The Federal Deficit....of Imagination

I want to talk with you about our government and the money we spend to keep it running.

I see your eyes glazing over, but I've got a surprise for you.

We have a federal deficit. And that is GOOD. In fact it is FANTASTIC. It means that the federal government put a bunch of money into the economy and didn't take it all back. And it never needs to take it all back.

This is a big deal!

The federal budget is not like any other budget. It's not like our household or business or state or town budgets. All those budgets have to be balanced. Whatever they spend has to be covered by an equal amount of income.

That's not true for the federal government. The federal government can and does spend more money than it receives in taxes. 

What? Does that mean the federal government does NOT pay all its bills?? 

Of course not! The federal government can ALWAYS pay its bills. How? The federal government, and ONLY the federal government, is authorized to PRINT MONEY. In a word, it creates money out of thin air. That is the government's job. That may be the government's most important job. It needs to create money to do any of the things we want it to do, from education, to health care, to military readiness. 

This is all explained in great detail in a book by Stephanie Kelton: The Deficit Myth. There is also a film about it: Finding The Money.

But let me address briefly the first questions that come to mind. 

If the government can create money out of thin air, why do we need taxes? Great question. We need taxes for three reasons. 

First, we want people to work. For our economy to hum, we need folks to participate. If we tell everyone they are going to owe the government some taxes, they'll get jobs to pay those taxes.

Second, we need to encourage businesses to be equitable. If businesses pay some people $10 per hour and other people $1,000 per hour, we need to tax the high earners more than the low earners for reasons of simple fairness. We created rules to make it possible for businesses to thrive in our economy. We also need rules to make it possible for workers to thrive in our economy.

Finally, we need to pull some of the money out of the economy to avoid inflation. How much? Great question! You're not going to like the answer. 

We don't know!! 

"Good grief," you say. "Why should I trust you," you ask. "You don't know what the heck you are doing and you want me to support you?! You must be kidding!" 

"Fair statement," I say. "But would you rather I lied to you?" I ask. 

Wrestling with inflation....and jobs....is not easy. 

Do you remember the Great Depression? Of course not, you'd have to be over 90 years old. How about the Financial Crisis of 2008? Remember all the talk of another Great Depression?

That's when banks failed, businesses closed and the government took a HUGE gamble....it flooded our economy with money! Boy did a man named Ben Bernanke get a lot of flack!

The honest to god truth is that pretty much all economists thought inflation would go through the roof back in 2008. Talk about the right person in the right place at the right time. Two years earlier President Bush had appointed a man named Ben Bernanke to be chairman of the Federal Reserve Bank. Guess what Mr. Bernanke's field of expertise was. The Great Depression!

Mr. Bernanke knew that The Great Depression would have been LESS of a Great Depression if the federal government had put MORE money in the hands of impoverished citizens. When FDR took office in 1933 unemployment had reached 25%. It took him eight years to bring it down to 15%, largely through the creation of government jobs. The CCC (Civilian Conservation Corps), CWA (Civil Works Administration) and the WPA (Works Progress Administration) created more than 14,000,000 jobs. Compared to FDR's predecessors, Presidents Hoover and Coolidge, FDR had turned the economic system on its head with this creation of jobs by the government. But after eight years there was still 15% unemployment. It was only due to World War II that unemployment dropped to 2%, three years later in 1943.

Coming back to our latest crisis, the 2008 financial collapse had caused banks to stop lending, afraid that their loans would end up defaulting.  Businesses stopped hiring. Businesses failed. Mr. Bernanke, as chairman of the Federal Reserve Bank, could not create jobs as FDR had. Only a President and Congress can do that. But Mr. Bernanke, as Chairman of the Federal Reserve, could send money to banks, hoping they would use that money to lend to businesses which would hire more people, creating jobs. And Mr. Bernanke knew from his research that as much as FDR had done, without World War II it would not have been enough to get us to full employment.

Chairman Bernanke sent banks money by buying their problematic mortgages (familiarly referred to as mortgage backed securities), as well as treasury securities (US government bonds...the safest investment in today's world!). Between 2007 and 2017 Mr. Bernanke bought $3.5 trillion dollars of securities. How did the Federal Reserve "buy" those securities? It just printed the money (using key strokes on a computer!). And our national debt grew from $9 trillion to $20 trillion. 

Wow. From 2007 to 2017, over ten years, the Federal Reserve Bank added $3.5 trillion to the economy and our national debt grew by $11 trillion. What happened to inflation? It must have gone through the roof! Right? 

Wrong! The average inflation rate for that ten year period was 1.8%.

Back to your question....how high can the deficit go before inflation takes over? Again, honestly, we don't know. But we DO know today's debt is not causing inflation, and we DO know that we can bring the debt down gradually over the next few decades, which President Biden has already started to do.

Thanks to tax cuts for the wealthy over the last several decades, our society is one of the most inequitable in our history. On April 11, 2024 Mother Jones reported that 806 billionaires in America own more wealth than the bottom 65 million households in our society. Eight hundred and six people own as much as 65 million. Mind boggling.

We can increase taxes on the wealthy, and they won't even notice. An alternative is to leave things as they are, risk hyperinflation, perhaps revolution, certainly massive disruptions. Even those 806 lucky oligarchs will notice that.

Forgive me the long winded explanation. But while it is reasonable to expect the value of the dollar to decrease (through inflation) if the government keeps creating dollars and never takes any back out of the economy, it is not accurate or reasonable to assume that the government must take as much money out of the economy as it put in. In fact that would be crazy. The federal government CAN and SHOULD keep more money in the economy than it removes. The federal government SHOULD  have a deficit, forever. 

By the way, the government does not use your tax dollars to pay interest on the deficit. Your tax dollars are simply dollars removed from the economy, as the federal government puts more money in the economy when it pays for stuff.

Taxes don't pay for stuff. Taxes keep the system fair and help keep inflation in check. The government has the authority to create money, tax some of it, and monitor inflation. That's what government does.

The important point is that we need good government to manage our free economic system. To those who say, leave the free market alone and it will do just fine, I have one question. Why are some people making $1,000 per hour and others $10 per hour. If you consider that "fine", I have to disagree. 

To sum up, we have the means to pay for our government. It's built into our Constitution. The government is authorized to print money. 

The real task is not finding the money. The real task is finding people for the jobs. We should and can have zero unemployment. We should and can have an economy in which everyone has a livable wage. The real challenge is getting the free market system and the government together to figure out what jobs we want in our economy. Do we want food, houses, smart phones, social workers, therapists, guns, bombs, national forests, highways, teachers. The list goes on and on. 

We need a government paying attention to the needs of our people in our towns and cities. The free market system is great at creating jobs. It's not so good at creating equity. And it's not suited at all to designing vibrant communities. That's not the job of a business. That's the job of government. 

Good government is vital to our country. We need talented people who aspire to making government an equal partner with our free market system, not folks who want government to heed only the wealthy and provide the bare minimum of service. 

We need good government and we can afford good government. Now you know how money is created. And you know that a federal deficit of money is absolutely OK. What's not OK is a deficit of imagination. Use your imagination to conjure up the society you would like to live in. Then use your votes to make it happen. And note, one person, one President, one Congressperson, is not going to make good government happen. It's going to take a whole team of dedicated people. If you're serious about imagining a vibrant society, you'll need to get a team of folks working on it. In the words of one of our most inspiring Presidents "Don't boo, vote!"