It Turns Out That No One Wants to Tell the Truth About Government 'Debt'

The editorial board at The New York Times recently published a missive on government ‘debt’ entitled America is Living on Borrowed Money. It began, “The federal debt is as old as the nation, and adding to it is sometimes prudent.” It went on to assert—without evidence—“It’s increasingly unstable.”

The closest they came to supporting their claim was a passing reference to the Congressional Budget Office’s (CBO) projection that “annual federal budget deficits will average around $2 trillion per year over the next decade,” followed by a declaration that “the era of low interest rates has ended.” This supposedly toxic and inescapable combination makes it “imperative for the nation’s leaders to chart a new course.”

It’s the kind of alarmist rhetoric that permeated the public discourse about a decade ago, and it’s attempting to stage a comeback. According to the editorial board, it’s getting too “expensive” to finance deficits, and lawmakers aren’t doing enough to solve the problem. So what does this self-described “group of opinion journalists whose views are informed by expertise, research, debate and certain longstanding values” recommend? Here are the closing passages from the article:

Any substantive deal will eventually require a combination of increased revenue and reduced spending, not least because any politically viable deal will require a combination of those options. Both parties will have to compromise: Republicans must accept the necessity of collecting what the government is owed and of imposing taxes on the wealthy. Democrats must recognize that changes to Social Security and Medicare, the major drivers of expected federal spending growth, should be on the table. Anything less will prove fiscally unsustainable.

That will require painful choices. But the failure to make those choices also has a price — and the price tag is increasing rapidly.

It’s a pitch for painful austerity that conveniently ignores the truth about government ‘debt.’

Days after the editorial board had its say, Annie Lowrey published a similar screed in The Atlantic. Her piece ran under the title It Turns Out That the Debt Matters After All. She interviewed me back in early June, and we talked for the better part of an hour. Her piece opens with the question, “Is it time to start worrying about the debt?” She acknowledges that it “feels like a weird question to ask,” since “the many dire things that the fiscal hawks said would happen if we did not shrink the debt a decade ago have not come to pass.”

But Lowrey has concluded that “there are trillions of reasons to be worried about the country’s financial situation now.” Like the editorial board, she points to America’s “ballooning borrowing costs,” “large deficits,” and the burgeoning “cost of benefits for older Americans” (Social Security and Medicare) as major causes for concern. Once again, projections about future spending (too much) and future revenue (too little) are taken as evidence of a fiscal problem that lawmakers will have to address in order to prevent America’s debt from becoming “unsustainable.”

In addition to talking with me, she also spoke with Larry Summers (former US Treasury Secretary), Mark Zandi (chief economist at Moody’s Analytics), and Brian Riedl (Manhattan Institute). After telling Lowrey that he’s “not a congenital deficit worrier,” Summers added, “I don’t think there’s ever been a moment when the trajectory looks as ominous as it does now.” That’s due mostly to rising interest rates, which, according to Summers, have darkened the fiscal outlook. Zandi agreed, arguing that rising deficits—and debt—were pushing up interest rates, which he called “corrosive” for economic growth. Riedl offered more of the same, telling Lowrey that “every time interest rates rise by one point, it costs as much as extending the Trump tax cuts for 10 years.”

It will not surprise readers of The Lens to learn that I offered a different perspective:

Some powerful voices in Washington argue that it will never be a crisis. “Yeah, I’m not worried,” Stephanie Kelton, an economist at Stony Brook University and perhaps the country’s most prominent deficit dove, told me. “This thing we call the deficit is not inherently problematic. It is not evidence that the government is mismanaging its finances. It’s not a problem that needs to be solved.” The United States government cannot run out of money, she noted: It issues the currency. Congress should spend what it needs to spend.

While I’m always grateful for the opportunity to share my perspective, I wish Lowrey had taken up some of the more challenging and substantive points I raised. Before I get to those, let me fill in some gaps and provide some additional context related to the passage above.

You’ll notice that there are no quotation marks around the words it will never be a crisis. That’s because I didn’t—and wouldn’t—respond to a question about the risk of adding to the national ‘debt’ by saying it could never lead to any kind of problem. What I explained is that I’m not worried about a Greek-style debt crisis that forces the US to default on payments to bondholders, current and future retirees, military personnel, health care providers, etc. because the United States (unlike Greece) issues its own currency. A currency-issuing government can’t run out of money, but it can run out of things to buy. It’s really important not to omit the second half of that sentence.

As I explained to Lowrey, MMT replaces an artificial budget constraint with a real resource (inflation) constraint. I would never make a vague and open-ended remark, advising Congress to spend what it needs to spend. There are always limits, and the fiscal limit is reached when the government runs out of things it wants to purchase at prices it is willing to pay. That is a core tenet of the MMT framework.

I also explained that I don’t think about government ‘debt’ the way most economists do, and I explained why I think it’s misleading to use terms like “borrowing” and “financing” to describe what’s really happening when the Treasury issues bonds. Unfortunately, the insights that come from a careful examination of real-world monetary operations, don’t usually receive mainstream coverage. If they did, they would reveal some hidden truths about how government finance really works and why editorials that proclaim America is living on borrowed money are so misguided.

The Truth About Government ‘Debt’

I have been countering the mainstream narrative on government ‘debt’ since I was in graduate school. My first academic publication, which grew out of my PhD dissertation, took aim at the conventional way in which we’ve been taught to think about the role of taxes and bonds in financing government expenditures. It was entitled “Do Taxes and Bonds Finance Government Spending?” Ask any mainstream economist, and they will tell you that the government uses tax revenue to finance part of its spending and revenue from “borrowing” to finance the rest (i.e. to cover the “deficit”). Following a deep dive into the mechanics of Treasury-Fed operations (as part of my PhD research), I concluded—in agreement with Warren Mosler—that this isn’t how we should understand these monetary operations.

I won’t drag you through the tedious reserve accounting. You can read my early work or any number of subsequent papers by Scott Fullwiler (here, here, or here) if you want updated versions of the same basic argument. You can read The Deficit Myth to learn why I don’t think we should be using words like “borrowing” or “debt” to describe what’s really happening when the Treasury sells bonds to match the annual fiscal “deficit.” You can click here to read the chapter of my book that focuses on the so-called national ‘debt.’ You can watch my TED talk, this CNBC video, or this presidential lecture to hear me explain again and again why the conventional story has the fundamentals wrong.

Here’s a summary of the MMT argument from Randy Wray’s recent book.

MMT sees the sale of government bonds by the sovereign as something quite different from borrowing: bond sales are part of monetary policy and help the central bank to manage interest rates. Government’s don’t need to borrow their own currency! …

… MMT rejects the notion that government chooses to tax, borrow, or print money. All government spending takes the same form: keystroke credits to bank reserves. We can choose to leave those in the banks or can sell bonds. This is not a borrowing operation. It does not crowd out any private borrowing, even if we do sell the bonds. Bond sales offer interest, they do not bid up interest rates. Indeed, all else equal, if government spends without selling bonds, its “deficit” pushes interest rates down (not up) to the central bank’s floor rate (what it pays on reserves). Interest rates on reserves and on short-maturity bonds are directly set by central bank policy; and those short-term rates largely determine the rates even on long-term government bonds. If rates rise, it is the central bank that raises them—not “markets.”

In Closing

Just imagine how the public debate might change if we were willing to admit any of this. How might we rethink this passage from the NYT editorial board?

Borrowing is expensive. A mounting share of federal revenue, money that could be used for the benefit of the American people, goes right back out the door in the form of interest payments to investors who purchase government bonds. Rather than collecting taxes from the wealthy, the government is paying the wealthy to borrow their money.

Using the MMT lens, I would challenge the use of the term “borrowing.” I would explain that offering bonds to investors is a policy choice, not an economic necessity. As Scott Fullwiler and I explained years ago, we could dispense with the practice of matching annual net (deficit) spending with newly-issued bonds, and nothing of consequence would change. (The editorial board could even consult their own in-house economist for affirmation of this claim.)

It is true that the federal government pays out hundreds of billions of dollars in interest each year and that the resulting income goes disproportionately to wealthier investors. It’s also true that Congress has the power to reduce (or even eliminate) this form of passive income if it decides the practice is inconsistent with serving the public purpose.¹

As I explained in the Financial Times in May 2020:

Today, ‘borrowing' is voluntary, at least for countries with sovereign currencies. Sovereign bonds are just an interest-bearing form of government money. The UK, for example, is under no obligation to offer an interest-bearing alternative to its zero-interest currency, nor must it pay market rates when it ‘borrows.’ As Japan has demonstrated with yield curve control, the interest rate on government bonds is a policy choice.

So today, governments sell bonds to protect something more valuable than gold: a well-guarded secret about the true nature of their fiscal capacities, which, if widely understood, might lead to calls for “overt monetary financing” to pay for public goods. By selling bonds, they maintain the illusion of being financially constrained.

Imagine trying to sell “painful” austerity to a population of readers (and voters!) who understood the truth about government ‘debt.’

1. And remember that price stability is part of serving public purpose in MMT.