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Debt Reckoning

Debt Reckoning
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It’s a difficult time to be a deficit hawk.

In March, Congress passed the CARES Act, named to show what lawmakers on both sides of the aisle wanted to be seen to be doing in the wake of the economic devastation caused by the outbreak of COVID-19. They cared to the tune of about $2.2 trillion, all of it billed to the deficit, making it the single biggest legislative care package in history by a wide margin. It was the first time Congress had ever passed a bill with a trillion-dollar price tag. As a point of comparison, the Affordable Care Act, the 2010 health law that would be known as Obamacare, which was viewed as unusually costly, had to be whittled down during the legislative process so as not to technically exceed the trillion-dollar mark. Its 10-year price tag, at the time of passage, came in around $940 billion.

But any real worries about those sky-high figures appear to have melted away in the face of the pandemic, which has exposed the underlying unseriousness of Washington’s approach to budgeting. For nearly 40 years, federal lawmakers have been trying, or at least pretending to try, to reduce the deficit. But when asked to make tough budgetary choices, they consistently buckle under the pressure of partisan politics. This, in turn, has given rise to simplistic economic theories designed to justify whatever outcomes are most convenient.

The CARES Act followed a series of smaller relief bills and would be succeeded by a $310 billion top-up to the original bill’s small business loan program, bringing Congress’ total coronavirus relief spending to nearly $3 trillion. And that was just for starters. By summer’s end, House Democrats and Senate Republicans were haggling over a new round of stimulus, with Democrats pushing a $3 trillion aid package and Republicans, representing the limited-government side of the argument, backing a mere $1 trillion in additional deficit spending.

When their bickering went as congressional bickering often does—nowhere—President Donald Trump eventually stepped in to impose extensions via executive fiat of some of the original CARES Act programs, including a boost to unemployment insurance that would cost tens of billions more. Did it matter that Trump’s unilateral move raised questions about his constitutional authority to authorize such spending? Not really. There was money to spend, or maybe, given the state of the federal fisc, there wasn’t, but either way, some politician, somewhere, somehow, was going to find a way to spend it. Trump even argued that his orders were designed to prod recalcitrant lawmakers into making a deal, which is to say, a deal to spend more.

Even before the virus wreaked havoc on the economy, projections showed that America’s 2020 budget deficit—the gap between federal tax revenues and total spending—would surpass $1 trillion for the first time in nearly a decade, and would continue to do so for years to come. The Medicare and Social Security trust funds, meanwhile, faced insolvency.

In 2016, Trump had campaigned on eliminating the national debt in under a decade. Yet by June 2020, the federal budget deficit had reached $864 billion…for just the month. That was more than the entire budget gaps in either 2017 or 2018. By September, the nonpartisan Congressional Budget Office (CBO) was projecting a $3.3 trillion annual deficit in 2020. Federal debt levels, which equaled just 35 percent of the economy in 2007 and 79 percent of the economy in 2019, would reach 98 percent. The CBO had previously warned that persistently high debt and deficits would have consequences: slower economic growth, an ever-increasing share of the budget consumed by interest payments on the debt, and reduced capacity to act should a major crisis arise. 

And yet as the virus consumed the nation, even many deficit hawks were recommending more spending, at least in the short term. In April, the Committee for a Responsible Federal Budget (CRFB), perhaps the foremost organization devoted to advocating lower federal deficits, issued a statement saying “today’s high deficits are needed to combat the current crisis” while also warning “they are by no means free.”

“It is strange to be a deficit hawk advocating for higher deficits,”  CRFB Senior Vice President Marc Goldwein says, “until you realize why we are fiscal hawks in the first place: so you have fiscal space when you need it.” That was the bigger problem: It wasn’t just $3 trillion in new deficit spending; it was $3 trillion on top of the tens of trillions that had built up during so many decades past.

Deficits hawks have never had it easy. Although they were occasionally afforded a measure of superficial respect, the last two decades have seen them increasingly branded as scolds who want to raise taxes and force cuts to entitlements, domestic programs, and defense spending. Elected officials, who prefer to promise voters pretty much anything but that, tended to pay lip service to the idea of balanced budgets and paid-for legislation—and then tended to ignore the deficit, except to score points against their political opponents.

Even still, this time seemed different. COVID-19 wasn’t just a novel virus. It was a novel economic problem, and the old guardrails suddenly seemed to vanish. While both parties had often used gimmicks and conveniently magical economic theories to justify shrugging at past pile-ups of debt, they had typically striven to maintain the pretense of fiscal responsibility. Now even that appears to have fallen away, another victim of the pandemic.

How will we pay for all this? As Congress debates trillions more in aid spending and Democrats prepare to erect a vast new infrastructure of federally funded programs should they win in November, it increasingly looks as if the answer is: Actually, we won’t.

‘A Bad Idea Whose Time Has Come’

The modern movement to control the deficit can be traced back to 1985 and the passage of the Gramm-Rudman-Hollings Balanced Budget and Emergency Deficit Control Act. President Ronald Reagan is often remembered as a hero to proponents of limited government, and it is certainly true that he spoke their language. But under his watch, federal spending grew. By the middle of the decade, deficits had more than doubled. In 1980, the gap was about $74 billion, equal to 2.6 percent of the overall economy. By 1983, it was about $208 billion, or 5.6 percent of the economy.

In theory, this was a bipartisan issue, with concerned legislators on both sides of the aisle wanting to be seen as fiscally responsible. The deficit had grown too large. Something had to be done. But what?

Looked at one way, the solution was straightforward, even obvious. Reagan had slashed tax rates while increasing federal spending, particularly on the military. With more federal spending and lower tax rates, the gap between outlays and revenues—that’s the deficit—had grown. To reduce the size of the deficit, lawmakers had essentially two levers they could pull: increasing revenue via tax hikes, and cutting spending.

On the one hand, this was fairly simple. On the other hand, it was incredibly complicated, because those who make a living asking large numbers of people to vote for them tend to be wary of pulling either lever. Broadly speaking, voters like tax cuts and spending hikes, not the reverse. Looked at this way, the solution was not obvious at all.

Gramm-Rudman-Hollings was an attempt to solve both the deficit problem and the political problem it created. Its congressional namesakes were two Republicans, Sens. Phil Gramm of Texas and Warren Rudman of New Hampshire, and a Democrat, Sen. Ernest Hollings of South Carolina. What they realized was that the real problem wasn’t pulling the two levers—it was being seen to pull them. Hence the insight that informed their solution: What if no one pulled them at all? What if, instead, they just magically pulled themselves?

Gramm-Rudman-Hollings was intended to put the United States on a path to a balanced budget in five years via a forcing mechanism: If Congress failed to hit certain deficit reduction targets each year, it would trigger a round of automatic spending cuts, reducing spending across every category by a certain percentage, via a process known as sequestration.

The idea that neither party’s policy priorities should take precedence was one that would guide budget reform efforts for years to come: The deficit would be reduced through shared pain and shared responsibility.

In theory, lawmakers could avoid these across-the-board cuts by settling on other methods for hitting the targets. But if Congress could not agree on an alternative, the program’s broad-based reductions would go into effect, whether anyone thought they were a good idea or not. Any automatic spending cuts would be calculated and carried out by the comptroller general, whom the president would nominate from a list of options provided by Congress. The important thing was that no one in Congress would be directly responsible.

The distribution of the spending reductions was also important, because among the problems facing Congress in pursuing deficit reduction was a basic disagreement over which programs to trim. Republicans favored reducing domestic spending and preserving spending on defense. Democrats preferred the opposite. If the automatic reductions kicked in, everyone’s priorities would be affected.

Imagine a debate between doctors about which of an ailing patient’s limbs to amputate: The Republican doctors say the patient needs arms to fend off attackers. The Democratic doctors say the patient needs legs to walk. The sequester would resolve this impasse by amputating all four hands and feet.

It was ugly by design, and no one thought this was a particularly good solution—not even Gramm, Rudman, or Hollings. Rudman famously referred to the legislation as “a bad idea whose time has come.”

As it turned out, it was a bad idea that didn’t work. In 1986, the Supreme Court found that the arrangement with the comptroller was unconstitutional. Under the Constitution’s separation of powers, Congress has the power to pass laws but not to execute them. Since the comptroller would be fireable by Congress, he or she would be essentially an agent of the legislative branch. And just as Congress cannot play any role in the execution of laws, neither can it delegate that power to an agent.

After the Supreme Court issued its ruling, President Reagan concluded that “now Congress must make the difficult choices” and “act promptly” to control the deficit. Legislators, the Court had determined, would have to pull the levers themselves.

As if to demonstrate that Congress was the kind of organization that could really get things done, congressional lawmakers acted promptly to ensure that they would not have to.

Congress passed, and Reagan signed, the Balanced Budget and Emergency Deficit Control Reaffirmation Act of 1987, which reaffirmed lawmakers’ commitment to avoiding the sort of difficult budgetary choices they had been attempting to avoid from the beginning. Sequestration authority was moved to the Office of Management and Budget (OMB), a body inside the executive branch, in order to conform to the Constitution’s separation of powers. Told to make hard choices, Congress had once again assigned someone else to make them.

Lawmakers also bought themselves time. The follow-up raised legally allowable debt limits and extended the original five-year deadline for balancing the budget by an additional two years.

This failed too. When the time came, instead of allowing the automatic cuts to go into place, Congress discovered workarounds. Because the deficit targets were based on budget projections—on expectations about spending and revenues over the next few years—those projections could be massaged to make it easier to hit the targets. Some outlays (for example, on anti-poverty programs) could be made exempt from the cuts. Other outlays could be moved from one fiscal year to another, at least on the ledger, providing the appearance of reduced spending. Even after relieving itself of direct responsibility, Congress found clever ways to keep the lever from being pulled.

There was another issue as well, at least among Republicans. In the early ’80s, some lawmakers had come under the influence of a macroeconomic theory that would come to be known as “supply-side economics.” This theory held that tax cuts could, in budget parlance, “pay for themselves” by boosting economic growth so much that the federal government would actually raise more revenue if it reduced rates.

There was some trivial truth to this. Imagine a world in which loaves of bread are taxed at 99 percent. This is a world in which not many loaves of bread are produced or sold and thus not much revenue is raised from the bread tax. Reduce the rate to, say, 50 percent, and you would probably see a marked increase in the production and sale of bread—and higher bread tax revenues as a result. Reduce the tax further, and the bread market would probably expand even more. Supply-side effects are real, but they typically offset only a small percentage of lost revenue.

Some Republicans took this to mean that tax cuts of just about any kind would often, and perhaps even always, result in higher federal revenues. At some point, however, lowering rates does in fact end up lowering revenues. A 0.001 percent tax on bread might unleash a powerful market in artisanal breadmaking. It would probably not produce higher total levels of tax revenue than a somewhat higher rate would.

In reality, this simplistic version of supply-side orthodoxy was not a macroeconomic theory so much as a convenient excuse for Republican lawmakers to give their voters what voters tend to want: tax cuts without spending reductions, i.e., a government they didn’t have to pay full price for.

Not every Reagan-era Republican bought into this theory, and even its proponents did not always espouse the most simplistic version. But it guided the party’s governance in spirit, if not always in strict practice or formal principle.

Reagan reduced income tax rates twice, spurring economic growth in the process, even as his Treasury Department foresaw a relative decrease in revenues. But revenues were only one side of the equation. Under Reagan’s administration, total federal spending increased by an average of 9 percent annually, rising from about $678 billion at the end of 1981 to about $1.1 trillion in 1989. The national debt nearly tripled from just under $1 trillion to about $2.9 trillion.

Among the chief proponents of supply-side theory was economist Arthur Laffer, who served as an adviser to Reagan and other Republicans of the era. Laffer has not espoused the vulgar version of supply-side theory himself. “Does every tax cut pay for itself? No,” he told National Review in 2010. Tellingly, however, he was opposed to Reagan-era deficit control measures such as sequestration.

In 1990, the Los Angeles Times published a forum on whether to keep Gramm-Rudman-Hollings on the books. Laffer was among the contributors. He blamed the law for crashing the stock market in 1987, warned that its budget cuts would be “deleterious,” and called the law’s effect on politics “catastrophic.” Gramm-Rudman-Hollings, he wrote, “should be legislated out of existence.” That very year, as the federal deficit hit $221 billion, it was. The deficit hawks had lost.

The Trouble With Diets

If there is a case to be made that Gramm-Rudman-Hollings was successful, it is not in its direct and immediate effects but in its aftermath. The law was succeeded by a pair of new deficit control measures, the Budget Enforcement Act (BEA) of 1990, which set caps on discretionary spending, and “pay-go,” short for pay-as-you-go, a provision of the BEA that was initially applied to entitlement program spending. With these measures, Congress was essentially putting itself on a fiscal diet, except instead of limiting calories and offsetting extra cheeseburgers with exercise, it was limiting spending and offsetting new fiscal expansions with either cuts elsewhere or tax hikes.

As with many diets, it worked—for a time. Bill Clinton began his presidency by raising the top income tax rate from 28 percent to 36 percent—an increase, but still far lower than the top rate at the beginning of Reagan’s presidency. And then, following the Republican takeover of Congress, Clinton negotiated with GOP lawmakers to lower projected federal spending—when politicians talk about spending “cuts” they are often referring to reductions of planned future spending—particularly on welfare assistance. Accordingly, the deficit dropped from $203 billion in 1994 to $22 billion in 1997.

Forced to work across the aisle, Clinton and the Republican Congress had done what their predecessors had failed to do: reduce the deficit. Federal spending dropped as a percentage of gross domestic product, which boomed under the first wave of internet-induced investments—the 1990s tech boom. The rapidly growing economy kept voters from revolting, and Clinton framed the budgetary contraction not as a reduction in government services but as an end to federal overreach.

“We know big government does not have all the answers,” he said in his 1996 State of the Union address. “We know there’s not a program for every problem. We have worked to give the American people a smaller, less bureaucratic government in Washington. And we have to give the American people one that lives within its means. The era of big government is over.”

In Clinton’s second term, the already shrunken deficit ceased to exist. By the year 2000, the federal government was running a $236 billion annual surplus. Finally, the deficit problem seemed to have been solved.

The trouble with diets is that even when they work, they’re hard to stick to. That is especially true when the diet must be renegotiated among a rotating cast of 535 lawmakers and a new president every four to eight years.

And so, under President George W. Bush, deficits returned, pushing past $400 billion and then $500 billion annually. The pattern under Bush was much the same as it had been under Reagan. Eyeing Clinton’s surplus, Bush promised and delivered a reduction in tax rates. But then—following the 9/11 attacks, a renewed conflict in Iraq, and the war on terror—Bush and Congress increased spending, especially on the military. Once again, reductions in tax rates plus spending increases were followed by a rapidly growing deficit.

Democrats regularly attacked Bush for fiscal profligacy; mismanagement of the federal budget was a regular talking point during Barack Obama’s presidential run. “When President Bush came into office,” Obama said in 2008, “we had a budget surplus, and the national debt was a little over $5 trillion. It has doubled over the last eight years. And we are now looking at a deficit of well over half a trillion dollars.”

Once again, there were calls for deficit reduction. In 2005, writing in The Atlantic, Jonathan Rauch proposed a renewed version of Gramm-Rudman-Hollings, describing it as “a bad idea whose time has come again.” Under Bush, the call would go unheeded. But eventually, the idea would return.

Federal deficits exceeded $1 trillion every year during Obama’s first term. Much of this, at first, was a holdover from the Bush years and the fiscal effects of the recession. But Obama’s first major legislative act was an $830 billion stimulus plan—entirely deficit-funded—and under his leadership, the emergency federal spending levels that Bush instituted during his final year in office became permanent.

This time, Republicans would be the ones to complain of profligacy and fiscal irresponsibility. Among the most outspoken of these critics was Rep. Paul Ryan (R–Wis.), who eventually became the party’s vice presidential nominee and speaker of the House.

Obama’s first response was the redoubt of many a blame-wary politician: a bipartisan committee. The National Commission on Fiscal Responsibility and Reform was formed in 2010. It was nicknamed after its two most prominent members, Alan Simpson and Erskine Bowles, a Republican senator and a former Democratic staffer in the Clinton White House, who served as figureheads of the bipartisan push to reduce the deficit.

Simpson-Bowles consisted of 18 people—a bipartisan mix of a dozen members of Congress and six private citizens—tasked with producing a set of recommendations for deficit reduction. There were difficult choices ahead. The committee’s job was to suggest which ones should be made.

The commission was a classic Washington gambit in that, outwardly, it was an attempt to solve a policy problem, but in reality, it was a politically motivated attempt to avoid solving that very problem.

Nominally, the problem the committee was tasked with solving was how to reduce the deficit. But that wasn’t the actual problem it was trying to solve, because since the 1980s the solution had remained fairly obvious: To reduce the gap between outlays (spending) and revenues (taxes), Congress would need to either increase tax revenue, reduce spending, or do some combination of the two. To be genuinely effective, the tax hikes probably would have to hit the middle class and the spending cuts probably would have to hit entitlements.

The actual problem the committee was intended to solve, then, was that, despite occasional protestations to the contrary, neither congressional lawmakers nor the president wanted to do any of this.

In the end, Simpson-Bowles recommended cutting spending and increasing taxes. In particular, it recommended cutting spending on entitlements and raising some taxes on the middle class in order to broaden the tax base.

The proposals were called “reforms” and were lightly disguised so as not to look too much like spending cuts or tax increases, but that’s what they were: Although some tax rates would be lowered, the committee also proposed eliminating all but a handful of tax carve-outs, many of which benefit the middle class. Under the plan, payroll taxes intended to fund Social Security would be expanded to hit a larger share of the wage base, and the age of eligibility for full benefits would slowly increase from 66 to 69. Revenue would go up. Spending would go down. The deficit would shrink.

And so, of course, neither the president nor congressional lawmakers agreed to any of it.

Eventually, someone in Washington came up with a solution to this problem: another bipartisan committee. This one, technically named the Joint Select Committee on Deficit Reduction but more widely known as “the supercommittee,” failed to produce any formal recommendation at all.  The committee members, all elected officials who relied on voters to keep their jobs, understood that in order to reduce the deficit, they would either need to increase tax revenue or cut spending, and they couldn’t agree on how to do it.

What they could all agree on was that the other party was entirely to blame. In November 2011, after the supercommittee reported that it had not been able to reach an agreement, Obama delivered a somber speech from the White House podium pinning the failure on Republicans who “continue to insist on protecting $100 billion worth of tax cuts for the wealthiest 2 percent of Americans at any cost.” Sen. Mitch McConnell (R–Ky.), then the minority leader, said the body failed “not because Republicans were unwilling to compromise, but because Democrats would not accept any proposal that did not expand the size and scope of government.”

A year later, with the presidential race in high gear, the parties were still trading barbs over the failures of the two committees. “Obama created a bipartisan debt commission,” groused Paul Ryan—by then the vice presidential nominee—at the Republican National Convention in 2012. “They came back with an urgent report. He thanked them, sent them on their way, and then did exactly nothing. Republicans stepped up with good-faith reforms and solutions equal to the problems. How did the president respond? By doing nothing—nothing except to dodge and demagogue the issue.” What Ryan failed to mention was that he was on the Simpson-Bowles commission—and he’d voted against its recommendations.

Yet in the years that followed, something happened: The deficit, which ran more than $1 trillion every year between 2009 and 2012, began to shrink. Not to zero, or even close, but to levels that more closely resembled those of the Bush administration, and in a bigger economy. By 2015, the deficit was $442 billion, or about 2.4 percent of GDP. The deficit problem hadn’t gone away. But its urgency had been reduced.

What had happened? In part, the major fiscal effects of emergency measures tied to the recession had shrunk. But even though the supercommittee had failed to issue a formal recommendation, its work had been tied to another budget process: sequestration, which put caps on federal spending and required Congress to cut $109 billion from the budget each year, equally divided between mandatory spending (which includes programs that run on autopilot, such as entitlements) and discretionary spending (which includes the military budget and a hodgepodge of other federal programs). Meanwhile, a bipartisan budget deal let temporary Bush-era tax cuts for high earners expire, while making them permanent for the middle class.

The bad idea’s time had come again, and this time it had an effect. Sort of. For a little while.

‘The Poor Deficit Hawk…Is Extinct’

The problem with Congress—OK, a problem with Congress—is that it can’t tell itself what to do. Not for very long, anyway. The 112th Congress in 2012 has no power to bind the 113th Congress, which means that if Congress in 2013 does not like the instructions passed down from its forebearers, it can tell the 112th Congress to go get stuffed. Which is more or less what happened.

Immediately, Congress started making deals to undermine the sequester. Starting in 2013, Ryan and Sen. Patty Murray (D–Wash.), his Democratic counterpart in the upper chamber, agreed to increase overall spending caps. The deal called for $63 billion in what they referred to as “sequester relief,” split between defense and domestic discretionary spending. More spending hikes followed. Sequestration wasn’t completely ignored, but its effects were diluted.

At first, these divergences were small. But over time they added up—and the avoidance efforts became more brazen. By the time Trump became president, most pretense of spending restraint had been dropped.

In 2015–16, Trump, like most Republicans, had run against the federal debt. His promise to eliminate it completely in eight years was deeply unrealistic, backed by no specific plan, and predicated in part on Trump’s confusion of the trade deficit (which measures inflows and outflows of goods between the United States and other countries) and the budget deficit (which measures how much more the federal government spends than it takes in). But it was, at least, a rhetorical concession to the Republican fiscal politics of the Obama years.

In early 2018, House Democrats negotiated a budget deal with Senate Republicans that suspended sequestration caps and authorized $300 billion in spending above previously allowed levels. The particulars were complex, as budget deals often are, but in broad strokes, the agreement was straightforward: Democrats got more funding for domestic spending, while Republicans got more funding for the military. Trump signed the bill, proclaiming, “We love and need our Military and gave them everything—and more.” The bill, he tweeted, would also mean “JOBS, JOBS, JOBS.”

For years, Democrats and Republicans had bickered over budget priorities. With the 2018 spending bill, they resolved their differences—by agreeing to spend more on everything.

That bill followed 2017 legislation, pushed through by Republicans, that lowered tax rates for both individuals and corporations. Some of those reductions—in particular, the bill’s permanent lowering of the corporate income tax—had been favored in some form by tax policy experts for years. But the overall impact would be to reduce projected tax revenue by about $1 trillion over a decade, relative to where it would have been otherwise, and probably more, if the individual rate reductions, which were temporary, were eventually made permanent. Not only did Republicans not offset those reductions with spending cuts, they also negotiated a deal with congressional Democrats to increase federal outlays across the board.

Once again, Republicans insisted that the tax cuts would result in no loss of revenue at all. “I’ll stick with my projections that the tax deal will pay for itself,” said Treasury Secretary Steve Mnuchin. Asked about the deficit impact of the tax bill, Paul Ryan said, “We believe we’re going to be fine on that,” citing “economic growth that gives us more revenue.”

Yet by 2019, the federal deficit had soared back to nearly $1 trillion. Even before anyone saw COVID-19 on the horizon, the CBO was projecting trillion-dollar shortfalls as far as the eye could see. The basic math, as always, was almost comically simple. Congress had reduced tax rates and increased spending. The gap between revenues and outlays had grown.

In a sense, there was a symmetry in this arrangement, with Democrats and Republicans each getting more spending for their priorities. Everyone should have been happy, as much as that’s possible in politics. But Democrats weren’t, because Republicans didn’t just get more spending for the military. They also got a package of tax cuts that congressional Democrats had universally rejected, with not a single one crossing the aisle to vote for the plan. And they had done so under the absurd pretense that this wouldn’t increase the deficit at all.

Democrats were angry. Shortly after the tax bill passed, Nancy Pelosi (D–Calif.), then the House minority leader, delivered a blistering attack on the bill and the Republican justifications for it.

“The GOP said [the tax bill] would pay for itself,” she said. “Instead, it will explode the national debt.” She attacked Ryan specifically and said that “every credible analysis” from both the right and the left found that “Republicans are exploding the debt.” Republicans, she charged, knew their arguments were false but plowed ahead anyway in order to advance their political priorities. The GOP cared about deficits only when it was time to “invest in people”—which is to say, when Democratic priorities were at stake. Fiscal concerns were a political cudgel, she implied, not a good-faith policy disagreement. Republicans had gotten away with something by dishonest means. And that had changed the shape of the debate.

“The poor deficit hawk,” Pelosi concluded, “is not just an endangered species. It is extinct.”

Washington Finds Its Balance

in Washington, things tend eventually to balance out. Not fiscally, but politically and strategically, with the two major parties and their respective ideological movements copying and countering each other’s moves. Conservative cable news networks launch in response to the perception that mainstream news has a liberal bias. A powerful think tank ecosystem on the right is replicated on the left. An escalation in tactical uses of the filibuster begets a push to eliminate its use. Republican Electoral College victories result in Democratic calls for a national popular vote. As in physics, every action has an opposite reaction, if not always an equal one.

Politics is a game of tit for tat, an eye for an eye, and when one side finds an advantage, the other side will eventually seek out a comparable advantage of its own. But that political balance, negotiated between rival elites, almost always comes at a cost—to individual freedoms, to norms of governance, to basic fiscal and budgetary responsibilities.

What Democrats saw not only in the 2017 tax bill but in the decadeslong deficit wars was that Republicans had found a political advantage in arguing that tax cuts paid for themselves. There was a clear pattern to federal budgeting: Under Republicans, tax rates would go down, spending would increase, and the deficit would rise. Under Democrats, tax rates would rise slightly, spending would hold more or less steady, and the annual deficit levels would decline. The GOP, which had long branded itself the party of limited government and fiscal responsibility, was the party of neither.

To the party’s base, this didn’t just mean that conservatives were hypocrites. It meant they could pursue their priorities without pressure to make concessions or tradeoffs. They had an argument, a rhetorical strategy—or, at the very least, a convenient and self-serving pretext—that insulated them from the understanding of shared pain and shared responsibility.

To rectify that political imbalance, the left—particularly the young, online left, which increasingly favored aggressive spending programs far more expansive than even many lifelong Democratic politicians would dare contemplate—would need a pretext of their own. And they would get it, in the form of Modern Monetary Theory (MMT).

Serious policy thinkers have always known you eventually have to pay for new spending with tax hikes and offset tax reductions with spending cuts. What MMT dares to suggest is: Maybe you don’t?

As with supply-side economics, the central insight of MMT is both true and trivial: The U.S. budget is not, strictly speaking, like a household budget or a business budget, because unlike a household or business, the federal government can print its own money. From this single observation, MMT theorists have constructed an entire macroeconomic worldview, which says explicitly that deficits don’t matter and, consequently, the government can and should print money to fund federal spending projects on a massive scale.

In this understanding of the economy, debt is not a constraint; nor are interest rates charged by bondholders. Debt can be paid down with a few congressionally authorized keystrokes on central bank computers generating new dollars. Bondholders will have little recourse but to accept these newly created dollars, because America’s currency is the global reserve. 

The only real constraint MMT proponents recognize is inflation, which serves as a signal that there are too many dollars in the economy and that some should be recalled by the government. But inflation has been running low for years.

The upshot of all of this is a belief not only that current deficit levels are sustainable but that they are actually too low. Congress, MMT proponents argue, should be spending far, far more. Fears about accumulating a large national debt should disappear entirely.

Among the chief evangelists of MMT is Stony Brook University economist Stephanie Kelton. In her recent book, The Deficit Myth (PublicAffairs), Kelton preaches the gospel of MMT, spreading the good news that deficits simply don’t matter.

“Congress has the power of the purse,” she writes. “If it really wants to accomplish something, the money can always be made available.” Therefore, “spending should never be constrained by arbitrary budget targets or a blind allegiance to so-called sound finance.”

From late 2014 through early 2016, Kelton served as the chief economist for the Democratic minority staff of the Senate Budget Committee, a position she eventually left to become an economic policy adviser to Vermont Sen. Bernie Sanders’ presidential campaign.

In her book, Kelton draws on this experience to observe that conservatives often selectively apply their deficit hawkery to big-ticket social programs—and makes the case for MMT’s deficit defiance as a response. “Whenever the topic of Social Security comes up, or when someone in Congress wants to put more money into education or health care,” she writes, “there’s a lot of talk about how everything must be ‘paid for’ to avoid adding to the federal deficit. But have you noticed this never seems to be a problem when it comes to expanding the defense budget, bailing out banks, or giving huge tax breaks to the wealthiest Americans, even when these measures significantly raise the deficit?”

Again, the political logic is explicitly laid out: If Republicans can casually dismiss the deficit increases caused by war spending and tax reductions, why shouldn’t Democrats do the same with their priorities?

The reaction was opposite—but not equal. GOP-backed reductions in tax rates had contributed to the deficit over the years, forgoing revenue if not always reducing it. (Revenues increased slightly after the Trump tax cuts, for example. But even with a fairly strong economy, they came in below pre–tax cut projections.)

The GOP tax bill had increased the deficit by about $1 trillion over a decade on paper and perhaps $2 trillion if the individual rate reductions are (as expected) eventually made permanent. Yet MMT, taken at face value, could plausibly justify programs, like Medicare for All, that would require tens of trillions in new federal spending over each decade. And the long-term rise in debt and deficits was already driven more by projected increases in spending, especially on entitlements, than by missing revenue.

This was political blowback. But it wasn’t proportional.

MMT has other components as well. For example, Kelton wants to significantly reduce the influence of the Federal Reserve, which manages interest rates to nudge both inflation and job creation. Instead, Congress would manage inflation risks through spending. The CBO, which currently produces a “score” projecting how most legislation will affect the deficit, would be tasked with estimating a given law’s effect on inflation instead. If inflation did increase, under this model, Congress would rein in the economy by pulling back on spending and increasing taxes to reduce the supply of currency in circulation.

As a matter of political economy, Kelton’s expectations are fanciful at best and are often undermined by her own self-described experiences. She repeatedly complains about congressional mismanagement of the budget and lawmakers’ misunderstanding of economics. Yet somehow she expects Congress to be able to manage the day-to-day of the economy via fiscal policy, with a jobs guarantee as a macroeconomic stabilizer. Her notion that politicians would work together to respond to an inflation crisis with contractionary fiscal policy—swift tax hikes and perhaps spending cuts—suggests an unfamiliarity with actual politicians. On a purely practical level, her ideas are either extremely cynical or extremely naive.

But what Kelton makes clear, perhaps inadvertently, is that MMT is best understood not as an economic system but as a political program, designed to solve a political problem. Although Kelton and her fellow MMT economists will readily admit that, at some point, there are limits on the productive resources that can be employed and thus limits on the power of Congress to spend new programs into existence, they rarely if ever recognize those limits in the real world. Instead, the focus is almost always on how political actors can spend more without consequence. “We can’t use deficits to solve problems,” she writes, “if we continue to think of the deficit itself as a problem.”

Few Democratic politicians are explicit proponents of MMT. Rep. Alexandria Ocasio-Cortez (D–N.Y.) has said that the idea deserves a “larger part of the conversation,” but even Kelton’s former boss Sanders still pays lip service to the notion that “every American should be concerned” about federal debt and deficits.

Yet as the Democratic presidential primaries played out, it became clear that the party’s leading lights were less concerned about fiscal restraint than ever. Sanders alone proposed more than $31 trillion in new spending, with just $16 trillion in offsets, according to the Committee for a Responsible Federal Budget. Biden’s vice presidential pick, Sen. Kamala Harris (D–Calif.), proposed some $46 trillion, according to Manhattan Institute budget scholar Brian Riedl. Even Joe Biden, a comparative moderate, proposed roughly $10 trillion in new spending.

Some of Biden’s proposed new spending was paired with offsets to keep the deficit impact down. Some was not. Some, like Massachusetts Sen. Elizabeth Warren’s Medicare for All proposal, was technically offset, but in a manner so convoluted and politically unlikely that it might as well not have been.

The Democratic Party is not a bastion of MMT. But driven by its leftward flank, the party’s desire for federal largesse has clearly grown, with plans like Medicare for All and the Green New Deal that would require trillions in new government spending making their way from the party’s fringes toward its mainstream.

In August, an economic adviser to the Biden campaign warned that the party’s agenda would be stymied by high deficits left over from the Trump era. He was swiftly criticized by Ocasio-Cortez: “To adopt GOP deficit-hawking now,” she said, “when millions of lives are at stake, is utterly irresponsible.”

As with Republicans and supply-side economics, it is the spirit of MMT, rather than the theoretical particulars, that guide its proponents in Congress. Which perhaps should not be a surprise, since the theories’ origins are conjoined.

MMT has roots in notions that go back decades, if not all the way to Adam Smith’s ideas about sovereign currency. But its modern-day godfather is hedge fund executive Warren Mosler, who Kelton says acted as a mentor, shaping her understanding of the economy.

In the late 1990s, as the deficit was briefly blooming into a surplus, Mosler became enamored of the idea that government’s status as a currency issuer rendered deficit fears pointless. He began to search for allies, and, according to The New Yorker, eventually connected with Donald Rumsfeld, the former Republican congressman who would become President George W. Bush’s defense secretary. Rumsfeld, in turn, introduced Mosler to someone who turned out to be “most helpful,” according to the article: Arthur Laffer, who “helped Mosler workshop his ideas” and put him in touch with a group of sympathetic economists “who became MMT’s founding thinkers.”

Two decades later, MMT is gaining currency in progressive circles, especially online. While its proponents would almost certainly say that the deficit-financed relief spending in response to COVID-19 is still insufficient, it represents a substantial move in their direction and a further breakdown of the sense that somehow, government spending must be paid for.

MMT backers seem to believe the world is awakening to their ideas. In an August interview with Dissent, Kelton described how, in the wake of the coronavirus, Congress had begun to leave behind old debates about paying for spending. “We spent a year arguing about where the money would come from,” she said, “and then suddenly the world opened to a new reality.”

Supply-side economics, meanwhile, retains its beachhead within the Republican Party, whose leadership continues to prioritize tax reductions above nearly all else, regardless of the budgetary impact. Over the summer, Trump advocated a payroll tax cut, eventually imposing a deferral he has hinted he’d make permanent if reelected. The president also reportedly has been looking at ways to unilaterally cut capital gains taxes. As he pushed both measures, he reportedly consulted with Laffer.

Congress, for its part, spent the summer arguing about whether to spend an additional $1 trillion or an additional $3 trillion on coronavirus relief, following the nearly $3 trillion that had already been spent.

The supply-siders had triumphed on the right, and the MMTers were winning crucial battles on the left. The deficit had always been a bipartisan problem. At last, America’s politicians had found a bipartisan solution. Lower taxes. Higher spending. And the biggest deficit ever. Finally, Washington had found its balance.


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Peter Suderman

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