The Deficit Myth Turns 5

Last week, The Wall Street Journal ran an article declaring, “Wall Street Is Sounding the Alarm on U.S. Debt. This Time, It’s Worth Listening.”

It began:

“Is the U.S. Going Broke?”

Featuring an illustrated Uncle Sam with pockets turned inside out, that was the cover story of America’s most influential news magazine…in March 1972.

That influential magazine was TIME, and the image of Uncle Sam with his pockets turned inside out was the inspiration for the cover of my book, The Deficit Myth.

I opened the introduction to the book with this paragraph:

I remember when I saw a bumper sticker on the back of a Mercedes SUV in 2008 while I made my one-hour commute from Lawrence, Kansas, to my job teaching economics at the University of Missouri in Kansas City. It featured a man, standing slightly hunched, with his pants pockets turned inside out. His face bore a hardened, serious look. He wore red-and-white striped pants, a dark-blue jacket, and a top hat adorned with stars. It was Uncle Sam. Like the driver with this bumper sticker, many people have come to believe that our government is flat broke and that its budget is unable to tackle the most important issues of our time.

The book was published on June 9, 2020. Exactly five years ago. Two weeks after its release, it was a New York Times best seller.

I think it’s safe to assume that part of the reason the book did so well is that it was published at more-or-less the perfect time. Governments around the world were embracing the use of large-scale fiscal deficits in support of households, businesses, and other currency users whose lives and livelihoods were being upended by the onset of a deadly pandemic. People really wanted to understand where all of the money was coming from and whether everything they’d been told about the dangers of government debt and deficits was really true.

Almost overnight, there was a flurry of headlines declaring that “We Are All MMTers Now.” That actually frustrated MMT economists. For one thing, there’s nothing in Modern Monetary Theory (MMT) that advocates for big deficits, or even deficits per se. As a framework for analysis, MMT is agnostic about whether there’s a plus sign (+) or a minus sign (-) in front of the number that falls out of the budget box at the end of each fiscal, calendar, or lunar year.

There are times when a balanced budget—or even budget surpluses—might be appropriate. If a country can achieve full employment and price stability without the need for fiscal deficits—e.g. because they run sufficiently large trade surpluses—that is entirely consistent with the policy objectives under MMT. If, however, it takes persistent government deficits to achieve those macro goals, then MMT is there to remind us why that shouldn’t spark panic and condemnation.

As I explained in The Deficit Myth:

[W]e should accept any budget outcome that delivers broadly balanced conditions in our economy. Thus, if the budget outcome depicted in Exhibit 2 on the left gives rise to the balanced economic conditions pictured on the right, then fiscal policy requires no further adjustment and we should consider the budget in balance.

While the pandemic is behind us, the U.S. continues to run large fiscal deficits, and republicans are looking to pass a bill that will perpetuate these deficits over the coming decade. Headlines are once again sounding the alarm over what is supposedly a reckless and unsustainable fiscal trajectory. I’ve made my opposition to the One Big, Beautiful Bill Act (OBBBA) clear, but I’m not joining the chorus of Wall Street worrywarts, including Ray Dalio, Peter Orszag, and Jamie Dimon, who are currently sounding the fiscal alarm.

Dimon wants us to believe that there’s a fiscal “reckoning” coming. He said, “I just don’t know if it’s going to be a crisis in six months or six years.” Dalio is equally certain there’s trouble ahead, giving America “three years, give or take a year” to avert an economic “heart attack.” Orszag doesn’t try to pin down the timing of a debt crisis, but he says “the wolf” is “lurking much closer to our door.”

One of the reasons we’re supposedly in trouble, according the WSJ, is that “the math is getting daunting with interest on the debt blowing past $1 trillion annually.” As I recently joked, one wonders how America survived the Volcker/Reagan era.

Anyway, happy anniversary to The Deficit Myth. I wish the current debate was less focused on the size of the so-called “national debt” and more focused on inflation risk and other MMT insights. Maybe we’ll get there in another five years, give or take. In the meantime, here’s Chapter 3 from the book: The National Debt (That Isn’t).