By Stephanie Kelton
Throughout the primary debates, Democrats missed a huge opportunity to talk with people about what it means to “pay for” your spending proposals. Now that Congress is preparing to spend ~$2 trillion without “paying for” it, we should talk about what that means.
First, what does it mean to say that Congress is “paying for” its spending? I worked in the Senate, and the phrase has a concrete meaning in the budget world. When a member of Congress drafts a bill, staffers often shop it around, looking for support from other members.
Inevitably, the first question that staffer gets is, “What’s your pay for?” So, for example, if you have a $1 trillion infrastructure bill, they want to know how you plan to fully offset that spending so it won’t add to the deficit. That’s what it means to “pay for” spending.
This usually involves raising taxes. If you can bring in enough new “revenue,” you can claim that you “found the money” to fully “pay for” your spending. This is the idea behind PAYGO–Pay As You Go – don’t add to the deficit.
When Congress passes a spending bill that is fully “paid for,” it sends two sets of instructions to the Federal Reserve. The first set of instructions tells the Fed to mark up the size of certain bank accounts (as the spending takes place). I explain here.
The second set of instructions tells the Fed to mark down certain other accounts (as people/companies pay more taxes). On balance, PAYGO is meant to result in the government subtracting away (via tax) exactly as many dollars as it adds (via spending).
We have been misled (suckered) into thinking that this is the epitome of “fiscal responsibility.” That “paying for” your priorities shows that a politician is “serious” and that his/her plans are “credible” because the “math adds up.” That is malarky!
As Alexandria Ocasio-Cortez has noted, Congress always has the power to pass legislation that sends only one set of instructions to the Fed. That’s what it is doing now. No one is trying to “pay for” a $2 trillion spending package to help cushion the economic blow to our economy.
It would be insane to try to offset that spending right now. Why? Because our economy runs on spending. And right now, spending is collapsing. We want the Fed to add to bank accounts WITHOUT subtracting away more right now.
Even in normal times, there are lots of things we could do without offsets. For example, Sen. Sanders proposed that we cancel $81 billion in medical debt. We could have easily done that without offsets. Cancelling medical debt allows those folks to spend that money on other things.
It would boost consumption spending (along with saving and paying down other forms of debt), but the US economy could easily have handled that additional consumption spending. No risk of accelerating inflation means no need for offsets.
Another example: Several economists (myself included) modeled the proposal to cancel student loan debt. We examined the macro effects and found that there was no economic reason to “pay for” it.
That won’t always be the case. Some spending proposals are so big that they require offsets (i.e. “pay fors”). It really comes down to inflation. How much can the economy handle–in terms of higher demand–before you need offsets?
The reality is that there is almost always enough slack in the economy to allow for an expansion of federal spending (or tax cuts) without offsets. Think of it as our “fiscal space.” We had enough fiscal space to do some of the things Democratic presidential candidates were proposing.
But we didn’t admit it. Instead, we pretended that everything needed to be “paid for”. That there was no low-hanging fruit available. That we were maxed out because we were facing trillion-dollar deficits (or a multi-trillion dollar national debt).
Watch what’s happening now. Learn from it. And when we get through this crisis–and we will–let’s come out with a new-and-improved understanding of the spending capacities of a currency-issuing government. We’re going to need it.
Dr. Kelton is a professor of economics and public policy at Stony Brook University and the author of the forthcoming book “The Deficit Myth.”
Doesn’t seeing UST yields go up in March at least hint at limits to investor appetite for UST?
Even Stephanie knows that this works only as long as other currencies/ economies are doing the same thing– and the US does not get “too far over its skis” (I am from Colorado) relative to other printing presses.
Damn straight Dr. K.
$2tln for corona virus relief? We have that. It’s in the private sector.
The US is a financial debtor nation, with $23tln in national debt and a rapidly growing debt to GDP ratio. I haven’t looked at our NET indebtedness, but presumably the parks, the military, our wonderful infrastructure are worth SOMETHING, so NET debt is less.
But from a sovereign credit analysis point of view, the best you can say about US credit quality is that we the US can print, inflate and debase as much as we need to pay back whatever we borrow.
Where are the RESERVES? Many countries, both democracies and dictatorships. have substantial reserve. They run surpluses in good times. Counter-cyclical fiscal policy reduces debt or adds to reserves during growth years. Their citizens either trust and elect politicians who can do this sensibly, or they live in tyrannies where there is no choice. But smart countries are run like smart households, putting something away for a rain day. Even the FuckWadis, and many other oil producing countries. have huge Sovereign Wealth Funds. It’s a countercyclical strategy of prudence, which gives countries greater flexibility during times of stress.
Under our election finance system, politicians have no incentive to run counter-cyclical fiscal policy. In order to be elected, you have to keep the fiscal and monetary spigots open. We’re just another banana republic.
Although we historically don’t tax extravagant levels of income when it is earned, the US creates wealth year in and year out. The “reserves” are there, but our reserves are in the private sector. The nation’s wealth is owned by some of its citizens, but not by most of them.
US News (not a progressive source) says the private sector has $107tln in wealth…. Five times annual GDP, we are not a poor country! There is an average of $881k per household, with a median net worth of $94k. That’s a lot of skew, but you knew that.
The top 1% of wealth holders own $34tln of assets. The next 19% have $50 tln, so $84tln, or 78% of all wealth, is held by top 20% of the population.
Recent wealth destruction has probably reduced inequality for most asset holders. Ugh.
The government may be “broke”. But the country isn’t. God knows I love private property and earned every nickel I have made. But I made them because I lived in a country that provided the opportunity for me do well.
There is a saying among policy makers- “You should never waste a good crisis”.
Monetary policy appears to be a responsive, effective kitchen sink of solutions to the crisis right now. Kudos!
But fiscal solutions are probably far more relevant to relieving the corona crisis.
We live in a time when $15tln of investment grade sovereign investment grade debt has negative notional interest rates. The idea of a federal government running a surplus and paying down debt or adding to reserves shouldn’t be anathema.
In a time of crisis. perhaps a sober re-thinking how the US wealth is held and utilized should be part of the national conversation.
Some Democratic candidates are proposing wealth taxes. Here’s what wealth in the U.S. looks like.
If you look at the wealth of the average US senator (even Bernie!), you know that dog won’t hunt.
“The reality is that there is almost always enough slack in the economy to allow for an expansion of federal spending (or tax cuts) without offsets. Think of it as our fiscal space.”
Why can’t the Germans grok this? Are they not intelligent? Are they not educated? Do they have no “fiscal space”, and if not, why not?
Dr. K loves her MMT!
“And when we get through this crisis—and we will—let’s come out with a new-and-improved understanding of the spending capacities of a currency-issuing government. We’re going to need it.”
Not hard. Just hire some Zimbabwean experts and they will explain everything to us.
We have a massive underutilized ability to produce the products and services for consumers demanding more of them. That’s why Kelton is right. Before we get high inflation we have to close the gap to optimal output that’s here right now. MMT uses the same thinking about supply/demand that its critics use but without the myth that increasing spending that boosts production automatically causes unwanted inflation. Before you get to “too much” you have to get closer to “enough” than we usually do, and much closer than we are doing now.
Hyperinflation results from a disastrous fall in the ability of an economy to produce essential goods. The US is unlikely to ever experience such a fall, and it makes no sense to run the economy as though we were. We should plan on the basis of the economy we have and will have going forward, and put our resources to work. It’s more costly not to do that than to do it.