Maya MacGuineas: The Profound Fiscal Irresponsibility of Resistance to Facts

Just as every Spring we can count on the Peter G. Peterson Foundation (PGPF) to do a supportive press release when the CBO issues one of its budget outlook 10 year projection reports, we can also count on being treated to public statements by Maya MacGuineas joining in the Peterson Army choir, warning about the coming debt crisis, and singing about the glories of deficit and debt reduction. And this while completely ignoring the real and sad consequences of deficit and debt reduction policies throughout the world since the crash of 2008, as well as previous applications to Latin American, Asian, and the nations of the disintegrated soviet empire, most notably Russia itself. Let’s look at Maya MacGuineas latest effort; her testimony to the Senate Budget Committee.

She begins by identifying herself as president of the Committee for a Responsible Federal Budget (CRFB) and head of the Campaign to Fix the Debt, which she describes as “non-partisan” organizations “. . . dedicated to educating the public about and working with policy makers on fiscal policy issues.” She then emphasizes that the Boards of her two organizations include past directors and chairs of various agencies within the Executive Branch and Congress, and leaders from business, government, policy and academia.

I know these types of introductions are standard for people testifying in front of Congress, and that there is nothing out of the ordinary in presenting them. But, perhaps, we should occasionally ask what they mean from the viewpoint of what they’re intended to convey which is the authority and credibility of the person testifying on the subject she/he has been called upon to testify.

So, my point is that what I see in these organizations is a lengthy list of individuals who have previously performed with what passes for success in governments and large organizations, but I also see that many of have them have been influential throughout a period when the United States became a place characterized by increasing extremes of inequality, due to their unfailing support for private and public partnerships, along with increasing subordination of the public sector to private sector business interests.

I also don’t see a diversity of viewpoints in this group with respect to ideas about federal budgeting and public finance. All I see are partisans, here, not partisans of the Republican vs. Democratic variety; but a partisanship of deficit/debt reduction vs. public purpose as the goal of fiscal policy.

The supporters of CRFB and Fix the Debt are all on the side of deficit/debt reduction regardless of the consequences for most of the American people, and so since Maya MacGuineas represents them and particularly Peter G. Peterson, I’m afraid, the only expectation one can have is that she is a representative of that view, the view of neo-liberalism and the Washington Consensus, and not a neutral witness at all.

So, Maya MacGuineas, as a partisan spokesperson for the groups and interests she represents and the correctness of the Washington Consensus made a number of primary points.

1. Our deficit and debt problems are far from solved

2. Having a fiscal goal is a key part of budgeting

3. There are many advantages to getting the debt to more manageable levels

4. Policymakers should avoid backward steps that add to the debt.

I’ll address each one.

First, she assumes that the current level of US debt and the projections made by CBO show a problem both with the debt level and the level of the debt-to-GDP ratio. She presents the usual frightening numbers to show that this is true. However, I don’t agree that there is any economic or financial debt level problem at all, provided only that the United States retains its present monetary regime of a non-convertible fiat currency, with a floating exchange rate, and no debts owed in any foreign currency.

That’s because for such a currency issuer, whatever debt level exists and falls due at any point, that debt can always be repaid because it is denominated in the currency the debtor nation can issue at will. All repayment takes then, is the willingness of the issuer to issue the money needed and to use it to repay the debt due.

Insofar as one may say that the US has a debt problem of any kind, that problem is one of politics created by people who keep repeating misinformation about the US public debt causing financial insolvency, if we allow it to grow any higher than it, or at least the debt-to-GDP ratio is now. That kind of insolvency can’t happen to the US because, in the end, there are no international or domestic constraints on our ability to create money to spend on repaying what we owe.

We can see this if we look the at the situation from a simple accounting perspective of assets vs. liabilities. The US government has many valuable financial assets, which, by the way, deficit hawks like Maya MacGuineas never talk about and compare to US liabilities, and among them the most valuable financial asset is its constitutional authority to create money whose financial value it can specify at will (which under present legislation is delegated to the Federal Reserve System and its member banks, and to the Treasury). Now, how much is that asset worth compared to whatever level of debt is in question?

What is the value of the federal money debt to federal money asset ratio, when the denominator of that ratio, is, in effect, infinity? From where I sit that value always = zero, whatever the level of debt may be at any point.

So, there can never be any diminution or increase in the capacity of a fiat sovereign government like the US government to repay its debt instruments regardless how small or large the principal value of those debt instruments is. Whether that value is $50 million or $50 quadrillion the value of the federal money asset ratio is still zero.

It’s also true that if no level of debt can represent a financial problem for a sovereign, it’s also true that no debt-to-GDP ratio can be a problem. But Maya MacGuineas states both that “having a fiscal goal is a key part of budgeting,” and also that “. . . the most important metric of a country’s fiscal health is its debt‐to‐GDP ratio.” And that means that she must view that metric as measuring progress towards the fiscal goal she favors, namely a balanced budget or at least a minimum level deficit.

But, surely, a fiscal goal whose metric may indicate no improvement or worsening with respect to improving one’s fiscal condition, has to be a meaningless fiscal goal accompanied by a meaningless metric. And the truth is that for fiat sovereigns like the US the fiscal goal of a balanced budget has no obvious interpretation as something desirable, improving our fiscal condition.

Of course, one can claim that running a balanced budget can increase government solvency the more it is done. But in fiat sovereigns like the United States, the goal of solvency has already been reached, since for reasons given above degree of solvency does not vary with the level of US debt, or with the level of the debt-to-GDP ratio. And since solvency is always there, then all that remains is to go beyond it to fiscal goals that are meaningful to people.

I think the fiscal goal that ought to replace either increased fiscal solvency or balanced budgets in nations like the United States is “public purpose.” Of course, “public purpose” is an abstract notion and measuring it will require a complex set of social indicators. Any single metric of whether fiscal policy is bringing us closer or further away from public purpose will certainly distort reality. However, fiscal metrics have to be dictated by proper fiscal goals. So, the goals must come first and the metrics problem solved later.

Also, Maya MacGuineas’s opposition to deficits is based on her identification of high and rising deficits with rising debt. But, there is no necessary connection between the two.

The deficit is the current negative value of the gap between federal tax revenue and federal spending; while deficits are financed through the sale of debt instruments subject to the limit. So the identification has been correct, in terms of current practice. But it is not mandated by current law, which allows deficits to be financed by the Treasury using platinum coin seignorage (HVPCS). I’ve explained the details in my e-book, along with background and history of the proposal, its theoretical context, and addressed a variety of objections in the legal, economic, political, and institutional, categories.

Maya MacGuineas next goes through “advantages” of bringing the national debt down to “a more manageable level.” She believes that lower public debt will produce: greater investment and economic growth; higher income and wages, lower interest rates, declining government interest payments, thus freeing up resources, increased ability to respond to problems, and reduced risk of fiscal crisis. I could take the time to go into detail about how silly each of her arguments are on each of these. However I’ll content myself with the following quick points.

First, if the debt really produces these results, then the remedy is just not to issue is anymore and pay off the old debt with seigniorage, while funding new deficits the same way, Second, if economies grow faster when deficits are reduced, then why is it that both in fiat sovereign and non-fiat sovereign nations, alike, we always see government cutbacks associated with recessions and depressions after the cutbacks occur? Where is the empirical evidence that, in the absence of bank-blown credit bubbles which we saw in the US towards the end of the Clinton and Bush 43 Administrations, economies grow faster when deficits are reduced?

Third, if there’s no evidence that there is faster economic growth when government is cut, then how can one argue that wages will rise due to this non-existent growth? Fourth, I agree that government cutbacks might produce lower interest rates, but only because the downturns resulting from the cutbacks would persuade central banks to keep those rates down. Fifth, declining government interest payments doesn’t free up resources. It just adds financial contributions to the non-government sector from the government sector.

Sixth, cutting back on federal borrowing won’t increase the government’s ability to respond to problems, because the “crowding out” theory of federal borrowing is nonsense. No matter how much money the federal government borrows, private credit worthy borrowers are able to borrow money if banks are willing to lend, simply because bank loans create deposits, and bank needs to fulfill their reserve requirements are always accommodated by borrowing reserves from other banks, or by the willingness of the Fed to always back bank after they issue loans, if they need additional reserves over and above what is available in repo markets. The Fed must provide this backing to the banks, because it is necessary to maintain stability in the financial system.

And seventh, lower debts and deficits will not reduce the risk of a financial crisis in the banking system, simply because “investors” in the market have no real choice when it comes to buying Treasury Securities. The rates of security offerings follow the federal funds rate, and the Fed can always maintain that rate though its open market operations, and its quantitative easing programs. IT can face investors with the choice of buying Treasury securities and earning something on their money, or sitting on their reserves and earning the minimum interest on reserves (IOR), offered by the Fed.

Also, no matter how high the debt is, it will be hard to persuade traders that the Government of the United States cannot make its payments. Remember, Greenspan, and Bernanke have explained to them that we always can, and the slightest exercise of the high value platinum coin seigniorage power by Treasury will produce a clear demonstration that this can always be done. Actually, the only possible cause of a crisis is a political one caused by the Congress’s failure to understand its own powers under the constitution as well as its own obligations.

But again, that is a political crisis, not a fiscal one, and if it were to occur, a large part of the blame would lie with Peter G. Peterson and the various groups he’s funded to generate the misinformation they’ve provided to the Congress for many years now.

Maya MacGuineas finishes her statement with an appeal not to add to the debt, while at the same time she says we don’t have to end deficits immediately, but should do so in concert with the business cycle. There are a few implications of that advice that are worth noting.

First, it is very possible that the fragile expansion underway now will falter, and land us in another serious recession. If that happens, it is very likely that increased safety net spending, even without deficits from discretionary stimulus will be result in increasing debt even if we don’t engage in stimulus. If that happens however, what can we do do about it?

If we practice austerity, the recent European record, as well as much else around the world, tells us that will only deepen the recession, and lead to even greater debt, which is what the debt hawks are trying to avoid. So what choice do we have: more deficit spending using increasing debt, more deficit spending using money creation as in seigniorage, or deepening recession?

And second, there is, in this advice, a failure to understand the sectoral financial balances accounting identity. Put simply, it is true that the balances of government spending, private spending, and foreign sector spending must equal 0, during any period of spending flows.

As it happens, the United States has been running a trade deficit (that is, the foreign sector has a surplus in its dealings with us), for many years. Those who want us to balance the budget during good times are really saying, that they want the federal budget to be more or less in surplus as it was under Clinton’s Administration.

That means that their prescription for good times is to force the private sector to absorb aggregate losses the size of the trade deficit. If that’s 3% of GDP, then the Maya MacGuineas, Pete Peterson, Paul Ryan crowd is appealing for the private sector to take those losses for as long as good times last. Now let’s imagine that the economy looks like it is booming due to a banking bubble, and good times last for 7 years or so. What will be the eventual result when the economy crashes? A sudden tanking of paper profits when people have to face the reality of a 21% loss in the net financial assets of the private sector over that period? That’s a disaster, waiting to happen.

That’s what MacGuineas is really offering. A false notion of fiscal responsibility that will deliver periodic disasters, increasingly impoverishing most Americans and completely subordinating them to the FIRE sector represented by Peterson and his allies.