Recently, the U.S. national public debt passed the $16 trillion mark. This, naturally, has led to much wailing and moaning (by people who have decent paying jobs. And live in nice places. Clearly the end draweth nigh. Or something). As always, I am puzzled and mystified by these concerns that somehow the U.S. will become bankrupt. This simply can’t happen because, unlike you, me or the Commonwealth of Massachusetts (God save it!), the U.S. government is a currency issuer, not a currency user. As Matthew Yglesias explains, that means we can never run out of money (boldface mine):
…this assertion that America is “out of money” has become an all-purpose crutch through which Reason can push an ideological agenda of skepticism about programs without actually making the case in its particulars. But it’s simply not true that we’re out of money. Many states and municipalities are up against hard budget constraints, but the US government has the ability to create US currency in unlimited quantities. It hasn’t run out of money and won’t ever run out of money. It would be nice for people to understand this point separately from controversies over whether public sector programs are wise or just. In principle, the US government could print up or borrow a ton of money, hand it to state governments, and then have all the money used to cut taxes rather than to finance programs. This would not be possible in a world where the US government faced a hard budget constraint but, fortunately, we don’t face any such constraint.
Deficits per se do not matter, but the effects of deficits (whether that spending is actual spending or tax cuts) do matter. For instance, we might have compelling reasons to not spend money to put a whole fleet of ATOMIC SPACE SCIENCE TANKS! WITH JETPACKS! on Mars:
Landing ATOMIC SPACE SCIENCE TANKS! WITH JETPACKS! seems to be a very intensive undertaking. We might not have enough mohawk-coiffed rocket scientists. Might need to rustle up a few more. We could run into resource limitations–maybe we want some of our engineers, computer whizzes, and mohawk-coiffed rocket scientists to do something else worthwhile (
figure out how to download porn faster!). Maybe making a bunch of ATOMIC SPACE SCIENCE TANKS! WITH JETPACKS! would make cause shortages in making other fancy gizmos (dunno). It might cause inflation in the ‘send stuff into outer space’ sector. Or maybe we simply don’t want that many ATOMIC SPACE SCIENCE TANKS! WITH JETPACKS!
I could have added that we might run out of plutonium to power the ATOMIC SPACE SCIENCE TANKS! WITH JETPACKS! Or it could drive out salaries for these types of engineers leading to price distortions. But any deficits per se caused by NASA are not a problem. Worse, pursuing deficit reduction will lead to lower private sector savings–that is, more people will be unemployed or have to take on debt to get by, which is what happened in the Clinton era (and continued on through the Bush era). Yglesias again (riffing on Weisenthal):
…households and firms, unlike the US government, can’t run a perpetual budget deficit. People and companies are mortal and can’t issue currency. We can borrow money and sometimes should borrow money, but over the long term income and spending need to add up in a way that isn’t true for currency issuing sovereigns. Yet when the federal government runs a budget surplus, this has to be matched by extra borrowing elsewhere. That sets the broader economy up for a debt crisis over time, as borrowing is pushed away from the entity with the greatest capacity for borrowing (the federal government) and onto firms and households who eventually do face hard budget constraints
So, like Honey Badger, I don’t give a shit about deficit spending or reduction, except in terms of outcomes, both policy and macroeconomic. But let’s really understand what this means in terms of policy and politics.
Corey Robin, in an excellent post, pithily summarizes the trap Democrats have found themselves in:
What Galbraith could not have foreseen—ensconced in the New Deal consensus as he was—was that that the real ceiling on social spending would be set not merely by the Republicans but also, and perhaps more fatally, by the Democrats.
Once upon a time Republicans were tax collectors for the welfare state. Now Democrats are the austerians of reactionary Keynesianism.
The Democrats seem intent on destroying programs that help their constituents for no damn reason. At sites ranging from DailyKos to Alternet, ‘progressives’ are offering plans to decrease debt (although these typically spare the worst of the cuts). Even Matt Taibbi’s excellent expose of Bain Capital (although I beat him to the ‘Bain bustout’ idea by months cuz I’m the pundiest pundit EVAH!), conflates federal debt with private debt. This is as much an affliction of the rank-and-file as it is the leadership. And it is political suicide, even if slow.
If we stop obsessing about deficits, our political discourse becomes much clearer, though, to some, frighteningly ‘populist’ as opposed to safely wonkish. If liberals want to tax the wealthy, they can’t argue that we need the money to ‘pay for government’ (though, after $16 trillion of debt, most of which has been generated over decades, that should appear self-evident). We don’t. There are compelling reasons to do so, including reducing income inequality, disparity of political power, taxing capital at the same rate as labor, preventing the establishment of a de facto aristocracy, and so on. We might have to call some people “fats cats” now and again.
At the same, conservatives will have to be much more honest about why they want to cut social programs. Claiming we can’t afford them is bullshit: they’ll have to come up with other reasons not to help Grandma heat her house.
As I’ve noted before, this has ramifications for science funding too. If we wanted to, we could double NIH funding. Arguably, if we don’t change how and what the NIH fund, we could wind up right back where we are today, with too many investigators chasing too few dollars, just at a larger scale. So maybe we shouldn’t increase funding that much until we figure out how to do it better–but that’s a completely separate policy debate. Operationally, as long as we have enough scientists and scientific materiel, there’s no reason why we couldn’t double NIH funding (remember: could and should are different).
So let’s stop worrying about deficits and start worrying about real problems (here’s one you can worry about). Unemployment, underemployment, and stagnating wages, along with a decaying infrastructure, that’s what we should be worrying about, not federal deficits denominated in currency the U.S. government controls.
An aside: As Cullen Roche notes, hyperinflation never happens without massive external shocks or rampant corruption (we’re talking Mobutu-scale corruption). Keep in mind, if inflation were to double (AAAIIEEE!!), that would put us…right where we were during the Reagan administration. Not a disaster.