COVID-19 Relief Bill draws another round
of pointless reiterations of
“how-are-you-going-to-pay-for-it?”
Those who had the patience and tolerance to wade through my earlier post on Modern Monetary Theory (find here) might not need to read the rest of this one. This one is something of a rehash of the reasons not to pay attention to the tired refrain, in respect to a government spending program, “how are you going to pay for it?”
Specifically, how are you (that is, we the taxpayers as distinct from zillionaires whose tax bills are barely a blip on their balance sheets) going to pay for the $1.9 trillion COVID Relief Bill, without bankrupting future generations?
It seems, from most of what I’ve been seeing and hearing, just about everyone on the political Left and Right is still buying into “The Deficit Myth”—the fertile soil from which the how-are-you-going-to-pay-for-it commonplace sprouts. In the view of both sides, the National Debt looms as colossally menacing to American financial welfare as was Sauron’s redoubt Barad-Dur to the welfare of the peoples of Middle Earth.
Interestingly, neither current Federal Reserve chairperson Jerome Powell nor past Fed chairperson and now Secretary of the Treasury Janet Yellen are sounding alarms about national debt risk caused by a $1.9 trillion economic stimulus. Powell, to the contrary (and to the discomfort of fiscal conservatives dismayed to find out that Powell is not exactly Their Guy), has been advocating a big stimulus bill for months in order to head off another deep recession.
I find it hard to believe that Jerome Powell and Janet Yellen—representing right-of-center and left-of-center monetary policies, respectively, can both be wrong about the lack of a threat to the nation’s financial future posed by a nearly $2-trillion federal stimulus.
In addition, neither one has raised concerns about runaway inflation consequent upon such a large fiscal stimulus. They have used similar language to justify their lack of concern, from Powell observing that the real economy has the ability to “absorb” the spending, to Yellen’s reference to the adequacy of the “fiscal space.”
While not accusing either Powell nor Yellen of fancying Modern Monetary Theory—Powell certainly doesn’t, and if Yellen does she has kept such inclinations carefully under wraps—one can say that their positions on the COVID stimulus are entirely consistent with Modern Monetary Theory.
A big reason to stop asking the pay-for-it question:
the deficit = surplus equation
In the earlier post, I went on at some (perhaps unnecessary) length laying out why how to pay for it is not the crucial question, but rather will the stimulus bring on too-rapid inflation? By “too-rapid” meaning above the 2% per year seen by such sages as Powell as not only acceptable but perhaps preferable to the relatively anemic inflation averaged over the last 10 years—see chart on inflation 1990-2021 here). For why some inflation on the order of 2-3% is good for the economy, check out this segment on Marketplace here.
I came upon the kernel of why deficit spending is almost always more good than bad just nine pages into Stephanie Kelton’s The Deficit Myth. In the book’s introduction, Kelton walks us through six subordinate myths that bolster the Deficit Myth. On page 9, she addresses the myth that “deficits are evidence of overspending,” and that federal deficits are evidence of the government “living beyond its means.” Kelton uses “some simple accounting logic” to illustrate that the deficit actually creates a surplus for entities such as businesses outside the government.
This “simple logic” is what turns much of the way we think about federal deficits on its head. Here’s Kelton:
Suppose the government spends $100 into the economy but collects just $90 in taxes. The difference is known as the government deficit. But there’s another way to look at that difference. Uncle Sam’s deficit creates a surplus for someone else. That’s because the government’s minus $10 is always matched by a plus $10 in some other part of the economy. The problem is that policy makers are looking at the picture with one eye shut. They see the budget deficit, but they’re missing the matching surplus on the other side.
However, in the same paragraph, Kelton warns:
It is possible for government to spend too much. Deficits can be too big. But evidence of overspending is inflation, and most of the time deficits are too small, not too big.
Why not to worry about inflation—yet
When it comes to Powell talking about “absorbing” the stimulus without runaway inflation, what matters is the amount of unused capacity to provide goods and services. Much of the latter comes in the form of labor: with 10 million Americans officially out of work, plus tens of millions of underemployed and working for starvation wages, there’s abundant capacity to absorb a big chunk of the stimulus (note that raising the minimum wage would have a major impact on “absorption”). The gig economy alone—where you find a lot of underemployed—is estimated to be $550 billion.
Both Jerome Powell and Janet Yellen believe that the real economy’s capacity to absorb the stimulus money is there. On a note of caution, it should be noted that Larry Summers has been loudly complaining that the size of the stimulus risks overheating the economy; but Paul Krugman, on the other hand, argues that while we should not ignore concerns about the economy overheating, but that if inflation threatens to run away, the Federal Reserve can put the brakes on by tightening monetary policy.
The general case for deficit spending: back to
Modern Monetary Theory
Whatever the reasons for caution in regard to the COVID-19 Relief Bill, concern about the federal deficit should not be one of them. Thanks to the U.S. having a sovereign currency, we can pay for it. Again I give you Stephanie Kelton to explain why (see below, although if you read the older post, you’ve already seen this). Visit YouTube to find more lengthy explanations by Kelton. Better yet, get her book The Deficit Myth, which is written in a pleasingly snappy style despite the wonkiness of the content.