economics

How many more trillions before the debt triggers a crisis?

Stanford University
Stony Brook University
Genesis
Response
Penultimate

Stephanie Kelton

Stony Brook University

June 5th, 2022
I have participated in numerous debates about the sustainability of U.S. government debt. I did this one for the Financial Times. This one for Bloomberg TV. And this one for Munk Debates. Each time, it feels like asking an atheist to debate religion with the Pope.
When someone like Jason Furman (a mainstream democrat) debates someone like Brian Ridel (a mainstream conservative), the debate “works” because both sides interrogate the question using a common macroeconomic framework. Neither questions the legitimacy of the basic question—i.e. how much debt is too much? Both think CBO's forecasts are meaningful. Both embrace the concept of a government budget constraint (GBC). Both believe that deficits must be “financed” and that “borrowing” is the preferred method of financing a budget deficit. And both agree that something must be done to put the debt on a “sustainable” path. So the “debate," such as it is, revolves around defending one's preferred method of stabilizing the debt ratio at some target level. It all just boils down to slowing the growth of future spending vs. accelerating the rate of future tax receipts.
The problem I always face in these debates is that I’m operating from a completely different macro framework. I don’t find CBO’s debt projections useful as a point of reference for thinking about fiscal sustainability. Like other MMT scholars, I understand the GBC as an ex post accounting identity, not an ex ante “budget constraint.” I see the purpose of bond sales as an ex post method of providing interest rate support, not an ex ante “borrowing" operation. And I reject the notion that so-called “money-financed” deficits are more inflationary than so-called “bond-financed” deficits. Further, with the abandonment of the gold standard and the shift to paying interest on reserves, I see no compelling reason for the continued matching of government deficits with new bond sales.
These differences make engaging the question of how many more trillions can be added to the national debt before triggering a crisis a difficult one. In this instance, the challenge is compounded by the fact that Professor Taylor concludes his post with an interpretation of MMT that I find unrecognizable.
For example, anyone with even a passing familiarity with MMT knows that taxes (not wage and price controls) are the means by which resources are moved from one part of the economy (private) to another (public) in MMT. Further, the basic idea of MMT is not that money could be used to finance the budget deficit but that there is no other way for the federal government to spend. All government spending is carried out by crediting bank accounts with newly-created (digital) dollars. So MMT is not advocating “printing money” to pay for federal spending. It is describing the mechanics of government finance. There is only one way to pay the bills, and it always involves the central bank keystroking new money into existence.
Professor Taylor closes his post by conflating the Federal Reserve’s bond-buying program, known as Quantitative Easing (QE), with MMT. He thinks MMT is about using central banks to “help finance the federal deficit by creating money” via QE. That is wrong. In fact, MMT economists have been skeptical of QE from the moment it was introduced under Ben Bernanke.
Professor Taylor wants us to worry about federal government debt. He appeals to the authority of the Congressional Budget Office (CBO), to authority of conventional economic theory/models, and to his own interpretation of the relationship between government debt and economic growth.
I am not worried.
MMT scholars have critiqued CBO’s theory/models, and we have analyzed the historical data that has been used to defend the proposition that high debt reduces economic growth. Like the Harvard professors (Carmen Reinhart and Ken Rogoff) who popularized this view, I think Professor Taylor is mostly confusing correlation with causation.
1 Comment
I don't understand why the Fed raising interest rates is the sole tool for controlling inflation. Seems like if demand is too high for goods and services it would be less intrusive and destruction to raise taxes and cut spending or a combination of both. Seems like what the Fed is doing now, raising interest rates rapidly and evaporating people's wealth from stock market losses (and bond funds, like those pesky ones the working class get sold in their 401, 403 plans!), and increasing the cost of government debt, is much more naive and destructive than the government taking that wealth and actually using it for something, like paying off debt, or redistributing it to the lower class so we don't end up with even more homeless and starving little kids.