Federal Spending Doesn't Cost Anything!
Over the past year, I've written numerous posts about fiscal sustainability, fiscal responsibility, and the various fairy tales and myths underlying what almost all of our policy makers have to say Government finance. I continue to search for a meme that will catch fire and lead people to seriously question the false idea that the US can't: afford to put everybody back to work, see to it that all Americans have good health care; provide an excellent education for our children, reconstruct the energy foundations of our economy, re-invent our infrastructure, and take the measures necessary to solve our other major problems before they get any worse.
It's the idea that we can't afford to pay for many things that we would like to do, that makes it so hard to legislate solutions. With “the national debt” at the level that it is, many legislators who might normally do whatever they could to address our various problems just throw up their hands. The rhetoric of fiscal sustainability and fiscal responsibility is too powerful for them to oppose. They want to be “responsible.” They want to be “grown-up.” They want to be known as people who can make “tough decisions.” So, as long as they believe that Government spending costs something, and adds to a crushing debt burden that we have to do something about, they will not vote for effective measures that will solve our national problems because either the cost/debt implications of solutions involving additional deficits are too great, or the tax implications of matching the costs with additional revenue are a burden they are unwilling to face.
So, here I go again with another meme, namely:
Federal deficit spending costs the US Government no net financial assets
And by the way,
Tax cuts that increase deficits also cost the US Government no net financial assets
How can that be? Well the short answer is that the US Government, viewed from a holistic perspective (Congress, Treasury, the Fed, and their interactions with one another) has no limits in its ability to create financial resources. My friend Warren Mosler, who last week reminded me that payroll tax cuts really cost the Government nothing, a reminder that led to my writing this post, likes to say that the Government is like the scorekeeper in a game. Like the scorekeeper, it never runs out of points to give to the players in the economic game, if the rules of the game make it necessary to hand out points.
As it is with the scorekeeper, the Federal Government neither has nor doesn't have any points (or USD). What it has instead is the authority to create points (dollars) in the non-Government sector through spending, and also, in the Government's case, to destroy them (through taxing or selling debt instruments). These days when the Government creates dollars, it typically costs it virtually nothing, because it's done electronically; and that also holds true when it destroys dollars. Let's look at the process of how the Government deficit spends in a little more detail to see how this works out.
First, when the Government decides to deficit spend, the Treasury typically does that by instructing the Federal Reserve Bank (FRB, or the Fed) to markup the reserve account of the bank of the recipient of the spending, and to instruct the bank to credit the recipient's account. Since by law the Fed can't allow the Treasury to run an overdraft in the Treasury General Account (TGA), Treasury must anticipate such an overdraft, and, following Congressionally imposed constraints, must sell debt instruments (e.g. Treasury Bills) in an amount necessary to ensure that there is no overdraft. So, step one places a debt instrument in the non-Government sector, and removes USD from that sector by debiting the purchaser's account, and the reserve account of the purchaser's bank, crediting Treasury Tax & Loan Accounts (TT&L), and ultimately the TGA.
Second, in step 2, the Government spends and marks up the non-Government sector reserve accounts, causing the spending recipient's account to be credited. At this point, the Government has withdrawn dollars from the non-Government sector, while adding the same amount of dollars through its spending, along with its debt instrument. It therefore has added a net financial asset to the non-Government sector, namely its debt instrument, having a specific principal value. What cost has it incurred in order to do that and perform its deficit spending? The answer is, virtually nothing.
Third, when the debt instrument sold by Treasury matures, Treasury will have to pay the principal and interest to the holder of the instrument. This repayment will then involve an exchange of money in return for the debt instrument, that is, an exchange of one type of financial asset for another. This is very likely to involve deficit spending again, but the financial asset remaining after the next cycle of spending and debt issuance will be larger.
Fourth, however, there is another scenario involving debt instrument redemption, as well. In that one, the Federal Reserve decides to buy debt instruments from the public. Unlike the Treasury, however, the Fed can simply markup accounts within the banking system without itself issuing debt. It creates money “out of thin air” and increases the money supply. When this happens we can see the full pattern. The Government has deficit spent, added a financial asset to the non-Government sector, and eventually converted that financial asset back to money, leaving an increased money supply in the non-Government sector, absent off-setting taxes or additional debt issuance.
Again, what does it “cost” the Government to deficit spend in this way? Virtually nothing. Also, note that the “cost” involved in deficit spending is the same whether or not the deficit involved is caused by new tax cuts or by new spending. So, again, Federal deficit spending costs the US Government no net financial assets; and tax cuts that increase deficits also cost the US Government no net financial assets.
Reading this, some of you may react by saying that the pattern I've sketched out is dependent on the ability of the Treasury to sell its debt instruments, and may ask: what happens if prospective buyers, especially foreign nations won't buy our debt anymore? Well, that is extremely unlikely to happen, for reasons I've outlined here.
But if it does, then the Government has other ways of deficit spending at no cost to itself. Specifically, Congress can stop requiring Treasury to issue debt when it deficit spends, and just let Treasury spend by marking up accounts. I've discussed that alternative here. Also, Treasury can use coin seigniorage to ensure that the TGA never runs an overdraft. I've discussed that here. Finally, Congress can place the Fed under the Treasury where it belongs, and the Treasury would regain full authority to create the currency needed for deficit spending.
In short, the Government can always deficit spend at no cost to itself. So, the idea that it can't afford to spend what's necessary to solve our various problems is just false. It's a bad joke, a fairy tale, or a lie, depending on who's telling it. Government spending certainly has real costs in resources and human effort that need to be arrayed against the real benefits of Government spending. Also, if the Government spends money beyond the capacity of the economy to produce goods and services, its money can be used to buy, then too much spending can cause demand-pull inflation. But the US Government, unlike the rest of us, has no financial limitations, only real ones of the sort I've just listed. So, since Federal spending doesn't cost anything, let's start doing it to provide everyone who wants to work a job, and while we're at it, let's save those state jobs in Wisconsin and every other state, and put our ridiculously bloated, ineffective, murderous, and corrupt health insurance industry out of business by passing HR 676, Medicare for All.