Heisenberg Report

Stephanie Kelton: This Is The Lesson Of The $2 Trillion Virus Stimulus Bill….

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.”