Bernie Sanders, Stephanie Kelton and the Great Budget Deficit Myth

I’m noticing that the news of Bernie Sanders hiring Dr. Kelton as his economic advisor made a very short and barely-noticed splash in the media, which strikes me as somewhat extraordinary, considering how the knowledge she brings to the table is somewhat revolutionary. It’s not new–bankers and the finance world know it very well–but it’s something that has been systematically lied about by economists and the mainstream business press for decades. And, well, it’s fairly obvious why that is. No one would tolerate the misery they inflict if they were aware of the operational realities of the money system.

So, here’s a small collection of articles that do a good job of explaining why that is:
Nice and basic:
Budget Deficits and Net Private Saving
This one answers some of the controversy over MMT:
Private Savings is Federal Deficit
And heck, why not. The exhaustive collection:
Warren Mosler’s Mandatory Readings page
And of course, my own collection: MMT Links

I’ve seen a lot of articles admitting that yes, federal spending is private income, but what about “crowding out private investment???”

This is a fairly blatant attempt to protect the notion that private credit is somehow money. Yes, you can get money from a bank and build a house. That is a net good, a net increase in wealth–until the bank wants it’s money back! What then? The bank didn’t give you enough money to pay the interest on it’s loan. Where does that come from? Another bank, that you then have to pay even more to? One can easily see how exponentially-growing privately-generated debt increasingly leads to debt crises.

The only money source that doesn’t want it all back is the government.

Money–government debt–is a service to the economy. That’s it’s only function, and government can issue it without restraint. There is no need to have unemployment of either people or resources. As long as both are available, just add money and stir. There is no “burden on the future.” How can there be? People working with resources are creating more wealth that will still exist in the future! How can this be a burden?

The only constraint on spending is resources. Do we have enough lumber to build the houses? Do we have enough carpenters? Do they have the time? When you think about it–if the answer to the above is yes, then it doesn’t matter if you get money from the government to pay for it; that only means that you don’t have to take on debt to add real assets to GDP. So the real complaint from the “crowding out” crowd is that government debt crowds out their unearned income from interest. It’s like fleas objecting to being “crowded out” of their share of your dog’s blood.

What if we’re at full employment (a dream, alas)? More government spending will then not increase anything, because no one is available to do the work anyway. One wonders how government could spend more if the economy is maxed out? They can buy more goods, which could, in theory, cause inflation–but then those goods are in turn used in the real economy anyway. We don’t lose them.

In reality, it’s never more spending that causes it, but credit bubbles, speculation, and resource collapses caused by disasters and outside forces, which is a topic for another article. In a productive economy, as long as everyone has income increasing at the rate of other prices, it doesn’t matter to them.

So the only people really bothered by inflation are those whose only income depends on the price of money, and have a vested interest in you believing that inflation is some kind of public catastrophe. Deflation makes their money worth more, so they much prefer a lousy economy with high unemployment. MMT has excellent ideas on managing the relationship between resource utilization and money supply, and it doesn’t entail any insane NAIRU (natural anti-inflation rate of unemployment) ideas. Which brings us back to Bernie Sanders and Dr. Kelton. The cure for this malaise is now within reach of Congress. Will they defy their banker constituency and let us get back to work?

2 thoughts on “Bernie Sanders, Stephanie Kelton and the Great Budget Deficit Myth

  1. Government debt PROVIDES the interest to the rentier class. I don’t think they want to get rid of that.

    My impression of what is meant by “crowding out” is that the money people use to buy Treasury securities would otherwise have been lent to business, in order to create more real goods and services.

    We can fix that – if it is a real problem, which it might be – by simply not issuing the government bonds. Mint a platinum coin, or change the law, so that the government can deficit spend without issuing securities.

    And, if the economy is at full employment the way government can spend more is to pay a higher price, to attract some of the existing goods and services away from private sector consumers, and drive up the price everyone else must pay for the remainder. To pretend you don’t know that is disingenuous.

    • That was kind of the idea behind QE, to force money out of bonds and into markets. Unfortunately, in the absence of real demand–too many living on too-low wages to be able to buy the economy’s production–what liquidity didn’t simply languish in reserves ended up rampaging around blowing derivative bubbles (sub-prime loans for cars, really? This is insanity) and causing headaches in emerging markets. Little of it was used to produce anything, it didn’t stimulate demand because it didn’t end up in worker’s pockets, and now that it’s ending, what little it was doing is tapering off. Anything that has to be paid back is ultimately deflationary if an outside source doesn’t cover the interest.

      It seems to me that allowing the existence of a rentier class at all is a political decision. Since all non-interest-burdened money comes from government, and all money created in the private sector *is* interest-burdened, it is indeed true that all interest is paid by the government. This is why restricting government spending leads to ever-larger debt crashes as the available money is concentrated in the control of rentiers and becomes unavailable to the real economy. We could, however, simply make privately-generated money illegal and eliminate the interest burden, which would then allow the money in circulation to be entirely used for production instead of debt service. Why shouldn’t the government simply issue enough currency for all economic activity?

      I agree on minting the coin, but not so much on issuing treasuries. There is a need for safe savings instruments in an economy where the safety net was never strong and is failing fast, and those savings have to at least compensate for inflation, if it occurs. And treasuries function as an adjustment mechanism. At one time they were a good way to keep a handle on the private generation of credit, but the rise of shadow banking and international money markets (and the loss of transparency with glass-steagall) made it impossible to even know how much was out there, let alone adjust rates to suppress it.

      You lost me on the last point though. If the economy is at full employment, why would government have any need to spend more? That is the point at which you stop spending, since the economy has no more capacity to produce more. Why would you want to drive up prices?

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