The ABCs of Political Economy by Robin Hahnel

Author:Robin Hahnel
Language: eng
Format: epub
Publisher: Pluto Press

Myths about Deficits and the National Debt

Much popular thinking about federal government debt and deficits is based on the following analogy: “If I keep borrowing, going farther and farther into debt, I will eventually go bankrupt. Therefore, if the federal government keeps borrowing, i.e. running deficits, going farther and farther into debt, it will eventually go bankrupt too.” But the analogy is false.

There is an important difference between the federal government and private citizens – or businesses and state and local governments for that matter. If anyone other than the federal government can’t get someone to loan them more money, they cannot spend more than their income. But if the federal government’s financial credibility bottoms out, and buyers in the market for new treasury bonds dry up, the federal government has one last resort. Unlike the rest of us who can be arrested and sent to jail for counterfeiting if we print up money to finance our deficits, the federal government could print up money in a pinch to pay for any spending in excess of tax revenues.

People in the know have long understood, even if the general public do not, that this is what a rational US government would do rather than fail to pay off treasury bonds when they came due, i.e. default on the national debt, since the disastrous consequences of a federal bankruptcy would be far worse than the inflationary effects of running the printing presses for a while. Which means that the “run the printing press option” never has to be exercised because there are always plenty of sophisticated big lenders willing to buy new bonds knowing that the US treasury would never default. But all this implicitly assumed that political sanity would prevail, i.e. that the US government would never choose to default even though it did not have to.

Debt ceilings, government shutdowns, furloughs, fiscal cliffs, and sequestration should all be understood for what they are – political insanity generated by partisan brinkmanship. The debt ceiling is a self-imposed limit on federal debt which began in 1917 as part of the Liberty Bond Act to finance World War I. The precise law governing the debt ceiling was modified in 1930, 1941, 1974, 1979, and 1995, but more importantly, whenever a self-imposed debt ceiling was reached Congress sensibly voted to raise the ceiling rather than leave the treasury unable to pay for spending authorized by a budget passed by Congress and signed by the President, or default on treasury bonds when they came due. However, in 1995, 2011, and 2013 a Republican-controlled House of Representatives turned the debt ceiling into a political football by refusing to raise it as the witching hour approached unless a Democratic President agreed to major political concessions. In 1995 federal employees were put on unpaid furlough and non-essential services were suspended for 27 days before the debt ceiling was raised. In 2011 the Government Accounting Office estimated that the delay in raising the debt ceiling had spooked investors enough to raise the government’s borrowing costs by $1.

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