Our debt isn't the problem (Why worry about balancing the federal budget at all?)

NewEconPerspectives ^ | January 1, 2013 | Stephanie Kelton

[gunsequalfreedom]

Look, up in the sky! It’s a “fiscal cliff.” It’s a slope. It’s an obstacle course.

The truth is, it doesn’t really matter what we call it. It only matters what it is: a lamebrained package of economic depressants bearing down on a lame-duck Congress.

This hastily concocted mix of across-the-board spending cuts and tax increases for all was supposed to force Congress to get serious about dealing with our nation’s debt and deficit. The question everyone’s asking is this: On whose backs should we balance the federal budget? One side wants higher taxes; the other wants spending cuts. And while that debate rages, the right question is being ignored: Why are we worried about balancing the federal budget at all?

You read that right. We may strive to balance our work and leisure time and to eat a balanced diet. Our Constitution enshrines the principle of balance among our three branches of government. And when it comes to our personal finances, we know that the family checkbook must balance.

So when we hear that the federal government hasn’t balanced its books in more than a decade, it seems sensible to demand a return to that kind of balance in Washington as well. But that would actually be a huge mistake.

History tells the tale. The federal government has achieved fiscal balance (even surpluses) in just seven periods since 1776, bringing in enough revenue to cover all of its spending during 1817-21, 1823-36, 1852-57, 1867-73, 1880-93, 1920-30 and 1998-2001. We have also experienced six depressions. They began in 1819, 1837, 1857, 1873, 1893 and 1929.

Do you see the correlation? The one exception to this pattern occurred in the late 1990s and early 2000s, when the dot-com and housing bubbles fueled a consumption binge that delayed the harmful effects of the Clinton surpluses until the Great Recession of 2007-09.

Why does something that sounds like good economics — balancing the budget and paying down debt — end up harming the economy? The answers may surprise you.

Spending is the lifeblood of our economy. Without it, there would be no sales, and without sales, no profits and no reason for any private firm to produce anything for the marketplace. We tend to forget that one person’s spending becomes another person’s income. At its most basic level, macroeconomics teaches that spending creates income, income creates sales and sales create jobs.

And creating jobs is what we need to do. Until the fiscal cliff distracted us, we all understood that. Today, we have roughly 3.4 people competing for every available job in America. The unemployment rate is like a macroeconomic thermometer — when it registers a high rate, it’s an indication that the deficit is too small.

So in our current circumstance — a growing but fragile economy — policymakers are wrong to focus on the fact that there is a deficit. It’s just a symptom.

Instituting tax increases and spending cuts will pull the rug out from under consumers, thereby disrupting the income-sales-jobs relationship. Slashing trillions from the deficit will only depress spending for years to come, worsening unemployment and setting back economic growth.

Conveying this is an uphill battle. The public has been badly misinformed. We do not have a debt crisis, and our deficit is not a national disgrace. We are not at the mercy of the Chinese, and we’re in no danger of becoming Greece. That’s because the U.S. government is not like a household, or a private business, or a municipality, or a country in the Eurozone. Those entities are all users of currency; the U.S. government is an issuer of currency. It can never run out of its own money or face the kinds of problems we face when our books don’t balance.

The effort to balance the books that’s at the heart of the fiscal cliff is simply misguided.

Instead of butting heads over whose taxes to raise and which programs to cut, lawmakers should be haggling over how to use the tool of a federal deficit to boost incomes, employment and growth.

That’s the balancing act we need.

[csmusaret]

If debt is so good I wonder how we are in such bad shape with a debt as big ours.

[gunsequalfreedom]

If debt is so good I wonder how we are in such bad shape with a debt as big ours.

According to the author it is because our debt is not big enough.

[Teacher317]

Let's accept his misguided premise and his slanted data... he is STILL demonstrably off-base with his conclusion.

The total national debt was only higher than 100% of annual GDP once before in our history, and that was during WWII (when we were financing massive supply dumps into Russia and England so that their children could die at the ends of Nazi machine guns instead of our children... a pretty good purchase, considering... and we paid the debt back down to 40% within 6 years).

Pelosi and Reid took over Congress with the ratio at 43% in 2007. It's now at 105%, in just 5 years. The IMF calls 125% as "unsustainable". Only 10 nations have a higher ratio right now, and most of them are in sever financial trouble (and most of the rest are tiny Caribbean island-nations). We are not currently paying 40 million Europeans to die in our place, and we are not about to enter an era where we have the the vast majority of the world's modern manufacturing plants that don't have bomb damage.

The "tool" of deficit spending may be occasionally useful... but as in all things (even milk consumption), too much can be fatal. We are nearing the practical limits, but the Left wants to race Forward anyway. Idiots.