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Federal Spending Doesn't Cost Anything!

letsgetitdone's picture

Over the past year, I've written numerous posts about fiscal sustainability, fiscal responsibility, and the various fairy tales and myths underlying what almost all of our policy makers have to say Government finance. I continue to search for a meme that will catch fire and lead people to seriously question the false idea that the US can't: afford to put everybody back to work, see to it that all Americans have good health care; provide an excellent education for our children, reconstruct the energy foundations of our economy, re-invent our infrastructure, and take the measures necessary to solve our other major problems before they get any worse.

It's the idea that we can't afford to pay for many things that we would like to do, that makes it so hard to legislate solutions. With “the national debt” at the level that it is, many legislators who might normally do whatever they could to address our various problems just throw up their hands. The rhetoric of fiscal sustainability and fiscal responsibility is too powerful for them to oppose. They want to be “responsible.” They want to be “grown-up.” They want to be known as people who can make “tough decisions.” So, as long as they believe that Government spending costs something, and adds to a crushing debt burden that we have to do something about, they will not vote for effective measures that will solve our national problems because either the cost/debt implications of solutions involving additional deficits are too great, or the tax implications of matching the costs with additional revenue are a burden they are unwilling to face.

So, here I go again with another meme, namely:

Federal deficit spending costs the US Government no net financial assets

And by the way,

Tax cuts that increase deficits also cost the US Government no net financial assets

How can that be? Well the short answer is that the US Government, viewed from a holistic perspective (Congress, Treasury, the Fed, and their interactions with one another) has no limits in its ability to create financial resources. My friend Warren Mosler, who last week reminded me that payroll tax cuts really cost the Government nothing, a reminder that led to my writing this post, likes to say that the Government is like the scorekeeper in a game. Like the scorekeeper, it never runs out of points to give to the players in the economic game, if the rules of the game make it necessary to hand out points.

As it is with the scorekeeper, the Federal Government neither has nor doesn't have any points (or USD). What it has instead is the authority to create points (dollars) in the non-Government sector through spending, and also, in the Government's case, to destroy them (through taxing or selling debt instruments). These days when the Government creates dollars, it typically costs it virtually nothing, because it's done electronically; and that also holds true when it destroys dollars. Let's look at the process of how the Government deficit spends in a little more detail to see how this works out.

First, when the Government decides to deficit spend, the Treasury typically does that by instructing the Federal Reserve Bank (FRB, or the Fed) to markup the reserve account of the bank of the recipient of the spending, and to instruct the bank to credit the recipient's account. Since by law the Fed can't allow the Treasury to run an overdraft in the Treasury General Account (TGA), Treasury must anticipate such an overdraft, and, following Congressionally imposed constraints, must sell debt instruments (e.g. Treasury Bills) in an amount necessary to ensure that there is no overdraft. So, step one places a debt instrument in the non-Government sector, and removes USD from that sector by debiting the purchaser's account, and the reserve account of the purchaser's bank, crediting Treasury Tax & Loan Accounts (TT&L), and ultimately the TGA.

Second, in step 2, the Government spends and marks up the non-Government sector reserve accounts, causing the spending recipient's account to be credited. At this point, the Government has withdrawn dollars from the non-Government sector, while adding the same amount of dollars through its spending, along with its debt instrument. It therefore has added a net financial asset to the non-Government sector, namely its debt instrument, having a specific principal value. What cost has it incurred in order to do that and perform its deficit spending? The answer is, virtually nothing.

Third, when the debt instrument sold by Treasury matures, Treasury will have to pay the principal and interest to the holder of the instrument. This repayment will then involve an exchange of money in return for the debt instrument, that is, an exchange of one type of financial asset for another. This is very likely to involve deficit spending again, but the financial asset remaining after the next cycle of spending and debt issuance will be larger.

Fourth, however, there is another scenario involving debt instrument redemption, as well. In that one, the Federal Reserve decides to buy debt instruments from the public. Unlike the Treasury, however, the Fed can simply markup accounts within the banking system without itself issuing debt. It creates money “out of thin air” and increases the money supply. When this happens we can see the full pattern. The Government has deficit spent, added a financial asset to the non-Government sector, and eventually converted that financial asset back to money, leaving an increased money supply in the non-Government sector, absent off-setting taxes or additional debt issuance.

Again, what does it “cost” the Government to deficit spend in this way? Virtually nothing. Also, note that the “cost” involved in deficit spending is the same whether or not the deficit involved is caused by new tax cuts or by new spending. So, again, Federal deficit spending costs the US Government no net financial assets; and tax cuts that increase deficits also cost the US Government no net financial assets.

Reading this, some of you may react by saying that the pattern I've sketched out is dependent on the ability of the Treasury to sell its debt instruments, and may ask: what happens if prospective buyers, especially foreign nations won't buy our debt anymore? Well, that is extremely unlikely to happen, for reasons I've outlined here.

But if it does, then the Government has other ways of deficit spending at no cost to itself. Specifically, Congress can stop requiring Treasury to issue debt when it deficit spends, and just let Treasury spend by marking up accounts. I've discussed that alternative here. Also, Treasury can use coin seigniorage to ensure that the TGA never runs an overdraft. I've discussed that here. Finally, Congress can place the Fed under the Treasury where it belongs, and the Treasury would regain full authority to create the currency needed for deficit spending.

In short, the Government can always deficit spend at no cost to itself. So, the idea that it can't afford to spend what's necessary to solve our various problems is just false. It's a bad joke, a fairy tale, or a lie, depending on who's telling it. Government spending certainly has real costs in resources and human effort that need to be arrayed against the real benefits of Government spending. Also, if the Government spends money beyond the capacity of the economy to produce goods and services, its money can be used to buy, then too much spending can cause demand-pull inflation. But the US Government, unlike the rest of us, has no financial limitations, only real ones of the sort I've just listed. So, since Federal spending doesn't cost anything, let's start doing it to provide everyone who wants to work a job, and while we're at it, let's save those state jobs in Wisconsin and every other state, and put our ridiculously bloated, ineffective, murderous, and corrupt health insurance industry out of business by passing HR 676, Medicare for All.

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

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rapier's picture
Submitted by rapier on

"since Federal spending doesn't cost anything"

Well if debt has no cost what is debt? Debt is an illusion? Funny that because debt figures in virtually all human interaction since well before money was invented.

If wealth requires no labor than XXXXXXX thousand years of human history filled with poverty and tragedy was some sort of mistake?

With all due respect I think your sort of going down the rabbit hole. I'm no gold bugger or Austrian. Well maybe a sort of Austrian on acid. Money is an abstraction even gold money but debt based money is an even more complex one. No matter the kind of money, debasing it debases the debt denominated in it. Ledger accounts may balance but moral ones don't. Then too of course the ledger accounts of the powerful are allowed to balance because those get the newly printed money, every one else sucks eggs.

Still the problem isn't too little money it is too much debt. Debt built upon debt in interlocking structures. It can't be paid back. No magic pony will appear to balance the books. We are in a true dilemma. It's the devil or the deep blue sea. In this case printing money is the devil. Alluring for awhile.

rapier's picture
Submitted by rapier on

Anything that can be represented in numbers can be represented in a table and be described or defined as asbtractions.

They created the money out of thin air yes. However by law it is stipulated that the money must be exchanged for a debt instrument, a financial instrument. One that will be paid back both in principal and interest, ideally. (I say ideally because the MBS was crap and much won't be paid off) When that money is paid back the newly created money disappears and goes to money heaven. Net there is no gain.

Now you can take this to various levels of abstraction and God knows modern accounting is abstract in the extreme but the mechanisms and transactions really occur. The end game of these mechanisms is when the Fed is buying a large plurality of the debt issued by the Treasury. When the transactions become fully an artifice with no intermediaries, ie. the market.

At some level and I think we are there now other buyers withdraw. Either because they no longer have the wherewithal to purchase Treasury paper or they no longer want to because they understand, instinctively probably, that what they are buying is no longer liquid, since the seller is already the buyer of first resort or because the pay back will be denominated in currency of ever declining value.

Now such arguments have been made to some degree since the deficits started exploding under Reagan and have always been boilerplacte economic theory. And sure it hasn't happened. Take comfort in that if you like.

If money and debt itself have absolutely no inherent value or worth then if real people still account for anything then eventually they will rebel. Especially since the benfits accrue to those with wealth and power and all they get is lectures about sacrifice and work. As if printing money is work.

In the meantime every time the Fed prints and buys Treasury paper asset markets of one kind or another rise 8 days out of 10, yet no new jobs appear. Obviously the status quo is in the interest of the elites and it is disconcerting to me that liberals cling to the belief that the Fed, the Treasury and the markets are actually doing it for us and it's working. It isn't working. At best it's the new tinkle down.

Sovereign debt is the biggest bubble of all.

rapier's picture
Submitted by rapier on

Whereby it is proven that some people think money is magical.

Please go read JK Galbraith's 'Money' for a pimer on monetary history and theory. It's very entertaining. Admittedly it's been more decades than I care to remember since reading it but I can assure you that you will discover there is nothing magical about money.

It is impossible to discern what your beliefs about money are but please don't elaborate here until you read that book. It's a fun book. You can't beat Galbraith for that. You won't regret it.

Submitted by lambert on

Well, it's elegant, at least. No real response, so "Go read a book." Not that I have anything against Galbraith.

letsgetitdone's picture
Submitted by letsgetitdone on

You said:

They created the money out of thin air yes. However by law it is stipulated that the money must be exchanged for a debt instrument, a financial instrument. One that will be paid back both in principal and interest, ideally. (I say ideally because the MBS was crap and much won't be paid off) When that money is paid back the newly created money disappears and goes to money heaven. Net there is no gain.

As I said above, the Treasury is required by law to issue debt. But the Fed isn't. The Fed just produces money when it thinks the supply should be increased. At that point it buys back debt instruments, and increases the money supply.

Also, above you keep conflating public debt and private debt. You can't do that because private parties can't create money. They have to get it from somewhere. The Federal Government however, has the authority to make it out of thin air. So how meaningful is it to compare public debt and private debt? Private debt burdens require income to liquidate. Public debts are just an accounting entry in that great spreadsheet in the sky. They can be repaid anytime the Government decides to stop issuing debt.

letsgetitdone's picture
Submitted by letsgetitdone on

I think Jamie Galbraith would side with the above post 100%. He's an MMT economist and a co-author of Warren Mosler's and Randy Wray's