I have a very difficult time countenancing the debt-limit debate as it manifests in soundbites from pundits and hapless (if mostly well-meaning) attempts by journalists to frame the discussion.
There’s no subject about which more nonsense is bandied than the purported limit on America’s “borrowing” capacity. Please do notice the scare quotes. They’re there for a reason. I won’t use them around every instance of the word “borrow” below, but you can consider them implied.
This is a topic about which the vast majority of people are totally ignorant, and this is one case where I’m not using the word “ignorant” in the pejorative. Rather, I mean it literally. I mean that there are only a handful of people in the entire world who understand and accept the realities of government finance for the issuer or the world’s reserve currency.
Some budget balderdash is just that — bombast for the sake of attention. Stephen Moore is an example of someone who traffics in just such economic agitprop in a fruitless effort to stay relevant. US lawmakers likewise engage in budget hyperbole. Politicians routinely leverage ghost stories about the deficit and federal debt for political gain. The majority of that banter emanates from Republicans who, in another example of the party’s wanton disregard for voters’ psychological well-being, have duped the public into believing that the GOP is a bastion of fiscal rectitude, when in fact, fiscal responsibility went out the window with Ronald Reagan. It was restored under Bill Clinton then went out the window again under George W. Bush. Donald Trump’s tax cuts were just another manifestation of Republicans’ unfathomably obtuse faith in supply-side gimmickry, which has failed every single time it’s been tried with no notable exceptions.
Some of that would be forgivable if it were apparent that US lawmakers’ dubious assertions about borrowing and spending were purely cynical — that inaccurate claims and sundry campfire ghost stories about the national debt were everywhere and always explainable by political avarice. But that’s not the case. Not even close. Rather, time and again, Republicans, Democrats, Fed chairs, Treasury secretaries and US presidents alike demonstrate beyond a shadow of a doubt that despite doing this for a living, they don’t understand what deficits and debt actually are in the context of the world’s reserve currency issuer.
Lawmakers’ readily apparent confusion compels everyone else (e.g., Wall Street and journalists) to speak in nonsense terms too. If the people who control the borrowing and the spending are hell-bent on staying confused and trafficking in nonsense, then everyone else is likewise condemned. Stephanie Kelton tried to be the Morpheus to this particular Matrix, but the timing left something to be desired. Inflation returned with a vengeance in 2021, and in a tragic irony, the very same budget canards she thought she’d vanquished won a new lease on life thanks to 8% consumer price growth. That, despite those canards remaining just as philosophically nonsensical as they always were.
Regular readers know I stopped debating this a year ago, when it became painfully obvious that virtually no one was prepared to have an intellectually honest discussion. Specifically, scores of purported macro mavens were quick to suggest that Kelton’s proselytizing somehow contributed to surging inflation and that, relatedly, elevated consumer price growth across developed economies “proved” that Modern Monetary Theory was inflationary.
When I suggested that reading all of Kelton’s published work (her book and papers) was a prerequisite for having an opinion, readers chafed. The old adage says “You’re entitled to your own opinion, but not your own facts.” In truth, you’re entitled to neither. You can’t have an opinion on something you haven’t done your absolute best to understand. In some cases, we have to make allowances for the sheer volume of published works on a given subject. Plainly, it’s unreasonable to demand that anyone who wishes to express an opinion on, for instance, the merits of organized religion, have read everything ever written on the subject including every holy book and every piece of noteworthy scholarship. That’d take 10 lifetimes. But when it comes to something like MMT, asking people to read the majority of the extant literature isn’t asking all that much, particularly given that most people inclined to weigh in have some background in economics, and thereby don’t need to spend months backfilling the basics.
Part of the blame, I’ve insisted, rests with Kelton for not exercising her authority as the face of MMT to rename it. It’s not a “theory.” The Deficit Myth is just a description of how government finance works in the US. If you’ve read it, and you understood it, you know there isn’t much about it that’s debatable.
Kelton, self-assured as she is, seems to habitually short change herself in that regard. Retaining the word “theory” opens the door to the possibility that you’re wrong. But, again, Kelton can’t be wrong because what she preaches is primarily (although not entirely) descriptive. It’s very difficult to be “wrong” when all you’re doing is describing a process that you, yourself, have participated in. You can mischaracterize it, willfully or not, but unless you’re trying, it’s very difficult to be mistaken about the mechanics of something you’ve done. Imagine, for example, describing to someone the mechanics of ordering a pizza. In order to get that “wrong” you’d have to be trying.
That’s what’s so profoundly disturbing about US lawmakers’ almost universal penchant for speaking in nonsense terms about debt and the deficit. Those are the people whose job it is to borrow and spend on behalf of the country, and yet somehow, they’re routinely wrong about how it works. Sometimes, politicians’ dubious claims are purely political. As alluded to above, that’s actually excusable to the extent politics is a bloodsport with no rules. But very often, such claims stem from genuine ignorance, and that spills over into the popular discourse.
On Friday, for example, The Guardian wrote, “Washington uses… borrowing to pay for everything from government employees’ salaries to military operations.” Spoiler alert: That’s not how it works. If Washington needs to borrow US dollars from, say, China, to fund “military operations,” then what happens in the event the US ends up in a war with China and Washington can’t borrow enough from Japan and Saudi Arabia to fund the necessary military expenditures? Does the US immediately surrender to Beijing, citing an inability to source US dollars? Obviously not. The US is the source of US dollars. Where else could they possibly come from? Does Beijing unearth them from a dollar mine in Inner Mongolia? Or sift them out of Yangtze sediment? And no, the US public doesn’t “make up the difference” by “loaning” Washington the dollars it needs. If you buy a Treasury bond with your hard-earned US dollars, where do you imagine those dollars originated? Did Lewis and Clark find them and bequeath them to future generations?
To be sure, there’s a lot of truth to the idea that the shifting composition of the Republican party raises the odds of a technical US default at some point, given that the GOP is increasingly beholden to (and I don’t see much utility in scouring the thesaurus for euphemisms) fringe lunatics. But even before the House played host to the type of people who might spend more money on items found in the checkout lane at the grocery store than they did on the groceries themselves, the Republican party was a magnet for career hypocrites peddling phony pretensions to various sorts of piety and doltish rednecks with a taste for grandstanding and an uncanny affinity for landing on the wrong side of every important issue. So, yes, it’s entirely possible that the US will default on its obligations at some point due to the prevalence of dangerous idiots on one side of the aisle.
But, I’d argue that when it comes to the frightening prospect of a global financial calamity catalyzed by a technical US default, the bigger risk is that virtually no politician — Republican, Democrat or Independent — possesses the intellectual capacity to process a few admittedly daunting realities about fiscal policy in America. Realities like the fact that “debt” is a misnomer when it comes to bonds denominated in a currency one issues, and the fact that one doesn’t need to “borrow” something one can conjure at will. These sorts of semantic fallacies are particularly counterproductive and wholly asinine in the US context given the dollar’s reserve currency status.
Countries have varying degrees of monetary sovereignty. It’s a continuum, and frankly, the US isn’t on it. Because the only thing in the world that dollars can’t buy is happiness, and the US is the sole legal issuer of those dollars. Treasury bills, notes and bonds are just interest-bearing dollars, but more importantly in this context, they’re the world’s preferred recycling vehicle for dollars obtained in trade and commerce, and they’re the collateral that makes the world spin — almost literally.
The idea of jeopardizing all of that would be insanity even if there were any truth to the various debt and borrowing canards that Kelton sought to dispense with over the past several years. The idea of a technical US default based on politicians’ inability to recognize that the Beltway vernacular around debt, borrowing and deficits is comprised almost entirely of statements constituting philosophical impossibilities would be positively terrifying if it weren’t so marvelously stupid, and thereby fabulously hilarious.
Typically, when I pen something like what you’ve just read, I receive e-mails and direct messages lauding my efforts, and over the years, these sorts of articles have garnered attention from the “somebodies” of the world. I used to entertain those folks on the assumption that, eventually, their avowed appreciation for my earnest efforts would manifest in the sharing of my musings with other “somebodies.” But, generally speaking, that never happened. I suppose I should blame my insistence on pseudonymity. Or, maybe I have that backwards. Maybe my mistake was telling some of those somebodies who I actually am.
Kelton clearly stated that inflation is a risk from MMT. Her answer was that legislators raise taxes to cool the economy. NOT to fund spending, but to cool demand.
Clearly that is a non-starter given our two year electoral cycle in the House of Representatives.
Yes, it’s indeed a non-starter. There’s only one example of fiscal policy being used to cool demand going back six decades. No politician will ever try it again, which means Keynesian economics is unfairly saddled with a reputation for being inflationary. It’s not Keynesian economics that’s the problem. It’s politicians only leveraging it to juice demand, never to curtail demand.
Sounds like MMT may be able to accurately describe a sovereign that spends what it issues, but that it’ll never be able to offer actionable policy. The fiscal levers are too political. Even in a world where everyone accepts that fiscal under-spending is a Good Thing, things will become intractable as soon as someones favored project is cut in favor of another’s. It just devolves to traditional pork barrel spending.
I think the closest you can get is giving the Fed the ability to offer sectoral credit levers, rather than the single FFR shotgun approach…. but of course this has its own problems, like putting bureaucrats in charge of determining which sectors merit increased investment. And of course, if any of those working become too evident to the public, the whole thing will get politicized and destroyed (by the public themselves or by scotus).
MMT is so often treated as a magic bullet, where everything would be easier if only these dumbasses would understand these basic monetary mechanisms… but i think it’s just a convenient distraction from the real problem — that nobody trusts each other anymore. Trust was always the foundation of the system, no matter how much we tarted up subjectivity with the objective sheen of law, philosophy, econ, etc. Without trust, facts are irrelevant. With trust, they’re only mostly irrelevant.
H
Once again you have hit the nail on the head — and once again you are absolutely right. Myths about debt are something akin to believing in Santa Claus, people can’t stop believing in him, no matter what they know to the contrary. And all of this political c..p is beginning to look like the politics relating to “stolen elections,” only actually stolen when a republican loses, and only if the individual pedaling the lie thinks s/he will benefit from doing so. Ironically, for me at least, my first publication, when I was still in grad school, was an edited treatise on governmental program budgeting which two of my professors excerpted from my honors thesis and included as a chapter for their textbook in Public Finance. I love this stuff but your observation that even those who spend our trillions for a living don’t understand it is sadly too true. Sadly, the source of much of this ignorance is the electorate which can only understand a few code words gleaned from Facebook, Twitter, or some other major source of fairy tales. Buying gifts for a semi-retired professor of Finance is a chore no one should be saddled with but my daughter rose to the challenge this year and bought me a shiny new copy of the book “Debt,” the first 5000 years. The author, David Graeber, is apparently an anthropologist who has waded into the muck where angels (and government officials) fear to tread. Can’t wait to read it. At first glance it feels as dense as plasterboard but we shall see if any light is visible from under the bushel.
sounds like a great way to culminate 2022, Mr. L. …hope 2023 is a happy and healthy year for you (et al), and always appreciate your contributions …
Internationally this is the universal conservative “red herring” that usually gets dragged out by comparing a moderrn economy’s budget to a personal household budget.
Absolutely. Other than immigration, this is the easiest thing to demagogue. “When you’re overdrawn, you can’t just print money, so why should the govt be able to do that?” Silly, but very effective at misleading.
One thing that might help, and which is actually doable from a political standpoint, would be if the FED decided to just retire some of the treasuries they hold. It wouldn’t have to be a lot, just enough to show the the “debt” doesn’t actually have to be repaid; that we are not, in one of the most pernicious of canards, “borrowing from our grandchildren.”
To reveal the system in such unambiguous terms is to invite criticism and reform to the system, which is why it will never happen.
Frankly I’m surprised we have ‘plain english’
I think the dynamics around deficits are similar to the ones around Trump. I suspect most serious Republicans realize that deficits are just a useful political wedge to win votes. Heck, Dick Cheney said the quiet part out loud 20 years ago when he acknowledged deficits don’t matter.
I would also argue that supply side economics has been very successful in achieving its actual goal: lining the pockets of their constituents. Republicans just can’t say that explicitly or they’d also have to recognize that those tax cuts don’t actually trickle down and have driven much of the asset inflation we’ve seen (alongside interest rates). It’s easier to let their voters believe that the gains they’ve made from housing prices and stocks over the last 40 years are due to hard work and that all the people who are shut out from housing and wealth now just don’t want to work. Those arguments are motivated reasoning at its finest.
The last thing I’d note is that Republicans other favorite budget buster, military spending, is effectively a jobs program (the Bush military misadventures aside) and I’ve come to appreciate the value that it provides when we aren’t engaging in reckless invasions. The budget flexibility that being the world’s reserve currency affords us means it doesn’t have to be an either/or proposition when it comes to military spending and spending on healthcare, education, etc. There is value to the stability that the US military provides, and given the imperial ambitions of autocrats in the East, it’s good to know that we haven’t fully dismantled our defense industry and that it does give a significant number of people meaningful employment and benefits.
I love this comment, @dayjob, and appreciate your many contributions to this section in 2022.
The US military is one of the best upward mobility government programs for the lower class citizens ( In addition to education) that we have in the US. It provides opportunities to learn responsibility and ethics, financial management, upward mobility etc.
Kelton’s proposed cure for legislative gridlock is policies that tighten fiscally on autopilot.
Automation is hard and control systems always have failure modes: gimbal lock in a gyrostabilizer, infinite loops in an algorithm, etc. Effective governance is even more difficult, however, and Kelton’s position seems eminently reasonable to anyone frustrated by performative politics. I’m willing to take my chances with a “fiscal rectitude algorithm” if it means that policy decisions, however wrong, actually get ENACTED.
All great thoughts! I want to thank all the commentators here on Heisenberg. Gratitude for bringing the Heisenberg Report to a higher level. Thanks guys and gals and who knows, maybe some bots!
Well, fact is “telling people who you are” is proof positive why we subscribe. Keep telling us…
You have given us so much- it seems that knowing your actual legal name/past resume would be a distant second in terms of importance, given what we already know about you from your written words.
Happy New Year, H.
Is Kelton correct? Yes
Is MMT descriptively correct? No
I’m one of the readers that’s tried to bring up a flaw with MMT by using Kelton’s own words in the past. For the record, I have read her work. I also agree with you, and her, that MMT is descriptive not prescriptive.
However, it seems that there is no accounting for the games of politics in the MMT description. There is an incorrect assumption made that there is enough political will for politicians to be able to increase taxes. In Kelton’s explanation below she talks about offsetting or mitigating the inflationary pressure of MMT with higher taxes.
Without higher taxes it would seem according to Kelton that MMT does describe increased inflationary pressures.
So in conclusion, MMT is not accurate because it makes incorrect assumptions.
Anyways, have a happy new years and thank you for doing what you do.
Kelton: “So taxes are important, because they’re one way that the government can reduce the purchasing power of all the other spenders in the economy. So if the government wants to come in and do a big ambitious infrastructure project and spend trillions of dollars into the economy. It might be worried that spending trillions of dollars could push prices higher, could lead to inflationary pressure.
And to offset or mitigate the inflationary pressure, it matches up some of its new spending with higher taxes. So it makes room for the government to be able to spend those dollars into the economy without creating inflationary pressures. Taxes are important because they allow government to pull a lever if it’s interested in rebalancing the distribution of wealth and income.”
Oh, I see. So if I correctly describe the process by which water is made safe for people to drink, I can be rendered wrong if it turns out that unscrupulous or clueless people work at the facility where the process takes place? If you correctly go through the steps to have a pizza delivered to your house but it never gets there because the delivery driver was drunk, will you accept the pizza shop’s contention that you aren’t due a refund because you made an incorrect assumption about driver sobriety? Also, speaking of “wrong,” that transcript you linked to was initially riddled with misquotes and typos of all kinds. I have no idea if they fixed them, so I removed the link. It took me an hour to clean that mess up when I posted it (with permission) here originally.
Also, you’re talking past me here (probably deliberately, because there’s no debating the points I’m actually talking about). I’m talking about whether the national “debt” matters, whether deficits matter and the extent to which politicians habitually show, in word and deed, that they don’t understand what a US Treasury actually is. They betray that ignorance in other, totally unrelated, ways too, which only underscores my point. You skipped all of that and went straight to the (implicit and deeply flawed) contention that the pandemic/war inflation is due mostly to fiscal spending. Sometimes, I think your sole purpose for sticking around on this platform is to make what you mistakenly think are valid arguments about MMT. To the extent that’s true, the saving grace is that you’re habitually mistaken without realizing it, which is, at least, a source of amusement.