The National Debt Is Congress’s Fault: Revisited

Much of the leverage conservatives and Republicans have over our fate is due to the belief most people hold that federal deficits, the national debt, and the GDP ratio are important, because we must bring them under control to avoid government insolvency. In addition, “everyone” seems to believe that the existence of the debt is due to the profligacy of the Government, its monumental waste, and the lack of courage of its legislators who spend too freely to please constituents, gain campaign contributions, and help themselves stay in office.

 

None of this is true, except that the existence of the debt IS Congress’s fault. But the reality explaining why this true is completely at odds with the current narrative.

 

The current existence of the National Debt, and also of a non-zero public debt-to-GDP ratio is the inevitable result of a technical decision that Congress has made about how the Treasury should finance its spending. And Congress can get rid of this debt over a 30 year period any time it wants to through a simple technical change in its appropriation bills and continuing resolutions.

 

The national debt exists today because when the nation went off the gold standard in 1971 and adopted its fiat currency system, Congress did not explicitly repeal its mandate (very appropriate when our currency was convertible to gold on demand, at least in theory) requiring that the Government back all its deficit spending with already existing borrowed dollars whose convertibility was covered by our holdings of Gold. This Congressional mandate to borrow funds by issuing debt instruments when the Government deficit spends caused the national debt to persist until 1996. Congress, then, unintentionally, removed the mandate, leaving in its place the perceived compulsion of an old die-hard financial practice supported by the false ideology of neoliberalism, and a real, but unrecognized, option to abandon the practice by using platinum coin seigniorage.

 

Had Congress repealed the practice when President Nixon took the country off the Gold Standard, and had we ceased to issue debt at that time, then the Government would have re-paid all of our 1971 debts as they came due, and both our national debt and our debt-to-GDP ratio would be at 0% today.

 

The practice of issuing debt when the Government deficit spends has no useful function today, and the interest income it provides for mostly wealthy investors and foreign Governments who buy Treasury Securities is simply a form of welfare for the rich and foreign nations. In fact, it is welfare that will amount to many trillions of dollars over the next 15 years, provided we continue the policy of issuing debt instruments.

 

Any positive effects this policy produces are vastly outweighed by the bad effects of having to cope politically and economically with the concerns of people who believe that the increases in the debt and the debt-to-GDP ratio give us a fiscal sustainability problem whose priority outweighs everything else. Even though the national debt has no effect on national solvency; it is a political problem. It magnifies the political strength of conservatives and weakens progressives because it makes people afraid to deficit spend since then the country will be “piling on our debt.”

 

Congress needs to unambiguously end the practice of getting the Government to issue debt instruments on a dollar for dollar basis with deficit spending, right now. If it does so it will:

— cease to provide welfare payments in the many trillions of dollars over the next 15 years mainly for the rich and foreign nations,
— gradually pay off the entire $20 plus trillion of Federal debt,
— have rapidly decreasing Treasury interest costs over the next decade until they entirely disappear from the federal budget,
— have no further need to take difficult votes about increasing the Federal debt limit,
— have no further need to worry about borrowing money from the Chinese, or the oil rich states, or the Japanese, that our grandchildren will one day have to re-pay,
— have no further need to worry about what the bond markets think or are going to do, or
— to worry about our debt or deficit spending being “fiscally unsustainable” when we want the Government to spend whatever money is needed to stop further climate change by rapidly shifting to renewable energy sources, and ending carbon emissions,  sustain the unemployed, help us end unemployment altogether with a job guarantee at a living wage with good fringe benefits, provide a more generous Social Security system for aging Americans rather than cutting the inadequate benefits we have now, provide a basic income for those who can’t or don’t want to work, fulfill American needs for new infrastructure, develop a re-invented first class educational system, and provide Medicare for All, among our other needs.

 

If Congress refuses to end the practice of issuing debt, when it can easily do so at any time without hurting people, then its habitual complaints about the size of “the debt” should cease at once and no longer pollute our political debates.

 

Many claim that ceasing debt issuance would inevitably lead to inflation because of the increase in the money supply caused by merely “printing money.” People who believe this do so because they think that dollar for dollar debt issuance associated with deficit spending removes as much currency from the non-Government sector as the Government spends, and because of this damps down any inflation that may result from the Government spending.

 

This reasoning is faulty on two counts. First, increases in the money supply caused by Government spending do not result in demand-pull inflation until the point of full employment is reached, because the increased demand produced by the Government is met by the private sector with supply rather than price increases.

 

And second, while Government debt issuance may transfer money back to the Government, it still leaves a net financial asset in the private sector, specifically, the Government debt instrument. It is highly debatable that the net addition of a debt instrument to the private sector is less inflationary, than just leaving additional cash would have been, and very likely that the debt instrument is actually more inflationary because 1) one can get more financial leverage from it than one can get from money, and 2) it adds more interest to the private sector than a cash deposit would.

 

The United States has many very real problems which it can address with Government programs. The deficit spending required to solve our problems shouldn’t be constrained by the non-existent financial, but ever present political, problem of the national debt, or the fantasy of stabilizing a debt-to-GDP ratio that also represents a non-existent problem, or the misguided notion that the issuance of debt makes deficit spending less inflationary than it otherwise would be.

 

To make sure that deficit spending is not so constrained, Congress needs to repeal Treasury debt issuance practices now before the American people learn the truth that Congress, itself, is responsible for all the angst we hear about the deficit, the debt, the debt-to-GDP ratio, and all the suffering among the American people over the years caused by the focus on these numbers rather than on the likely and real impact on public purpose of federal fiscal policy.

 

This clause is needed in every appropriations bill:

 

Upon passage of this appropriations bill, the Federal Reserve is directed to fill the Treasury’s spending account at the New York Federal Reserve with the addition to its Reserve Balance necessary to spend this appropriation. In addition, the Federal Reserve is directed to fill the Treasury spending account with the additions to the Treasury Reserve balances necessary to repay all outstanding debt instruments including principal and interest as they fall due for the fiscal year of this appropriation.

 

 

 

 

 

 

The first sentence ensures that in the event there is deficit spending in an appropriations bill, reserves will already exist in the Treasury spending account to allow Treasury to perform its mandated spending without further borrowing. So, from the point the language is included in federal legislation, further Treasury borrowing to “pay for” deficit spending will cease to exist.

 

The second sentence ensures that reserves will already exist in the Treasury spending account to repay principal and interest on outstanding debt instruments as they fall due throughout the fiscal year of the appropriation. So, from the point the language is passed, the Treasury debt will be in continuous decline until, after 30 years, it will be gone entirely.

 

Let us call incorporation of this language in appropriations and CR bills, Overt Congressional Financing (OCF) of fiscal policy and associated deficit spending. And what we have now, we can call, in contrast, implicit Congressional Financing (ICF). OCF is better than ICF in that it is much more transparent and, almost immediately, will be much more popular with most people than ICF and its load of public debt instruments.

 

Within 6 months of passage of the legislation providing for OCF, its effects will be visible enough for the public to see that “teh debt” is a dead political issue, killed by the legislation. And for the more reflective among them, to  learn the lesson that the debt was never a bonafide financial issue, but always a political one caused by the failure of people to understand the fiscal power of a monetary sovereign government to repay its own debt instruments as they fall due.

 

At that point, and even before that for many people, we will see the end of austerity politics, periodic debt ceiling crises, fiscal cliffs, sequesters, and budget crises. OCF directly ends debt ceiling crises, because the debt is no longer relevant except as a constantly shrinking obligation that will be paid off as it falls due.

 

As for fiscal cliffs, sequesters, and budget crises, their justification is primarily in the false claim that the US is running out of money, and must slow the growth of the national debt enough to allow the debt-to-GDP ratio to shrink, so that we can’t afford to implement the deficit spending that may be necessary to create full employment, pass Medicare for All, and do other things that a majority of the population supports heavily, but does not insist upon in the face of supposed budget problems. There would be no fiscal cliffs, sequesters, or budget crises, without the claim that there is a Government Budget Constraint (GBC).

 

Once we dispel that claim with OCF, these things will be gone with the wind, and a new set of hopefully more fruitful problems will emerge. I look forward to these new problems, the real problems posed by the need to win debates with conservatives about the likely real effects of fiscal policy for public purpose, rather than the faux problems of imaginary fiscal constraints giving rise to neoliberal austerity. They will be a great step forward for American Democracy!

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