The “Debt Crisis” According to Bruce Bartlett: Capital Investment, the “Debt Burden,” Fiat Currency, and the Debt Limit
This is the second in a blog series of commentaries on Bruce Bartlett’s recent statement to the Senate Budget Committee. The first post in the series discussed a number of his comments on aspects of the “debt crisis,” a crisis he and I both believe doesn’t exist. I discussed a number of his reasons for doubting the severity of any debt problem and related each of them to the capabilities of the United States as a fiat sovereign.
In this post, I’ll cover the issues related to capital investment, the debt burden, fiat currency, and the debt limit. I’ll begin with Bruce Bartlett’s statement on how capital investments ought to be treated in the budget.
5. Capital investments are appropriately financed by borrowing. There is an unfortunate tendency to treat all government spending as if it is consumption. Economists will commonly subtract the deficit from national saving to determine net saving. But of course, the federal government makes unambiguous investments in physical, technological and human capital that provide benefits for future citizens as well as those today. It would be highly desirable to clearly separate capital expenditures from operating expenses in the budget. . . . It is penny-wise/pound-foolish to cut infrastructure investments. Those who note that the states have balanced budget requirements and favor one for the federal government never call attention to the fact that such requirements apply only to state operating budgets, not capital budgets. . . .
Joe: First, capital investments by fiat sovereign governments may also be just as appropriately financed by money creation including seigniorage. In both cases the same immediate addition of net financial assets to the economy occurs. In the case of borrowing, there is a further addition of interest payments over time, so long as these aren’t accompanied by additional taxes. But direct money creation can also be added to equalize the total contribution to the private sector if that’s what we want to do.
Second, I agree that it would be good to separate capital investment from other spending in the federal budget to give people an overview of what its composition is in terms of this distinction. But, of course, some federal investments are likely to have much more positive outcomes than others, and there is no getting around that question of effectiveness, which is, in part, a question of political and human value judgments. One can have a budget where 25% is spent on projected future benefits, and another where 15% of the same total amount is spent on such benefits. But if the projected net human value of the 15% exceeds that of the 25%, then the second budget is preferable, assuming that the projected outcome of both are equal or nearly equal in other ways.
Third, economists who subtract the deficit from national savings to determine net savings must not be macroeconomists, because macroeconomists all learn the accounting identity implying that federal deficit spending increases domestic aggregate private sector savings unless all of it leaks out to the foreign sector in the same time period over which the deficit is calculated. This is a consequence of the sectoral financial balances accounting identity central to MMT. In short, federal deficits increase net private sector saving in the aggregate, and can’t be viewed as reducing it.
Fourth, Cutting infrastructure investments is terrible policy when you have an infrastructure gap estimated at $3.6 Trillion. But failing to spend to close that gap is worse than penny-wise and pound foolish, since for a fiat sovereign there is no shortage of the capability to produce the money needed to close that gap.
There are considerations of inflation and resource impact that have to be kept in mind if proposed policies would spend too much within a given period on that problem, so that the spending went past the point of full employment or created shortages of material or human resources. But there are no financial capability problems involved in making the decision to close the infrastructure gap. So, the fact that Congress isn’t spending say $700 billion per year over 6 years on that problem, funded by seigniorage, is fiscally irresponsible, in my view.
Lastly, Bruce Bartlett is right to point out that those who point to the states as having balanced budget requirements as an argument for imposing such a requirement on the federal government, never point out that those same states don’t apply that requirement to the whole budget, but only to the operating expense portion of their budgets.
In addition, however, it is worth pointing out that far too many of the states were near basket cases of austerity in the aftermath of the crash of 2008, precisely because of that requirement. If the federal government had had the same requirement, then the Great Recession would certainly have become a Great Depression.
6. Those that fear the burden of the debt on future generations always forget that future generations inherit the assets as well. In the case of the national debt, it is true that future generations will inherit the obligation to continue paying interest, but they also inherit the bonds on which that interest is paid. While relatively few individuals may own Treasury securities, vast amounts are owned indirectly by pension funds and insurance companies for which they are a vital asset with which they will pay benefits to future generations. If the national debt were entirely owned by Americans, we would literally owe it to ourselves; there would be no burden in the aggregate.
Joe: I’ve heard this argument many times. It’s a good one; very plausible. But, it’s also true that the relationships between the people as individuals and certain of their Government’s assets and liabilities doesn’t exist. The language used by Bruce Bartlett, and many others who hold this same view of things shares the framing of the inter-generational accounting terrorists assuming that we as individuals legally share in the debts and liabilities of the federal government. Its only difference is in assuming that we also share in federal assets, so that our share of the federal balance sheet is very likely to retain a positive net worth even if the debt instruments on the liability side keep on growing as time passes.
But, I don’t think this describes the legal relationship at all, and that one gains nothing by accepting this framing of individual responsibility for government debts. You and I as individuals have no legal claim on the assets of the federal government, and “we” also have no contractual obligation to repay its debt instrument liabilities. We, as individuals don’t owe $18 Trillion, and no one of us owes $56,000 even though our government owes and must repay, as guaranteed by the Constitution, $18.1 Trillion.
I’ve outlined the argument in more detail in this post, but its meaning is clearly that legally there is no debt burden. It is an imaginary propaganda construct. Instead, there is only a train of assumptions ending with the conclusion that one day our government will impose on us enough tax obligation in excess of current spending to cover repaying the debt instruments issued by the government.
But that conclusion is neither inevitable nor obligatory. First, because the national debt can be continuously rolled over with new debt, if our government wants to issue and second, because, alternatively it can repay it and cease further debt issuance if it so chooses. So, right now no one of us has any liability for the national debt. It is a government liability and if we have any ounce of common sense, we will see to it that either the Government repays it using its fiat sovereign authority to pay it down, or, alternatively, it simply issues new debt to repay the old as it falls due.
7. The burden of debt owned by foreigners is not a problem as long as it is denominated in dollars. In every single case where a nation has gotten into debt trouble, such as Greece or Argentina, it has been because they sold bonds denominated in currencies they cannot control. Their problem wasn’t so much that they couldn’t service the debt as that they lacked the means to make or refinance principal payments when due. This cannot happen to any country that only sells bonds denominated in its own currency. In the early days of the Republic borrowers needed gold to service foreign debts. This is the principal reason why the Founding Fathers were opposed to government borrowing. In recent history, the U.S. has borrowed in foreign currencies only once back in the Carter Administration.. . .
Joe: That’s right, of course. But, it also means, once again, that there’s no debt burden relating to US debt instruments owned by anyone whether foreign or domestic.
8. The debt limit is a dreadful way to try and constrain the growth of debt. It manifestly does not work and creates unnecessary risk in financial markets when it is not raised in a timely manner. It should be abolished. . . . Since Congress is unlikely to do this, I have long urged the president to utilize his power under section 4 of the 14th Amendment to the Constitution to invalidate the debt limit. The legislative history of this provision makes clear that its purpose was to prevent Congress from holding the debt hostage to a political agenda. . .
Joe: I agree that the debt limit is a terrible piece of legislation that should have been repealed long ago, certainly by 1971, when the federal government went full-bore fiat. However, I don’t think the president has the legal right to use the 14th amendment, unless the Supreme Court first invalidates the alternative ways the President can call upon to avoid both default and breaching the debt ceiling, because if any of those alternatives are legally valid, then the debt ceiling law isn’t in direct conflict with the 14th amendment, and that amendment can’t justify a declaration that the law is unconstitutional.
Altogether, I’ve discussed seven options for ending debt ceiling crises and offered my reasons for thinking that the 14th amendment must be the last, rather than the first alternative tried by the President, in a previous series of posts. This one is the evaluation piece in the series. It has links to the previous posts other than the conclusion which is here. The series is also an appendix to my e-book.
(Cross-posted from New Economic Perspectives.)