Steven Rattner’s opinion piece in the New York Times and Furman’s interview on National Public Radio are perfect examples of the ideas that MMT want to debunk. Deficits are not normal; deficits crowd out private investment; the public debt is a burden on our grandchildren; our ability to respond to societal problems is limited by the fact that the US government does not have enough money to confront them.
Below is an alternative interview to the Furman’s interview that reviews these points. This is the short version that provides quick-bit answers. A long version that provide data and more elaborated answers is available also on this blog (Dear Ms. Cornish, I hope you will forgive me but I will plagiarize you entirely for the sake of this exercise).
AUDIE CORNISH, HOST:
The national debt surpassed $22 trillion this week – a new record – and this despite candidate Donald Trump’s promise to reduce U.S. debt once he became president. There was a time when the soaring national debt caused panic in Washington. Now it’s mostly crickets, at least from the officials who have control over the federal budget. So what’s changed? We’re going to ask Eric Tymoigne. He is an associate professor of economics at Lewis & Clark College. His works shows that one must make a crucial distinction between monetarily sovereign and non-monetarily sovereign governments when discussing issues surrounding the public debt and fiscal deficits.
Welcome to the program.
ERIC TYMOIGNE: Thanks for having me.
CORNISH: So you’ve written about the debt. And you hear that $22 trillion figure, and you argue that it’s not so scary. How come?
TYMOIGNE: I don’t think anything has changed in terms of the hysteria surrounding the public debt. We are so focused on the debt number that we lose sight of the issues at hand. Only the will to go to war provides strong enough of a motive to leave the debt concern aside.
But regarding your question, yes $22 trillion is a large number but it really is just a number on a spreadsheet. It would be scary if it had any negative impact on the economy. There is scant evidence of that despite the broken records continuously played by those who promote hysteria about the public debt.
Treasury securities provide to households, firms, pension funds, state governments and foreigners a means to accumulate financial wealth in a safe way. Treasury securities are also the backbone of the financial system. Looking more broadly at the economy there is no evidence that the public debt has any negative impact on economic growth, inflation, tax rates, or interest rates. The deficit does not raise interest rates and does not lower economic growth. A higher public debt does not lead to higher tax rates.
The US government does not, has never, and ought not to, manage the public debt in the same way you and I manage our private debts. It is incorrect to analyze the finances of the US government by taking household or business finances as a point of reference. Public and private debts are totally different animals when a monetarily sovereign government is involved.
CORNISH: To you, what has changed? What’s different?
TYMOIGNE. Nothing has changed. As usual, in the short run, deficits sustain private incomes by injecting more money in the economy than they remove through taxes. Deficits help to sustain private investment by stabilizing the profit of businesses. Expected sales, not interest rates, are the main driver of business investment and fiscal deficits boost the sales of businesses while having a negligible impact on the cost of credit.
In the long run, deficits translate into the public debt that provides a reliable source of net wealth to non-federal sectors. The public debt will never be repaid. We have not been burdened with higher tax rates to repay the public debt created at the time of our grandparents; our children and grandchildren won’t be burdened by higher tax rates to repay the public debt created today.
We may raise tax rates in the future but not with the goal of repaying the public debt. There is no reason to do so, and doing so would be harmful to the finances of households, banks, firms and other for the reasons I just provided.
CORNISH: But as you’re talking about, I mean, the economy is good. Unemployment is low. If there was ever a time when we should be shrinking the national deficit, shouldn’t this be it? I mean, is this the time for some dramatic moves?
TYMOIGNE. The main reason the US Treasury runs a deficit is not deliberate reckless policies or politicians who do not know how to put the US government finances in order. The US government actually has little control over the size of its expenditures and revenues.
Tax revenues are heavily influenced by the income earned by the domestic private sector and this fluctuates widely with the business cycle. Government expenditures are largely set by legal requirements (social security, Medicare, etc.).
Of course, this begs the question of what, if not the US government, determines the size of the fiscal position and so the growth of the public debt. The main drivers are the desire of other economic sectors to improve their financial standing. At the macroeconomic level, not all economic sectors can record a surplus at the same time, at least one of them must be in deficit for the others to be in surplus. In the case of the United States, the domestic private sector and the foreign sector want a surplus. They record a surplus; therefore, the government sector must record a deficit.
In other words, fiscal deficits are a normal state of affairs for the US government. They have been so for decades. This is the norm in the United States and throughout the world. Get over it.
So no, the government should not proactively try to reduce its fiscal deficit and repay its public debt. The government should let it fiscal position (deficit, surplus or balance budget) be whatever it needs to be in order to accommodate the desires of the other sectors to improve their financial standing. Going against the desired surplus of the non-government sectors will only result in a recession.
CORNISH: The new tax law has been in effect for a little over a year now. Are we actually moving in that direction?
TYMOIGNE. Again, the fiscal position will adjust to the needs of the economy. We should forget altogether about the number on a spreadsheet and pay attention to the real issues. In that case, the tax law was a major issue in the sense that it has provided massive permanent tax breaks to income categories that do not need them. In that sense, we are moving in the wrong direction because we are reinforcing income and wealth inequalities that are already extremely high. The new tax law perpetuates and encourages the rise of dynasties that already have overwhelming influences on our socio-eco-political life.
CORNISH: If the national debt is an indicator of long-term economic health, then why wouldn’t we be worried?
TYMOIGNE. The national debt is not an indicator of our long-term economic health. The public debt can always be repaid. The US government cannot be forced to default on its public debt because it is monetarily sovereign; it issues the dollars needed to service the public debt.
This, of course, does not mean that we ought to repay the debt at once by “printing money”; this is a silly conclusion. That would be massively inflationary and I already stated that it is in nobody’s interest to repay the public debt and we won’t.
What monetary sovereignty means is that the US government has control over the cost of its public debt, that it can decide what type of debt to offer to other sectors, and that government has the financial flexibility to spend on whatever its society decided is the public purpose.
As long as the cost of public debt stays low relative to the growth of the economy, the public debt will not explode relative to the size of the economy. The usual case is that the interest rate on the public debt is below the growth rate of the economy, precisely because a monetarily sovereign government has a strong control over that interest rate.
What are indicators of health for our economy? Standard of living, life expectancy, literacy rate, availability and quality of childcare and healthcare, are major indicators. Low unemployment, moderate income and wealth inequalities that encourage individual initiatives, quality infrastructures that accommodate the needs of the society, and environmental sustainability are others. We are failing on a number of these indicators of economic health. Take a look at the crumbling state of our infrastructures that requires trillions of dollars to be brought back up to standard. Today the greatest threat is environmental sustainability. This problem is so large that it directly threatens human existence.
Responding effectively to these pressing issues will require massive government spending, and generate a rapid increase in the public debt, here and abroad. We did it during World War Two, we can do it again.
The question you have to ask yourself is if tackling these issues is more important than a number on a spreadsheet. While solving these issues may require sacrifice in terms of productive resources, especially if a rapid reengineering of our economy is required (which it is for some issues), it will not require a sacrifice in financial terms for the US government and our grandchildren. What is productively possible is always financially possible for a monetarily sovereign government. We may have to declare War on Climate Change for people to realize that.
CORNISH: Eric Tymoigne, associate professor of economics at Lewis & Clark College. Thank you for speaking with us.
TYMOIGNE: Thanks so much for having me.