Friday, December 29, 2017

The Smartest Economist In America Explains What Deficits Really Mean


In early October one of the brightest economists in the country, Stephanie Kelton-- who had served as the Democrats’ chief economist on the Senate Budget Committee and as Bernie’s chief economics adviser during his presidential campaign-- penned an especially instructive OpEd for the NY Times, How We Think About the Deficit Is Mostly Wrong. At the time, it helped open the eyes of dozens of members of Congress and congressional staffers. It needs to be more widely distributed since American have been schooled their whole lives to not understand public deficits. We are constantly told to think of deficits the same way we think of personal debt. There’s a big difference.

Kelton’s OpEd was written about 3 months before the Trump-Ryan Tax Scam passed. She pointed out that the preliminary 9-page framework “achieved a rare feat of bipartisan agreement in Washington-- worry from the left and the right about the plan’s potential to increase the deficit. Chuck Schumer warned that the plan would deepen the deficit by $5 trillion to $7 trillion. Bob Corker said, “If I think it adds one penny to the deficit, I’m not going to vote for it.” Schumer was wrong and Corker was easily bought off. Kelton is no fan of this monstrosity, but not for Schumer’s hypocritical reasoning.
Are the proposed tax cuts a huge giveaway to the rich? Most definitely. Will they, as advertised, create a booming economy with benefits that trickle down to everyone else? I don’t think so. Mr. Trump’s plan will widen the country’s already dangerous wealth and income gaps, and because the gains go mostly to those at the very top, the tax cuts won’t do much to promote broad-based consumer spending or overall job growth.

That’s enough to reject the plan. But it would be unwise to oppose tax cuts, or any other federal legislation, simply because they add to the deficit.

Why? Because bigger deficits wouldn’t wreck the nation’s finances. Unfortunately, budgetary effects are the sun around which everything revolves in Washington. Should we invest a trillion dollars in our crumbling infrastructure, offer Medicare for All or pass the biggest tax cut in the country’s history?

Propose any of these, and the first question on everyone’s lips will be, “How are you going to pay for it?” The reason is simple: Lawmakers are obsessed with avoiding an increase in the deficit.

The impulse is so strong that it’s almost Pavlovian. It’s also holding us back. Politicians of both parties should stop using the deficit as a guide to public policy. Instead, they should be advancing legislation aimed at raising living standards and delivering the public investments in education, technology and infrastructure that are critical for long-term prosperity.

Right now, anything ambitious requires a score from the Congressional Budget Office. A “bad” score-- one that adds to projected budget deficits-- can easily doom good legislation because lawmakers are told that their math doesn’t add up. And that’s a problem.

Because, actually, the math always adds up. To see why, we have to look beyond the government’s balance sheet. Think of it this way. Government spending adds new money to the economy, and taxes take some of that money out again. It’s a constant churning of pluses and minuses, and their minuses become our pluses.

When the government spends more than it gets in taxes, a “deficit” is recorded on the government’s books. But that’s only half the story. A little double-entry bookkeeping paints the rest of the picture. Suppose the government spends $100 into the economy but collects just $90 in taxes, leaving behind an extra $10 for someone to hold. That extra $10 gets recorded as a surplus on someone else’s books. That means that the government’s -$10 is always matched by +$10 in some other part of the economy. There is no mismatch and no problem with things adding up. Balance sheets must balance, after all. The government’s deficit is always mirrored by an equivalent surplus in another part of the economy.

The problem is that policy makers are looking at this picture with one eye shut. They see the budget deficit, but they’re missing the matching surplus on the other side. And since many Americans are missing it, too, they end up applauding efforts to balance the budget, even though it would mean erasing the surplus in the private sector.

And because there is so much misunderstanding, Americans are vulnerable to nationalist scare tactics that warn of the perils of relying on foreigners to pay our bills. The truth is, there’s no reason to worry about China (or any other entity) refusing to finance our deficits. In fact, we should think of the government’s spending as self-financing since it pays its bills by sending new money into the economy.

When there’s a deficit, some of that new money can be traded in for a government bond. What’s often missed in the public debate is the fact that the money to buy the bond comes from the deficit spending itself.

What isn’t missed is the fact that the government pays interest on those bonds. Lawmakers are obsessed with this line item in the budget, as if it’s akin to a cable bill that keeps taking a bigger and bigger bite out of your household budget. It isn’t. Unlike a household, the government doesn’t have to trim other parts of its budget to make ends meet. Congress can always create more room in the budget by adding rows or widening the columns to put more resources into education, infrastructure, defense and so on. It is purely a political decision.

Of course, there are real limits to what can be done. No country can commit to large-scale infrastructure investment unless it has the available labor, machinery, concrete and steel. Trying to spend too much will cause an inflation problem. The trick is to adjust the budget to make efficient use of the people, factories and raw materials we have.

But all of this goes unrecognized on Capitol Hill, where the very words “debt” and “deficit” have been weaponized for political ends. They serve as body armor to politicians who would deny resources to struggling communities or demand cuts to popular programs.

Perhaps no one is more skilled in the dark art of deficit deception than Representative Paul Ryan, the House speaker. He has described the budget outlook as a “fiscal train wreck,” and he has demanded cuts to programs like Social Security and Medicare in the name of protecting future generations from a “crushing burden of debt.” His language is poll-tested and inflammatory by design. It’s intended to create a sense of urgency to move the budget into balance, where, we are told, the math of federal spending will finally “add up.”

In a more rational world, lawmakers would abandon the crude C.B.O. scoring model and recognize that the risk of overspending is inflation, not bankruptcy. They would avoid fruitless battles over the debt ceiling, and they would acknowledge that the deficit itself could be deployed as a potent weapon in the fights against inequality, poverty and economic stagnation.

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At 8:48 AM, Blogger AXEC / E.K-H said...

Down with idiocy
Comments on ‘The Smartest Economist In America Explains What Deficits Really Mean’

MMT: Money-making for the one-percenters

MMT is ALWAYS a bad deal for the 99-percenters

MMT, money printing, stealth taxation, and redistribution

Egmont Kakarot-Handtke

#MMT #LearnMMT #DebunkMMT #NotDifficult #FailedScience #FakeScience #ScientificIncompetence #ProfitTheory #PrivateSectorSurplus

At 10:53 AM, Anonymous Anonymous said...

Interesting piece and a good primer on MMT. I think the Republicans have secretly understood this for some time. It was Dick Cheney who said Reagan taught us deficits don't matter. They certainly don't matter when Republicans want to give tax cuts to the rich or provide the Pentagon with more funds for our endless wars. Deficits only matter to Republicans when Democrats want to give relief to the poor or the working class. Free college--can't afford that; Medicare for All--too expensive; rebuild our infrastructure--can't afford that either. Of course, this fallacy seems to intimidate the Democrats who always try to be fiscally responsible to their own detriment. Reagan cut taxes and Clinton balanced the budget, which resulted in George W. Bush then cutting taxes again and Obama trying to be fiscally responsible in the face of the worst post-war recession. Now Trump is cutting taxes once again, and I can almost hear Joe Biden practicing how he will balance the budget when he is President. Fortunately, Stephanie Kelton has advised Bernie Sanders that there is no need to fall for these phony Republican games. I hope to see a President Sanders fund single-payer healthcare, free State college tuition, a massive green new deal infrastructure plan with a federal jobs guarantee, and then use the deficit argument (phony though it may be) to shrink the military industrial complex down to where we can drown it in the bathtub.

At 11:09 AM, Anonymous Anonymous said...

OK. low-level for idiots. Fine. But there are lies herein:

"Lawmakers are obsessed with avoiding an increase in the deficit."
Only a moron believes this. They use deficits as an excuse to cut sustenance programs (never the DOD). But they don't give a flying fuck about increasing deficits when they are trowelling on more wealth to the top 1%. The statement is a bald-faced lie.

"government spends $100 into the economy but collects just $90 in taxes, leaving behind an extra $10 for someone to hold."
If that someone spends it, allowing that $10 to rattle around the economy creating more profits, spending and so on, it's ok (unless there is too much extra and inflation gets too high or some other incentive becomes problematic).
But the government, since 1980, has given $9.99 of that $10 to people who are already rich, who pad their holdings with it. That's why we have so many billionaires today and zero in 1980. It's unproductive excess.

"we should think of the government’s spending as self-financing since it pays its bills by sending new money into the economy."
Pre-1980, this may have been more true. Since 1980, for the reasons stated above, it's a total lie. The deficit money mostly goes into the portfolios of the uber wealthy who, on occasion, might buy a gulfstream or a yacht. But mostly they just watch their holdings value go up.

"the risk of overspending is inflation, not bankruptcy."
This isn't very true if the overs go to the rich's portfolios. If it went into the actual economy and rattled around a while (before condensing out in china, india or somewhere else), too much would result in inflation. As of 1980, the odds of inflation are pretty much zero.

Also, the current interest load on the debt is relatively low. But two things could blow that up:
global economic volatility resulting in much higher interest rates on our paper
global reaction to American political tire fires resulting in nobody any longer investing in our paper no matter what the interest rate is.

If the interest load on the debt got to a big enough slab of the total budget, it WILL have a drag on the rest of the economy. Interest paid on debt is another unproductive part of an economy.

Otherwise, this has some good stuff in it. Chief among them, it proves that the democraps have been suckered into politically nonsensical debate over debt ceilings as part of the Rs' successful attempts to make americans dumber and dumber. The Ds could be helpful... but haven't been since Carter was prez.

At 2:47 PM, Blogger Debtee said...

Stop giving these lying, sociopathic greedy money addicts excuses - they PRETEND they are worried about the budget, the deficit, and so on TO DUPE US. Most are FULLY AWARE of the theater they perform, and it has been going on since 1971 in particular.
And most of them are totally willing to deficit spend to enrich themselves and their fellow money addicts, and they do it with FULL KNOWLEDGE of what they are doing! Defense, federal prisons, healthcare insurance, Medicare Part D and more are their big 'pay-off' systems, privatized to spread money to the few who own or INVEST IN these systems (and they should NOT be for profit and NOT be something to invest in!!). Privatization is the MAIN WAY they enrich themselves and the other cabal members - and the people running any privatized system get to bill any amount, including for massive exec salaries and millions/BILLIONS in profits.
Start calling for Nuremberg-type trials for most of Congress, heads of defense companies, corporate media heads, fossil fuel corporate heads, and more - charges of fraud, dereliction of duty, misappropriation of govt funds, and crimes against humanity - this would be a good start, and we would see how fast they figure out how to SPEND FOR THE PUBLIC GOOD, which is actually their JOB and their DUTY!!

As economics professor Ellis Winningham has put it on his FB page:
"Dear Congressmen and women who lie to the people of the United States, telling them that the US government is broke and that universal health care is inefficient:
If you do not want to do your god damned job as a Representative or Senator, then quit. Get the fuck out of Congress and go find a job with a private employer who has a need for self-serving, lying, hypocritical, back-biting, sociopathic parasites.

At 2:21 AM, Blogger AXEC / E.K-H said...


From macroeconomic analysis follows Public Deficit = Private Profit.#1

Either Stephanie Kelton does not understand this, then she is an incompetent scientist. Or, she understands it, then she sells a social bluff package for the benefit of the one-percenters.#2

If Stephanie Kelton is the “Smartest Economist In America” one trembles to contemplate how stupid the rest is.

Egmont Kakarot-Handtke

#1 Keynes, Lerner, MMT, Trump and exploding profit

#2 MMT: The one deadly error/fraud of Warren Mosler

At 11:22 AM, OpenID Bill said...

Does Kelton understand that Public Deficit = Private Profit? She said as much: "the government’s -$10 is always matched by +$10 in some other part of the economy."

OC, if the $10 is distributed randomly according to income, most of it will end up with those with the highest income. But it is not distributed randomly, it is distributed politically. The Republicans are attempting an one-two punch. First, give money to the rich, then, on the pretext that the debt or deficit is too high, decreasing government spending on increasing taxes on the poor and middle class.

At 1:48 AM, Blogger AXEC / E.K-H said...


You say: “Does Kelton understand that Public Deficit = Private Profit? She said as much: “the government’s −$10 is always matched by +$10 in some other part of the economy.”

Kelton’s incompetence is in these for words “in some other part”. The macroeconomic Profit Law says unequivocally Public Deficit = Private Profit and NOT in “in some other part”.#1

Either Stephanie Kelton does not know the Profit Law, which is fundamental to ALL of economics, or she obscures it for some reason.

There is NO need to speculate about Stephanie Kelton’s ulterior motives. What has been proven is that MMT is materially and formally inconsistent, that is scientifically worthless.#2 Therefore, ALL economic policy proposals of MMTers, including Stephanie Kelton, have NO sound scientific foundations.

Contrary to the social appearance, MMT is de facto agenda-pushing for the one-percenters. MMTer, including Stephanie Kelton, are either stupid or corrupt or both.#3

Egmont Kakarot-Handtke

#1 For the formal proof see

#2 For the full-spectrum refutation of MMT see cross-references

#3 MMT: The one deadly error/fraud of Warren Mosler


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