{"id":13663,"date":"2016-12-31T22:01:01","date_gmt":"2017-01-01T03:01:01","guid":{"rendered":"http:\/\/multiplier-effect.org\/?p=13663"},"modified":"2019-03-05T12:01:23","modified_gmt":"2019-03-05T17:01:23","slug":"xmas-cheer-the-debt-is-not-our-biggest-problem","status":"publish","type":"post","link":"https:\/\/blogs.bard.edu\/multiplier-effect\/xmas-cheer-the-debt-is-not-our-biggest-problem\/","title":{"rendered":"Xmas Cheer: The Debt Is Not Our Biggest Problem"},"content":{"rendered":"

Why do so many pundits and politicians, including the future director of the Office of Management and Budget, beat the debt drum so loudly and so often? It\u2019s one of the most effective, and most abused, wedge issues in American politics.<\/em><\/p>\n

by Kerry Pechter<\/strong><\/h3>\n

The nomination of Mick Mulvaney\u2014deficit hawk, three-term Republican congressman from South Carolina and founding member of the House \u201cFreedom Caucus\u201d\u2014to the cabinet-level directorship of the Office of Management and Budget is not good news for the financial system.<\/p>\n

Mulvaney has said (and perhaps even believes) that one of the “greatest dangers” we face as Americans is the annual budget deficit and the $20 trillion national debt. This notion is an effective political weapon, but it\u2019s dangerously untrue. If it were true, the country would have failed long ago.<\/p>\n

Debunking this canard should be a priority for anybody who cares about retirement security. As long as we believe in the debt bogeyman, we can\u2019t productively solve the Social Security and Medicare funding problems, defend the tax expenditure for retirement savings, or even create a non-deflationary annual federal budget. Everything will look unaffordable.<\/p>\n

Hamilton, the Broadway star<\/strong><\/p>\n

If you don\u2019t believe me, believe Alexander Hamilton. In 1790, the new nation was awash in government IOUs\u00a0but had little cash or coinage for daily commerce. Hamilton, the impetuous future Broadway subject, resolved the crisis with a simple argument. He reminded his fellow founders that debts are also assets, and that the most secure assets are those that yield a guaranteed income stream from a sovereign government with the power to tax.<\/p>\n

At the time, according to Hamilton\u2019s \u201cFirst Report on the Public Credit,\u201d the U.S. debt in 1790 stood at $54.1 million and change. In that document, the first Treasury Secretary laid out his plan\u2014over the protests of deficit hawks\u2014to restore the debt\u2019s face value, secure the new nation\u2019s credit rating, and put new money into circulation through interest payments on the debt, with revenue from taxes on imports.<\/p>\n

The plan worked. With its par value established, U.S. debt became\u2014and still is\u2014the basis of the nation\u2019s money supply. \u201cIn countries in which the national debt is properly funded, and an object of established confidence, it answers most of the purposes of money,\u201d Hamilton wrote. \u201cTransfers of stock or public debt are there equivalent to payments in specie; or, in other words, stock, in the principal transactions of business, passes current as specie.\u201d<\/p>\n

Not a burden on our backs <\/strong><\/p>\n

Since then, during times of doubt, others have re-explained all this. In 1984, many people were panicking that the federal budget deficit had reached $185 billion. That July, economic historian Robert Heilbroner, author of The Worldly Philosophers<\/em>, explained in a New Yorker<\/em> essay that their fear was based on a misconception.<\/p>\n

\u201cThe public\u2019s concerns about the debt and the deficit arises from our tendency to picture both in terms of a household\u2019s finances,\u201d Heilbroner wrote. \u201cWe see the government as a very large family and we all feel that the direction in which these deficits are driving us is one of household bankruptcy on a globe-shaking scale.\u201d<\/p>\n

That\u2019s not so, he explained. The government is more like a bank, which lends by creating brand new liabilities. (You can also think of it as the cashier at a casino, who has an infinite number of chips at her disposal.) \u201cAs part of its function in the economy, the government usually runs deficits\u2014not like a household experiencing a pinch but as a kind of national banking operation that adds to the flow of income that government siphons into households and businesses,\u201d he wrote.<\/p>\n

“The debt is not a vast burden borne on the backs of our citizenry but a varied portfolio of Treasury and other federal obligations, most of them held by American households and institutions, which consider them the safest and surest of their investments.\u201d<\/p>\n

\u2018Heterdox\u2019 economic view<\/strong><\/p>\n

Over the past 30 years, however, as the national debt has become a political football, this common-sense explanation of it has been suppressed. You hardly ever hear it articulated. It is kept alive mainly by \u201cheterodox economists\u201d like Stephanie Kelton and L. Randall Wray.<\/p>\n

In the 2015 edition of his book, Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems<\/em>, Wray explained the flaw in the idea that the deficit, the debt or the interest on the debt will eventually overwhelm us. It\u2019s the kind of straight-line forecasting, he wrote, that ignores self-limiting factors or feedback mechanisms.<\/p>\n

\u201cIf we are dealing with sovereign budget deficits we must first understand WHAT is not sustainable, and what is,\u201d Wray wrote. \u201cThat requires that we need to do sensible exercises. The one that the deficit hysterians propose is not sensible.\u201d He uses the analogy of Morgan Spurlock, the maker of the 2004 documentary\u00a0Supersize Me<\/em>, to illustrate his point.<\/p>\n

In the movie, Spurlock wanted to discover the effects of consuming 5,000 calories worth of food at McDonald\u2019s every day. Wray pointed out that, if you ignored certain facts about human metabolism, the 200-lb Spurlock would inevitably weigh 565 pounds after a year, 36,700 pounds after 100 years and 36.7 million pounds after 100,000 years. Of course, that can\u2019t happen.<\/p>\n

\u201cThe trick used by deficit warriors is similar but with the inputs and outputs reversed,\u201d according to Wray. \u201cRather than caloric inputs, we have GDP growth as the input; rather than burning calories, we pay interest; and rather than weight gain as the output we have budget deficits accumulating to government debt outstanding.<\/p>\n

\u201cTo rig the little model to ensure it is not sustainable, all we have to do is to set the interest rate higher than the growth rate\u00a0\u2013 just as we had Morgan\u2019s caloric input at 5,000 calories and his burn rate at only 2,000\u00a0\u2013 and this will ensure that the debt ratio grows unsustainably (just as we ensured that Morgan\u2019s waistline grew without limit).\u201d<\/p>\n

Fooling the people<\/strong><\/p>\n

Like any other threat, the debt\u2019s scariness factor depends on how you frame it. The 2016 budget deficit was $587 billion, which sounds terrible. But that was just 3.3% of Gross Domestic Product. The U.S. debt reached $19.9 trillion in 2016, which also sounds terrible. But that is the amount accumulated since 1790<\/em>. Our annual<\/em> GDP is almost $18 trillion.<\/p>\n

To enlarge the frame, we should include the whole\u00a0\u201cfinancial position\u201d of the United States. According to Wikipedia, it \u201cincludes\u00a0assets\u00a0of at least $269.6 trillion and\u00a0debts\u00a0of $145.8 trillion. The current net worth of the U.S. in the first quarter of 2014 was an estimated $123.8 trillion.\u201d In that context, neither the deficit nor the debt seem like terrible threats.<\/p>\n

If you’re bent on making the math look scary, you can easily do it. As Wray noted above, \u201cIf the interest rate [i.e., costs] is above the growth rate [i.e., revenues], we get a rising debt ratio. If we carry this through eternity, that ratio gets big. Really big. OK, that sounds bad. And it is. Remember, that is a big part of the reason that the global financial crisis (GFC) hit: an over-indebted private sector whose income did not grow fast enough to keep up with interest payments.\u201d<\/p>\n

But the government doesn’t face the same constraints as the private sector (which is why it could bail out the private sector in 2008-2010). Once you recognize that U.S. assets are huge, that U.S. debts are also private wealth, and that the debt needs to be serviced but never zeroed out, then today’s debt shrinks into the manageable problem that it is and not a source of panic. (Paying down the national debt\u2014in effect, deleveraging the government\u2014would be disastrously deflationary; that\u2019s a topic for another article.)<\/p>\n

So why do so many pundits and politicians, including the future director of the Office of Management and Budget, beat the debt drum so loudly and so often? The answer is obvious. It provides an evergreen reason to delegitimize any and every type of government spending, regulation and taxation. It\u2019s one of the most effective, and most abused, wedge issues in American politics.<\/p>\n

Kerry Pechter is the founder and editor of the <\/em>Retirement Income Journal<\/a>. Reprinted with permission.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Why do so many pundits and politicians, including the future director of the Office of Management and Budget, beat the debt drum so loudly and so often? It\u2019s one of the most effective, and most abused, wedge issues in American politics. by Kerry Pechter The nomination of Mick Mulvaney\u2014deficit hawk, three-term Republican congressman from South […]<\/p>\n","protected":false},"author":202,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[112],"tags":[1119,368,151,822],"class_list":["post-13663","post","type-post","status-publish","format-standard","hentry","category-modern-monetary-theory","tag-hamilton","tag-l-randall-wray","tag-mmt","tag-public-debt"],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/posts\/13663","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/users\/202"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/comments?post=13663"}],"version-history":[{"count":15,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/posts\/13663\/revisions"}],"predecessor-version":[{"id":14423,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/posts\/13663\/revisions\/14423"}],"wp:attachment":[{"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/media?parent=13663"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/categories?post=13663"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/tags?post=13663"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}