The Deficit Myth

1. The government is not constrained by revenue like a household

Uncle Sam doesn't need to come up with dollars before he can spend. The rest of us do.

Government as currency issuer. Unlike households or businesses, the federal government is the issuer of the currency, not just a user. This fundamental difference means that the government can never "run out of money" in the same way a household can.

Spending and taxing sequence. In reality, the government spends first and taxes later. This is represented by the S(TAB) model: Spend, then Tax and Borrow. This is in contrast to the common belief that taxes fund spending.

Implications for policy. Understanding this reality opens up new possibilities for addressing societal needs. Instead of asking "How will we pay for it?", we should ask "Do we have the real resources to do this?"

2. Deficits are not inherently bad; inflation is the real constraint

For evidence of overspending, look to inflation.

Redefining fiscal responsibility. The size of the deficit itself is not inherently good or bad. What matters is the impact on the real economy, particularly inflation.

Inflation as the true limit. The government's ability to spend is not constrained by revenue, but by the economy's capacity to produce goods and services. Overspending occurs when it pushes the economy beyond its productive capacity, leading to inflation.

Policy implications. This understanding shifts the focus from arbitrary deficit targets to managing real economic outcomes. It suggests that there's often more room for beneficial government spending than conventional wisdom allows.

3. The national debt is not a burden on future generations

The national debt poses no financial burden whatsoever.

Reframing the national debt. What we call the national debt is actually the sum of private sector savings in the form of government securities. It's not a burden we're passing on, but a form of wealth.

Government's unique position. Unlike households, the government can always meet its obligations in its own currency. It can never be forced into default like Greece or other non-currency-issuing entities.

Implications for policy. This understanding removes the false urgency to "pay down the debt" at the expense of current needs and investments in the future.

4. Government deficits create private sector surpluses

Uncle Sam's red ink is our black ink!

Sectoral balances. The economy can be divided into three sectors: government, domestic private sector, and foreign sector. A deficit in one sector must be matched by surpluses in the others.

Government deficits as private wealth. When the government runs a deficit, it's adding financial assets to the private sector. This can support economic growth and private savings.

Policy implications. This understanding challenges the notion that government surpluses are always desirable. In fact, government surpluses can lead to private sector deficits and economic instability.

5. Trade deficits are not always harmful to the economy

America's trade deficit is its "stuff" surplus.

Reframing trade deficits. A trade deficit means a country is receiving more real goods and services than it's sending out. In this sense, it can be seen as beneficial.

Global currency dynamics. The US dollar's role as the global reserve currency contributes to persistent trade deficits, but also provides significant benefits to the US economy.

Policy focus. Instead of obsessing over trade deficits, policy should focus on ensuring full employment and fair trade practices that benefit workers and the environment.

6. Entitlement programs are financially sustainable

As long as the federal government commits to making the payments, it can always afford to support these programs.

Financial vs. real constraints. The challenge for programs like Social Security and Medicare is not financial sustainability, but ensuring we have the real resources (healthcare providers, goods, services) to meet future needs.

Political choices, not financial necessities. Any cuts or changes to these programs are political decisions, not financial imperatives.

Policy implications. Instead of focusing on trust fund accounting, we should be planning to ensure we have the necessary real resources to care for our aging population.

7. Focus on real resource constraints, not monetary ones

How will we resource it?

Shifting the paradigm. Instead of asking "How will we pay for it?", we should ask "Do we have the real resources to do this?" This focuses attention on what truly matters for the economy and society.

Real limits. The true constraints are things like skilled labor, raw materials, and ecological limits. Money is just the tool we use to mobilize these real resources.

Policy implications. This shift in thinking opens up new possibilities for addressing pressing societal needs, from healthcare to climate change mitigation.

8. A federal job guarantee can stabilize the economy

The job guarantee is the MMT solution to our chronic jobs deficit.

Automatic stabilizer. A job guarantee would act as a powerful automatic stabilizer, expanding during economic downturns and contracting during booms.

Benefits beyond employment. Such a program could address unmet community needs, provide a wage floor, and enhance worker bargaining power.

Implementation. The program would be federally funded but locally administered, focusing on creating jobs that serve community needs.

9. Modern Monetary Theory (MMT) redefines fiscal responsibility

MMT gives us the power to imagine a new politics and a new economy.

New lens for policy. MMT provides a framework for understanding how modern monetary systems actually work, challenging long-held beliefs about government finance.

Expanded policy space. This understanding reveals that we have more options for addressing societal needs than conventional economics suggests.

Responsibility and constraints. MMT doesn't advocate unlimited spending, but rather a more accurate understanding of true economic constraints and possibilities.

Last updated: July 24, 2024