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The Debt Scold's Lament (Slight Return)

(Image from an obscure website)

The recently passed Tax "Reform" package, which is thought to increase the National Debt by another trillion dollars (this, assuming it adds to GDP, and absent any disruption) has set off another round of anxiety attacks on the matter. But the agonizing over the debt level itself misses the point.

Moreover, people still have a problem conflating "debt" with "deficits." "Debt" is the price tag on prior commitments the government has made. The money has already been spent, flowing into the economy, and funding our prior commitments. The "deficit" represents the current pace of funding ongoing commitments. In other words, "Debt" is the accrued deficits of prior years. So it is possible, as it has been in recent years, to sharply reduce the deficit even as debt levels grow at the same time. I've lost count how many commentators, including those handsomely paid to hold forth on these matters, as well as some Congressmen sitting on finance and budget committees, can't get this basic concept right. They should be embarrassed.

People look at the debt without context, just as they do with tax policy. No matter what, "Less" is thought to be better than "More," and that frames their debate. But there is so much more to it than that. As with tax policy, it's not a matter of more or less, but what you aim to do with targeting distribution to achieve some kind of economic equilibrium. In other words, instead of trying to shoehorn the debt into a number we're supposed to be mentally "comfortable" with, the real goal here should be to have a level of debt that optimally suits the needs of the economy to the greatest effect. That means in an economy that may need a tighter labor market to produce wage gains, or provide funding for infrastructure, or care for the needs of an aging population.

Debt is elastic. There is no firm number that suits every situation, and the United States Government can never run out of money. Our only real constraint is inflation. This is not a new concept in economics, but it is being revived by some notable voices as "Modern Monetary Theory," and it is, pardon the expression, gaining currency since the financial crisis exploded. Traditionally, it has been held that an increase in the money supply created inflation, but those who have clung to this idea have been left dumbfounded by the sight of the money supply growing (through the proxy of quantitative easing) with no inflationary input to show for it. But it flies in the face of accepted doctrines:

An Open Letter to Ben Bernanke

e21 Staff

NOVEMBER 15, 2010


To: Chairman Ben Bernanke Federal Reserve Washington, DC

Dear Mr. Chairman:

"We believe the Federal Reserve's large-scale asset purchase plan (so-called "quantitative easing") should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment."

The signatories of the letter referenced above, some of them charlatans, dated November 15, 2010 have all had to eat their words. Of course, few actually have, given their stubbornly frail egos, but as I've noted before, partisanship can easily blind even professional economists to empirical evidence, leaving the hair on their prejudices unmussed.

There are those who think "MMT" goes too far, and for what it's worth, I agree. There has to be some constraint on debt levels, if only for the reason of market psychology. But the new conversation about MMT is causing people to take a look at how we can deploy the resources of a fiat currency to the best effect, and provide some relief for some intractable problems in our society.

The use of debt fearmongering has a policy end: the imaginary constraints we put on ourselves as to "tolerable" debt levels provides political leverage for opposing expansionary spending as well as justifying reckless tax cuts. The smarter way to manage the debate is to ask ourselves what kinds of outcomes we want when it comes to debt levels. Whether it's 2 or 20 Trillion is practically beside the point.

The point is "what kind of country do you want?"

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