The Fiscal Summit Counter-Narrative: Part Eight, Narrative and Counter-Narrative For Fiscal Sustainability
(Author’s Note: This is the concluding post in an eight part series on the counter-narrative to the austerian/deficit hawk/long-term deficit reduction approach to fiscal policy that is dominant in Washington, DC today. At the end of this post I list and link the seven earlier posts in the series. I think the eight posts are important because they give the only progressive counter-narrative to the austerians, including the President, that doesn’t share their basic paradigmatic framing; namely that there is a Government Budgetary Constraint on the United States flowing from a danger of forced Government insolvency.)
I started this lengthy series by saying:
Well, it’s Springtime in DC. Time for the Peter G. Peterson Foundation’s annual event. The Fiscal Summit, to be held on May 15, better named the Fiscal Cesspool of distortions, half-truths and lies, is a propaganda extravaganza designed to maintain and strengthen the Washington and national elite consensuses on the existence of a debt crisis, the long-term ravages of entitlement spending on America’s fiscal well-being, and the need for long-term deficit reductions plans to combat this truly phantom menace. The purpose of maintaining that consensus is to keep an impenetrable screen of fantasy intact in order to justify policies of economic austerity. that have been impoverishing people and transferring financial and real wealth to the globalizing elite comprised of the 1% or far less of the population, depending on which nation one is talking about.
I then pointed to the first two Fiscal Summit Conferences in 2010 and 2011, identified some of the featured participants in both of these, and the then pending 2012 conference, and identified the primary myths used to form the neoliberal-based deficit hawk/austerian “fiscal sustainability”/”fiscal responsibility” narrative driving the politics of fiscal policy towards debate, discussion and passage of a long-term fiscal policy plan focused primarily on deficit reduction and long-term “fiscal responsibility” and “fiscal sustainability.” I then set out to present a detailed account of the five sessions of the April 2010 Fiscal Sustainability Teach-In Counter-Conference along with comments and references (links) to posts appearing since the Teach-In. The five sessions and accompanying Q & A, covered in posts 2-7 of this series, supplemented by additional post-conference work provide a fiscal sustainability/fiscal responsibility counter-narrative based on the Modern Monetary Theory (MMT) approach to economics.
In this final post of the series, I’ll juxtapose the primary claims underlying the neoliberal austerian fiscal sustainability/fiscal responsibility narrative, and the MMT answers to them. The austerian claims all link to MMT-based posts that critique them. The paragraphs following each austerian claim summarize the MMT answers, and the counter-narrative.
The US Government has the Constitutional Authority to create an unlimited amount of money provided Congress appropriates the spending, and places no constraints on spending such as a need to issue debt instruments when the Government deficit spends, or debt ceiling limits. So, all constraints on spending appropriations are purely voluntary in the sense that they are due to Congressional mandates that Congress can repeal at any time.
Having said that, the constraints mentioned are now in place, and the Teach-In didn’t deal with ways of getting around the constraints within the framework of current law. It didn’t show that without legislative changes, the Executive can always create enough money to pay for whatever spending Congress has appropriated and also repay debt, so that even with a Congress willfully maneuvering for default, the Executive can ensure that the Government doesn’t run out of money even without more taxing and borrowing.
Since the Teach-In in April 2010, the option of using Proof Platinum Coin Seigniorage (PPCS) as one method of getting around the debt ceiling has received a lot of attention. Originally suggested by Beowulf some time ago, there are any number of PPCS options the President can use to generate coin seigniorage profits to use for a variety of purposes. I’ve outlined some of them here. Some PPCS options stop with $1/2 Trillion coins, some go over $1 Trillion up to $5 Trillion, and still others envision very high face value coins ranging to $60 Trillion and up.
For getting around the debt ceiling, coins with face-values up to $5 Trillion will certainly remove the need to issue further debt subject to the limit and break the debt ceiling. However, minting a platinum coin with a face-value of say, $60 Trillion is also a political game-changer, because it results in filling the Treasury General Account with enough in credits to make it obvious to the most concrete thinker that the Government has the capacity to pay all the debt subject to the limit, issue no more such debt if it so chooses, and also spend whatever Congress chooses to appropriate in the way of new programs to solve current problems.
So, issuing a $60T coin, removes the issue (excuse) of whether the Government of the United States can afford to pay for employment programs, educational programs, infrastructure, new energy foundations, a Medicare for All program, new R & D programs, or expansion of the social safety net from the political table. Issuing that coin can and would create a new political climate moving American politics much further to the left within the space of a few months. In short, it would dramatically illustrate the MMT counter to the austerian deficit hawks, namely that the US Government is not running out of money and cannot do so as long as it has the intention to use its authority to create more of it.
Clearly this isn’t true. First, the Federal Reserve, a Government agency can create unlimited money “out of thin air,” as the saying goes, though not for purposes of deficit spending, or directly liquidating Treasury debt. But second, I’ve just pointed out that PPCS can be used in the present legal framework to create money other than by taxing or borrowing.
Again this is false. Congress has placed a debt ceiling on the Government, and it has also mandated debt issuance when the Government deficit spends, by prohibiting the Fed from lending the Treasury money. So, it’s only the self-imposed constraint of Congress that prevents the Government from continuing to add “debt to the national credit card.” There is nothing inherent in the international economic system, or our own Constitution that prevents us from adding debt as needed.
And even if current constraints on debt ceiling constraints remained in place, Treasury can still issue debt without breaching the debt ceiling. Beowulf, the blogger/commenter, who first proposed using high face-value PPCS to get by the debt ceiling, just came up with a new option to avoid breaking the debt ceiling. That option follows:
“Another way to sidestep the debt ceiling is to go the opposite extreme from one-day maturities, issue perpetual T-bonds with no maturity date (what the Brits call consols). Look at the debt ceiling law, the public debt adds up, for all outstanding debt, the face amount of the guaranteed principal. The future interest payments to be paid aren’t counted. (“The face amount of obligations issued under this chapter and the face amount of obligations whose principal and interest are guaranteed by the United States Government“).
“If there’s no maturity date, then there’s no promise to repay principal and thus there’s nothing to add to the public debt total. Tsy could issue an unlimited amount of consols without tripping over the debt ceiling.”
Beowulf has more on consols here. But the possibility of consols is enough to show that the Treasury has an unlimited credit card under current legal arrangements, and can use it without breaching the debt ceiling, though of course, it can’t spend more than Congress has appropriated, and is also required to repay debt and interest that is coming due.
Btw, few public discussion on the size of Treasury’s credit card hardly ever recognizes just how much Federal debt is repaid every year as it falls due. This fiscal year alone, through June 20, $47.6 Trillion in Federal debt was repaid, while $48.6 Trillion in new debt was issued. This isn’t what you’d expect to find if the national credit card was limited by anything other than an arbitrary debt ceiling imposed by a Congress that can remove that ceiling in one hour.
This conclusion follows from the ideas that we’re running out of money and also out of space on “the national credit card.” Since these notions are just not true, why should we cut either Federal Government spending, or Federal deficit spending on grounds of scarcity of money? The austerians have other reasons for wanting to do that; but in the fiscal summit narrative, the reasons given are these two.
If they’re false justifications then the fiscal sustainability/responsibility narrative is both unsustainable and irresponsible, since it leads to unnecessary cuts in Federal spending that will hurt many millions and also the economy for no good reason at all. Austerity is a solution to a problem that doesn’t exist, or to put it a bit more kindly, it’s a solution looking for a problem. Or to put it less kindly, perhaps it’s the solution to the kleptocrats’ problem of how to create an impoverished underclass that will accept its looting without complaint.
In any event, MMT says that we don’t need to make-do with no more money as long as the economy is operating below its full productive capacity and full employment. Since the Government can always make more money, there is no need to make do with less, until there are concrete negative consequences of more spending. In fact, the Government must spend more to lift private sector aggregate demand and enable the Economy to get to full employment. Demand-pull inflation will not occur as a result of Government spending as long as the economy is operating at less than full employment.
The bond markets don’t control US interest rates. The Treasury can flood overnight bank reserves and float short-term debt to meet its targeted interest rates, however low they may be. The Government, if Congress would let it, can even stop issuing debt when it deficit spends (by using PPCS or consols, or by Congress moving the Fed into Treasury where it belongs) in which case the bond market interest rates would become entirely irrelevant.
Our creditors all want export-led economies. This means that they must accumulate dollars, because the US is where the consumption power is, and if they want to keep exporting they must keep the American consumers’ business. Their dollar surpluses can sit idle in their Federal Reserve accounts or be used in a way that makes them money. Buying our debt makes them some money, however little it may be at current interest rates. Buying our goods and services reduces their trade surpluses with us, and goes against their export-led policies. Selling our currency, weakens the value of the USD holdings they retain. In short, they have little choice other than to buy our debt, unless they want to gradually adjust trade balances with us over time.
Even more importantly, as I keep repeating, we don’t need to raise money by borrowing USD from them or anyone else. We can simply spend/create it ourselves if Congress repeals its constraints prohibiting the Fed from “monetizing” the debt, or if the President decides to use PPCS or consols. The result of no more debt issuance, along with use of these other methods, would be paying off the national debt over time, without austerity. So, why don’t we do that? Could it be that the austerians want austerity for political rather than economic reasons, and that the fiscal sustainability/responsibility justifications they give are just part of a complex fairy story they tell to avoid being candid about why they want austerity?
No US generation except one has ever repaid the national debt by running budget surpluses. That generation was rewarded with the depression of 1837. Moreover, each time the nation ran substantial surpluses for a period of time, the country fell into depression or recession, most recently the recession of 2001, following Clinton’s four years of running a surplus. It’s a bad idea to repay the national debt by running surpluses, so our grandchildren won’t do it unless they can do it without discontinuing “deficit” spending. That’s possible, but only if the Congress repeals the mandate to issue debt when the Government deficit spends, or alternatively, the Government freely uses its PPCS power. In both cases the national debt can then be repaid without requiring that tax revenues match or exceed Government spending.
In any event, our grandchildren will not have the burden of repaying the national debt, but if we are so stupid as to attempt to pay it by running surpluses and practicing austerity, then they will have the burden of growing up in poor families, attending very poor schools, living in mal-integrated communities where they’ll be subject to crime and violence, and living in a class-ridden nation run by a kleptocratic elite that monopolizes both the artificially constricted supply of financial wealth, and the increasingly scarce real wealth produced by a stagnant, broken economy. That’s not what any of us want; but that’s what the austerian/deficit hawk policies will produce.
All together now, there is no such problem. Since the US Government has no limits other than self-imposed ones on spending or borrowing, the level of the national debt or debt-to-GDP ratio doesn’t affect the Government’s capacity to spend Congressional Appropriations at all. These numbers aren’t related to fiscal sustainability in nations like the US with a non-convertible fiat currency, a floating exchange rate, and no debts denominated in a currency it doesn’t issue. Such nations can’t become involuntarily insolvent because they always create more currency to pay debts denominated in that currency.
If the debt-to-GDP ratio were 300% and there were no other changes in current the US would still have the same ability to deficit spend it has now. Conversely, if the debt-to-GDP ratio were 10%, the same would apply. To put this simply, the size of the public debt subject to the limit, and the size of the debt-to-GDP ratio have no impact at all on our capability to deficit spend, because we can always make the money we need, if need be, through PPCS. So there is no need for a long-term deficit reduction plan to lower the debt-to-GDP ratio. There is also no need to run surpluses to decrease the size of the debt, since we can always use profits from PPCS to do that without either borrowing more or raising taxes.
Even though neither the level of the national debt, nor the level of the debt-to-GDP ratio creates a sustainability problem for the US, depending on conditions, the deficit can be too high. But the question of when a deficit is too high isn’t an issue of fiscal sustainability in the sense that we can run out of money, but instead is an issue of the negative consequences of an excessively high deficit. The most important of these consequences is demand-pull inflation, and when that is observed, Federal spending should be reduced to control or eliminate it. However, there are two questions arising here. First, which spending, if cut, will produce the most overall benefit. And second, what’s the impact of cutting spending vs. the impact of doing nothing, vs. the impact of raising taxes.
No, the Federal Government is not like a household! Households can’t make their own currency and require that people use that currency to pay taxes. Households can run out of money; but the US can’t ever run out of money as long as Congress decides to appropriate spending and gives the Executive the authority to implement that spending. So, the Federal Government doesn’t have to sacrifice to live within its means, since its “means” to create new currency is limited only by its own decisions and not by any factors external to it. Put simply, Federal spending including deficit spending doesn’t cost anything in the doing. The only relevant question is its real effects on the economy.
The problem with this claim is that it assumes that deficit spending is a problem that we must “tackle.” But, there is no “excessive spending” per se. And I’ve said enough already to show that whether this is a problem or not needs to be debated. Whether spending is excessive can only be evaluated in context.
The issue is always the effects or impact of Federal spending. Spending is “excessive” when it fuels inflation, or when it provides financial benefits to already wealthy people who don’t need such benefits, or when it funds programs that impose real costs on people and society like negative environmental effects, locking-in dependence on fossil fuels, imposing environmental risks, increasing economic, social, and political inequality, undermining civil liberties, civil rights, privacy, etc. Also, “excessive spending” shouldn’t be cut to lower deficit spending, It should only be cut because of its negative impacts, including inflation.
Again, this claim assumes that Social Security funding is a problem and that the program needs to be strengthened by fixing its funding. But that claim is at issue. In parts Three and Four, Warren Mosler and Stephanie Kelton, both argued that Social Security solvency is a fake problem from the MMT point of view and posts since the Teach-In have reinforced this argument.
Apart from the fact, that it isn’t obvious that a bi-partisan solution to a fiscal problem would produce the a real solution, it’s also true that this is a fake fiscal problem. Social Security should be strengthened alright. But the way to strengthen it is to guarantee its funding in perpetuity, and to greatly increase benefits for many seniors whose current benefits leave them scraping the poverty line. Try doubling SS benefits while providing full payroll tax cuts. That will strengthen SS and the economy as well.
As I’ve indicated above, this view is total nonsense, because federal spending is costless in the spending. If the debt subject to the limit bothers the neoliberal austerians so much, they ought to be supporting full payoff of the debt using PPCS profits. Doing that won’t harm the economy, and it won’t cause inflation either, since the bonds retired are more inflationary then the money paid to redeem them.
I certainly agree with this claim if the Congress legislates and the Government implements Paul Ryan’s or other austerian budgets and long-term deficit reduction plans. On the other hand, if MMT proposals providing for responsible fiscal policy ending unemployment while providing price stability were adopted, then the next generation will inherit a much more dynamic, growing, yet more sustainable economy and a much happier and freer nation, no longer run by the 1%.
This one is a real laugher. Greece and Ireland can run out of Euros. California can run out of dollars. But the United States can’t run out of Dollars. Japan can’t run out of Yen. The UK can’t run out of Pounds, and Canada and Australia can’t run out of Canadian or Australian Dollars. So, governments like California, Michigan, Wisconsin, etc. can become the next Greece or Ireland if the Federal Government allows that to happen by refusing to bailout States if they need it, but the US can’t become the next Greece or ireland, because it can always bail itself out if it chooses to do so.
The real danger for the US is in becoming the next Japan and losing a decade of economic progress by following neoliberal deficit reduction doctrines. The US is now approaching four years of the decade we are losing. Why are we losing it? Because, as Warren Mosler is fond of saying: “Because we fear becoming the next Greece, we continue to turn ourselves into the next Japan.” That is, we’re making ourselves a stagnant economy by imposing unnecessary fiscal constraints, rather than creating/spending the money we need to solve our increasingly serious national problems.
No! REAL Fiscal Responsibility is fiscal policy intended to achieve public purposes while also maintaining or increasing fiscal sustainability viewed as the extent to which patterns of Government spending do not undermine the capability of the Government to continue to spend to achieve its public purposes. So, the REAL Government fiscal responsibility problem is not the problem of everyone “sucking it up” and responsibly accepting austerity. It is not targeting the debt-to-GDP ratio and managing Government spending to try to stabilize it.
Instead, it is the problem of people facing up to the need to use fiscal policy to stop our out of control economy from ruining the lives of any more Americans. This means that the REAL solution to the REAL fiscal responsibility problem is for our leaders in Congress and the Executive Branch, to remove fiscal constraints and use the fiscal powers of the Federal Government to fund solutions to the many national problems we face, starting with creating full employment, and a real universal health care system in which no one is shut out, or forced into foreclosure or bankruptcy by medical bills, and then all the other serious problems we face, but now will not handle because we claim a non-existent fiscal incapacity of the Federal Government. There is no incapacity! We have not run out of money! We have only run out of smarts, will, and courage! We need to get those back, and do what must be done to reclaim the future for working Americans.
Well, let’s see. We’ve got austerity now in Ireland, Spain, Portugal, Italy, the Baltics, and, of course, Greece, among nations in the Eurozone, and also in the UK. Is it creating jobs anywhere? Is there even one case, in which the “austerity will create jobs” theory isn’t being refuted by events? Some may think that Latvia is beginning to recover because it’s unemployment rate has now fallen to 15%; but that’s because 200,000 Latvians (10% of the population) have chosen to emigrate, a particularly effective way of both leaving the labor force, and lowering the rate of unemployment. Bet we could lower unemployment here too, if we first ran the economy down by 30%, drove U-3 up to the 20% level, and then had 31,000,000 people leave the United States for parts unknown. Oh austerity, will thy wonders never cease?
Conclusion: Saying No to Neoliberal Austerity
This post marks the end of a lengthy journey through the proceedings of the Fiscal Sustainability Teach-In Counter-Conference I’ve offered to you. I wrote this series because I think an answer was needed to this Spring’s lobbying for austerity and long-term deficit reduction by the Peterson Foundation-associated politicians, lobbyists, and intellectuals who are still, even after three years of the Obama Administration, dominating the Washington conversation about fiscal responsibility and fiscal sustainability, and still pushing these issues to the center of our concerns, even after years of high unemployment, and the destruction of 40% of the accumulated wealth of middle class Americans, the continuing decline in the quality of our schools, our collapsing infrastructure, the continuing decline in social and economic mobility in the United States, the continuing subversion of the political system by monied elites, both personal and corporate, the continued failure of our health care system to deliver health care to all Americans that works, and doesn’t economically devastate those who enter the health care system, and the continued exacerbation of many of our other problems. Why do the partisans of austerity and long-term deficit reduction say that the fiscal sustainability problem is a more important problem than all of the others, or even a problem at all?
It’s because they say that the US Government is constrained in its spending by its need to raise revenue from taxing and borrowing, and its dependence on the bond markets for reasonable interest rates when it borrows. This is the Government Budget Constraint (GBC) which is at the very center of their story, and which drives their reasoning to the conclusion that unless we get the national debt under control so that the debt-to-GDP ratio stops growing and stabilizes at some reasonable level, our financing from the bond markets well carry prohibitive interest rates. And that if we continue borrowing beyond that our credit will finally collapse preventing us from funding many of of our essential programs and even our common defense.
All the claims, I’ve reviewed here, except perhaps for the last, are based on the idea that this GBC exists. There’s plenty of evidence that it exists, they say. Look at households, look at private businesses, look at non-profit organizations, look at state Governments, look at Greece, Ireland, Spain, etc. They all have GBCs don’t they, and since the Government is just like an enormous household, it has a GBC too, right? Wrong!
MMT says that for a Government with a non-convertible fiat currency, a floating exchange rate, and no debts in a currency not its own, there is no GBC. That claim is at the heart of the counter-narrative asserting that the US has no budget constraint except for self-imposed ones.
Some rightly point out that even though the Constitution allows creation of financial wealth without limit, a GBC does exist in the US because Congress has imposed it, by locating the power to create money “out of thin air” in the Fed, and by requiring that the Fed not extend credit to the Treasury, by either allowing it run a negative balance in its accounts, or by monetizing Treasury debt by buying it directly. However, these claims don’t hold up because 1) Congress can always remove these constraints since they are political rather thah economic, and 2) they ignore the 1996 legislation allowing the Secretary of the Treasury to mint proof platinum coins of arbitrarily high face value, e.g. $60 Trillion.
Treasury can use that law to fill the public purse, pay off all debt subject to the limit, and cease to issue any new debt. Since this capability exists, even without Congress removing its constraints on Treasury money creation, Treasury can still create whatever it needs to close any gap that might appear between tax revenues and federal spending.
So, here we are, a Government without a GBC that can never run out of money involuntarily, and we’re facing a persistent, well-funded and powerful consensus in Washington that wants to impose austerity on all of us in the name of a non-existent GBC that it passionately asserts will cause the nation to “go broke,” if we give priority to all of our major problems while forgetting about their fantasy that we are doomed if we don’t reach some entirely arbitrary level of debt-to-GDP ratio, that they have no way of even deriving in any rigorous way from their neoliberal theory.
With increasingly grave warnings of doom they try to make us believe that we are facing a national crisis that must be met with a bipartisan solution that will be impervious to the inevitable protests that will arise from most people when their solution causes suffering — as it inevitably will since as MMT shows, deficit reduction and government surpluses will inevitably cause destruction of private sector financial assets in the private sector.
Since the elites are in a better position to protect their financial assets than other Americans, the burden of austerity will inevitably fall on most of us. We will be sharing the sacrifices, while they will be getting richer from their efforts in the international gambling casino, and from seizing everyone else’s property when austerity renders debtors unable to pay their debts.
Negotiation of that “bipartisan agreement” they are seeking will probably use Bowles-Simpson as a framework, even though that framework was never adopted by the “Catfood Commission,” and even though it has received great resistance in Congress since it was published, by the two Chairs in the absence of agreement needed to make it a commission product. In any event, the main thrust of the austerians/deficit hawks: that fiscal policy should focus on a long-term deficit reduction plan cutting back the social safety net, is still very much alive politically in Washington, DC and another attempt to implement it is likely in the lame duck session, barring an implosion in Europe before then, that could change the priorities of the deficit hawks.
So, the importance of continuing to counter austerian propaganda like The Fiscal Summit of 2012, and other non-partisan organizations allied with the Peterson Foundation remains. We, who believe in the MMT counter-narrative must continue to fight to try to break through the screen of their closed system. One of the popular slogans for the austerians this year is “Debate the Debt.” There’s a petition web site urging politicians to debate the debt. There’s a proposal demanding that the presidential candidates devote a whole presidential debate to the debt and deficit issues.
What is it the austerians want us to debate? They want us to debate how we should reduce deficits over the medium and long-terms by spending less and taxing more. But they most emphatically don’t want to debate whether the debt, deficit, and debt-to-GDP ratio, represent real problems relating to fiscal sustainability or fiscal responsibility. Put simply, they don’t want us to debate whether there problem is really a problem for our capacity to spend in the future or for government solvency.
They say there’s a government solvency problem and that all of us must and should suffer to solve it. MMT says that there is no solvency problem and there’s no reason for people to suffer any more than they have already due to the crash of 2008. That’s the debate about the debt we badly need right now, When they say debate the debt, they mean debate how we should all suffer to get rid of it. When I say “debate the debt,” I mean debate whether the public debt subject to the limit is a real problem, or a just a massive distraction from coming to grips with our real problems. I think that my debate question is clearly prior to the austerians’ because it doesn’t assume the conclusion that there is a problem and that focusing on it isn’t a distraction.
But, I think it is a massive distraction; and I can prove it! Just mint that $60 T platinum coin and the debt problem will go away. Then the Peterson Foundation will need to invent a new fairy tale to distract us with; or maybe they’ll do all of us a favor and just go out of business, so we can re-build our country without having to deal with their insolvency fantasy first!
(Cross-posted from Correntewire.com)