Spending, Deficits, and the National Debt: Quit Worrying and Go Big

We are in a familiar situation: Democrats have control of the White House, and marginal control of the House and Senate, but are stymied by Republican attempts to stop progress on anything meaningful.  Their weapons are the filibuster in the Senate, and the argument that any substantial program will be too expensive.  The Republican goal is to rule the country as a minority party.  For this to happen, they must limit access to the ballot box for people who are not likely to vote for them; they must limit the application of majority rule; they must maintain the economic and social conditions that encourage strife between social groups.  Economic inequality is not a problem; it is a part of their plan.  Racial strife is to be maintained; it has been a part of their strategy for centuries.  One can draw a straight line across time from the economic and political philosophy espoused by the slave-state South to that of the Southern core of the Republican Party today.

The Democratic Party, as the representative of progressives and progressive policies, has been too timid in the past to push the types of policies that would be actual game changers.  In fact, in the past, it has been complicit in furthering the Republican agenda.  There comes a time when they can no longer afford to be weak and submissive in the face of organized Republican resistance.  They must recognize that they can overcome the Republicans’ weapons. 

The filibuster derives from a mistake made early in the 1800s.  In a change intended to clarify Senate rules, a right of a member to end discussion by requesting a majority vote was inadvertently eliminated.  His left no way to force an end.  This left the senate in the mode of assuming that no members would abuse this path in order to subvert the will of the majority on a major issue.

 It wasn’t until 1917 that the procedure was carried to an extreme.  At that point a group of isolationist senators talked for 23 days until the senate’s session came to an end in order to block Woodrow Wilson’s intention to arm merchant ships prior to formal entry into World War I.  The response to this action was to establish a mechanism for terminating “debate.”  The original notion was to allow a two-thirds majority to vote for “cloture” to end debate.

The filibuster again became an issue when it was used by southern senators as a means of obstructing attempts to combat their Jim Crow laws and Policies.  Minimal reforms were put in place, but it wasn’t until 1974 that significant changes were made.  With Watergate and Nixon’s resignation the election of a large Democratic majority forced the required majority from two-thirds down to three-fifths.

There is a valid argument to be made that the filibuster is important in preventing a majority from imposing onerous conditions on a minority.  The problem with such an argument is that it cannot conceivably apply to all matters of legislation.  Not all laws should require a supermajority.  Yet with the election of Barack Obama, the filibuster became a standard legislative block for any democratic initiative the Republicans chose to block—and they blocked nearly everything.  When Trump came along the Democrats returned the favor.  The behavior in the Senate has become absurd.

The Republicans threaten the Democrats by telling the terrible things they will do in the future if they are not allowed to block all legislation now.  Well, guess what, they have already demonstrated that they will do terrible things whenever it suits their fancy.  The Democrats should eliminate it entirely or modify the filibuster rule so that it cannot be used against all legislation. 

The other Republican weapon, the threat that “deficit” spending will bankrupt the nation and impose “an intolerable burden on our children” is nonsense.  The United States has monetary sovereignty and issues fiat currency.  That is, they spend, tax, and borrow in a currency that does not need to be converted into some other quantity such as gold or some other currency.  Such fortunate countries do not need to create debt in order to spend more money.  The United States issues government securities to indicate deficit spending but it is mostly a bookkeeping exercise that has also been useful in controlling interest rates.  And the threat that investors will drive up interest costs on our national debt by demanding higher rates of return on government bonds isn’t going to happen because the Fed merely has to purchase the bonds itself at whatever conditions it chooses, something it often does.

It seems that the economics profession suffers from a lack of perspective as to what money actually represents.  Anthropologists and economic historians who delve into its origins provide a better understanding.  There is a group of insurgent economists who are promoting what has been labeled Modern Monetary Theory (MMT).  Stephanie Kelton defends this theory and its consequences in her recent book The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy.  MMT and the national debt were discussed in Eliminating the National Debt with a Keystroke: Modern Monetary Theory.  Kelton attributes this rebirth of economic insight to not an economist but to a wise investor named Warren Mosler.  She provides this perspective.

“Warren [Mosler] saw things that most economists were missing.  To many of us his ideas sounded completely original, but most weren’t.  They were only new to us.  It turns out they could be found (and we found them) in canonical texts, like Adam Smith’s Wealth of Nations or in John Maynard Keynes’s two-volume classic, A Treatise on Money.  Anthropologists, sociologists, philosophers, and others had long ago arrived at similar conclusions about the nature of money and the role of taxes, but the economics profession largely lagged behind.”

“Taxes are there to create a demand for government currency.  The government can define the currency in terms of its own unique unit of account—a dollar, a yen, a pound, a peso—and then give value to its otherwise worthless paper by requiring it in payment of taxes or other obligations.  As Mosler jokes, ‘Taxes turn litter into currency.’  At the end of the day, a currency-issuing government wants something real, not something monetary.  It’s not our tax money the government wants.  It’s our time.  To get us to produce things for the state, the government invents taxes or other kinds of payment obligations.  This isn’t the explanation you will find in most economics textbooks, where a superficial story about money being invented to overcome the inefficiencies associated with bartering—trading goods without the use of money—is preferred.”

The Federal Reserve can, and does, create money whenever it wishes to.  The so-called deficit is only a problem if there is more demand for services than the economy is capable of producing.  This causes inflation.  Until inflation ensues, the deficit can increase as much as necessary to produce the expenditures our nation needs to make.

To pay any interest on the national debt, the Federal Reserve merely produces a credit to whatever account it is due.  These transfers are tallied by tradition, but they have no economic impact.  The issuing of bonds in a value equal to the deficit spending of government is also a tradition.  Its main economic impact is that it provides a means of controlling interest rates.  Kelton suggests that the Fed could buy back all the bonds issued as easily as it pays the interest on them, with little if any adverse effects. If the Fed were to credit the value of the bond to the account of each bond holder it would merely be exchanging non-interest-earning dollars for interest-earning dollars.  The net wealth of the bondholders would be unchanged, but the interest earned would disappear in the future.  There would be no new surge of excess dollars into the economy.  The loss of income would be slightly deflationary. 

So, Democrats, you have the opportunity and the capability to invest large amounts of money in projects that will benefit a needy nation.  Our country is falling apart.  Fix it!

You can learn a little about a lot of things or you can learn a lot about a very few things. Guess which is the most fun.