Budget Sense and Nonsense

With the submission of the Obama administration’s budget today, fiscal silly season is opening. President Obama already launched an opening salvo last week with his proposed freeze on non-security-related military spending,which amounts to a rounding error on the ten-year budget projections, which are themselves a rounding error on the long-term budget projections– at a time when unemployment is running at 10.0%. Fortunately, there is a partial saving grace, which is that the freeze does not set until until fiscal year 2011 (which begins in October 2010), and in the meantime Obama has proposed $100 billion in tax cuts and government spending to create jobs. (Whether his proposals are the right way to spend $100 billion is a debate for another time.)

The midterm elections are looming already (note: do we have to be satisfied with a political system in which the legislature is preoccupied with upcoming elections half the time?), and the two big themes seem to be jobs and the deficit. With unemployment at levels not seen since the 1980s, it’s obvious why jobs are on the political agenda. With the federal budget deficit at record (nominal) levels, it also seems obvious that the deficit should be on the agenda, but this is really an unfortunate artifact of our political system. A government deficit is the result of insufficient government saving, and a period of high unemployment is absolutely the worst time to increase government saving. The sensible solution would be to use the urgency we currently feel to put in place long-term fiscal solutions, but the political system can’t handle that (see health care reform as Exhibit A). As a result, when deficits go up, we get lots of short-term politicking about the deficit–in Paul Krugman’s words, the “march of the deficit peacocks.”

On these two themes, the Democrats’ message is that (a) they are fixing the economy (growth is back, they are doing something about jobs) and (b) they are serious about the deficit (bank tax, three-year freeze, health care reform, etc.). The Republicans’ message is that (a) the Democrats have failed to fix the economy (unemployment is still high) and (b) the deficit is the Democrats’ fault due to runaway government spending. While I have been extremely critical of the Obama administration for its generous policies toward large banks, which I believe have increased the risks facing the financial system in the future, otherwise they have taken directionally the right steps as far as jobs are concerned. And when it comes to long-term deficits, the Senate health care reform bill–whose cost-cutting measures are based largely on proposals from the administration, particularly Peter Orszag–is perhaps the biggest deficit-reduction bill of all time.

The Republicans, by contrast, are using their status as the party out of power to spout all sorts of nonsense when it comes to the deficit. Representative Paul Ryan was quoted by the New York Times calling the budget “nothing more than a plan for more of the same — a very aggressive agenda of more government spending, more taxes, more deficits and more debt — with just a few cosmetic budget maneuvers to give the illusion of restraint.” To begin with, I can give him a pass for redundancy (“more deficits and more debt”), but complaining about “more taxes” and “more deficits” in the same sentence? Does Paul Ryan not know how a deficit is measured, or does he not know where government revenues come from? Logically speaking, it must be one or the other.

Speaking of taxes, how did we get into this deficit mess in the first place?

You’ve no doubt seen this chart from the Center on Budget and Policy Priorities or something similar before, but that doesn’t make it any less true. And what is it in the president’s proposed budget that the Republicans are aiming at? The plan to let the Bush tax cuts lapse for people making more than $250,000 per year. In other words, the problem with the Obama budget is that the deficits are too high, and the solution is to cut taxes. Huh?

None of this is new, of course. Sam Stein pointed out the same issues in December. Yet since Ronald Reagan, a large proportion of the electorate has become wired to believe that deficits are always the product of excess government spending, so the facts bear repeating.

The fiscal situation is actually very simple. The budget was in surplus when President Clinton left office, although there was already the prospect of budget-busting Medicare deficits in the long-term future. The 2001 and 2003 Bush tax cuts and the unfunded Medicare prescription drug benefit created the large deficits of the Bush era. (The Iraq and Afghanistan wars didn’t help, but it’s not fair to blame those entirely on the Republicans; plenty of Democrats went along.) Then the financial crisis and the resulting recession blew a huge hole in government tax revenues, creating the current spike in deficits; that spike was exacerbated by the stimulus package, which most but not all economists would consider a sensible response to a major recession. (According to an earlier analysis by David Leonhardt, the projected average fiscal balance for the years 2009-2012 has changed, since Clinton left office, from an $846 surplus to a $1,215 billion deficit. The biggest lumps are $673 billion in Bush administration policies and $664 billion in the costs of the financial crisis and recession, including bailout costs.)

Yet somehow the Republicans have tried–successfully!–to spin our current and projected deficits as the result of “more government spending,” putting the Democrats on the defensive. And unfortunately, the result is the Obama administration buying into the Republican attack line–that government spending must be reduced. How else to explain the three-year spending freeze, which is mainly symbolic and a little bit destructive? The bipartisan commission to reduce the deficit has a little more to recommend it, although I’m skeptical that it will achieve anything. The Republican position seems to be that the deficit commission is bad because–wait for it–it might increase taxes. Here’s what the Wall Street Journal has to say:

“Republican leaders are under pressure from conservatives not to cooperate, due to concerns that the commission would recommend tax increases.

“‘Look, I don’t think anybody in the country thinks we have a problem because we tax too little, I think the problem is we spend too much,’ Senate Minority Leader Mitch McConnell (R., Ky.) said on CNN’s ‘State of the Union’ on Sunday. ‘So, I like the commission idea, just as I said a few months ago. I think a better way to do it is target spending.’

“Deficit hawks in both parties say the commission must be able to look at spending and revenue to make a dent in the deficit in the near term. But politically, its members could be boxed in. Not only are Republicans opposing tax increases, but they are also attacking Democrats for proposing cuts to Medicare.”

So, let’s recap. The medium-term deficit problem was created by Bush tax cuts and by an unfunded Bush-era expansion of Medicare. The long-term deficit problem is all about Medicare. Yet the only solution that Republicans can think of is reducing spending–but not Medicare spending. Of course, this shouldn’t surprise us; Mitch McConnell gave us this, after all:*

But apparently the sharp political minds in the Obama administration have decided that this is the turf they have to fight on. Now it seems that instead of going back to Bill Clinton in 1995-1996, they are reaching all the way back to 1993, when Clinton, Rubin, et al. decided to kill the deficit monster first and worry about helping the poor and the middle class later. They did kill the deficit monster (OK, they just knocked it out for a decade), but then they lost Congress in 1994 and never got around to helping the poor and the middle class; by the time we got a president and Congress who might have tried, it became time to kill the deficit monster again.

The real solution to the deficit problem must fix the long-term Medicare problem. That means some combination of reducing the long-term cost of health care (which the administration tried mightily to do, so far unsuccessfully) and increasing funding (taxes). The idea that we can just spend less money on health care costs as health care costs increase (and with about 47 million Americans already uninsured) is patently ridiculous–unless your goal is simply to let low- and middle-income seniors die. So the only important question is how to reduce Medicare spending or increase Medicare revenues. But with an opposition party ready to roll out its artillery at any mention of either Medicare cuts or tax increases, it’s hard to see where a solution can come from.

* The image is from congressional Democrats, but the press releases were really issued by McConnell.

By James Kwak

42 thoughts on “Budget Sense and Nonsense

  1. but complaining about “more taxes” and “more deficits” in the same sentence?

    Every penny of deficit today is, in fact, a tax on future generations.

    Just saying.

  2. The situation is rather tricky. Ok, so it’s terrible. Fact of the matter is that the democrats even if being the lesser evil don’t have enough skills or sense of responsibility to handle the situation. It is very easy to balance the budget and only thing that is needed is an explanation to the people.

  3. The Great American Age of Selfishness will be our downfall. I live in a conservative state and work with mostly conservative people. Ever since Obama was elected, they’ve all complained about spending and high taxes.

    Obama’s budget affects my industry, and all of the sudden, there is a rally cry to increase spending in our industry from everyone I work with.

    So, most americans think high spending is bad, unless it gives them a job, and think that high taxes are bad, because those taxes “don’t help them”.

    It really is fascinating.

  4. Stop slammin’ poor Mr. McConnell. What’s wrong with a democratically elected representative candidly recognizing the will of the electorate … _and_ the inherent problems with what the electorate want? The cognitive dissonance is generalized, not his fault.

  5. I have one question. How can you know how much the tax cut “cost”? Wealthy often choose how much income to realize. Usually these arguments assume the same amount of income is realized with and without the tax cut which isn’t true.

  6. Also, hypothetically speaking, if spending went up by more than the increase in taxes, the deficit would increase. So Ryan’s statement is not a logical impossibility.

    Of course, it’s incorrect in this particular case.

  7. Explanations do not work. You must tell an emotional story. Explanations come across as hoidy toidy elitist liberal gibberish that angry Republican stooges can’t listen to, because it requires paying attention to what somebody on the stupid-box is saying for more than 15 seconds contiguously. Then you have to sometimes turn on your brain in order to work through math or logic problems to grasp the answer.

    If you can tell an emotion-fueled story that makes fun of smart people and reason while making people scared of the results of not listening to you, you can win. Oh, and you have to make sure you’re not a Democrat, because the Republicans have already turned that in to one of the most derogatory words in their narrative.

  8. Democrat is bad. Like, it’s a choice, right? Either the people, or the nation. Be for the people, or be a patriot. Scary, scary, scary.

  9. I find the discussion fascinating. The very thing that we can do with much less of is the military. I am reading Chalmers Johnson’s book Nemesis. The military’s budget is incredibly bloated with lots of stuff not in the national interest, and, in fact, if it were pared in half or more, the result is that terrorism would likely become a thing of the past. The reason that terror networks are so successful is that the US has more than 730 military bases in 130 countries in the world, and keeps them there to remind the world who’s in charge. They pay lot’s of corrupt governments (like Turkey, and Kazakhstan) good money to allow them to be where they shouldn’t. If we cut half of the military budget, we could actually pay for everything else easily. What the White House has proposed is barely ok, but until the economy (if ever) really starts growing robustly, there is no way to attempt fiscal solvency. Yes, we can build mechanisms and plan now for that future, but we can’t get jobs going and get the deficit handled simultaneously.

    The President has said that he would excise waste from the current budget, and the Republicans are offering him a line item veto, maybe it’s time to go that way, although I am not sure that it’s Constitutionally possible.

  10. Democrat == liberal == socialist == communist == dictatorship == pure evil

    At least that’s how it’s spelled out in the neocon encyclopedia, I hear.

  11. Nemo, normally I really enjoy your comments and agree with a lot of what you say, but I think in this instance your characterization of deficit spending as a future liability that must be repaid is misguided. As I’m sure you’re well aware, the national debt is a nominal measure, not a real one. The idea that future generations will have to sacrifice real goods and services to pay back the debt we incur in the present is problematic. Ask yourself this, when our children build 20 million cars per year 20 years from now, will they have to send them back in time to pay off the debt we incurred 20 years earlier? Of course not. There is no such thing as time travel. Our children won’t and can’t pay us back for anything we leave them, even if they wanted to. What the government deficits can influence is the current year DISTRIBUTION of real output. But any distribution deemed unreasonable by the political forces at any time can be readily altered. The current hysteria of the Republican Party over any proposed tax increases should make that abundantly clear. By now I think it should be pretty obvious that the national debt will never be repaid. This is because debt issuance isn’t really about “financing,” government spending. As the monopoly provider of fiat currency the U.S. government is not financially constrained by anything except the possibility that nominal aggregate demand exceed real output capacity (in which case inflation would ensue). The government’s decision to issue debt should not be viewed as a necessary measure to “pay for,” its spending. There is no necessity to pay for anything. The true purpose of debt issuance is to anchor inflation expectations and allow the central bank to maintain its interest rate target. For more on the role debt issuance plays in the economy see here, here, and here:




    This is a topic I’m actually just starting to study myself so I could definitely be wrong in my interpretation though. The claims being made in the readings I’ve linked to are very different from the type of thing I was taught in my college economics courses. It was another commenter here at the Baseline Scenario, Tom Hickey, who introduced me to this line of thinking so if you’re going to tear apart my arguments here Nemo keep in mind it’s not really my fault =)

  12. That’s too simplistic. Say inflation is what the Fed says it will be: 2%. And say the economy grows at …

    Never mind.

  13. NKlien @12:38–

    Don’t take it to heart if you’re ignored. This idea seems to frighten the pants off most econs. Just keep sluggin’.

  14. Just one quibble – since we’re insisting on the right numbers, then using the bogus “10%” U3 number is out of place.

    The number closest to reality, the U6, is >17%.

  15. where is in the chart the cost of clinton era bankrutpcies of enron&world.com?911?airport and other security?help to airlines?cost of a new home security department?katrinka huricane?and still,unemployment was 4,2%.budget deficites EXPLODED after democrat win in 2006.why not to find the REASON for the default of fannie mae?congressional hearings too much?we did lend them over $120bilion.should we know?and AIG?samething.

  16. You present an intriguing idea, but it fails on several merits. First, someone or some country holds that issued debt, and as a matter of law those debt obligations have to be paid. Afterall, didn’t we just “loan” AIG some billions of dollars so the holders of its debt obligations could be paid?

    Second, even if you never pay the actual debt as issued by the givernment, you do have to pay interest, and the more debt you have out, the more interest you have to pay.

    Third, since payment of both the debt and service/interest payments on the dbet occur in the future, they can be seen as taxes on the future economy. If and when that marginal tax rate goes up, because either the debt itself oges up, or its interest goes up, there will be real economic consequneces in as much as money that could go to wage payment or other economic rents instead go to dealing with debt and debt service.

  17. The same is true of tax cuts. Look at the hole GWB’s tax cuts have created. Talk about entitlements, what of the hidden entitlements for all those tax cuts and subsidies to Big Ag, Big oil, etc.

  18. And while you are at it… why do we pay a mercenary a couple hundred thousand to do the work of a forty thousand dollar a year solider. Not to mention the cost of all the contracts with billions paid for poor workmanship. The Seabee’s and Corps of Engineers could have done a better job at far less cost.

    Next why do we have bases all over the world and at what cost? And why do we allow taxpayer payments to contractors overseas that do not pay a dime of tax to the Treasury. Talk about rip off.

  19. As a matter of law debt issued by the government must be repaid, but my point is that repaying that debt has no affect whatsoever on the ability of the government to continue to spend in the future. That spending must be accounted for, but accounting for debt service is not the same as saying future generations will have to forgo real goods and services to pay back the debt we incur now. Deficit spending means the government borrows from one person and gives it to another, so nothing new is added or taken away, it’s just a shift of money from one person to another. If future generations are unhappy with the distribution of real goods and services in the economy they can change that distribution through the political process. Note, this is in no way an endorsement of unlimited deficit spending. Clearly excessive deficit spending can become inflationary, causing severe distortions in the real economy. We should be very careful about how much money we spend and what we spend it on. But that conversation is very different from the one most politicians are currently having where they argue the debt we incur now must be paid back by future generations.

  20. The taxpayer did not pay for the Worldcom or Enron bankruptcies. Bush was president on 911 and ignored the threats. Same with homeland security. Yeah, the Republicans are blameless even after they have controlled Congress for a decade and had control of three branches of government for 6 years and were the masterminds of regulatory destruction.

  21. Because Sarah Palin said it–which must mean it couldn’t possibly be anywhere near anybody’s truth.

    I’m of the dark opionion that it’s not even avoidable, but we really don’t deal in any way with the demographics of the baby boom at this point.

    And, they’re definitely a generation that thinks it’s going to live forever so, no need to speculate.

  22. Because we have them out there stirring up a serious genocidal pogram. Someday, we might have to turn the Official Military on them in order to make it look like we Officially Disapproved all along.

  23. great entry James. You hit the nail on the head. I am all for raising taxes on Medicare. Also, do away with the Social Security exemption, like Candidate Obama talked about.

  24. I have been waiting for the Republicans to “Man Up” when they again gain control of all 3 branches of government and abolish: Social Security, Medicare, Office of the Secretary of Health Education Welfare IRS, FED and the income tax. They can also either make the interstate highway system a toll road or sell it back to the states or to a private company. The only federal programs would be War (national security) and the Post Office and with a bit of constitutional change that could be sold off also.
    Man Up bitches or shutup.

  25. “the Senate health care reform bill–whose cost-cutting measures are based largely on proposals from the administration, particularly Peter Orszag–is perhaps the biggest deficit-reduction bill of all time.”

    Isn’t it true that the House bill scored as an even bigger deficit reduction according to the GAO?

    Isn’t it true that the pulic option (aka Medicare E) scored even better than the final House bill?

    I detest this kind of accidental or intentional carelessness. It is of a kind with “entitlement” blather aliasing Social Security with Medicaid.

  26. “Also, do away with the Social Security exemption, like Candidate Obama talked about.”

    I believe there is a strong case that this is exactly the wrong step, from a pre-paid insurance (against an unepxectedly long life) the payers are indeed “entitled” to, to a tax-funded “welfare” program. SS is regressive for a good reason; short of drastically increasing payouts for the rich, any attempt to make it progressive (or even just flat) will make it even more vulnerable to slander and BS than it already is.

    Given the actual “shortfall”, it is also not yet shown to be a necessary step.

  27. Of course, the proper solution to the deficit is to (a) reduce defense spending (and re-purpose it to a transition to non-military aerospace and engineering industries serving a push to a 21st century infrastructure), and to (b) restore the marginal tax rate to Reagan at the least, FDR at best – on all income.

  28. Naomi,

    you were exactly right up to this point: “The government’s decision to issue debt should not be viewed as a necessary measure to “pay for,” its spending…”

    after that it’s just nonesense.

    One more point though, some of the debt is externally held (say by the Chinese) and to the extent that future generations don’t want to inflate or explicitly default then they will have to give up real goods to the foreign creditors.

  29. @Adam P

    You’re the second person on this website to think I’m Naomi Klein. I thought her book “The Shock Doctrine,” was quite good, if a little over done, but alas I am not her. My first name is Nolan, and I’m just a public school social studies teacher.

    Care to elaborate on why you feel the claim that a government sovereign in its own currency is not financially constrained is “nonsense”? Keep in mind, I’m not saying inflation isn’t a possibility, only that the risk of inflation is what we should be talking about, not the possibility that the U.S. government will somehow “run out of money.” There’s a lot in those three readings I linked to that I don’t fully comprehend so if you have substantive criticisms to make about how debt issuance in the U.S. is not about inflation expectations and interest rate maintenance I’d love to hear them.

    About the external debt we owe to the Chinese; that debt is denominated in U.S. dollars so it is in fact a nominal constraint, not a real one. If the Chinese government wants to use its reserve of U.S. dollars to purchase real goods and services it will have to pay market prices at the time of purchase. It is the Chinese who are vulnerable here, not the U.S.

  30. It is do-able. Just not with *this* group of miscreants and the monstrous plan they concocted.

  31. How about the 6 Trillion dollars of Fannie and Freddie mortgage debt that Obama has taken on as federal obligations? How about his encouraging them to step up their purchasing and buy even more mortgages with the same faulty controls that got them in trouble in the first place? How about the out of control behavior going on at the FHA – they are guaranteeing 40% of all mortgages currently being issued – even mortgages with 3 1/2 % down for people with credit scores as low as 620 – still, today. What happens when housing prices drop another 30% and all of that crap drops in the taxpayer’s laps?

    What about the Trillion dollars worth of sweetheart loans Bernanke and Paulson and Geithner have given to banks to buy or guarantee their toxic assets, and plenty more to come?

    Don’t tell me that Obama has any credibility as someone who is trying to reduce the deficit while he lets the Treasury department run wild with PPIP, and puts an UNLIMITED guarantee on Freddie and Fannie debt.

    How can anyone take him seriously as a deficit fighter when his ONE AND ONLY suggestion for the TBTF banks is to say that depositary institutions can’t engage in proprietary trading? That’s it? That’s going to save us from the next round of bailouts? Bear Sterns wasn’t a depository institution! Lehman brother’s wasn’t a depository institution! AIG wasn’t a depository instituion, or Goldman Sachs or Merril Lynch.

    He is as corrupt and complicit in bailing out the big banks instead of shutting them down as Bush, and Paulson, and Geithner.

    Medicare is a budget problem, yes, maybe, someday. But making the United States responsible for the debts of Citibank and Bank of America and AIG and Freddie Mac and Fannie Mae are TODAY’S PROBLEM, and Bush/Obama are at the heart of all of them.

    Paulson, Geithner, and Bernanke, (which is to say BUSH AND OBAMS) are the CAUSE of our true budget problems. The only reason you can ignore that fact is that all of our real, monumental current budget problems are being deliberately lied about and kept off balance sheet.

  32. Right, I lost any respect I had left for Obama when his suggested freeze on spending that excluded the military. He has asked for 1 Trillion dollar in defense spending in the new budget. With a Democrat like that, why not just elect a Republican and have done with it?

  33. The problem isn’t that the Republicans deregulated. The problem is that the Republicans AND THE DEMOCRATS conspired to take the banks bad debt onto the governments books.

    Deregulation would have been fine, if Paulson and Bush and Bernanke had actually been honestly in favor of free enterprise (aka capitalism). But they weren’t in favor of anything of the sort. They were in favor of corruption, aka, crony capitalism, aka, socialism for the rich, bailouts for the powerful and the politically connected.

    If the banks had been forced into receivership by the FDIC and reorganized, and then broken up, the economy would be well on it’s way to recovery, because it would have been the INVESTORS – the BONDHOLDERS and SHAREHOLDERS and senior management of the banks and AIG would be the ones who would have experienced the pain – instead of the American people and the American taxpayer. The banks would have emerged from reorganization with pristine balance sheets, (and thank god new management) having shed all of their debt, and ready to lend again. Instead we are condemned to a who knows how many years of “recession” while the “too rich to fail” banks repair their balance sheets.

    And Obama is just as guilty for the bailout as Bush. He supported the bailout every step of the way. He voted for the bank bailout bill. He vocally supported Paulson and Bernanke in their policy during the election, and he continued the bailout policy from the moment he was elected – presumably because the big wall street banks were his biggest campaign contributors.

  34. Isn’t it true that the only reason the health care bill qualified as a deficit reduction bill is because the costs kicked in immediately and the benefits were delayed until year 3 or 4?

  35. As one of the 47 million uninsured American’s I would like to suggest that Obama get Medicare spending under control before he takes on any additional responsibilities.

    If he can actually fix the Medicare spending problem, if he actually has all sorts of innovative ways to fix Medicare spending, then have at it.

    But let’s talk about the government taking on health care for an additional 47 million people after we’ve seen if they can provide health care for the people they have ALREADY promised to provide it for without bankrupting the country.

    I’m far more worried about out of control federal spending than I am about getting the federal government’s ‘help’ in solving my health care insurance problems. Right now I would bet that taking care of my own health care needs would be cheaper than letting the federal government try to do it. Can anyone spell bloated, inefficient bureaucracy?

    When the federal government controls 100% of the countries health care, I expect it will work about as well as the department of motor vehicles. Or congress.

    In my opinion the reason health care is already so expensive is because the federal government is so deeply involved in it. The best way for the American people to get cheap health care would be for the Federal Government to replace Medicare with a very high copay health insurance. If they wanted to be progressive about it, the hi copay could be on a sliding scale based on some sort of a means test. And then they should turn around and make the ‘tax credit’ for health insurance contingent on the ‘health insurance’ provided ALSO have A VERY HIGH COPAY (again, if you want, means tested). But until people have to pay some reasonable portion of their own health care, health care costs will never be contained. You know that. I know that. This isn’t a Democrat vs. Republican issue. This is a basic human nature issue.

    And since neither the Republicans or the Democrats have the stones to say no to ‘Senior Citizens’, don’t hold your breath on any meaningful reform of Medicare. Ever.

  36. Ok, Nolan (sorry about that),

    first of all this:

    “It is the Chinese who are vulnerable here, not the U.S.”

    is exactly right but, what I said was:

    “to the extent that future generations don’t want to inflate or explicitly default then they will have to give up real goods to the foreign creditors”

    which you haven’t refuted. The only way to avoid giving up real goods is to depreciate the currency (meaning inflate in tradeable goods) or default.

    Furthermore, I never said the government was “financially constrained” or that it could ever “run out of money”, the government has REAL constraints, in real terms it does in fact pay for the goods it consumes.

    Moreover, imposing a large stock of nominal debt on future generations will either expropriate future non-debt holders in favour of the debt holders or impose inflation on the future generations. Neither outcome is desirable for the future generation.

    (I’ve seen the bilbo blog, it’s not a good place to learn economics).

  37. No worries, like I said you’re not the first person to mistake me for Naomi Klein.

    My only desire in responding to Nemo above was to move the conversation away from talking about how burdensome it will be for future generations to pay off all the debt we incur now and toward a discussion of the risks of inflation. You and I seem to be on the same page that the appropriate focus of discussion should be on the risk of inflation, but I suspect we disagree on the threat inflation poses in our current environment and possibly on the steps we should take now to mitigate the risk of a severe price dislocation (either inflationary or deflationary) in the future. I don’t really have time to get into this now, but hopefully we can at least agree on what the appropriate focus of the debate should be. I will say that I disagree with your penultimate statement where you seem to imply that our only two options for dealing with the nominal debt overhang is to either inflate it away or to explicitly default (the latter being in my opinion highly unlikely). There is a third way; strong economic growth spurred by much needed investment in the infrastructure and basic R&D necessary for a 21st century economy. Depending on your ideological persuasion this investment can either be led by the private or public sector. Bill Mitchell seems to prefer the public sector, but there are other proponents of MMT, Warren Mosler for example, who would prioritize the private sector. Personally, I tend to agree with another contributor to this website, Stats Guy, that the best way to proceed is for the government to create the necessary funds by injecting a large stock of permanent base money into the economy, and then using tax credits, direct subsidies, and matching grants to states to be used on approved infrastructure improvements. With the amount of under-utilization we see in the economy now I am very skeptical that this course of action will lead to rampant inflation. Of course I admit the possibility that I could be wrong.


    I’ve learned economics from traditional textbooks too (at a pretty good American university to boot), and I even teach advanced placement micro and macro economics courses to high school students, so I don’t think its fair of you to imply I’m just parroting Bill Mitchell’s talking points, as you seem to do in your parenthetical aside at the end of your comment. If that wasn’t your intent I apologize. Cheers!

  38. James, I just want to say ‘Thank you’.

    Thank you for a fact-based, comprehensive summary of the issue.

    It’d be nice if we need a vote-up/vote-down system for the comments on this site. Some of them are obviously thoughtful and objective, but too many are a mess of overly simplistic arguments from people who don’t want to think hard about this and overly emotional rants, also from people who don’t want to think hard about this.

  39. to ella.seems to me,you are getting too emotional.taxpayers PAID for enron and world.com in lower tax revenue,loss of capital-write offs.the FACT is,the government PAID for help after 911,katrinka,for new dep.of home security.and another is,demokrats ARE in charge of money in the house/senate since 2006 elections.that is,as i see it,when the budgets started to baloon.another FACT is,they were/are in charge of FANNIE MAE-went down first-and NO congressional hearings into them.WHY?

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