(Author’s note: I’ve offered this idea a couple of times over the past few months here, with surprisingly little reaction. I’m trying once again, because I’m persuaded that much of the leverage that conservatives and Republicans have over our fate is due to the belief that most people hold that federal deficits, the national debt, and the GDP ratio are important, and that we must bring them under control to avoid Government insolvency. In addition every one seems to believe that the existence of the debt is due the to the profligacy of the Government, its monumental waste, and the lack of courage of its politicians who spend too freely to please constituents, gain campaign contributions, and help themselves to stay in office. None of this is true. The current existence of the National Debt, and also of a non-zero public debt-to-GDP ratio is the inevitable result of a technical decision that Congress has made about how the Treasury should finance its spending. This post talks about that decision, points out that its consequence is the National Debt, and also points out that the very existence of the National Debt is the fault of Congress.)
It is Congress’s fault that we have a national debt at this point in our history. And also Congress can largely get rid of this debt over a 10 year period any time it wants to.
The national debt exists today because when the nation went off the Gold Standard in 1971 and adopted its fiat currency system, Congress did not 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. This Congressional mandate to borrow funds by issuing debt instruments when the Government deficit spends, is what has caused the national debt to persist.
Had Congress repealed it when President Nixon took the country off the Gold Standard, and had we ceased to issue debt at that time, then the Government would have re-paid all of our 1971 debts as they came due, and our national debt today would be zero and our debt-to-GDP would now be at 0%.
The Congressional mandate to issue debt when the Government deficit spends 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. In fact, it is welfare that will cost the Treasury almost $12 Trillion over the next 15 years if we continue the policy of issuing debt instruments.
Any positive effects this policy 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. Even though the national debt has no effect on national solvency; it is a political problem. It magnifies the political strength of conservatives and weakens progressives because it makes people afraid to deficit spend since then the country will be “going into debt.”
Congress needs to repeal the mandate forcing the Government to issue debt instruments on a dollar for dollar basis with deficit spending, right now. If it does so it will:
– cease to provide welfare payments in the many Trillions of Dollars over the next 15 years mainly for the rich and foreign nations,
– gradually pay off the $14 plus Trillion Federal debt entirely,
– have rapidly decreasing Federal interest costs over the next decade until they entirely disappear,
– have no further need to take difficult votes about increasing the Federal debt limit,
– have no further need to worry about borrowing money from the Chinese, or the oil rich states, or the Japanese, that our grandchildren will one day have to re-pay,
– have no further need to worry about what the bond markets think or are going to do, or
– to worry about our debt or deficit spending being “fiscally unsustainable” when we want the Government to spend money to sustain the unemployed, help us end unemployment altogether, provide a more generous Social Security system for aging Americans rather than cutting the inadequate benefits we have now, fulfill American needs for new infrastructure, develop a re-invented first class educational system, and provide Medicare for All, among our other needs.
If Congress refuses to remove its requirement to issue debt, when it can easily do so at any time, then it’s habitual complaints about its size should cease at once and no longer pollute our political debates.
My earlier posts on this subject were met with anticipated responses claiming that ceasing debt issuance would inevitably lead to inflation because of the increase in the money supply caused by merely “printing money.” People who believe this, do so because they think that dollar for dollar debt issuance associated with deficit spending removes as much currency from the non-Government sector as the Government spends, and because of this damps down any inflation that may result from the Government spending.
This reasoning is faulty on two counts. First, increases in the money supply caused by Government spending do not result in demand-pull inflation until the point of full employment is reached because the increased demand produced by the Government is met by the private sector with supply increases rather than price increases. We have known that since Keynes. A very good recent account of the consequences of just creating money through deficit spending unaccompanied by debt issuance is this post by Professor Bill Mitchell. Yet another is this very good one by Professor Scott Fullwiler.
In addition, Professor Stephanie Kelton, shows that while Government debt issuance may transfer money back to the Government, it still leaves a net financial asset in the private sector, specifically, the Government debt instrument. As Scott Fullwiler points out in a comment on Stephanie Kelton’s post, it is highly debatable that the net addition of a debt instrument to the private sector is less inflationary than just leaving additional cash would have been, and very likely that the debt instrument is actually more inflationary because 1) one can get more financial leverage from it than one can get from money, and 2) it adds more interest to the private sector than a cash deposit would.
The United States has many very real problems which it can help to address with Government programs. The deficit spending required to solve our problems shouldn’t be constrained by the non-existent problem of that national debt, or the fantasy of stabilizing a debt-to-GDP ratio that also represents a non-existent problem, or the misguided notion that the issuance of debt makes deficit spending less inflationary than it otherwise would be. To make sure that deficit spending is not so constrained, Congress needs to repeal its debt issuance mandate now before the American people learn the truth that Congress, itself, is responsible for all the angst we hear about the deficit, the debt, and the debt-to-GDP ratio.