Tag: deficits

-Open Letter to Maya MacGuineas, President of CRFB

An alternative to popular faith

        On September 23, 2009, Ms. Maya MacGuineas, President of the Committee for a Responsible Federal Budget, wrote an article titled, “Can Deficits Fix the Economy” (http://crfb.org/blogs/can-deficits-fix-economy). In the article, she agrees on the need for deficit “ . . . spending on public investments . . .” but she expresses concern about the government’s ability to borrow more money. I wrote her the following note:

Ms. MacGuineas,
         In your article, “Can Deficits Fix the Economy,” I’m pleased to see you understand the necessity of federal deficit spending for economic growth. This puts you well ahead of debt hawks like the Concord Coalition, who actually have called for surpluses large enough to eliminate federal debt, demonstrating their misunderstanding of money and its sources.
        Nevertheless, you said, “. . . given how much we have borrowed in the past, there is little room for deficit financing new investments, and I would instead shift our budget by cutting spending on consumption and directing it toward higher levels of public investment. If we had listened to budget scolds in the past, we would have more room on our balance sheet now for government borrowing – unfortunately, we did not.”
         Exactly the same concerns were expressed by many back in 1979, when the debt was less than $800 billion. In the past 30 years, the debt has grown 1,400% and not only does there remain plenty of room on our balance sheets, but the federal government does not need to borrow at all. See the post:
“How to Eliminate All Federal Debt, Deficits and Interest Payments”

        The government borrows by creating T-securities out of thin air, then selling them. The government far more easily could create money out of thin air, and eliminate the borrowing stage. This also would eliminate misguided concerns about our debt and our ability to borrow.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

-Another reason deficits are necessary

An alternative to popular faith

Here is one of the many reasons federal deficit spending is absolutely necessary — even more so, now — and why trying to reduce the deficit is dangerous and imprudent.

Note how debt growth declines before recessions and increases to cure recessions

Source: Joe Weisenthal and Kamelia Angelova, Clusterstock – Business Insider, September 9, 2009

Economic growth requires spending by consumers, businesses, local governments and the federal government. When consumers aren’t spending, businesses also spend less. The federal government must spend even more to take up the slack.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

-Learn to love the debt

An alternative to popular faith

       Deficits are necessary. They add money to the economy. A large economy has more money than does a small economy. Therefore a growing economy requires a growing supply of money. Quod erat demonstrandum.
       Concern about the federal debt revolves around two beliefs: Someone (often characterized as “our grandchildren”) will have to pay those debts, and large debts cause inflation.
      For us citizens, personal debt is concerning, because our debt must be repaid. People go bankrupt when they can’t repay their debts. But, if you owned a magic printing press, and you had the legal right to print as much money as you wished, your debt never would concern you.
       Received a bill for a million dollars? No problem. Turn on the magic press and poof!, it’s paid. Unfortunately, you and I don’t own a magic press, so we worry about our debt.
       The federal government, uniquely among all U.S. debtors does own that magic printing press. It can pay bills of any size, which is how today, it easily services a gross debt of $12 trillion. Not even during the current recession has any federal check bounced. Not even close.
       Still we worry about federal debt as though it were our own. Why? Partly because so many people tell us we owe the federal debt. How silly. Debt is owed by borrowers. We are not the borrowers. In many cases, we are the lenders, the owners of T-securities. The government is the borrower, and we are not the government. There will be no bill collectors on our doorsteps, demanding that we pay our mythical share of the federal debt.
       But won’t “our grandchildren” have to pay for the debt through higher taxes? For the past 50 years, tax rates actually have gone down, despite massive deficits. There is no relationship between deficits and tax rates, which are political, not financial, decisions.
      What if tax rates were to rise moderately? Let’s do the math. Say in Year One, taxes total $10 trillion and spending totals $11 trillion. Spending exceeds taxes, which causes a $1 trillion debt.
       In Year Two, tax rates rise, so taxes now total $11 trillion, but spending rises to $12 trillion, and now the debt has risen to $2 trillion.
       How much of Year One’s debt did taxpayers pay? Answer: None. Taxes weren’t even sufficient to pay for Year two’s spending, let alone pay for last year’s debt. The only time taxpayers pay for debt is when taxes exceed spending, i.e a surplus.
       That is why surpluses have caused all six depressions in U.S. history. Surpluses, not debt, cost taxpayers money.
       The inflation logic is that federal debt increases the money supply (true), which dilutes the value of money (not true). Money value is based not only on supply, but also on demand.
       Money supply can increase massively, and still not cause inflation, if demand goes up as much. Demand is determined by risk and reward. Risk is inflation (which is a result, not a cause), so the key to money value is reward.
       What is the reward for owning money? One reward is the ability to buy things with it, but in a massive economy like ours, there always are plenty of things to buy. The real reward for owning money is interest. The higher the rates, the more valuable the money. That’s why the Fed raises rates at even the hint of inflation, and that also is why in the past 50 years, there has been no relationship between federal deficits and inflation. None. (See: See Do Deficits cure inflation?
       In conclusion, rather than being concerned about federal debt, we should welcome it. Money growth brings economic growth.

Rodger Malcolm Mitchell
For more information, see http://www.rodgermitchell.com

-The debt ceiling illusion

An alternative to popular faith

      Sometime in October, the federal debt will touch the legal ceiling of $12.1 trillion, and Congress will decide whether or not to raise it. Surely, the debt ceiling law is among the nation’s silliest.
      Visualize this: All year, you recklessly spend more than you earn, and at the end of the year you announce that you will not pay your bills because you are frugal.        That’s Congress.
      Congress authorizes federal spending and federal taxing. So Congress already has control over the federal debt. It is Congress that has created the $12 trillion debt. Now, Congress will decide whether to pay for what Congress has authorized.
If Congress doesn’t increase the debt, several bad things could happen. The U.S. could default on its debts, thereby removing forever the trust other nations and our own citizens have in our money. Borrowing would become much more difficult and the world would begin to dump its T-securities – a financial calamity. Would Congress be that stupid? Well, it’s Congress.
      Or, the recovery from this recession could end, and we could plunge into a depression of unprecedented magnitude. Would Congress be that stupid? Well, it’s Congress.
      Or, the Treasury could implement some accounting tricks like redeeming government employee retirement funds, now invested in T-securities. Or the Treasury could stop paying interest on government trust funds. Both actions are internal devices without substance, merely delaying the inevitable, as does the vote on the debt ceiling.
      No responsible person, who cares about America, would vote against raising the debt ceiling, but we’re talking about Congress, a group that often embraces style over substance. The debt ceiling has two results. First, it is a shameful admission by members of Congress they know or care little about the bills they vote for, and focus on the individual, pork-barrel amendments they can sneak in. Generally, Congress is a “You-vote-for-mine-and-I’ll-vote-for-yours” club.
      Second, the debt ceiling gives members of Congress political cover — the ability to vote for spending for their constituencies, while voting against spending as a whole, thus to demonstrate how frugal and disciplined they are.
      There should not be a debt ceiling. If Congress wishes to be frugal, it should do so when authorizing, not when paying, its debts. Any Congressperson who speaks against raising the debt ceiling is a phony. Or is that statement a tautology?

Oh, and by the way. Limiting the creation of debt limits economic growth, but that is a subject discussed in many posts on this blog.

Rodger Malcolm Mitchell
For more information, see http://www.rodgermitchell.com