The federal government has already poured $3T into the economy to soften the economic pain caused by the coronavirus. It is currently debating sending another $1T to $3T into the economy to deal with the prolonged nature of the downturn. You might be worrying about the impacts on current and future generations of this high level of spending. After all, how is the government going to pay for it all? Doesn’t the federal government have to balance its budget eventually? Sadly, there are several pervasive myths related to the federal government’s deficit that lead to misunderstanding and confusion. Here are a few of the more common ones:
- The federal government should budget like a household does. Unlike households, businesses and local and state governments, the federal government is a currency issuer, not a currency user. Therefore, it can never run out of money and doesn’t have to raise money (via taxes and issuing bonds) prior to spending because it is the issuer of a fiat currency not tied to gold or another currency. All other entities must eventually balance their budget and pay back their debts. This situation also applies to other monetary sovereigns such as the UK, Australia, Canada and Japan.
- Deficits are evidence of overspending. This isn’t true because the federal government can’t run out of money, the federal budget is used to balance out the economy and it has almost always run deficits that are too small as evidenced by unnecessary unemployment. Instead of deficits, the true limit to our economy’s potential is inflation. Government deficits won’t generate inflation unless the economy is operating near full capacity.
- One way or another, we’re all on the hook for the national debt. In reality, the national debt poses no financial burden whatsoever. As a currency issuer, the federal government will always be able to pay the interest on the national debt and could even retire 100% of it tomorrow if it so chose. It would just remove Treasury bonds from circulation and replace them with dollars, which it can issue ad infinitum. But then the private sector would have no risk-free interest-bearing asset to invest its savings in. Furthermore, paying off the debt by running federal surpluses removes money from the economy and every time the government has done that, it has triggered a depression. Most recently, the Clinton surplus in 1998-2001 was followed by a recession in 2001.
These myths and others are clearly and thoughtfully debunked in a new book published this year titled “The Deficit Myth” by Stephanie Kelton. It makes the case for setting aside a relentless and often political focus on the federal budget deficit to instead focus on the true limits to our economy’s productive capacity, which will manifest itself in the form of inflation. We should also focus on deficits that matter, such as deficits in good jobs, health care, education, infrastructure, climate and democracy. These are deficits that really matter if we want to have a society that benefits all and is worth living in.