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The Real Solution to the REAL Fiscal Sustainability/Fiscal Responsibility Problem

letsgetitdone's picture

In a recent post I wrote about “The Real Solution to the Fiscal Sustainability Problem.” But I was just kidding, folks. That was a solution only for people who think that Fiscal Sustainability means controlling the growth of the national debt, and stabilizing and reducing the debt-to-GDP ratio. That view of Fiscal Sustainability, however, doesn't trace the connection from a coherent idea of fiscal sustainability to the national debt and the debt-to-GDP ratio. So, let's start from such a view and see where it leads us. Fiscal Sustainability is:

the extent to which patterns of Government spending do not undermine the capability of the Government to continue to spend to achieve its public purposes.

If you don't agree with that definition, then propose another; but it seems clear to me that when people say that Federal spending is unsustainable, they're saying that there's something about that spending or its impact that undermines the future capability of the Federal Government to keep spending. If they're saying something else, I'd be happy to learn what that is if someone will enlighten me. As for including “public purposes” in that definition, I did that just to emphasize that Government spending is always supposed to be aimed at purposes that the public endorses and/or thinks is valuable, and at nothing else.

So, if you can accept this or a similar definition of fiscal sustainability, then please note that it can be consistent with worries about debts, and debt-to-GDP ratios; but only if the Government's ability to spend is operationally limited by its ability to tax or to borrow. If it could not tax or could not borrow any additional money to use to increase spending to accomplish its public purposes, it would be true that any short-term increase in spending that outran its ability to gather revenues over time would be "fiscally unsustainable."

On the other hand, however, if a Government's ability to spend is not dependent only on its ability to borrow or tax, then these debt-related indicators of fiscal sustainability aren't valid any more, because they no longer measure rise or fall in that ability. We then need new measures.

So, in the United States today, is the Government's ability to spend dependent on its ability to tax, or to borrow? If not, what is it dependent upon? If not, are the Administration and the various deficit commissions, hawks, and doves who believe in long-term debt problems making much ado about nothing? Are they focused on a non-problem, a distraction? Are they preparing legislation to cut Social Security and Medicare, entitlements, as they call them, out of a mere confusion, an error in their understanding about how the Government actually spends money? Is their reluctance to support the new stimulus spending that is clearly needed to restore full employment based on a horrible mistake? More generally, is their whole orientation to any new legislation that involves considerable Government spending based on a misunderstanding about the ability of the Government to spend?

The answer to the first two of these questions is that the Government's ability to spend is based on its unlimited constitutional authority and monopoly powers to create currency and bank reserves. Pavlina Tcherneva puts this very well in the context of discussing whether the Government can continue to run deficits. She says:

". . . how long can the government keep running deficits and what if it goes bankrupt?" Here, too, we have to remember that government deficits are unlike those of the private sector. This is because the private sector cannot pay by issuing its own currency or create reserves at the stroke of a pen, but the federal government can. By constitutional right, it has monopoly powers over its currency and bank reserves and, therefore, always pays by creating such reserves when it credits the private bank accounts of its payees (see how the Fed and Treasury interact to make payments). The US government has a Central Bank that never bounces government checks and always makes good on government commitments.

In other words, there are no technical reasons why a nation with sovereign control over its currency, like the U.S., should ever go bankrupt—unless of course a misguided Congress places arbitrary political restrictions on the government to meet its financial obligations.”

And, as matter of fact, a misguided Congress is placing arbitrary restrictions on the Government's ability to meet its financial obligations. There are two very important ones. The first is the mandate to issue debt when the Government is anticipating deficit spending. And the second is the limit on the amount of debt the Government can have outstanding. Neither is sufficient to create a fiscal sustainability problem, but both, taken together, constitute the REAL fiscal sustainability problem of the United States currently.

As I explained in my previous post, if the mandate were removed and the Government could use its constitutional authority to spend/create money without issuing any more debt, it would be impossible for its current spending to preclude its future spending and full fiscal sustainability would exist. Or, alternatively, if Congress ceased to impose debt limits, then, also, no current spending could preclude future spending and we would also have full sustainability, since no matter how much debt was incurred there would be no limits on the US meeting its obligations.

So, to summarize, if the United States has a fiscal sustainability problem, then it is one that is wholly due to two Congressional restrictions on the Government's full constitutional currency power. Its fiscal sustainability problem is not due to defense spending, or entitlements, or interest expenditures, or any other category of Government expenditures. And there is no need to cut such expenditures for fiscal sustainability reasons, though there may be a need to cut many Government programs because they don't fulfill any public purposes. All that's needed to ensure fiscal sustainability, is to repeal either of these two Congressional restrictions on Government spending, preferably the mandate to issue Federal debt, because that would also solve the false sustainability problem of too high national debt, and debt-to-GDP ratios.

So, the answers to all questions after the first two above are yes. The hawks are making much ado about nothing, or at least very little. They are creating a distraction over a non-problem. They are confused about the need to cut entitlements. In fact, there is no need to do that. They are confused about how the Government spends money, and also have a misunderstanding about the Government's ability to spend. Finally, they are making a horrible mistake in not supporting enough Government spending to create full employment and to maintain it.

And this brings us to fiscal responsibility. It is not the same as fiscal sustainability. Of course, the deficit hawks and doves, including this President, believe that fiscal sustainability and fiscal responsibility are related because the only fiscally responsible fiscal polices are those intended to stabilize and eventually reduce the debt-to-GDP ratio. So, for them fiscal responsibility becomes a policy of fiscal austerity and a structure of constraints on Government spending that will destroy the future of our children and grandchildren.

But, as I've shown, Congress has only to lift one of two restrictions on the Government's authority to spend in order to achieve the full fiscal sustainability originally granted to the Federal Government by the constitution. The first and most fiscally responsible thing for the Obama Administration to do is to call for lifting of one or both of the two Congressional restrictions. The coming and completely avoidable crisis over the debt limit provides the perfect backdrop for such a request.

Why should Obama wait for the Republicans in the new Congress to refuse to extend the size of the debt limit? Why not ask the lame duck Congress to remove the debt limit entirely, and, while they're at it, give the Treasury the freedom to issue or not issue debt at its discretion? If the President appeals to the Public and makes it clear that the two Congressional restrictions are a) the source of the national debt they're so worried about, and b) create the possibility of periodic crises that threaten to shut down the Government, and that he really needs these two restrictions removed to prevent financial crises in the future, he may be able to get one or both repeals through Congress.

The Republicans won't want to along, of course. But does Mitch McConnell really want Rand Paul to be able to precipitate a Government shut-down crisis in March or April of 2011? Everything's going his way, and he doesn't need to risk the cries of outrage that will come down on him from his Wall Street friends, if the Government gets shut down and the bond markets are in a tizzy about irresponsible Republican behavior.

Whether or not full fiscal sustainability is immediately achieved, it's clear that a fiscally responsible fiscal policy is to seek that full fiscal sustainability and, at the same time to implement fiscal policies that will fulfill public purposes. As Pavlina Tcherneva also says:

But just because government deficits can always be financed and just because government deficits create private sector surpluses, does it mean that all kinds of government spending are equally responsible? And the answer is clearly, NO.

A responsible government spending policy is not measured by some arbitrary accounting result called the deficit, but by the impact it has had on the real economy.

In other words, fiscal responsibility is fiscal policy intended to achieve public purposes while also maintaining or increasing fiscal sustainability. So, the REAL Government fiscal responsibility problem is not the problem of everyone “sucking it up” and responsibly accepting austerity. It is not targeting the debt-to-GDP ratio and managing Government spending to try to stabilize it.

Instead, it is the problem of people facing up to the need to use fiscal policy to stop our out of control economy from ruining the lives of any more Americans. This means that the REAL solution to the REAL fiscal responsibility problem is for our leaders in Congress and the Executive Branch, to remove fiscal constraints and use the fiscal powers of the Federal Government to fund solutions to the many national problems we face, starting with creating full employment, and a real universal health care system in which no one is shut out, or forced into foreclosure or bankruptcy by medical bills, and then all the other serious problems we face, but now will not handle because we claim a non-existent fiscal incapacity of the Federal Government. There is no incapacity! We have not run out of money! We have only run out of will and courage! We need to get those back, and do what must be done to reclaim the future for working Americans.

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

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CMike's picture
Submitted by CMike on

If the problem is the fiscal choices our government has been making for decades -including not taxing the rich and corporations enough; paying huge sums for overpriced health care products and services; buying hundreds of billions of dollars of useless military equipment- why would tapping into an unlimited source of money do anything but encourage the government to engage in more reckless expenditures of money and seek to enrich further the wealthiest Americans, and non-Americans, at the expense of the general population?

letsgetitdone's picture
Submitted by letsgetitdone on

the unlimited expenditure of money, or spending money on the wrong things. On limitations, Government spending should be limited if it has an inflationary impact. Price stability is one the goals of fiscal policy, along with full employment.

Also, none of us should spend Government money on the wrong things. Responsible fiscal policy calls for spending on public purposes, not private gain.

However, having said the above, the truth is that there is no solvency problem associated with the US's fiat currency system, beyond the political problem of getting Congress to remove artificial constraints. It is also true that there is no economic need for the Government to cut any expenditures for the sake of stabilizing some meaningless debt-to-GDP ratio. I think these are important truths the Public needs to know. Democracy is based, in the end on truth and honesty. It can't be sustained without at least a modicum of that,

The lie about the possibility of Government solvency has now hurt working people for 35 years since the days of Jimmy Carter. It's time to say goodbye to that lie, and make the political fights needed to ensure that capacity for Government spending is used on the right things. I want to spend my time fighting about that, not fighting over the distraction that the Government could possibly run out of money.