In a recent article at the Huffington Post, Lynn Parramore assembled a team of economists to refute nine "myths" about the deficit. On the one hand, it was refreshing to see these economists discuss with such candor the fact that our financial system is backed up by nothing but green pieces of paper. On the other hand, it was shocking to see these economists laud the fact.
Believe it or not, the theme of the article is that all the handwringing over the federal budget deficit is misplaced, because Uncle Sam can print all the money he needs. In short, these economists think the printing press has abolished economic scarcity.
Well, it hasn't. Printing up green pieces of paper (or adding numbers to electronic bank balances) doesn't create more goods and services. But to see the precise errors involved, we'll need to quote from some of the alleged myth-busting.
HuffPo Myth #1: The Federal Government Should Balance Its Books
The first (alleged) myth that the HuffPo piece tackles is the claim that the federal government "should balance its books like a private household." But this is apparently wrong, because
a government is the issuer of the currency. The household, on the other hand, is the user. Households are restricted by the need to somehow get money into their bank accounts, or their checks will bounce. The federal government, by contrast, doesn't "have" or "not have" dollars. There is no vault or lock box where it "keeps" its money. In fact, it makes all of its payments simply by electronically crediting private bank accounts and there is no practical limit to which it can change those numbers up. Spending by the federal government always creates new money in the system, while taxation destroys it. When households and firms pay taxes, the money does not go anywhere; the government simply debits those private bank accounts by electronically reducing the amount of reserves they hold, i.e., by changing the numbers in those bank accounts down.
It's hard to know where to begin. In the first place, the above explanation is simply wrong. Strictly speaking, the US federal government does not simply create new dollars when it spends, and it doesn't destroy dollars when it taxes.
On the contrary, the federal government takes in revenues from taxation and the floating of Treasury debt, and keeps its funds in banks. The government really does have a budget; that's how we measure the budget deficit after all.
Now it's true, the Federal Reserve complicates things tremendously. There is a definite sense in which the Fed "monetizes" the government's deficit spending, and in a sense uses price inflation as an additional mechanism (in conjunction with taxation and borrowing) to transfer wealth from the private sector to the government. (I spell out the exact mechanism here.)
"There is a definite sense in which the government plays by a different rulebook, because the central bank waits in the wings to monetize its debts."So if we want to bend over backward, we could forgive the above writer for lumping the Federal Reserve and the federal government into one entity. But even if we assume that the term "government" above really means "government plus the Fed," the writer is still wrong for implying that government budget deficits are no big deal.
When the government spends more than it collects in taxes, it has to make up the difference somehow. It can borrow the money, which pushes up interest rates and sucks capital away from private business. Or it can (loosely speaking) print the difference, which pushes up prices and erodes the purchasing power of everyone else in society.
When people complain that the government isn't living within its means, they have in mind the idea that its spending is unsustainable, because people won't tolerate the taxes necessary to support such bloated programs. That is why the average person views a huge government deficit as fundamentally dishonest and irresponsible. One can't refute this revulsion by pointing out that the government (through the Fed) has the power to simply print up more dollar bills.
HuffPo Myth #2: Social Security Is in Crisis
Since the HuffPo piece has already "proven" that government deficits are irrelevant, it should come as no surprise that Social Security is in fine shape:
The truth is, the [Social Security] system was never broken in the first place, because the government's ability to pay benefits does not in any way depend on the balance in the Social Security or Medicare Trust Funds. Benefit checks come directly from the Treasury, and, as Alan Greenspan has admitted, "[A] government cannot become insolvent with respect to obligations in its own currency."
And so the question is not whether the government needs to make "tough choices" in order to keep these vital programs afloat. The question is, will politicians make the toughest choice of all and tell the American people the truth: Social Security and Medicare face no financial crisis now or in the future.
Again, what would it mean if the Social Security system did face "tough choices"? It would mean that workers would have to pay more, or retirees would have to collect less benefits. If we "solve" the crisis by printing up new money, that implicitly enacts both of the tough choices. That is, workers end up contributing more out of each paycheck (because prices rise faster than wages) and retirees end up getting smaller benefits (because their promised checks buy less stuff at the grocery store).
The common problem with the HuffPo treatment of the first two "myths" is to focus on the narrow issue of accounting, as opposed to the broader economic issue. Yes, a government can "solve" its deficit problems or Social Security shortfalls by printing up new money. But that doesn't alter the underlying economic problem of a program trying to give more resources to one group than it can extract from another group.
In any event, not only is Social Security in crisis, it is already broke — the storm has arrived.
HuffPo Myth #3: Government Deficits Burden Our Children
So far, we've been told that government deficits pose no harm, but now we see that, in addition to being irrelevant numbers, they actually make our children richer:
Most people don't realize that government debt — Treasury securities — are nothing more than savings accounts at the Federal Reserve Bank in Washington.
There are about 13 trillion dollars in Treasury securities at the Fed. Collectively, these savings accounts are known as the national debt. The national debt represents a portion of the combined savings of US residents, corporations, banks, and foreign governments. And most folks probably don't know that when a person buys them, the Fed simply transfers the dollars from her checking account to a savings account at the Fed called a "Treasury security."…
In the future, when our grandkids make payments on Treasury securities, they will simply credit accounts at the Fed-just as we do today, and as our grandparents did before us. It is a simple matter of data entry, and not a financial burden.
If the government spends and taxes wisely today, our grandchildren inherit roads, dams, parks, public buildings, and, most importantly, an educated and healthier workforce. These things are admittedly hard to value precisely — but there can be no doubt that our grandkids will be much better off having been born into a society that has modern infrastructure and services that our government policies can help to provide.
As with the treatment of Myth #1, here too the economist is simply wrong. When someone in the private sector buys a Treasury security issued by the federal government, that money is ultimately spent by the government — just as if a private corporation issued a bond. Yes, the Federal Reserve complicates things (as mentioned above), but the description in the block quote above is simply wrong.
It is also interesting that the economist "proves" that interest payments on the debt aren't a burden, because they are "a simple matter of data entry," but he then goes on to say that these simple keystrokes somehow lead to the creation of a productive infrastructure for our descendants. That's some data entry!
There is a grain of truth in all this, but the HuffPo economist gets it backward. It's true that the payment of interest on government debt per se doesn't impoverish "the next generation," for the simple fact that the payments are made to the bondholders, who themselves will be members of "the next generation." To put it in other words, we as taxpayers have higher (future) liabilities when the government runs up a debt, but the people who currently lend to the government in turn are able to pass on more assets (in the form of Treasury bonds) to their heirs.
"The real issue is this: will our children be richer if politicians pick the projects to fund, or if those decisions are left to the private sector?"When the government runs a deficit, it spends more than it otherwise could have. That means more of the economy's real resources — labor, steel, computer processing time, etc. — are devoted to political ends, rather than private commercial activities.
The real issue is this: will our children be richer if politicians pick the projects to fund, or if those decisions are left to the private sector? The HuffPo economists think the government is capable of "wise" investments, but I'm not so sure.
HuffPo Myth #6: Government Deficits Deplete Savings
We have skipped ahead to one of my favorite fallacies:
The truth is that deficits add to the total monetary savings held outside of government. To the penny. That's right, if the government deficit was 1 trillion dollars last year, then total net savings of everyone outside of government went up by 1 trillion. Not a penny more or a penny less.
Let's look at a simple transaction where the government deficit spends $100. Say the government sells US $100 of new treasury securities. We buy them and our bank account goes down by $100 when we pay for them, but we have the $100 of treasury securities we bought. Are we any poorer? Of course not! In fact, since we bought the securities voluntarily, we probably did it because we think that purchase made us richer. All we did was exchange $100 that was in our checking account for a $100 Treasury security.
After we pay the $100 for the Treasury securities, the next thing that happens is the government then spends $100 by buying something from us. So we now have both the $100 the government just spent and the $100 of Treasury securities we just bought.
So because of the $100 of deficit spending, we got our $100 back in our checking account, and we also have $100 in Treasury securities. Our monetary wealth is now $100 more than it was before.
The deficit spending of $100 added $100 to our savings. Yet all of our leaders insist that deficits take away from our savings.
You can now understand the reason our savings went up so much last year. It was because the government deficit was so much higher. Now you know more about that than anyone on TV.
I have picked apart the flaws in this particular argument in a previous piece. For one thing, to focus on our $100 in extra savings without focusing on the higher future tax burden is absurd.
But rather than get into the technicalities, let's just point out that the HuffPo analyst left out one important piece of the story, even if he reasons on his own terms:
When the Treasury bond matures, the government owes us (say) $105. So the government taxes us $105, making us $105 poorer. Then it pays us that money right back, but also takes away our bond. In the end, we have no extra wealth to show for the government's deficit spending.
Robert Murphy is teaching a class this fall in the Mises Academy on the principles of Austrian economics.Another way to illustrate the flaw in the HuffPo argument is to substitute "government" with "Halliburton." The block quote above would then "prove" that the more money people invested with Halliburton, the richer the world-minus-Halliburton would become — as a simple matter of accounting. I doubt HuffPo would endorse that argument.
Conclusion
The financial shenanigans of the federal government and the Federal Reserve are quite complicated. There is a definite sense in which the government plays by a different rulebook, because the central bank waits in the wings to monetize its debts. Most people shy away from this conclusion, because it is too horrible to consider. Yet ironically, the economic analysts rounded up by HuffPo consider the inflationary machine to be a beautiful thing.
