WILFORD: There’s No Such Thing As A Free Deficit

Andrew Wilford National Taxpayers' Union Foundation
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The pandemic, and subsequent recession, has led to unprecedented levels of spending. And yet, as the country continues to pile up debt with seemingly little consequences, it’s led some to question whether consequences for overspending truly do exist. Unfortunately, the Congressional Budget Office’s (CBO’s) latest report reminds us they most certainly do.

Perhaps the most prominent advocate of this form of deficit denial is Stephanie Kelton, whose book The Deficit Myth was recently endorsed on Twitter by rapper Ice Cube. Strange as that sentence probably was to read, it illustrates how ideas once confined to a wonky fringe are becoming more and more mainstream as deficit numbers become larger and larger with no appreciable effect on everyday life.

Neither was Congress necessarily wrong to respond to the unprecedented threat of COVID-19 with a significant fiscal response. Lockdowns made sense in the face of a pandemic which has now claimed the lives of over 200,000 Americans, but absent substantial action by Congress, the millions of Americans who lost their jobs or had to board up their businesses would have been left out to dry, in large part because their governments told them to stay home.

But none of that means that deficit spending is without consequences. Modern Monetary Theory (MMT) advocates such as Kelton essentially claims that deficits are fine so long as they don’t create inflation, as we can just print more money to pay down any costs we incur.

That claim is not entirely untrue, and it’s a known fact to any economist that governments can raise revenue off the difference between the cost of printing money and the value of the printed money (though with a substantial effect on inflation). Yet it’s the extremes that Kelton takes this concept to that make MMT pseudoscience. She claims that by printing money, the country can afford to pay for whatever it wants to, from a Green New Deal to a federal jobs guarantee. Any jobless Americans can simply be scooped up and shipped off to go work at a wind farm.

There’s plenty of reason to be skeptical that the government can efficiently boost economic output by placing Americans in jobs that the market isn’t asking for, but it’s worth keying in on the deficit claims Kelton makes. MMT relies in large part on the fact that our brains naturally are very bad at comprehending large numbers. In the face of trillion-dollar deficits, the $32 trillion price tag of Medicare for All or the difficult-to-pin-down price tag of the nebulous Green New Deal (probably north of $50 trillion) stop appearing so intimidating.

That’s well beyond the means of Kelton’s theory to pay for. One academic paper estimated that maximum revenue from seigniorage, or the federal government’s monopoly on money printing, is 4 percent of GDP (beyond that point inflation effects outweigh the revenue gained). That means that the United States could conceivably raise about $800 billion per year from printing money. That’s about a quarter what it would take to pay for Medicare for All and about 16 percent of the Green New Deal’s cost. Oh and by the way, that would create an inflation rate of 266 percent. So for revenue that would not even sniff the cost of paying for fanciful new programs, you could expect to pay more than two and a half times more for the things you buy.

And if we went ahead with these expensive plans thinking that MMT would save us, the CBO shows what the cost would be. Over the next thirty years, spending on the interest on the federal debt (not paying down that debt, just paying the interest) is projected to quadruple. That means it’ll leapfrog spending on Social Security and all discretionary spending, including defense spending. Paying interest on the debt will even approach spending on all major health care programs.

So if your eyes are glazing over at talk of multi-trillion dollar budget line items, think of it this way: if current spending trends continue, by 2050, we could fund Social Security all over again with funds we’re paying to service our debt, and have money left over. That’s money going straight down the fiscal drain.

Neither is heightened recession/pandemic spending a strong case for ignoring deficits. One of the downsides of piling up debt in good times is that the country has less room to respond to crises. We shelled out trillions of dollars in spending to help unemployed Americans and closed-up small businesses, but as the CBO report shows, we’ll pay for that down the line.

Deficit denial becomes more tempting as our debt piles up, but it’s faulty economic logic. Future generations deserve better than the ever-growing can that’s being kicked down the road.

Andrew Wilford is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education at all levels of government.