Malcontent’s candidates to primary Obama.
I like your ideas.
Recommended.
Very well presented, thanks, letsgetitdone.
Joe, obviously the problem isn’t one of clarity of thought or logic but of a systemic structure that has many vested and politically powerful interests.
It’s that problem I sure wish we could come up with a solution to.
The diary Rusty wrote where a solution was for people to withdraw their ‘paltry’ savings,etc. from the ‘banks’ certainly would lead to some changes especially given how little of the guarantees by the FDIC are actually covered. That might be the only way that the MMT becomes accepted.
Thanks Mason, that’s a high compliment. But I was pleased to see that Elizabeth Warren won. I don’t think she’d sell us out, and I think she has some familiarity with MMT economics. She’s close to Bill Black who, in turn is close to Randy Wray, and she’s also close to Jamie Galbraith. So, if she were ever to be elected, I think we’d have that New Deal 2.0 we’re looking for.
Also, Russ Feingold would be a good mate for her. His silly economic ideas wouldn’t be controlling, and he’s back her up strongly on accountability. That would be a helluva good ticket I think.
Thanks you Rusty. I’ve been looking around for the right formulation of this that would go viral. I decided to formulate things this way, because I wanted Force people into admitting that getting rid of the debt wasn’t their real concern.
You’ll see that if any gold bugs or hawks come to fight a little over this one, it will be about inflation and not debt. I’d like to shift the issue to that because I think we can have a more rational discussion about that.
Of course, from the MMT point of view, whether or not one issues debt, doesn’t really impact solvency. There are simply no solvency issues with a Government having a non-convertible fiat currency system with a floating exchange rate and no external debt in another currency. But I’d rather not argue endlessly about that. Let’s just get rid of the debt, by getting rid of the mandate and then we can argue with them about inflation.
At least that’s a real issue; not just a distraction.
Perhaps, that’s true, Bruce. But I do think that part of the problem is the public’s clarity of thought. As long as the hawks can distract them with debt and with household analogies, they create the kind of fuss we’re seeing now. If we can get Congress to repeal that mandate and pay of the ‘effin debt, then everyone gets focused on full employment and price stability and we can see if the pols get results.
Btw, asking Congress to get rid of the debt by repealing the mandate isn’t so far-fetched. If they oppose getting rid of the debt that way, how can they keep riding the hobby horse of the debt crisis? I know they’ll try, but progs can reply: “Quit yur grousin’ You can get rid of the debt anytime you want. You don’t have to cut anything!
Then they have to reply with: well that’s printing money, and then the progs say, well all money is “printed” these days. Nothing is backed by Gold, so why shouldn’t we print some to stop borrowing from the Chinese?
Then they come back: well it will cause inflation, and then the progs say, well you don’t know that. There’s no evidence to prove that. So, would you rather try it, and see if it works or would you rather we keep owing $13 T to the Chinese and the Japanese.
I think thus last is a winning political argument. And once we get to try it. There’s no going back.
ILMLIA
(I’m licking my lips in anticipation)
Feingold/Warren
“That would be a helluva good ticket I think” !!!!
Nice little article, letsgetitdone.
ubetchaiam said:
“Joe, obviously the problem isn’t one of clarity of thought or logic but of a systemic structure that has many vested and politically powerful interests.” [I do not mean to pick specific individuals, I am near the end of this thread and needed an example to make my point.]
letsgetitdone said:
“But I do think that part of the problem is the public’s clarity of thought. As long as the hawks can distract them with debt and with household analogies, they create the kind of fuss we’re seeing now.”
[In the article you mention "a form of welfare for the rich." You also mention public anger (and anger always masks fear, as my therapist pointed out to me 20 years ago…) This will become relevant…]
You are both right in your statements.
“the problem isn’t one of clarity of thought” — The wealthy vested and politically powerful interests have clarity of thought; they know they must keep the public’s clarity of thought distracted with household analogies. It is a political problem, not an economic problem. Creation of the belief that there is an economic problem is, currently, the winning political argument.
There is an infinite number of moving parts involved.
Importantly, you have human pride and arrogance, base emotions of the individuals in the public. i.e. “Roll Tide” or “Noles #1″ or “Don’t mess wit Texas” etc.
Those simple-minded emotions of fear and pride are easily exploited by the clarity of thought of the vested and politically powerful interests.
So, in the end, letsgetitdone, while your economic thoughts are correct, your final sentence here, “I think thus last is a winning political argument,” is incorrect, because you are mixing apples and oranges. Logic doesn’t rule (“evidence” doesn’t matter,) in the political landscape, football fever rules. (Though that, in turn, is manipulated by wealthy media conglomerates and their clear, profit driven, thought processes…)
[I am sure I did not make a very clear comment: My point is that our own individual human pride, in the vein of "I am right," -- whether from ubetchaiam, or letsgetitdone, or fuckno, or Grey Wolf, or themalcontent, or Michael Kwiatkowski, or whoever -- prevents we, the collective public, from using superficial football fever mentality from manipulating the mass public for their own good. And, perhaps ethics and honor also prevents us [each individual] from using under-handed manipulation… While MMT may be correct economically, what is needed politically, what must be used [collectively] are emotions; fear, pride, simple household analogies, football fever, etc. So I come back to, “You are both right in your statements.” But, I also assert the “I am right” clause, you are both also partially wrong, in different aspects. ;-) Just my comments from the peanut gallery…] (This comment is a MESS! “Ay, caramba!”)
Greywolf, I think Warren should be at the top. She has great ability to communicate, and is much more class-oriented than Russ, who is a classical “Good Government” midwestern progressive, rather than a New Deal progressive. Warren, on the other hand, is someone who can help us reconstruct the economy and, once again, give us a working people’s party rather than just a coalition of special interests dominated by the corporates. Also, I think she would be more inspiring leader than Russ. That’s why she should be at the top.
Greywolf, (sigh) this is a very old argument. Going back to the Greeks at least. While there’s certainly much truth to it and also people like Frank Luntz and Karl Rove who’ve used it as an operating theory for riches and success, it isn’t true that football fever and manipulation always rule the day in politics. This stuff is a complex mix. The irrational is certainly there, but the rational is too, and sometimes people can see their own interest and their collective interest and calculate it correctly.
What I’m doing here is proposing a way of clearing away some underbrush, so that we can define conflicts around problems and not the false “problem” of the debt. That WILL improve things politically for people who want to use an activist Government for solving national problems.
IMHO, the Federal Reserve is the only reason why we don’t deficit spend.
Which is better for the banks? Deficit spending which messes with interest rates, or buying t-bills directly from the banks in a private auction?
I’ve finished your train of thought and the caboose is the FED.
Marinara, Sure it’s better for the banks, but do people want to get rid of the National Debt or don’t they? When you pose it as that kind of political question and push it, I don’t think the banks will stand a chance, unless they up and admit that there are no solvency problems and that we’re not running out of money.
They can’t have it both ways. If they want to have their version fiscal responsibility, they have to get rid of the national debt and quit fooling around.