It's the Same Old Song

Part 2, The Return of the Deficit Hawks

Apr 18, 2021

“The important thing to realize is that governments are not like you and me, governments don’t have to pay back their debt. All they have to do is make sure that their obligations don’t grow beyond any reasonable estimate of what they can use over time. That means they never actually have to pay off debt. It’s a threat that exists only in the imagination of people who want to have some reason to squeeze government spending.”
-Paul Krugman

Joe Biden has begun his Presidency with bold initiatives. In a major change from his predecessor, he quickly moved to deal with the Covid crisis, rolling out plans to increase vaccine production and distribution. Fifty days into his Administration, he signed the American Rescue Plan Act, committing the government to spend $1.9 trillion to help resuscitate the economy. In early April, he announced the $2.2 trillion American Jobs Plan, part one of what he said would be a $4 trillion effort to repair and modernize the nation’s infrastructure. The plan’s expansive definition of infrastructure has brought howls of complaint from the Republicans: Besides traditional projects such as roads and bridges, the administration intends to spend on high-speed broadband, upgrading the nation’s electrical grid, home care for the elderly, electric vehicles, affordable housing, and school construction. There is the usual sound-bite messaging from the GOP about adding to the deficit and rigorous objection to Biden’s proposal to increase the corporate tax rate from 21 to 28 percent to “pay for” all these programs. Senate Minority Leader Mitch McConnell said that if the Democrats stick with a plan that is “going to have massive tax increases and trillions more added to the national debt, it’s not likely” he would support it.

And that brings us to what I call the “fear of debt” discussion. For decades, the Republican mantra has been that the government is “living on the credit card”, leaving future generations to pay the bill. They like to make the comparison to family finances or to the budgetary practices of the states. (Most states have balanced budget restrictions meaning they cannot borrow to cover revenue shortfalls.) Struggling to pay a debt or not being able to pay it at all is anxiety-inducing for the average person. But the finances of families, businesses, and states are not the same as those of the Federal Government, the issuer of the currency in which it borrows.

Moreover, the facts belie the deficit hawks’ argument that government borrowing injures the nation’s economy:

Except for two years during Andrew Jackson’s Presidency in the 1830s, the United States government has always carried a debt.
For the last 50 years, the real (inflation-adjusted) GDP of the US has quadrupled. The government ran a deficit for 48 of those years.
Despite consistent deficit spending and borrowing by the government, and including the dramatic surge because of the Republican tax cuts in 2017 and Covid-related spending last year, inflation has remained low.

These facts undercut the Republican crusade against “big government”. It has long been a conservative goal to unwind the social safety-net programs that began with the New Deal and were extended by Lyndon Johnson’s Great Society. Conservative fear-mongering about big government and the threat it posed to individual liberty did not fully obscure that Republican jeremiad was always all about the money. When Ronald Reagan entered the White House in 1981, Republicans began in earnest to pursue a policy of “starving the beast”, reducing the government’s ability to spend by cutting taxes. Grover Norquist founded the anti-tax Americans for Tax Reform and began asking House and Senate Republicans to sign a pledge opposing increases in marginal tax rates. Eventually the concept of “pay fors” became part of the budgetary process: To increase spending in one discretionary area, the government needed to reduce it in another, mainly because increasing revenue by raising taxes is anathema to the GOP.

Stephanie Kelton, professor of economics and public policy at Stony Brook University, is a leading proponent of Modern Monetary Theory (MMT). She took to Twitter this week to present some thoughts on “pay fors”:

Let’s play the “pay for” game. Suppose you want to spend $3-$10 trillion on a Build Back Better agenda. You’ve decided that you’re going to play the “pay for” game, which means you will show where every dollar you plan to spend is going to “come from.” 1/
The whole point is to appear “fiscally responsible,” showing that you can carry out your spending without adding to the deficit. In other words, for every dollar you want to spend INTO the economy, you have a plan to rip a dollar OUT of someone’s hands. 2/
The Biden administration has put forward their plan, which mostly relies on raising taxes on corporations. The president says it will raise more revenue (over 15 yrs) than he is proposing to spend (over 8 yrs). Don’t ask me why. 3/
Along with some other changes, the Biden plan would take the corporate income tax rate from 21% to 28%. Already, a number of Dems are balking at 28% and chattering about going to 25% instead. And, of course, CEOs are fighting back. 4/
If Dems don’t have the votes to go to 28%, then what? Scale down the package? Fight over other ways to raise taxes? The opposition loves it, because they know that the odds of passing anything bold drop precipitously when Dems hold themselves hostage to the “pay for” game. 5/
Is there a way out? Setting aside the MMT solution, which is to stop playing the conventional “pay for” game altogether, why not simply take the IRS Commissioner at his word? Why not make the case that you can spend up to $10 trillion without raising a single tax? 6/
If all you need is stepped up enforcement of EXISTING TAX LAWS, then you can play the “pay for” game even if you can’t get the votes for a slew of tax increases. Maybe I’m wrong and the votes are there. Give it a shot! 7/
Both strategies get you the revenue you think you need, and both reduce inequality. So I guess I’m curious to know whether the administration is digging its heels in on the need to RAISE TAXES or whether they would accept HIGHER REVENUE to play the game. 8/
As I’ve been saying for months, there’s yet another way to play the “pay for” game. Just make the case that the money you spend ‘today’ will come back to you ‘tomorrow.’ Fiscal multiplier and all that. 9/
Alternatively, we could all grow up and stop this nonsense. Admit that taxes don’t “pay for” anything and that all government spending is paid for in one way and one way only—the Federal Reserve credits the appropriate bank accounts. 10/end
- @StephanieKelton

It would not be cynical to point out that despite the rhetoric, beginning with Reagan, the deficit has been larger with a Republican in the White House than with a Democrat.

Facts are indeed stubborn things.

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