If you have "no place to go," come here!

The Real Solution to the “Fiscal Sustainability Problem”

letsgetitdone's picture

As I've blogged many times before, I don't think there is a “fiscal sustainability problem” as the people who are presently deluging us with exhortations to bring the national debt and the debt-to-GDP ratio define it. That's because I define “fiscal sustainability” in a different way than they do, as I've explained in another post. In this one, however, for the sake of argument, I'll accept the deficit hawk/dove notion of “fiscal sustainability” and offer a different and, I think, much better solution to that problem than any of the deficit-reduction Commissions, groups, and individual members of these bodies are proposing to us now.

Fiscal Sustainability according to the deficit hawk/doves refers to: the annual Federal Deficit (the gap between Federal Spending and Federal Tax Revenues), the public National Debt (the accumulated inflation adjusted sum of deficits and surpluses since the inception of the Republic), and the debt held by the public to GDP ratio. People who write about this see things this way: continuing and growing deficits are a sign that fiscal sustainability is going down; continuing and growing increases in the national debt are a sign that fiscal sustainability is going down; an increasing debt-to-GDP ratio is a sign that fiscal sustainability is going down, and the problem of fiscal sustainability must be solved by at least stabilizing, and eventually, decreasing the debt-to-GDP ratio over time.

When they explain why they see things this way, they say that the Government can only fund its spending by either taxing to raise revenue, or borrowing to fund deficit spending, and that if too much is borrowed too fast, so that the debt-to-GDP ratio grows too rapidly, this will result in the bond markets losing confidence in the Government's ability to repay its debt, which, in turn, will cause these markets to demand higher interest rates on Treasury Securities, increasing the cost of interest on the debt over time, until, eventually, the interest payments on Federal Debt are so high that they squeeze out other Federal expenditures and programs, and leave no space for spending we need to do to solve vital problems.

The concern about the bond markets and the pressure on the dollar they can bring to bear is so great that some have reported that President Obama's primary reason for creating the National Commission on Fiscal Responsibility and Reform was to try to get a long-term deficit reduction plan through Congress in order to convince them that the United States is serious about bringing its debt problems under control.

There are many things wrong with the reasoning I've just laid out, and in past months I've blogged about its various flaws. But let's put that aside for this post. Let's assume that the narrative is correct. If so, then the problem of rising interest costs is caused not simply by deficit spending, but by our need to borrow to fund it.

If we didn't need to do that anymore, then we'd be able to avoid increasing the national debt, and the debt-to-GDP ratio, and, eventually, there'd be no Federal interest costs at all, since we'd be gradually paying down our previous debt as it came due. By 2025, the date when current projections suggest that our debt-to-GDP ratio will reach 120%, we'd actually have a debt-to-GDP ratio of zero, because we'd have paid off the national debt.

So, the simplest and most direct solution to the so-called “debt crisis” is simply not to issue any more debt when the Federal Government deficit spends. Why can't the Government do that now?

The answer is that when the nation went off the Gold Standard in 1971 and adopted its fiat currency system, Congress didn't repeal its mandate, very appropriate when our currency was convertible to Gold on demand, in least in theory, requiring that the Government back all its deficit spending with already existing borrowed dollars whose convertibility was covered by our holdings of Gold. The mandate to borrow funds, however, has no useful function today, and the interest income it provides for mostly wealthy investors and foreign Governments who buy Treasury Securities is simply a form of welfare for the rich, and any positive effects it produces are vastly outweighed by the bad effects of having to cope politically and economically with the concerns of people who believe that the increases in the debt, and the debt-to-GDP ratio give us a fiscal sustainability problem whose priority outweighs everything else.

So, let's make the deficit hawks and doves happy and remove all their debt, and debt-to-GDP ratio worries with the following solution. Congress: repeal the mandate forcing the Government to issue debt instruments on a dollar for dollar basis with deficit spending! The mandate has no useful function now, other than to provide welfare for the rich and foreign nations. If you repeal it we'll:

-- cease to provide that welfare,
-- gradually pay off the Federal debt entirely,
-- have rapidly decreasing Federal interest costs over the next decade until they entirely disappear,
-- have no further need to worry about what the bond markets think or are going to do, or
-- about our debt or deficit spending being “fiscally unsustainable.”

C'mon Congressfolks, you can solve the deficit hawk/dove's version of the fiscal responsibility and reform/fiscal sustainability problem very, very easily, and also quit having to worry about those difficult votes on increasing the debt limit. All you have to do is get rid of that mandate to issue debt, and the whole political mess these deficit reduction Commissions and interest groups are making goes away.

You won't have to raise the Social Security Retirement age and get young people angry at you, or piss off Seniors because you're committing to cut their Medicare, or get people frosted because you're going to cut the heart out of a program they really, really like. You know you really, really, really don't want to take that vote the President, Bowles and Simpson, Alice Rivlin, Pete Peterson, and all their friends, are setting you up for. So don't! Get rid of the mandate, get on with the real problems facing the country, like jobs, education, a new energy foundation for our economy, and real health reform rather than an insurance company bailout, and tell the bond markets to go to hell!

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

No votes yet


gizzardboy's picture
Submitted by gizzardboy on

You make it sound as though this mandate is sort of a peculiarity of U.S. law. Does any country anywhere in the world operate the way you propose? If not, why not?

letsgetitdone's picture
Submitted by letsgetitdone on

I didn't suggest that the US was different from other nations in working things this way, but was only pointing to the historical accident of its having the mandate because it was on the gold standard.

As for other nations with bona fide fiat currency systems. I don't know what they've chosen to do. But I do know that none of them has to issue debt, and if they still do so, it is for the same reason it is done here. That is, it is the custom. It was done in the old days, and apart from that the rich and foreign nations want the bonds to be issued.

I can probably find out easily enough if Australia has to issue debt. I suspect it doesn't but still does so because it chooses to.

CMike's picture
Submitted by CMike on

Ultimately, a dollar is worth what it will buy. As long as you have a closed (entirely domestic) economy with high unemployment and high real interest rates you might expect an increase in the money supply to stimulate economic growth. An added dollar spent by government into a closed economy with under-utilized productive capacity is likely to create an added dollar, or more, of real economic output.

Our economy is not a closed one. We import resources and manufactured goods. Unless we have a very clear plan to use fiscal deficits to increase the domestic production of goods, as opposed to temporarily increasing the domestic consumption of goods and services through transfer payments, we're going to end up with rising costs for goods without an accompanying rise in wage rates or employment. The result of quantitative easing, the wonder of financial assets being purchased by the Fed with money created by keystrokes, has been an inflation in financial asset prices since March of '09, not an increase in money being spent on capital equipment and the work force.

letsgetitdone's picture
Submitted by letsgetitdone on

QE2 is primarily going to involve a trade of bonds for reserves i hopes that more reserves will stimulate lending and therefore help the economy. Since the extra reserves are just that and can't be used for lending, they won't cause either inflation or help business activity.

The FED is just barking up the wrong tree.

Our economy isn't a closed one. But that doesn't mean that stimulus won't work. It means that we need enough stimulus to counter the leakage to exports. Why you think that's a problem for us, I don't know. The world sends us real wealth; we send them electronic bits of information. They free up our labor to work in areas we can't manufacture in efficiently. There's no problem, unless we need to retain the manufacturing field we're talking about for non-economic reasons. If that's the case, we have an industrial policy to protect those areas of the economy the way other civilized nations do.

As far as raising wages is concerned, pass EFCA, and raise the minimum wage. Downsize the financial industry and get it heavily regulated so that there's more profit in other areas of the economy. Then we'll start producing again. Whatever we do however, it won't be helped by continuing to live with the debt fiction. Get rid of it people can think about the real issues you're raising.

CMike's picture
Submitted by CMike on

"The world sends us real wealth; we send them scraps of paper," updated to read, "The world sends us real wealth; we send them electronic bits of information." Wealth by keystroke. Here's an alternative view about how things are working out for two of those suckers who are getting stuck with our "electronic bits of information."

Look at it this way: In the midst of the Great Recession, the United States is suffering through nearly 10% unemployment and 50 million people without health insurance. A new report has found over 14% of Americans living below the poverty line, including 20% of children and 23% of seniors, the highest since President Lyndon Johnson's War on Poverty. That's in addition to declining prospects for the middle class, and a general increase in economic insecurity.

How, then, should we regard a country that has 5% unemployment, healthcare for all its people, the lowest income inequality and is one of the world's leading exporters? This country also scores high on life expectancy, low on infant mortality, is at the top in literacy, and is low on crime, incarceration, homicides, mental illness and drug abuse. It also has a low rate of carbon emissions, doing its part to reduce global warming. In all these categories, this particular country beats both the U.S. and China by a country mile.

[Here's a sharp criticism of that Steven Hill piece by Peter Dorman at Econospeak focusing on which strategy has a "sustainability problem."]

tomfoolery's picture
Submitted by tomfoolery on

if we hadn't, as a species, gone past the carrying capacity of the planet, polluted ourselves into a corner (and refuse to change our ways), and continue to make the same mistakes regarding each other, cooperation, and wealth-distribution (not to mention war as the answer to human problems).


letsgetitdone's picture
Submitted by letsgetitdone on

Relevance to the post?

Submitted by jawbone on

voters view the government's budget just at they view their own: If they don't have the money to meet every obligation when it is due, they will suffer greatly. Loss of good credit rating, late fees, higher and higher interest rates, eventually bankruptcy, loss of health insurance perhaps.

Now, the US government will not face bankruptcy (and if it does, it probably means we are done as a first world nation), but the Deficit Narratve put out by deficit hawks and Austerians has made voters believe that view. Oooooh! Scary! SocSec will be gone by 2037!! Ooooh! Scary! Greece! Ireland! No matter that the banksters of Ireland are mostly responsible for most of the Irish economic problems. Austerians merely conflate the two (or more, including Italy, Spain, Portugal) to scare, scare, scare the public.

How can you, and we as non-economists if we're trying to explain your approach, explain to non-economists a different Narrative? With different, easy to comprehend examples?


Hugo Heden's picture
Submitted by Hugo Heden on

Dear letsgetitdone,

This article may actually show a good way of explaining things. I've read a bit on MMT and all that, but not yet fully understood what you people are trying to say. This helps, I think.

I'll try to take my questions down to a level such that even I could understand them, so this may sound very basic to you -- please bear with me.

So, what you're saying is that the government (one that issues its own free-floating currency) never needs to borrow in order to deficit spend? Contrary to popular belief?

You're suggesting deficit spending without borrowing to cover for it?

And of course, sometimes you then get criticized for wanting to "print money" and inducing Weimar/Zimbabwe-inflation, right? Let me assume that, and go on.

But one could call it (deficit spending without borrowing to cover for it) "printing money", right? I'll assume that too, and go on.

Ok, hmm. I can see that back in the old days, when the currency in question was pegged (to gold or whatever), then the government could not just "print" new currency (unless it could also somehow print more gold). That could easily lead to "disaster".. Or at least "default" (if, say, too many of the currency holders wanted to exchange their money for "the gold" -- like the Nixon chock in 1971). Am I with you so far?

And even of the government did borrow money to cover for the deficit spending, there could be problems, just like when a household borrows to cover their overspending and even for their interest payments. In that regard, government economy was just like household economy back then. Right?

It seems that many of those old currencies that were once pegged to stuff (like gold or other currencies) have "defaulted" and started floating freely instead.

Sometimes I think you people are saying something like this: "Hey, wake up everybody -- the new free-floating-currency is a fundamentally different thing from the pegged-currency-system -- not just a slight variation of it!"

Because people in general (including most of academia pretty much all over the world) have not really updated their thinking for the new "free-floating-currency"-paradigm. Is this how you would describe it too? People still uses the old "pegged-currency" thinking. Back then, you could not just print money, because that could lead to "national default" (again, like the Nixon Chock in 1971). So you'd have to borrow to fund deficit spending, whenever the latter was needed.

But nowadays, governments can just print money (barring any self-imposed legislative limitations). A government "sovereign in its own currency" can never be forced to default. (It can default if it really wants to, say in order to abandon a currency in the context of a political revolution). Right?

Submitted by lambert on

... but we're "printing money" now, and have been since Nixon took us off the gold standard in the 1970s.

It's only that, through the Fed, we've outsourced the job to the banksters, to whom we pay rent for printing what's ours in the first place.

You might say that "Freedom of the press belongs to those who own one" applies with even greater force to fiscal policy than it does to the media...

Hugo Heden's picture
Submitted by Hugo Heden on

Thanks for the comment lambert. I am not completely sure that I understand what you're saying actually -- but I think we're coming from totally different places: I'm from Sweden, these are my first comments here, and I can't say I really understand how the Fed (i.e. the U.S. one) works. I sometimes hear the criticism that it's "private" (or pseudo-private or whatever), but I couldn't comment more on it than that.

Right now, I am trying to understand how the MMT:ers think in terms of an idealized, theoretical "model" of a national economy -- the general principles, rather than the U.S in particular.

Submitted by libbyliberal on

American citizen entitlements ... the right to life, liberty and the pursuit of happiness. The common good. The public trust. All these are being raped from us by the fraudsters. $13 trillion to them, and those of us the money was taken from are scolded to tighten our belts. A New Deal for Americans needs to be insisted upon. Alas, like with single payer universal health care, the genius and wholesome and workable WIN/WIN factors are eclipsed by the disinforming fear-mongerers for profit and power and the manipulated lemmings who bang their drums loudly.

Hugo Heden's picture
Submitted by Hugo Heden on

So one fundamentally different thing nowadays is that the government can always print more money. Of course, this sounds super-weird to most -- it's obvious that undisciplined money printing will lead to problems. Most people would immediately think: high inflation. Hyper-inflation.

Instead of leading to immediate default -- where money loses part of it's value instantaneously -- we would risk the slower version of it -- inflation -- where money loses it's value over time. And this is where the discussion usually ends, right? The principles seem to be very similar to back in the old pegged-currency days. The free-floating currency looks like a slight variation of the same system, nothing else.

But then, you people try to say something like this: Hey, you know what what we can do now, with the free-floating currency system, that they could not do before? We can "print money" -- just enough money to keep the economy rolling in good pace, without much unemployment and all -- and we can do it without inducing inflation!

Now, somewhere around here you start to lose me. This is where I need more help. Am I right so far?

What are the fiscal policy guiding principles that you see before you -- the principles that will lead to full employment and price stability and no problematic national debts?

Is it the Job Guarantee stuff? I've read some about that from Bill Mitchell, Warren Mosler and a few more. Is the Job Guarantee ideas just a part of MMT, or is it rather at the fundamental core of it, would you say? (I.e, are there many MMT:ers that don't care much for the Job Guarantee, or is JG rather the one crucial strategy that needs to be understood when dealing with MMT?)

Hugo Heden's picture
Submitted by Hugo Heden on

So your contention is that the way we "print money" now is not driven by politics -- i.e., by values and interest? Why?

No, I don't think that's what I'm saying. I may be using bad terminology. When I talk about a government "printing money", I am referring to

* deficit spending (spending more than taxing)...

* without issuing debt (i.e without "borrowing" the money to cover for the deficit)

And I would have thought that this is not what is done today..? Therefore, I would say that governments are typically not "printing money" today. Am I using the "printing money" terminology incorrectly?

Hugo Heden's picture
Submitted by Hugo Heden on

I'll try to outline what I believe to be the main principles when it comes to the Job Guarantee (JG) ideas.

The thing is this: If the economy is running slow, then lots of people will typically be unemployed. The government could then just decide to hire them. This is a good opportunity to get work done that is not typically performed by the free market. This could involve building infrastructure, urban development, environmental projects? What more?

The typical counter-argument would be that "the government can't afford it". That would (often) have been true for a pegged-currency-system economy, like in the old days -- when the government economy functioned like a household, or a corporation. If the government would be in severe debt, it could not borrow more. And just "printing money" (without borrowing) could lead to the currency defaulting.

But today, governments (that are "sovereign in their own currency") can actually just print and spend money in a fundamentally different way. They do not need to borrow to deficit spend. They can just print money to hire anybody that is unemployed! But they still need to be careful not to induce too much inflation (which is the archetypical problem when "printing money").

So, how can they do that? How can they print money to hire anybody that is unemployed, i.e without borrowing money, and without inducing inflation?

The trick is this: The Job Guarantee system must not contribute to raising the general wage level in the economy. It must not compete with the free market for labor. Thus: Only the "minimum wage" may be given for jobs within Job Guarantee system.

Am I getting the fundamental principles so far? Is this really the principle that you're talking about? This kind of deficit spending (printing money to spend on a JG program) would not induce inflation, because it does not contribute to raising the general level of wages?

Is that all? It can't be. There's got to be more..? But this is where it ends for me.. From here, its just an empty void -- I just can't think further than this.

(For example, what about taxing? I mean, you can't just stop taxing, right? How much taxing is needed? What are the principles for that?)

Any help with this would be much appreciated.