I didn't fully understand why the national debt was completely irrelevant until I listened to Harry Shearer's October 28, 2012 podcast (transcript). He interviews Dr. Stephanie Kelton, who is an Associate Professor at the University of Missouri Kansas City and a Research Associate at the Levy Institute of New York City. The short of it is that, having gone off the gold standard, the U.S. Government can print the money it needs to pay off the debt or to pay off the interest on the debt. The only things we need to worry about are unemployment and inflation.
The Republicans (and many Democrats) talk about the debt like we are talking about a household's debt, a company's debt or a state's debt. But the U.S. government issues the currency that the debt is paid in. An analogy would be that if your family owned a million dollars you would probably be in deep trouble. You would have the incredibly hard, if not impossible, task of paying the interest and keeping yourself from going bankrupt. But now imagine if I gave you a box that made real money. This box will make as much money as you need. Would you worry about your debt? No. How much you put on credit cards or how many loans you took out would not really matter. The United States has the magic box. We MAKE the money that the interest on our loans is paid in. Of course there is a danger of inflation, but right now the biggest danger to our country is unemployment and underinvestment in education, research and infrastructure. More below the line.
First a caveat - I am not an economist, so please take the time to listen to Dr. Kelton or read the transcript. When I listened to it there was a very real "eureka moment".
We are a currency issuer
The fundamental difference between a household, a business, a state or a local government and the U.S. federal government is that the U.S. federal government is the issuer of the currency, and everybody else that I mentioned is merely the user of the currency. We all have to go out and get the dollar in order to spend the dollar. We either have to earn it, we have to borrow it, we make investments, we may have interest income – whatever, but we have to come up with the currency from some source.
Greece is a currency user
Greece uses the Euro which is not issued by the Greek government as their national currency. The Euro is issued by the European Central Bank. That is the heart of the difference between us and Greece when it comes to debt. Greece never had a debt crisis (even though they have been deeply in debt in the past) before they went the Euro. Now when the government runs out of funds they have to request more from the European Central Bank.
Same for Greece. High debt is not something entirely new to Greece, but it was always sustainable before because the debt was denominated in the drachma, and they could always come up with the currency when they needed to make a payment.
Can we just spend and spend without constraint? No, you do have to worry about inflation, but only when you are nearing full employment and there is inflation. Right now we should be pouring money into the economy.
But this is not – what I’ve been saying shouldn’t be interpreted to mean, because you can spend and you can create the currency in an infinite way, that you should go out and spend to infinity. That’s not it at all. What I’m saying is that when you have about 23 million Americans who want to work and they want full-time work and they’re unable to find it, when you have things that need to be done, useful things that need to be done – like, I mentioned the $2.2 trillion in infrastructure investment that needs to be made, and you have folks who want to work, and you have useful things that need to be done, and you have the financial wherewithal to make that happen, it’s not financially responsible.
Dr. Kelton does not let Democrats off easily:
I mean, you know, who wants to strike the Grand Bargain? Who said “go big”? Who said “four trillion”? No, most of this kind of talk is actually coming from the Democrats. It’s not a free lunch. There are lots of things that we don’t do today to recover the economy to where we should recover it, and you’re just sitting here looking at still very close to 8% unemployment, and we’ve chased so many people out of the labor force that the real numbers are much higher than that. And every single day we’re leaving around $10 billion on the table in lost output, lost income, because of all of the unemployment.
The bottom line is that the debt is not the problem the Federal Reserve could print out the money tomorrow and pay everyone off if congress told it to. We don't even have to tax people to get the money - just print it. So the "national debit" crap is the red herring to end all red herrings. We need to put people to work by investing in education, science, and infrastructure.
The fight over taxes is a distraction:
We don't need to tax anyone to get the money to invest in education, research and infrastructure. The national dialogue has been framed so that the real issue -congress's refusal to invest in America - is lost in the infighting over the debt, entitlements, and taxes.
The only thing I can really think is that the national dialogue is so set with the haves and the have nots and the makers and the takers and the 1% and the 99%, and so when anybody in the middle class or anyone who’s poor or any part of the 99% says, “We don’t want you to cut this program because it helps us,” or “We want more investment in education” or whatever it is, the politicians, you know, they pat their pockets and they say, “We’d love to help you but there’s no way to pay for it.” And so the 99% point at the 1%, and they say, “They have all the money. Go get the money from them.” And the 1%, having the power and influence that they have, successfully push back against that. And so you have these two sides pitted against one another as if, you know, in order to pay for something, you have to rob Peter and pay Paul. And what the 1% should really do, I think, is to point at the Congress and say, “Don’t look at me. They have all the money.” You know? I mean, turn the attention where they really could effectively say, “Hey, don’t come to me and say you’re going to raise my taxes. I’m not causing any inflation. You don’t need to raise taxes unless you’re trying to cool something down.”
Congress can give us the money:
The U.S. dollar comes from the U.S. government. Congress has given itself a monopoly over the issuance of the U.S. dollar. If you and I try to do it, we go to jail. It’s called counterfeiting, right? But the U.S. government has the monopoly right to create the currency. And as the issuer of the currency, it can, as Alan Greenspan has said, as Ben Bernanke has said, it can never run out, it can never go broke, and it can never be forced to miss a payment.
[the U.S. Government] doesn’t need to finance itself by raising taxes or collecting money through the sale of bonds, which is what we call borrowing. No. That is not that purpose of either of those operations. The currency comes from the government. So, could the government write checks on its account at the Federal Reserve and just allow the balance in that account take an overdraft? Right? So allow the balance in its account at the Fed to go negative, deeper negative, deeper negative? And the answer is yes, it could. Currently there are laws in place that prevent the federal government, that prevent the Treasury, from running its account at the Fed into the negative. But who came up with that rule? Congress, of course. So, there is no financial constraint. The U.S. government is not revenue constrained in the way that private business is or in the way that we’re constrained.
The only people standing between us and full employment are politicians. I really think a lot of them (at least on our side) don't understand the fact that the national debt can never be the problem as long as we are the currency issuer. The real economic problems we have to worry about are unemployment and inflation. Right now unemployment is the problem. Our side has to make people understand this. Every time that one of our people get in front of a microphone they need to be explaining this to the people, because as long as people think that our national debt is equivalent to a family, a state or Greece's debt we won't be able to get past the hair-on-fire debt argument.
Our argument for 2014:
In my opinion this should be the foundation for our 2014 election platform. Congress needs to invest money in education, research, and infrastructure to put people back to work. Forget the debt, forget taxes. Put people to work and repair America.