This is the last post in my analysis and commentary on Bruce Bartlett’s testimony to the Senate Budget Committee. There’s one very significant issue left to discuss, and that is the issue of fiscal gap and generational accounting and whether it should be institutionalized in legislation. I’ll begin this post with that discussion and then end the series with my overall evaluation of his effort.
Fiscal Gap and Generational Accounting
15. Generational accounting exaggerates the burden of debt. Intergenerational accounting attempts to assess financial burdens through time, especially with a view to claiming that financial decisions taken in one generation can impose burdens on another. But this argument refuses to count as real assets the infrastructure and other national assets that the current generation will leave for future generations, and it does not understand that federal government debt never needs to be retired. In real terms, there obviously are no intergenerational transfers, except for the knowledge, the physical assets and the larger environment, which the present leaves to the future. The real goods produced in 2050 will be distributed to those alive in 2050, regardless of the public debt in existence at that time. Meanwhile, the U.S. government can always meet its payments when they come due. . . .
I agree with most of this, but want to add context and omissions to it.
The Peter G. Peterson Foundation (PGPF) and its allied army of associated deficit hawks want the Congressional Budget Office (CBO), the General Accountability Office (GAO), and the Office of Management and Budget (OMB) to do fiscal gap accounting and generational accounting on an annual basis and, upon request by Congress, to use these accounting methods to evaluate major proposed changes in fiscal legislation. Generational Accounting is an invalid long-range projection method that doesn’t take into account:
– the projected value of the Government’s capability to issue fiat currency and reserves in the amounts needed to fulfill Congressional appropriations and re-pay its debts,
– the projected non-Government assets corresponding to government liabilities,
– the likely economic impacts of Government spending, surpluses, and deficits,
– the impact of accumulating errors on projections, and
– the biases inherent in pessimistic AND contradictory assumptions.
It is a green eye shade method that ignores both economic and political reality. If we want America to have the fiscal policy space it needs to begin to restore the American Dream, then we need to defeat proposed policies or legislation which put building blocks in place to bias fiscal policy towards austerity and the economic decline it will surely produce for ourselves, our children, and for their children.
Here are five reasons why fiscal gap and generational accounting legislation is a very, very bad idea.
First, the dangerous practice of making policy makers focus on deficit neutrality as THE key evaluation criterion for new government fiscal policy, has already introduced a bias towards austerity policies over the past 37 years. It is largely responsible for the higher levels of unemployment, the unremitting downward pressure on wages, and growing inequality in America. The proposed requirement for CBO, GAO, and OMB to perform annual fiscal gap and generational accounting will heavily reinforce and extend the already science fictional evaluations of fiscal legislation for projected deficit neutrality and fiscal gaps performed by these agencies, rather than for the real economic and societal impacts of fiscal legislation.
These evaluations are now based on invalid projections over a 10 year period. But legislation inspired by the generational accounting point of view would require the same kinds of evaluations, and pure fantasy projections over a 75 year period. To extend the projection period out to 75 years and include “liabilities” that have no legal accounting status at all at this time, will only double-down on Congress’s destructive bias towards austerity in fiscal policy, and further institutionalize trends toward economic stagnation and growing inequality.
Second, passing generational accounting-based legislation will strengthen the official status of the myth that Governments issuing their own non-convertible fiat currencies having free-floating exchange rates, and no debts in a currency they don’t issue, still have Inter-temporal Government Budget Constraints (IGBCs). They do not! And the US, as one of these governments, has no such constraint with respect to financial solvency. Since it doesn’t, the US, thankfully, has policy space to cope with recessions and depressions that many nations, including the nations of the Eurozone don’t have.
Third, passing generational accounting-based legislation can only happen over the objections of the American people. All the public opinion polls make it clear that super majorities are opposed to any safety net cuts at all, and even favor expansions or enhancements of safety net programs. They also want real full employment, infrastructure spending, debt relief, greater economic equality, and solutions to climate and energy problems. Generational accounting legislation will only put barriers in the way of solving these problems.
Fourth, there is no “fiscal gap” or fiscal “burden” on our children and future generations even assuming that current law is retained without any changes. Generational accounting doesn’t project revenue from the possible use of platinum coin seigniorage as miscellaneous receipts, even though the capability to use it is part of current law. If it did, it would have to conclude that there is no “burden,” because there is no real “fiscal gap.” There is just an accounting gap which the President can plug at will when he chooses to order the Secretary of the Treasury to have the Mint cover the “unfunded liabilities” with a platinum coin(s).
Even if platinum coin seigniorage isn’t used to “fund” the liabilities, however, there is no problem if Congress lifts the debt ceiling routinely, as it used to do before the debt ceiling became politicized, so that the Treasury “funds” liabilities using sales of debt instruments. If one assumes that the practice of lifting the debt ceiling routinely is reasserted in the future, then again, the “unfunded liabilities” would disappear from generational accounting.
Fifth, Generational and fiscal gap accounting, contrary to what its supporters claim, leave important things off the books, and include many “liabilities” that are not, in fact, “liabilities.” Again, miscellaneous receipts from platinum coin seigniorage are evidently not projected in the generational accounts, even though having such receipts is a possibility under current law, and substantial miscellaneous receipts already exist for coin seigniorage involving other types of coins. On the other hand, many liabilities that are not legally on any “books” are included in such accounting, while the asset side is given short shrift.
Generational accounting supporters have called attention to the “unfunded liabilities” they project for the Government; but they have failed to take into account the additions to the non-government sector from projected Government deficit spending. This is incomplete, inaccurate, and biased accounting.
The accounting relationship between the US Government and the non-government sector is given by the sectoral financial balances equation: Government Deficits (whether “funded” by debt, reserve, or currency liabilities) = Non-Government Savings. So, for every liability the government generates, there is an equal volume of assets added to the Non-Government sectors.
Where is that reality in the generational accounting/fiscal gap/”fiscal burden” approach? Where is the recognition for example, that if the “unfunded liability” 75 years out is equal to $222 Trillion, then if it were “funded” either through direct government creation of reserves or through selling debt instruments, or through some combination of the two, the $222 Trillion “funded liability” would then be matched by $222 Trillion in non-government assets?
Bruce Bartlett’s testimony is a strong and significant criticism of austerity-based fiscal policies in the present context. It denies the existence of such a crisis, and pokes a myriad of holes into the narrative of the “we have a serious debt crisis” narrative.
Sometimes, his statements approach MMT perspectives very closely. For example, when he points out that the federal government can always pay its debts when they fall due, and also, when he says that “The burden of debt owned by foreigners is not a problem as long as it is denominated in dollars,” the analogy between a household’s debt and the government’s debt is a false one, where he acknowledges that the government’s power to print money is important when it comes to repaying debt, and when he debunks the idea that there is any relation between deficits and inflation in the modern experience of governments.
However, in this analysis, I think I’ve shown that the government’s capability to create fiat money at its discretion is relevant to most of the issues about debt repayment or solvency he directly addresses in his statement, and that its relevance across the board is very understated in his analysis. In addition, Bruce Bartlett seems to overlook the importance of the sectoral financial balances accounting identity to the issue of whether budget deficits should be seen as a good thing in the context of the continuous trade deficits run by the United States, and the savings desires of Americans.
He doesn’t recognize that budget deficits compensate for leakages of aggregate demand to aggregate private sector savings and to trade. He also doesn’t seem to recognize that given a trade deficit, there can’t be private sector savings in the aggregate unless the government budget deficit exceeds the value of the trade deficit.
In turn, he also doesn’t seem to recognize that if the government deficit is smaller than the trade deficit, then the private sector is losing net financial assets in the aggregate for as long as that condition lasts, making economic expansion within the private sector dependent upon credit expansions for economic growth and creating or maintaining full employment during that period of time. In his statement, Bruce Bartlett says that there is no short-term or medium-term debt crisis, and since “crisis” is a term that certainly doesn’t apply to long-term problems, one can infer that he accepts that there is no such crisis.
However, that doesn’t exclude the possibility that he believes there could be a long-term debt problem related to solvency that we will have to deal with later. But, from the MMT perspective, there cannot be one for a fiat sovereign like the United States. In addition, because of the way sectoral balances work, there may well be a need to run substantial budgetary deficits for many years to come to maintain a robust economy, full employment, and a level of private savings, sufficient to support aggregate demand going forward.
This kind of orientation to deficits and possible debt increases, if deficits are accompanied by debt issuance rather than seigniorage, isn’t something that is contemplated in the neo-Keynesian economic orientation of Paul Krugman, which Bruce Bartlett appears to believe in. Neo-Keynesians believe in targeting budget deficits during bad times in the economy, and running surpluses in good times.
This is different from the MMT orientation which is to do what is necessary to create and maintain full employment and price stability, and other valued goals fulfilling public purpose, and to let the deficit float as a consequence of fiscal policy. Deficits may be created by this orientation for decades on end if the context of international trade requires them.
MMT considers this not only no problem, but actually the meaning of real fiscal responsibility. But neo-Keynesians would not concur, because deficits in “good times” would conflict with their approach.
I think this is where Bruce Bartlett would part with MMT-based fiscal policy. That difference may not seem important right now, but it makes all the difference in how one runs fiscal policy, even right now.
Neo-keynesians would still run it with close attention paid to deficits and debts accompanying fiscal planning, but MMT economists and policy analysts would look only at real world consequences or likely consequences of fiscal policies, and that orientation would govern fiscal planning and policy beginning right now and going forward. It would be a profound revolution in the conceptual framework of fiscal policy.