These Are the Times that Try Men's Souls
And mine too.
These are the times that try men’s souls. That was the opening sentence from Thomas Paine’s well-known pamphlet published on December 23, 1776. I found myself thinking about it while reading coverage of the debt ceiling in The New York Times.
It started a couple of days ago, with Peter Coy’s “What America Should Do About its Ballooning Debt.” After pointing to Congressional Budget Office (CBO) projections of a widening gap between government revenues and outlays, Coy told readers:
Unless you subscribe to modern monetary theory…something has to be done, and soon.
Similar coverage appeared this morning, with Jim Tankersley’s article, “How the U.S. Government Amassed $31 Trillion in Debt.” It’s basically a whodunnit, where the “it” in question is “America’s ballooning debt.“
After a lengthy historical autopsy, Tankersley concludes that it’s a bipartisan problem. Democrats and Republics share roughly equal blame for our nation’s (supposed) fiscal predicament.
America’s ballooning debt is the result of choices made by both Republicans and Democrats. Since 2000, politicians from both parties have made a habit of borrowing money to finance wars, tax cuts, expanded federal spending, care for baby boomers and emergency measures to help the nation endure two debilitating recessions….
It is difficult to fully assign responsibility to individual presidents or parties for total levels of debt, because policy decisions often influence one another. By one crude measure, debt has been a bipartisan pursuit: It grew by $12.7 trillion when Mr. Bush and Mr. Trump, both Republicans, were in office, and by $13 trillion under the Democratic administrations of Mr. Obama and Mr. Biden.
If you’ve already adopted the MMT lens, then you feel my pain (pun intended) when you read articles like these.
On one level, I sympathize with those who write for popular mainstream audiences. After all, it’s customary for government officials, as well as most economists, to refer to the sale of US Treasuries as “borrowing” and to call the outstanding stock of US government bonds “the national debt.” So these journalists are just following suit.
But the words “debt” and “borrowing” seem like poor choices when you peel back the onion and trace through the monetary operations that give rise to the issuance of government securities.
Ask yourself, does a currency-issuing government ever need to borrow its own currency from anyone? And if it chooses to offer bonds in exchange for some of its own previously-issued currency, is it really “borrowing” in any meaningful sense of the word? Does it make sense to say that the government is “going into debt” when it allows us choose whether we want to store our dollars in the form of cash or bonds?
Think of it like this. The US government is the issuer of the currency. Each year, the federal government pays out a lot of dollars. That money goes to military personnel, civilian employees, health care providers, Social Security beneficiaries, farmers, government contractors, etc., etc. To keep the numbers (and the story) simple, let’s say Congress has authorized $5 trillion in annual spending. Now suppose that $4 trillion is collected in the form of tax revenue and other payments to the government. The difference between these two numbers is—unfortunately—referred to as “the government deficit.” And that gets almost everyone twisted around, asking who’s to blame, because the word “deficit” carries such a negative connotation.
It would be far better, in my view, to simply call the resulting difference “net spending.” The important point is that when net spending is positive (G > T), it tells us exactly how much income the government is adding to the financial positions of the non-government sector (domestic private sector + foreign sector) beyond (or net of) what it is subtracting from their financial positions through taxation. This is a core tenet of the MMT macro framework, and it’s why I titled Chapter 4 of my book “Their Red Ink is Our Black Ink.” On the other side of every government “deficit” lies a non-government surplus of equal size.
What About the “Debt”?
As I explained in Chapter 3 of my book, Congress could dispense with the sale of US government bonds altogether if it wanted to.1 After all, no one demands to be paid in US Treasuries. The government could simply write checks to contractors, farmers, civilian employees, etc--as it does now--and call it a day. There's no need to match net spending with newly-issued bonds the way it’s done today.
Prior to 2008, this would have flooded the banking system with reserves, driving the federal funds rate to zero. To prevent that outcome, the Federal Reserve would simultaneously drain reserves via open-market operations until the overnight interest rate was restored to the Fed’s (usually positive) interest rate target.2
Today, the Fed (like other major central banks) hits its interest rate target by paying interest on reserves (IOR). So, if the government’s net spending added, say, a trillion dollars to the banking system, the additional reserves would simply earn whatever the Fed has decided to pay on those balances. The point is that the Fed no longer relies on open market operations in US Treasuries to achieve its overnight interest rate target.
As Scott Fullwiler and I explained years ago, it all comes down to how you want to hit your interest rate target. There’s no need for the government to sell bonds if it doesn’t want to. It can always just write the checks and let the dollars accumulate in the bank accounts of the non-government sector. It’s no more (or less) inflationary either way. As we wrote:
[B]ecause there is no difference between bond- and money-financed government deficits, there is no reason for the government to sell bonds at all. We can stop today. No further increases in the debt and no unnecessary and counterproductive debt ceiling drama.
When we wrote our piece, we weren’t necessarily making a policy recommendation to dispense with bond sales. We were simply pointing out a basic operational fact out. Selling bonds versus not selling bonds isn’t about how you want to pay the bills. And it's not about "printing money" or "monetizing the debt." It’s about who you want to pay the interest—the Fed or the Treasury.
Viewed through the lens of MMT, bond sales aren’t really about “borrowing” to finance a “deficit.” They’re about how you want the central bank to achieve its interest rate target. You can't avoid the interest if the Federal Reserve is free to target a positive overnight interest rate. And here's the thing--there are no schools of economic thought (MMT or otherwise) that will say one part of the consolidated government paying the interest is more inflationary than another. A deficit can be inflationary, but the inflation risk isn’t a function of who pays the interest.
I started this newsletter, in part, out of frustration. Not only do I enjoy writing for a diverse audience of readers, but as an economist who has devoted nearly three decades to the pursuit of understanding our monetary system and the mechanics of government finance, I feel an obligation to push for better narratives.
It’s hard to break old habits of thought, and language is a powerful force. I know from my time working in the United States Senate that politicians like to “stay on message,” even when the message reinforces pernicious myths about “deficits” and the so-called national “debt.”
Frankly, I don’t know whether—of if—there will ever be a sea change in our public discourse. Right now, too many people are committed to repeating inapplicable household metaphors and chasing after headlines with tales of fiscal doom.
But because there is so much at stake, I’ll keep fighting to improve the public discourse. As Thomas Paine wrote in that famous essay, “Tyranny, like hell, is not easily conquered; yet we have this consolation with us, that the harder the conflict, the more glorious the triumph.”
This isn’t something you can do on a whim. Too much of the global financial architecture currently depends on the existence of a massive and highly-liquid Treasury market. But there are ways to replace Treasury securities with something that would offer the same functionality without the political and ideological baggage of being identified as “debt” of the US government.