This commentary is by Tom Wagner, a retired certified financial planner and founding partner of an independent, fee-only financial firm in Wilder, Vt. He is a graduate of the University of Vermont and has an MBA in finance from Wichita State University. Early in his career, he was an international banker.
Recent commentary by Jeffrey Wennberg expresses the view that pandemic spending and proposed spending is creating an economic crisis.
Deficits have been a way of life in our economy for a very long time. At the beginning of 1946, our national debt was $259 billion, a result of previous administrations’ deficit spending and World War II, and was greater than our entire economy. Politicians and financial experts warned then that “our children and grandchildren will never be able to pay for it.”
I am that grandchild, and it seems like we have not been burdened, nor has the economy. Today the national debt is $28 trillion, 111 times greater than 1945.
Like almost everything, economic thinking is constantly evolving. There is a growing cadre of economists who want our government and Congress to adopt modern monetary theory, which changes the way we view both politics and economics by showing that federal deficits are good for the economy.
Congress holds the power of the purse, and if it wants something it has had no problem spending. Roosevelt had his New Deal, JFK set us on a path to the moon, LBJ fought the Vietnam War, and Reagan slashed taxes. Now we have done the right thing by keeping our country and the economy afloat during the pandemic. All of these actions, and many other examples, required deficit spending.
To understand modern monetary theory requires a change in our thinking. Unlike our households, the federal government is not constrained by a budget because it issues its currency and does not have to balance its books. The U.S. can always pay its bills, and we are not dependent upon anyone, including China, for financing. We cannot end up like an insolvent, bankrupt Russia in 1998, which defaulted on its debt.
Not many countries have the capability to fund whatever it wants. The U.S., Canada, the UK, Australia, New Zealand and Japan can. Japan has demonstrated for many years that it can run large deficits and keep inflation under control, as its national debt is 266% of its economy and in 2020 inflation was minus-0.06%. Countries in the European Union are limited because they use the Euro, not their own currency, and we recently saw Greece’s difficulty as a result of being constrained by being in the EU.
There is a constraint to unlimited spending, however; it is the impact of this spending and whether the spending would create long-term inflation. As long as there is unutilized capacity in our economy, we can continue to spend without being concerned about inflation. As long as there is this underutilized capacity, we can spend for programs we need without having to find ways to pay for them.
As talks continue about the proposed infrastructure bill, Congress is trying to find ways to pay for it instead of asking whether we have the capacity for this funding in our economy. Hence, a new tax on corporations has been proposed. While taxes are beneficial and important, modern monetary theory highlights the fact that taxes take money out of the economy. Government spending injects beneficial money into the economy, and thus we do not need to find a way to pay for our infrastructure. MMT proponents suggest we don’t need to fix the debt; we need to fix our thinking about it.
The federal debt is the private sector’s (corporations and individuals) surplus. We need to change our thinking about the national debt to reflect that it is actually the national savings.
Think about how we “fund” our debt. The Treasury in conjunction with the Federal Reserve issues U.S. Treasuries, which are held as sought-after investments because of their risk-free nature. The national debt becomes our savings (investments). Interest payments on these Treasuries also are an injection of cash into the economy, and into the holder’s pocketbook. Fiscal deficits increase our wealth and collective savings.
If we have the political will, we can fund any programs we want. We never have to worry about running out of money. For instance, we do not need to worry about running out of money to fund Social Security. Alan Greenspan, a former chairman of the Federal Reserve and a Reagan appointee, answered former Congressman Paul Ryan’s question about Social Security by replying, “There is nothing to prevent the government from creating as much money as it wants.”
For a detailed, clear, concise, and easy to read exploration of MMT, read Stephanie Kelton’s “The Deficit Myth,” a New York Times best-seller.
