As the Debt Ceiling Approaches, a Fiscal Myth Echoes Across the Landscape of Politics
Periodically, as reaching the debt ceiling approaches, a spate of articles and posts appear in the mainstream media warning about an impending government financial crisis, and doing so in a manner that falsely constructs the problem situation presented by the limit, and also falsely narrows the available alternatives to solve the problem. For example, an article recently appeared in Vanity Fair’s The Hive, written by Bess Levin, which provides a very good illustration of this false construction and the errors of fact supporting it.
First, the title of the article “THE G.O.P. TAX CUT IS DRAINING THE TREASURY EVEN FASTER THAN EXPECTED” is misleading in itself, because the Treasury isn’t being drained by the Republican tax cut, but by federal spending mandated by Congress, including spending to repay previous debt instruments as they fall due. As this spending takes place, the Federal Reserve marks down the Treasury spending account, and it is this that is draining it.
Why does Levin think that the tax cuts are draining the Treasury account more rapidly than before? It is because she believes that federal revenue from federal taxes and bond sales funds spending.
So, she infers that lower tax revenues, not compensated for by sales of more debt instruments, means that less in reserves is being added to the Treasury spending account. But Levin is wrong about how federal spending is funded.
It is actually funded by Congressional appropriations or continuing resolution acts followed by the Fed using its delegated authority from Congress to mark up the Treasury spending account with additional reserves. Taxes do not fund spending; and neither does revenue from the sale of Treasury securities.
Yes, the Fed only acts to create new reserves for the Treasury, under certain rules which include draining both tax and bond sale-derived reserves from private sector accounts. But, destruction of such reserves through marking down private accounts is an action distinct from creating new high-powered reserves in the Treasury spending account.
Second, Levin also inaccurately says:
America’s burn rate is speeding up—leaving Congress just a few weeks to raise the debt ceiling again.
Granting that “the burn rate” is a metaphor, it is not increasing, if what Levin means by this is the rate of increase of Treasury spending. That is normal for this time of year.
If, on the other hand, by “burn rate” Levin means the rate at which the reserve balance in the Treasury spending account declines, then that phrase would be accurate, but it doesn’t follow that Congress has just “. . . a few weeks to raise the debt ceiling again.”
There are other actions that Congress or the Executive could take besides raising the debt ceiling to avoid a Treasury default, assuming that is the consequence Levin wants to avoid. These other things include both Congressional and Executive actions.
Alternatives to Raising the Debt Limit
The Congress could, if it desired:
— pass Overt Congressional Financing (OCF) (See the graphic below)
— repeal the debt limit law; or
— pass re-organizing the Federal Reserve to nationalize the regional Fed banks, and place them along with the Board of Governors and the Federal Open Market Committee under the supervision of the Secretary of the Treasury who could then order the Fed to fill the Treasury spending account using its authority from Congress to create reserves, so that Treasury could fulfill its Congressional spending mandates. Any of these alternatives to raising the debt limit are available to Congress.
The Executive branch for its part could:
— mint a 1 oz platinum coin with a face value large enough, so that after the coin were transported to the New York Fed for deposit, its face value credited to the Mint’s Public Enterprise Fund (PEF) account, and the seigniorage profits from the Fed credited to the Treasury spending account, the total of reserves in that account would be enough to fulfill Treasury’s spending obligations to Congress for the foreseeable future. Such a coin with a face value of $100 Trillion would probably be enough to fulfill such obligations.
— Issue “consols”, i.e. Treasuries that provide no date of repayment of principal (perpetual bonds) at interest rates higher than those offered for debt instruments that repay the principal on a fixed date. Consols are not subject to the debt limit, because that law only applies to securities whose principal amounts are owed to the holder by the Treasury.
And again, either of these actions is an alternative to raising the debt ceiling.
Faux Fiscal Responsibility, Public Purpose, and Real Fiscal Irresponsibility
Next, Bess Levin begins the main body of her article by saying:
One of the many things confirmed by the great tax-bill melodrama of 2017 is that Republicans only pretend to care about “fiscal responsibility” when Democrats are in power and tax cuts aren’t on the line. With the opportunity to slash the corporate rate nearly in half, cries of “I won’t endorse a bill that adds one penny to the deficit!” evaporated, and tacking on $1.5 trillion became no big deal.
The assumption behind this passage is the view that “fiscal responsibility” means spending to reduce or eliminate the annual budget deficit, so that the Republicans were not only hypocritical in their loud allegiance to the doctrine of “fiscal responsibility”, but also did something fiscally irresponsible, because they passed a bill that increased the budget deficit by an average of $150 Billion per year over 10 years.
But this assumption is false because it ignores the reality that since the Federal government is a monetary sovereign that can, at will, create its own currency, there is no solvency problem arising from deficits, or the level of national debt, or debt-to-GDP ratio arising from them. The solvency issue is a faux issue and the attempt to define “fiscal responsibility” relative to that non-existent problem is wrong-headed in the extreme, and has proven to be a tool used against progressive economic legislation by those who favor austerity and inequality.
In brief, a monetarily sovereign government like the US cannot run out of money involuntarily, because it has unlimited authority to create whatever amount of money it needs. That doesn’t mean it can spend whatever it wants, or run as large a deficit as it wishes, because it has to evaluate its spending options against their likely impact, including inflation and whatever undesirable consequences it may create by spending on the wrong things or spending in the wrong way.
So, the test of fiscal responsibility then becomes the impact of proposed spending rather than a non-relevant mathematical criterion of too much spending such as the debt-to-GDP ratio or the face value of the principal of outstanding debt instruments previously sold tied to the mistaken notion that the Government can be forced into insolvency if it spends too much. The criterion I favor for evaluating fiscal responsibility in place of solvency related mathematical criteria is Public Purpose.
Public purpose is a composite involving many dimensions. We need not review it here in detail, but it includes full employment, price stability, basic economic rights, economic inequality, and a number of other criteria related to real outcomes rather than fiscal myths.
So, Levin’s charge of fiscal irresponsibility against the Republicans on grounds of running too large a deficit evaporate in light of the reality of monetary sovereignty and the criterion of public purpose. However, that does not mean that the Republicans are not acting fiscally irresponsible now whereas, they were practicing hypocritical fiscal responsibility earlier.
It means instead, that the Republicans were fiscally irresponsible earlier because their legislative activities opposed public purpose. And now they are still fiscally irresponsible because they have passed a huge tax cut which is likely to both increase inequality and also poverty, both of which are important dimensions of public purpose.
Next, Levin, points out that the Republicans will soon turn around and begin to preach once again to us about “fiscal responsibility” and the importance of cutting social safety net spending due to the increase in deficits we will see shortly, which as we know now are only significant because the legislation mandating the deficit spending will have created greater inequality, poverty, fatalities due to lack of health insurance, and a host of other ill — effects due to both the kind of spending involved and the cuts to other spending passed in the act. And then she asserts:
Which makes it somewhat ironic that the Treasury is now burning through its cash reserves at an even more spectacular rate.
Here, I see not only the irony, but the dishonesty, gaslighting behavior, and outright immorality in the Republican blueprint for paying off their donors while planning to scream “fiscal irresponsibility” at progressive policies which would provide for deficit spending for public purpose rather than for the benefit of donors.
Projections of Insolvency: “Running Out of Money” or “Refusing to Create More Money”?
Bess Levin then points out that due to the tax legislation “the federal government will run out of money even sooner than expected.” Again, she is assuming that taxes fund spending, when tax revenue never gets to the Treasury spending account before the Fed destroys it, and she is also assuming that the Treasury, has no way to induce the Fed to fill its account other than to drain tax and bond revenues beforehand.
As I’ve explained earlier, both of these assumptions are untrue. That means that it is not the Trump tax cuts that threaten “running out of money” and default in the first half of March, earlier than expected, nor the tax cuts and the failure to raise the debt ceiling. Instead, if default happens, it will be the fault of both Congress and the Executive for not taking at least any one or of the 6 possible actions, including raising the debt limit, the only option mentioned by Levin.
In closing Levin says:
A proposal to raise the debt ceiling may repel G.O.P. deficit hawks, who in the past have pushed for spending cuts before allowing a vote. And Democrats may be equally hesitant to support the measure, particularly if there’s been zero progress on the immigration front. . . .
To be fair, the C.B.O. report doesn’t factor in the stratospheric growth Team Trump promised would be spurred by the tax plan, allowing it—per Treasury Secretary Steve Mnuchin—to not only “pay for itself, but . . . pay down debt.
And then she cites Bruce Bartlett saying that Republican growth projections are “wishful thinking”, but even that final shot misses the central point at issue, namely that increased growth would not create tax revenues that will “pay for” spending, simply because taxes do not fund spending in the first place.
As egregious as this example from Vanity Fair of the false construction of the debt ceiling problem is, it is far from alone each time a debt ceiling crisis approaches. As the current one approaches, Bess Levin doubled down on her false construction of the debt/deficit problem in this post.
In addition, the Fiscal Times, in a post by Michael Rainey, provides essentially the same take on the debt ceiling crisis as Bess Levin does, minus the emphasis on fiscal responsibility and Republican inconsistency, mentioning only raising the debt limit as a possible solution to the problem. Also, the Washington Post scooped both the Fiscal Times and The Hive with this article by Erica Werner and Damian Paletta on January 31, providing the same construction of the problem as Levin’s piece, but also providing more context about the shutdown and budget crisis, and the mechanics of the “extraordinary measures” Treasury is taking to avoid breaching the ceiling. The WaPo piece, however, also avoided the “fiscal responsibility” and Republican hypocrisy aspects of the situation.
On February 1, WaPo columnist Catherine Rampell addressed the debt ceiling crisis in a longer piece with a little more background on the debt limit legislation and how its use today in hostage-taking departs from the intention of the law to discipline federal spending. Rampell editorializes about the deterioration of Congressional leadership since the crisis of 2011 and emphasizes the context of the debt ceiling issue in a number of other issues that together create the potential for voluntary default due to miscalculation.
Hers is the only one of the articles reviewed that mentions the possibility of either raising the debt ceiling, or repealing the debt limit law. She doesn’t, however, mention other possible alternatives based in recognition of the monetary sovereignty of the United States, and the fact that taxes and bond revenue do not fund spending.
Conclusion: Ideological Blinders
Why are there so many errors in the posts of Bess Levin and also other journalists writing about debt ceiling crises? I suppose there are many reasons: the need to write too many stories to meet the expectations of editors; the need to maximize brevity, the need to minimize research; the need to copy the stories of others to save time; the need to reinforce the perspectives of significant others in one’s environment; and other pressures in the journalistic environment, including the pressure to be “politically correct” by not straying far from received wisdom.
But, I think the most important factor in producing the error-filled narrative in Levin’s post, and in the others I’ve referenced is that the authors cannot entertain alternative narratives about how federal funding and spending happens, or about the additional alternatives that exist for solving the debt ceiling problems, because they wear neoliberal ideological blinders taught to them in universities teaching neoliberal approaches to economics. Since 2009, much digital and actual ink has been spilt attempting to break through these blinders by educating people about heterodox economic paradigms, providing alternative accounts to the neoliberal view of how federal spending happens.
But journalists are among the most conservative of thinkers when it comes to writing about economics and they adhere strongly to the neoliberal view that governments do and ought to get their spending money only from already existing net financial assets. They seem wedded to a fixed pie of the world, when it comes to acquiring financial assets, and to government’s inability to affect this pie..
So, they create narratives that reflect and reinforce the neoliberal paradigm with its insistence that governments can only tax and spend to get money to spend and cannot or should not entertain the idea of using their authority to create money. They wear, in other words, their neoliberal ideological blinders when they view debt ceiling crises, and they refuse to read or absorb new paradigms in economics that have emerged over the past 30 years. Until that changes, and there are powerful forces in Washington, New York, globally and in the mainstream media that oppose paradigm changes with all their resources, fairy tales and fiscal myths will reign in policy circles, damaging austerity will reign supreme, and the trends toward plutocracy, oligarchy, and totalitarianism will continue with the likely result that our species will not survive the many problems, including the climate crisis, that we must soon transcend.
At this writing, politico reports that
Congressional leaders clinched a two-year deal to lift strict budget caps on defense and domestic spending, putting an end to a series of short-term spending bills and shutdown fights that have defined Washington the past few months.
The deal is expected to increase defense and domestic spending by roughly $300 billion over two years, according to administration and congressional sources, as well as lift the debt ceiling through the election and include tens of billions in disaster aid. . . .
A plan to lift the debt limit, which requires action in the coming weeks, and whether to extend expiring tax provisions were among the few outstanding issues that could be attached to the deal, according to aides in both parties familiar with the talks. Sen. Roy Blunt (R-Mo.) said the debt ceiling is likely to be suspended through next March in tandem with the budget deal. Cornyn said nearly $90 billion of disaster aid for wildfires and hurricane damage will also be included.
So, Congress is apparently going to both refuse to officially raise the debt limit, and also repeal the debt limit law, but instead will suspend the debt ceiling until next March, well after the 2018 Congressional elections, where a new Congress will decide whether one of the methods for permanently curing debt ceiling crises will be used to end additional episodes of debt ceiling brinksmanship after March 2019.
*This article originally appeared at JosephMFirestone.com on 2/7/18.