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The Insanity Isn't the Deficit Spending; It's Claiming That the Government's Budget Is Like A Household Budget!

letsgetitdone's picture

It's a trope with our politicians, including the President, his likely Republican opponent Mitt Romney, and an emerging third party candidate over at Americans Elect and NoLabels, Pete Peterson's long-time Sancho Panza, David Walker. The trope says that the Government is just a family, even though it's a very big one, and that, like any family, it has a “household” budget, called the Government budget.

There's nothing to this, of course, The Government is not like a big household or even the largest corporation. It is not the user of our national currency. It is the creator of it. All of our dollars come from the authority of the Government to spend, and, in the act of spending to create dollars.

If the Government has debt, it can always pay that debt simply by marking up the accounts of its creditors. Also, unlike your household or mine, it doesn't matter how much is on the Government's credit card, it can always repay its debts whenever they come due, unless Congress does something stupid to stop it from doing so.

In fact, its own constraints aside for a moment, the Government has precisely the same ability to repay its debts, however high those debts are, and however high its debt-to-GDP ratio is, so long as those debts are owed in the currency (USD) it has the authority to create. It doesn't matter whether the Government owes $14.3 Trillion, or $30 Trillion, or only $50,000. Its ability to pay, self-constraints aside, is exactly the same. It doesn't matter if its debt-to-GDP ratio is 0% or 10% or 100% or 300%, it's ability to meet its debt obligations is exactly the same, if it only decides to shed its self-constraints.

Now, the Mitt Romney campaign, is taking its turn at offering us the “Government is just a big household, so we can't take on any more credit card debt, because if we do then one day we'll run out of money and our grandchildren will have to pay the price” trope. But Romney's campaign has gone beyond words into an “infographic” to try to reinforce this myth of the austerians.

Even though they differ on details Romney, President Obama, David Walker, Pete Peterson, Erskine Bowles, Alan Simpson, other deficit hawks, as well as the deficit doves, would l all say they agree with the general picture presented by the infographic without, perhaps, agreeing on the specifics of the last two lines. But, again, this infographic, is as much a fairy tale as the corresponding verbal trope. So it needs an answer; one based on Modern Monetary Theory (MMT), and the realities of sovereign fiat currency systems. Here it is.

MMT answer to austerians

Figure 1: The Real Insanity Is Austerity. Stop It!

The bottom line is that there isn't a valid analogy between the Government and a family household, and that the insanity is to cut back on deficit spending when we still have 25-30 million wanting full-time work who can't find it.

Specifically, the Government pays with dollars it can legally issue in unlimited amounts at any time! Also, the Government can't become insolvent except as a result of Congressional, and unconstitutional, stupidity.

So, let's start telling the truth about the Government budget and its unlimited capacity to spend, and let's get full employment and Medicare for All, invest in the economy, cut regressive taxes, and solve the rest of our accumulating problems.

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Seth's picture
Submitted by Seth on

I'm not sure you'll ever persuade many people that government spending is actually FREE, tho' I follow the argument. For me the more persuasive answer is that the US Government isn't like a household because it is immortal. We mortals can take out a 30 year mortgage without being considered out of our minds because 30 years is on a par with a human working lifespan. If we all lived -- and could continue making a consistent level of income -- for CENTURIES, it would make as much sense to borrow for an indefinite period. Just as Britain paid for the Napoleonic Wars with perpetual bonds. And far from killing themselves with debt, the 19th century was a period of unprecedented prosperity for the UK -- at least for those with enough social status to get a share of the goodies. (Don't it ALWAYS boil down to being in the club?)

Submitted by lambert on

and you are not the only one to make it. Corrente, 08/14/2011, from Professor Susan Feiner at the University of Southern Maine:

We are in a different place than is the government, because you and I will die. At that point, our estates will be settled: if our assets (positive blips) are greater than our liabilities (negative blips), then our heirs inherit. If the reverse occurs, then nobody gets anything. Ditto for business bankruptcies—paying off creditors requires asset liquidation.

There’s nothing comparable to death for the US. The national analogy—revolution or an invasion/occupation—would render dollars useless, no longer accepted for purchases or paying debts.

Bankruptcy is simply not possible. As long as the debts owed by the US government are dollar denominated debts, we can always create all the dollars we need.

So, the test of independent invention lives again.

NOTE Now, one might take the deeply paranoid view that the State is not immortal exactly because the 1% wants to destroy it or at least replace it. But that is another topic for discussion.

First they ignore you, then they ridicule you, then they fight you, then you win. -- Mahatma Gandhi

letsgetitdone's picture
Submitted by letsgetitdone on

But default is possible.

First, in case of revolution a successor regime can change the currency and repudiate all previous debt instruments

Second, in case of voluntary state breakup of a political unit one or more of the States involved might repudiate previous currencies and debts.

Third, in the case of the United States repudiation of debts is possible. It's illegal because it's in violation of Section 4 of the 14th amendment. However, Congress and the Executive can just refuse to pay debts saying that the United States has 'run out of money" and can't afford it. This isn't economics or finance. It's about stupidity, perfidy, and politics.

This:

"Bankruptcy is simply not possible. As long as the debts owed by the US government are dollar denominated debts, we can always create all the dollars we need."

is beside the point. Yes, bankruptcy in the legal sense is impossible, since the State isn't subject to its own bankruptcy laws. However, the State can repudiate its debts even though it can create all the dollars it needs. To say or imply that repudiation or default is impossible is just a mistake. It may be illegal. It may be stupid. It may be needless, it may be evil. But all these things are possible and common and so is US default on its debt.

Part of the point of saying to people that the Government can never become insolvent is to make the further points that default is illegal, stupid, needless, or evil, and that it can never be due to insolvency in case of the united States.

On immortality, the common sense point is that the State goes on forever, but the individual dies and so can corporations or other entities apart from the State. But this:

"There’s nothing comparable to death for the US. The national analogy—revolution or an invasion/occupation—would render dollars useless, no longer accepted for purchases or paying debts."

again misses the point, which I think is that the financial consequences of State death are different from the financial consequences of the physical death of individuals or the liquidation of organizations. In the cases of individuals and organizations, estates get settled. But in the case of State death there may be no settlements unless the successor State wants to recognize previous debts.

In any event, the State is not immortal. Their death is infrequent. Czechoslovakia died peacefully not to long ago, and the Soviet Union fell apart before that, and Nationalist China died too, as did Czarist Russia and the Austro-Hungarian Empire. States just aren't immortal. That's hyperbole, not fact, also often said of corporations.

letsgetitdone's picture
Submitted by letsgetitdone on

I don't think States are immortal. They can be destroyed by revolution and their debts can be repudiated.

In addition, Governments using non-convertible currencies, with floating exchange rates, and having no debt in currencies not their own have no need to issue debt instruments and can quickly repay current debts if the want to, however large those debts are.

I think it's important to tell people the truth, which is that deficit spending without using debt is an option for us, as is deficit spending in any quantity with debt issuance. We do have constraints. We can't spend so much that we cause demand-pull inflation. We can also spend on programs that have very bad effects. But the truth is that the issue is the impact of any spending, deficit or otherwise that we undertake. It is not solvency, or whether we are running out of money.

Nor do we have to persuade a majority or an overwhelming number of people that there's no solvency problem. All we have to do is to convince the opinion leaders of all political views that this is so. Then they will build the consensus that there is no solvency problem.