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.

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