Time for Politicians to Stop Deficit Fearmongering

The common misconception is that the government is doing something wrong when it runs a deficit, but what most people don’t understand is that there’s a matching surplus in another part of the economy, says economist Stephanie Kelton


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Story Transcript

SHARMINI PERIES: It’s The Real News Network. I’m Sharmini Peries, coming to you from Baltimore. During Tuesday night’s tax reform debate on CNN between Senator Bernie Sanders and Ted Cruz, a number of thorny tax issues were raised. We are going to take a closer look at some of those issues and implications. One issue that came up several times during the debate was the federal debt, which is currently at $20 trillion. Here’s what Texas Senator Ted Cruz said about it at one point in the debate.

SPEAKER: Senator Cruz, recent projections estimate that the tax framework currently under consideration would add $2.4 trillion to the debt over the next 10 years. What steps will you take to ensure that the tax reform doesn’t add to the debt burden my generation is already facing?

TED CRUZ: Well, thank you for that question. It’s a very good question. Listen, when it comes to the deficit and debt, it is immoral, the debt we have. When Barack Obama was elected, the national debt was 10 trillion. Today it’s 20 trillion. One president doubled what 43 presidents had built before. We’ve gotta turn it around. That’s a big part of why I ran for Senate.

SHARMINI PERIES: Joining me now is Stephanie Kelton. She’s a former chief economist for the Senate Budget Committee Democratic staff and is currently a professor of public policy and economics at Stony Brook University. She has recently penned an op-ed in the New York Times, titled “How We Think About the Deficit is Mostly Wrong.” Stephanie, welcome.

S. KELTON: Thank you.

SHARMINI PERIES: So let’s start with the issue of the federal deficit and the federal debt. As we saw in the clip from the debate, Ted Cruz argues that it is immoral. In your article, though, for the New York Times, you say that there is a fundamental mistake with the way politicians generally see the debt. Give us a brief summary as to where the mistake lies.

S. KELTON: Well, all right, let’s see if we can do this briefly. I’d say the fundamental problem with the way we think about the deficit, and let’s leave aside the debt for the moment and just focus on the deficit, is that we look at this thing in complete isolation. There’s no context whatsoever. We hear a number, we read it on the pages of the Wall Street Journal, or we hear it reported in the news, and we say, “The government’s deficit is,” and then they tell us a number–$600 billion, okay, something like that. We say, “Oh, my God, that’s terrible,” right. “That must be awful. That must be evidence that the government has done something horribly wrong.” Because we’ve been programmed by people, quite frankly, like Ted Cruz and the Republicans. So both parties are guilty of this.

But they have taught the American people over time to loathe the deficit, to fear the deficit. You heard the term “moral.” You heard the reference to the question that was asked, “burdening my generation.” We have indoctrinated hundreds of millions of Americans to believe that the government is doing something wrong when it runs a deficit, that it’s gonna lead to pain down the road, and that the pain is gonna be felt by the next generation. And they’re afraid, and they want the problem solved because they think it is a problem.

So what I did in that New York Times piece was to say, “Hang on, let’s take a deep breath and let’s try to put this thing in context. And understand that when the public sector, when the government runs a deficit it’s making a net contribution to the rest of the economy.” We don’t think of the deficit as having a positive impact. We only think of it as a negative thing.

But if you actually stop and figure out what the heck is going on when the government runs a deficit, it goes like this: Suppose the government spends 100 into the economy, but it only taxes 90 back out. Okay, we label that a deficit. And yet, we don’t realize that there’s 10 somewhere in the economy now that wouldn’t have been there if the government hadn’t run that deficit. In other words, the government’s deficit becomes a surplus to some other part of the economy. And when we forget that, we get into all kinds of trouble trying to cut spending, to reduce programs in order to deal with this problem, which ends up actually hurting the private sector of the economy.

SHARMINI PERIES: And Stephanie, what about the interest that we pay on the debt? How do you explain that? I

S. KELTON: So I’d go back to my example, right. When the government runs a deficit, it’s putting more money into the economy than it’s taking out. So in my example, I said suppose they spend 100 into the economy, but they only tax out 90. Now that leaves 10 in the economy for somebody to hold. And what happens is, Congress says whenever we do this thing called deficit spending, we are requiring ourselves to borrow, okay. And so what that means is that the government sells bonds.

So now the government holds up this thing called the Treasury bond. And it says, “I’ve gotta sell this bond for 10. Who wants to buy it?” Now someone in the economy is sitting there holding $10 in cash and looking at that bond and saying, “Aha, the bond pays interest. I would rather swap my cash for the interest-bearing bond the government is offering.” So now somebody in the economy is holding a bond. And you’re right to say that the federal government is paying interest on that.

Now somebody is getting paid interest income for not really taking any risk at all. So the question then becomes, why does the government do that? Why do they offer to swap their money, part of it, for this interest-bearing thing called a U.S. government bond that they then end up having to pay interest to someone? And the answer is: It’s a relic of the old monetary system we used to have back when we were on a gold standard. We don’t have that kind of a system anymore. Congress could decide doesn’t make sense to do this anymore. All we’re doing is subsidizing the wealthy, who are overwhelmingly those who hold bonds. Congress could stop issuing bonds if it wanted to. It could eliminate the interest income if it so chose.

But the bigger question I think is, is it a problem? Is there a risk? Does the fact that the government pays interest on its debt pose some sort of unique challenge? Is it a hazard? And my answer to your question, that question would be, no.

SHARMINI PERIES: Now I guess one of the problems and why the Republicans are so successful at selling this to us is because we compare it to our own debt. What we owe the bank, and the interest they’re charging us. And that comparison gets us muddled. And add to that, we see examples like Greece where there’s so much national debt that it cannot pay. That in order to borrow to sustain the Greek economy, they had to borrow at prohibitively high interest rates. So that doesn’t help. Now would the U.S. end up in a situation like Greece?

S. KELTON: No. But despite what politicians do, which is to scare the American people and say, “We’ll end up like Greece.” And so people have heard that over and over again now. Why won’t we end up like Greece? What did Greece do that got Greece into so much trouble? It isn’t that Greece borrowed and had high public debt that got Greece into trouble. It’s that Greece stopped borrowing in its own currency. Remember, before Greece joined the Economic and Monetary Union, it’s currency was known as the Drachma. That was the Greek currency, and it was controlled by the Greek government. Well, when Greece decided to join the Economic and Monetary Union, the Euro, it gave up the Drachma and it started spending and borrowing in this Euro currency, which it does not control. So all of a sudden, Greece turns itself basically into the state of Georgia, if you like. And Greece is now promising to pay Euros when it borrows. The problem is, Greece doesn’t create the Euro. And so that’s where Greece’s problems lie.

The U.S. is in debt in U.S. dollars. And the cool thing about owing people U.S. dollars when you’re the U.S. government is, you’re the only game in town. Nobody else can create the U.S. dollar. It can only come from the United States government, which is why you can never run out. You can never have bills that you’re unable to pay. You can never be forced into default. You can never be forced to go to credit markets and pay higher and higher rates of interest to get your currency because you’re the issuer of the dollar. It’s completely different thing.

SHARMINI PERIES: Right. Yet Puerto Rico can because they can’t print money.

S. KELTON: Exactly right. Puerto Rico can’t. Detroit can’t. States and local governments, businesses, households can’t. The federal government is in a very unique position with respect to the currency. It issues it, and the rest of us just use it.

SHARMINI PERIES: All right. So another point, economists say we’re at close to full employment and that therefore more borrowing by the government will lead to inflation. What do you say to that?

S. KELTON: Well, first, the question: Are we that close to full employment? I know the official numbers suggest that the U.S. economy is at or very close to full employment. But there are plenty of economists, I think you probably had one on your show a little while ago today, who would tell you that the U.S. labor market is not exactly at full employment.

In fact, if you look at the number of people who are officially unemployed and you add to that the millions of people who are working part-time because their bosses won’t give them full-time hours. They won’t give them the hours that they want. They want full-time work and they can’t find it. And you add to that the number of people who simply gave up on the job market. They dropped out of the labor force. They became discouraged, and they’re not looking for work. But if the job were available tomorrow, they would take it. You take all of those people, and you’re looking at something like 17 million Americans today who want full-time work and can’t find it.

So I think there’s plenty of room in the labor market to allow some additional growth, to have the economy expand. And I think we can do that without creating any inflationary pressure for a bit of additional time.

SHARMINI PERIES: All right. And finally, Stephanie, if running a deficit is not a big problem as Senator Cruz makes it out to be, wouldn’t this be an argument in favor of cutting taxes for everyone, including the rich?

S. KELTON: Well, I don’t think so. And the reason is this: That the deficit is not a problem is not a permission slip for the Republican Party to go in and push through the kind of tax cuts that we’re looking at.

I mean, these are tax cuts that, as you know, go disproportionately to those at the very top. Some 80 percent of all of the benefits will go ultimately to the people in the top one percent. So we can say that you could do what the Republicans want to do, and it will increase the deficit. And that will not lead us to the road to ruin. It will not turn us into Greece. It will not mean catastrophe for future generations in terms of their tax burden and so forth.

But does that make it the right policy? Does that make it good policy? And the answer to that question for me anyway is: Absolutely not. Just because the impact on the deficit won’t lead to catastrophe doesn’t mean that what the Republicans are proposing in terms of this tax giveaway to the wealthy isn’t catastrophic in a number of ways.

SHARMINI PERIES: All right, Stephanie. I thank you for being so crystal clear with economic issues that are complex to understand. Making you the good teacher, professor you are. I thank you so much.

S. KELTON: Thank you. Thanks very much.

SHARMINI PERIES: And thank you for joining us here on The Real News Network.