Can We Afford Two Wars?

Back in 2009, in the wake of the global financial crisis, Steve Scully asked President Obama when America would finally run out of money. The president replied, “We’re out of money now. We’re operating in deep deficits.” (click image to play)

Last night, Scott Pelley asked President Biden his own version of that question. (click image to play)

PELLEY: Are the wars in Israel and Ukraine more than the United States can take on at the same time?

You’ll notice that Pelley didn’t explicitly ask about money, but here’s how President Biden responded:

BIDEN: No. We’re the United States of America, for God’s sake. We’re the most powerful nation in the history—not in the world—in the history of the world. The history of the world. We can take care of both of these and still maintain our overall international defense. We have the capacity to do this and we have an obligation to do so. We are the essential nation, to paraphrase the former Secretary of State. And if we don’t, who does?

Earlier today, Sky News’ Wilfred Frost put the money question to U.S. Treasury Secretary Janet Yellen. (click image to play)

FROST: Paul Tudor Jones the famed investor was on CNBC this week, and he said, “This is the most threatening and challenging geopolitical environment that I’ve ever seen. At the same time, the US is in its weakest fiscal position since WWII with debt-to-GDP at 122%.”

Can America—can the west—afford another war at this time?

YELLEN: I think the answer is absolutely. America can certainly afford to stand with Israel and to support Israel’s military needs. And we also can and must support Ukraine in its struggle against Russia.

Yellen went on to talk up the US economy, pointing to low unemployment and lots of progress on inflation. She also mentioned the bipartisan infrastructure bill, the CHIPS & Science Act, and the Inflation Reduction Act, which (taken together) will boost revenue and economic growth for years to come. In terms of our “fiscal situation,” she implied that higher interest rates complicate the picture, but she offered reassurances that the administration is committed to a sustainable fiscal path. She added that the president’s budget would cut the deficit by $3 trillion.

We can afford it because we have low inflation? Because we have low unemployment? Because we’re going to crack down on tax cheats? Because we’re repairing roads and bridges and subsidizing green technologies? Because the administration has a (dead-on-arrival) budget proposal to cut future deficits? From an MMT perspective, none of this makes much sense.

Oddly, I found myself thinking back on the way President Trump handled a similar question about whether the U.S. could afford to spend more than $6 trillion after the pandemic hit. (click image to watch)

TRUMP: The beautiful thing about our country is $6.2 trillion—because it is 2.2 + 4.0—it’s 6.2 trillion dollars and we can handle that easily because of who we are—what we are—It’s our..It’s our…We are the ones. It’s our currency. We can handle it. And we can handle…I watched Jerome Powell the other day, and he did a good job. He said, “we’ll do whatever we have to do.” John, we have to do whatever we have to do.

It wasn’t exactly elegant, but Trump basically gave an MMT-informed response, explaining that the reason the federal government (unlike state and local governments) could afford to spend whatever it takes is because it is the issuer of the currency.

Fortunately, he understood that the large fiscal deficits he helped to create in prior years didn’t tie his hands the way Larry Summers and Jack Lew (both former US Treasury Secretaries) had warned. Both Summers and Lew (wrongly) warned that the 2017 tax cuts would leave America in a financial straight jacket, incapable of funding national defense or responding to other unexpected crises.

Just as Trump knew that that the U.S. could afford to roll out a multi-trillion dollar fiscal package in 2020, President Biden knows that America can afford to provide funding for multiple wars at the same time. As Adam Tooze remarked earlier today, the logic of fiat money—i.e. MMT—always prevails in a foxhole.

Knowing this, as Raúl Carrillo does, you arrive at the next MMT-inspired question: What are the inflationary implications? We can think about that in a future post. In the meantime, here’s the paper Raúl links to below.