By Marshall Auerback, a market analyst and commentator. Originally published at
Another day, another temporary government shutdown and then finally a long-term “bipartisan compromise” so beloved of the punditocracy is reached. Early last Friday morning, the president signed a new funding bill that was narrowly passed in Congress only a few hours earlier. All told, the deal authorizes about in new discretionary spending over the next two years.
“While neither side got everything they wanted, this compromise provides critical funding that will go towards improving the VA, CHIP, the opioid epidemic, and infrastructure spending,” . “I look forward to now working with my colleagues on a solution for DACA, border security, and immigration policy.”
Yes, there were enough goodies to avoid a long drawn-out shutdown. But the most striking thing about the agreement was how few alarms were raised about the estimated increase in the budget deficit, even by the vaunted Tea Party wing of the GOP, whose rise allegedly came about in protest to the “unsustainable” growth in public spending. Certainly, there were a few deficit scolds here and there, who decried the latest “. But for the most part, those voices played little factor in the moves to prevent a lengthy cessation of government operations.
That was clearly not the case a few weeks earlier when the Trump tax cuts were passed and Democrats in particular vociferously sounded off on the dangers of increasing the federal debt to the tune of $1.5 trillion. Nothing from Chuck Schumer; even less from Nancy Pelosi, who several weeks earlier had , “A GOP tax bill that explodes the deficit by $1.5 trillion means dumping $4600 in debt on every man, woman & child in America.”
Well, it’s great that Ms. Pelosi can do basic arithmetic. But at a time when the Republicans have been (hypocritically) abandoning deficit terrorism to advance their own political agenda, it’s uninspiring that the Democrats could do no better than reinforce the ‘deficits are bad’ meme.
Because the truth is, there is nothing insidious or inherently sinister about these deficits per se. As the economist Stephanie Kelton :
“Government spending adds new money to the economy, and taxes take some of that money out again. It’s a constant churning of es and minuses, and their minuses become our es. When the government spends more than it gets in taxes, a ‘deficit’ is recorded on the government’s books. But that’s only half the story. A little double-entry bookkeeping paints the rest of the picture. Suppose the government spends $100 into the economy but collects just $90 in taxes, leaving behind an extra $10 for someone to hold. That extra $10 gets recorded as a sur on someone else’s books. That means that the government’s -$10 is always matched by +$10 in some other part of the economy. There is no mismatch and no problem with things adding up. Balance sheets must balance, after all. The government’s deficit is always mirrored by an equivalent sur in another part of the economy.”
Obsessing about government budget deficits is as absurd as an accountant only paying attention to one half of a balance sheet ledger when conducting an audit. And the public, frankly, is more interested in the ways in which we spend, rather than whether we should spend at all.
It is obvious now that the GOP cynically used deficit hysteria as a means to kill off the Obama agenda at birth during the latter’s presidency, as Jonathan Chait recently Even in the last days of the Obama administration in 2016, Senate Majority Leader Mitch McConnell was describing the national debt as “.” But let’s recall that previous Democratic presidencies were also complicit in perpetuating the narrative of an out-of-control national debt. during his presidency (as did his wife during her presidential campaigns). Both Clintons trumpeted the policy “achievement” of running budget sures (even as a dangerous private debt buildup was developing to offset the resultant contraction in government spending). And within two months of being elected to the White House (and despite being in the midst of the gravest financial crisis since the 1930s), that that the nation’s long-term economic recovery could not be attained unless the government got control over its most costly entitlement programs. He went to convene a “fiscal responsibility summit” and then later set up the Simpson/Bowles Commission on “entitlement reform” (which is usually code for cuts to Social Security and Medicare).
The point is certainly not to absolve the Republicans for their blatant cynicism, or lay the blame on either Obama or Clinton, but merely to highlight that when one accepts a prevailing (and profoundly misguided) paradigm on deficits, it opens the door to all sorts of political mischief and bad policy-making. Implicit in the idea of “unsustainable public spending” is the belief that public debt is invariably an evil, the consequences of which must be stopped at all costs.
In reality, the financial crises of the past several decades have clearly demonstrated that excessive private sector debt buildup has played a far more destabilizing role in the global economy than fiscal profligacy. But it’s very hard to make that case if we focus incessantly on public debt and thereby perpetuate the notion that government deficits per se are the root of all economic evil. In many respects, the argument over deficits and public debt echo the prayers of St. Augustine on chastity: “Oh Lord give me chastity, but do not give it to me yet.” The Democrats’ problem (from the point of view of the debate on government deficits) is that they have long conceded the virtue of “fiscal chastity,” which therefore makes it virtually impossible to construct a strong argument in favor of government fiscal stimulus programs to combat unemployment, the health care crisis, or decaying infrastructure. Framing the budget issue within the Augustinian framework makes the question of budget cuts an issue of when, not whether. And that has given the Republicans the political initiative in terms conveniently invoking the cudgel of budget cuts whenever they feel like it.
In truth, politicians of both parties should stop weaponizing the deficit in this manner. We have to look at the entire economic pie (the government sector, private households and corporations, and trade—exports and imports) before pronouncing on the wisdom of a certain kind of fiscal policy approach. And we also have to look at the economic context, rather than approach the problem with some vague pre-existing notion of what is “fiscally sustainable.”
In fairness, some economists are doing this, such as Jason Furman. Furman, who was the chairman of the White House Council of Economic Advisers during the second term of the Obama administration, has estimated that , and two percent for the next. Those are not insignificant numbers, and Furman expressed the concern that, given the magnitude of the impending surge in spending at the stage of the economic cycle, the U.S. economy could ultimately experience significantly greater inflationary pressures (as well as a more hawkish monetary policy response from the Federal Reserve).
Is Furman right? , which at first glance seems to imply that we are pretty close to a full employment economy. But outside the cocoon of Wall Street or Silicon Valley, GDP growth and re-employment have still not transmitted to material wage growth for the entirety of the recovery. Furthermore, the employment-population ratio for prime-aged workers remains depressed. Economic commentator Doug Henwood : “If the same share of the population were working now as at the 2006 pre-recession peak, 8.4 million people more would be employed.” In other words, there is still an army of underemployed workers to be drawn back into the workforce, which likely moderates wage pressures going forward.
As for the much-hyped average wage gains of last week, which is cited as the reason for the recent fall in equity prices, it has gone overwhelmingly to managerial workers (it goes without saying that wage stagnation for most Americans the last 30 years has undermined the capacity of households to maintain consumption growth without recourse to private debt). And a large chunk of the latest tax cuts still goes to groups with the largest propensity to save, rather than spend. Finally, the bulk of the new expenditures used to avoid another government shutdown will simply go to expand the defense budget, with correspondingly little multiplier impact in the civilian economy.
In truth, this whole debate about ” are red herrings used to mask the fact that wage shares have fallen and more and more national income has been concentrated toward the top tier, giving us an economic model that is both inefficient (because the marginal propensity to save is higher amongst the “rentier class” than it is amongst lower income groups), and politically unsustainable (especially as it relies on perpetual wage stagnation to sustain profits). The real questions surrounding deficits are not ones of affordability or solvency, but whether we are deploying the stimulus dollars productively. Do we use the deficits to generate more employment (and, hence, bring more taxpayers into the system who contribute revenue to the federal government); do we use the dollars injected to rebuild our decaying infrastructure; can we structure tax cuts in a way that helps to reduce income inequality (thereby putting the economy on a more sustainable footing as it means less reliance on credit and debt)?
With those questions in mind, the answer appears to be a resounding no. The recently passed tax “reform” and the funding agreement to reopen the government appear to channel the benefits disproportionately toward corporations, high-income earners, and the military, whilst providing little relief for low-income Americans, who have been enduring cuts to welfare and flat wages growth for years (and , despite repeated promises to the contrary by Trump). Unemployment and underemployment remain a big problem. Our national infrastructure is falling apart and damaging productivity. Many communities are struggling without access to basic services, including health care. Simply recognizing that our sovereign government cannot go bankrupt does not solve those problems, but it does make them easier to discuss and resolve them honestly. Unfortunately, if the recent debates are anything to go by, we are still a far way off from having that kind of a discussion, let alone reforms that would address the problems directly.