Do Not Confuse Solvency with Sustainability

By Pavlina R. Tcherneva

The Peter G. Peterson foundation held its ‘fiscal summit’ yesterday to address the looming government debt and deficit ‘problem’. According to a TRNN journalist who attended the summit, the conference began with “we know what the problem is, the federal government debt and deficits have become unsustainably large, we need to make hard choices, cut government spending, including on Social Security and Medicare…”
Any sensible person should be scandalized by this purely ideological stance. When it is necessary to go into war, the deficit is never a problem; when we bail out the financial sector, deficit spending is a ‘requirement’, when we build prisons and pack more people in our jails, oh well… But when it comes to paying for the retired and the sick, surely the government can’t afford to do that! Grandma better pull herself by her bootstraps and take responsibility for her retirement or healthcare needs. But even if we get past the propaganda, Peterson and all the deficit hawks are making one fundamental mistake: they are confusing sustainability with solvency.
A counter-conference on fiscal sustainability, that very same day, addressed the technical aspects of the way the U.S. government actually spends. It demonstrated that it makes absolutely no sense to talk about deficit sustainability, in terms of the ability of the government to pay its obligation. By definition and in practice, the government sector in a sovereign-currency economy is the only sector that settles its payments in terms of its own liability. I would love to create my own IOUs and use them to pay my electric bill, but I can’t. Of course I could issue “Pavlina notes” but my electric company would not accept them because they cannot be converted into cash or dollar reserves –in other words, into government money! Remember, the Federal Reserve is the bank of the Government and settles its payments by crediting private bank accounts with reserves. For this reason, unlike my commercial bank or yours, the Fed never ‘bounces’ government payments. And how could it? Would it ever run out of electronic dollar reserves? It is impossible for the only sector in the economy which spends by issuing its own liability, to ever ‘run out’ of liabilities.
Just because the government pays by issuing liabilities, does not mean that it can spend willy-nilly on whatever it chooses! Absolutely not! The constraint to government spending is inflation (not the ability to ‘pay’), which is why you always have to fix government spending to something of value. When government spending injects bank reserves into the private sector it must do so by producing something for society.
Mad obsession with debt- and deficit-to-GDP ratios, divorced from any consideration to what is happening to the real economy, boggles the mind. Remember government deficits always create non-government surpluses–to the penny. When the government spends more than it collects, the private sector earns more than it pays in taxes to the government. That is, the private sector accumulates these government liabilities, again, in the form of electronic dollar reserves. The government does not run out of ‘electronic reserves’. These deficits go somewhere! They create income and profits for someone. The real question is “for whom?” and did those earners produce anything of value to society in exchange for getting this money? This is not a matter of financially bankrupting the nation. It’s a matter of bankrupting the economy in real terms. It’s about filling the coffers of a financial sector which has hired 7% of total U.S. employees in increasingly dubious services and who take almost 40% of total corporate profits (half of which are rents and serve no economic purpose). It’s about starving grandma, leaving our kids without world- class education, allowing the sick to get sicker, and the unemployed to become unemployable. And all because we refuse to build the real resources which we all need in order to maintain a decent standard of living. Now I would prefer not just a decent standard of living, but an excellent one—one to boast about, one that the richest country in the world can offer its citizens. Stop confusing solvency with sustainability. Start measuring sustainability in terms of the real goods, services, and jobs government spending creates for the public purpose. To paraphrase and old adage, how sustainable the future of a society is can be measured by the way it treats its most vulnerable members—its children, elderly, poor and unemployed.

5 responses to “Do Not Confuse Solvency with Sustainability

  1. great post pavlina!

  2. Thank you for this excellent post. You've nicely distilled what I have heard Hudson discuss but did not understand.So, if I am understanding the opinion here correctly, we could take major steps toward getting out of this mess if the administration would simply enact a comprehensive jobs program?

  3. The problem here seems to be a failure of liberalism/utilitarianism. in the neoliberal model freedom to pursue individual utility (self-interest) is presumed to be guided by an invisible hand to produce maximum utility, not only manifesting as social welfare but also the most efficient and effective means from creating it. This presumes that social welfare based on maximum utility is the aggregation of individual utility. Such a presumption involves the fallacy of composition, as it shown empirically in many ways, not the least of the which is the Gini coefficient. As a matter of fact, wealth and income concentrate at the top, and concentrated income and wealth destabilize the economy and society.The proponents of liberalism claim that any encroachment on "liberty" and "free choice" undermines free market capitalism and leads inevitably to socialism, which is always and everywhere doomed to failure because a command economy is inefficient. Therefore, any "redistribution" of wealth for social welfare purposes is contrary to the spirit of free market capitalism, which is claimed as the economic foundation on which liberal democracy is built. In this view, the best we can hope for is the maximum utility produced by the free market, and if some are left behind or fall through the cracks, it is due to either their own poor choices or "friction."This is a bogus argument, and it, too, needs to be attacked based on its fallaciousness. As Joseph Stiglitz recently observed, "There is no invisible hand." Key assumptions of neoliberalism, such as rational expectations and efficient markets are based on specious assumptions that are contradicted by events.The "fiscal responsibility" argument is grounded in liberal ideology. While I applaud the push to show the fallaciousness of the reasoning behind the recent "deficit errorism," the entire neoliberal agenda must also be addressed or, they be back with something else if this attempt fails.In a sense, it really is about "Hayek vs. Keynes."

  4. Hi Pavlina, I really love this post for its simplicity and clarity in making the case. May we cross-post this to with a credit and link to this UMKC blog of course?

  5. Outstanding commentary, Prof. Tcherneva!Brilliant, as usual.Few can really understand the obvious: that the colossal national debt and deficit spending result from those debt-financed billionaires who have transferred the private debt they peddled for their ill-gotten billions onto the public arena.That, together with all the war profiteering and death profiteering is the primary cause for all that runaway debt.Again, we thank you, Madam!