The Deficit Myth

Road to Resilience


The 1.9 trillion Covid 19 Relief Bill has engendered equally mammoth hopes and fears.
I’ve been thinking lately about the difference between Republicans and Democrats—that the former generally think that government is the problem and the latter that it is the solution.  Obviously, it is much more nuanced than that, but that is the basic shape of it.

It was Reagan that first said that government was the problem 40 years ago, and we have been operating on that premise ever since.  With minimal interference by the government, the private business sector has been in control, and the result has been a massive transfer of wealth to the top.  Supply-side economics says this is okay because the captains of industry will use that wealth to create more jobs and, as they say, “lift all boats.”  The wealth has certainly risen to the top, but precious little has trickled down.

For the first time since the 1960s, the government is putting wealth and power back into the hands of working people.  (By “working” people I mean the people that earn money by their labor as opposed to those that earn money by investing capital.)  As the Republicans feared, this bill addresses not only the pandemic but the economic balance of power that has skewed toward the wealthy for the last 40 years.

The Covid 19 Relief Bill could be the beginning of a new era.  If the Democrats abolish the filibuster and push through their agenda, including a massive infrastructure bill and a Green New Deal with a guaranteed job for all that want one, we will get a chance to see if we create prosperity or languish in debt as the Republicans predict.  In the last 40 years, our corporate fathers have given us debt instead of actual wealth.  We have the houses, cars, and the whole gamut of stuff that mimic wealth, but we actually own little of it.  By controlling the capital, the wealthy get wealthier and more powerful. They’ve had 40 years to achieve results with supply-side economics and have only managed to make themselves wealthier.  Now it is time to try something else.

What we will find out is whether the massive infusion of money will cause serious inflation and whether the increase in the deficit will cripple the economy.  I recently finished reading a book called The Deficit Myth by Stephanie Kelton.  She is a leading proponent of Modern Monetary Theory (MMT) which states that national deficits in a country with a sovereign, fiat currency are not to be feared.  The Federal Reserve creates money when it is needed and, as Alan Greenspan has testified under oath, “It is impossible for the federal government to go bankrupt.”  It has not been accepted as a working hypothesis, because we are not able to accept that a sovereign government that creates money is different from users of money, such as households, cities, and states.  We users of money have to balance our budgets and can go into default, but the national government can always print more money.  This is not a silver bullet.  The main constraint in creating money is the possibility of inflation.  When the economy is weak but has adequate resources and has room for productive expansion, money can be infused into the economy with little inflationary danger.  With our need for massive investment in infrastructure, need to transition to renewable fuels, need to rehabilitate our environment and wildlife habitat, clean up pollution, and all else that will be demanded to counter climate change, we will have more than enough production to absorb an extraordinary infusion of cash.  MMT is another argument against privatization—without the sovereign currency advantage, we really would have to pay back all that money.

As counterintuitive as MMT is, we can have some confidence that it works if we look to other times when we went deeply into debt.  World War II was such a time.  Where did the wherewithal come from to finance the huge costs of armaments and prosecution of the war?

We experienced a shortage of resources as the rationing at home attested to, but there were no worries about a shortage of money.  We came out of the war with a huge deficit but continued to infuse more cash as we had a rapid expansion of our economy that lasted for two decades.  Our deficit went over 100% of GDP around 2014 and is now at about 140%.  Japan’s ratio of deficit to GDP is now at 280% with no deleterious effects on the economy.  In 2008, we had the TARP bailout of around 800 billion with no concern about where that money was coming from or whether we were saddling our grandchildren with crippling debt.  You can be sure that now that the Republicans are out of power, we will hear no end to the fearful talk about crippling debt.  What they won’t tell you is that what they most fear is the transfer of wealth and power from the wealthy elite to the general populace.