The deficit scolds, I mean:
Same old, same old.
Here’s something to think about. Stephanie Kelton of Modern Monetary Theory was on Fareed Zakaria today:
ZAKARIA: “Let’s get this done.” That’s what President Biden said before heading to the G-20 in Rome. He wanted Congress to pass his proposed $1.75 trillion climate and social spending bill and $1.2 trillion infrastructure bill.
Both have had their price tags halved, and there’s still hand-wringing over how much they cost. But does the cost really matter?
Stephanie Kelton is a professor of economics and public policy and the author of “The Deficit Myth.”
Welcome, Stephanie. One of the things that you have talked about in your book and — is that, when we think about this question of are we spending too much, will this kind of deficit spending cause problems like inflation, you say it’s as if the last 30 years of history didn’t happen. Tell us what you mean by that.
STEPHANIE KELTON, PROFESSOR OF ECONOMICS, STONY BROOK UNIVERSITY: Well, Fareed, for so many years we have been taught to think about government deficits as something that’s inherently irresponsible. Maybe in a time of crisis, like after the financial crisis and the Great Recession, or during the COVID pandemic, we make allowances and we say, “Well, OK, we have to run some deficits because it’s a moment of crisis.”
But in more normal times we’re told that deficits are something that we ought to strive to avoid, that governments ought to balance their budgets, that they should effectively balance like — a budget like a household, that deficits are dangerous because they do things like driving up interest rates, making our long-term debt unsustainable, producing a slower growing economy, putting us at risk of national bankruptcy, insolvency, turning into Greece, the kind of thing that we saw in 2010 with many countries in Europe struggling with debt.
So we have been taught to think of deficits are something that’s inherently dangerous and risky. And I think the last 30 years, as you just said, really should cause us to rethink a lot of that.
ZAKARIA: And — and explain what you mean by that, that we — we have been going through — we’ve been spending; we’ve run up large deficits. Countries like Japan have run up huge deficits and no inflation.
KELTON: Yeah, Japan’s been running large fiscal deficits for the last three decades, and — and you’re right, with little inflation to show for it. The U.S. has been running fiscal deficits basically my entire life, with the exception of really four years during the Clinton presidency.
And, you know, we have just witnessed in the last 18 months or so Congress commit about $5 trillion to fighting the pandemic, supporting the economy. And what did we end up with?
We ended up with the shortest recession in U.S. history. So we have demonstrated the power of fiscal policy, what it is possible to do, lifting nearly half of all the kids in this country out of poverty, supporting families, supporting small and large businesses, protecting this economy through the pandemic. And it works. And it works without producing all of the negative consequences that we’ve been taught to associate with deficits.
ZAKARIA: What about the argument that now you are seeing inflation?
Larry Summers has argued that right now, because of, really, the COVID relief spending that was in his view too much, you are seeing inflation. Summers, I should explain, does support a lot of the social spending and the infrastructure bills, but he feels like all of it together is producing inflation. And the numbers do seem to be ticking up, right?
KELTON: Well, look, one of the first things that we teach students in their very first economics course is not to confuse correlation with causation.
So, yes, we have had two things happen. We have had a huge increase in fiscal support — so large government deficits that have supported the economy and pulled us out of a recession very, very quickly.
And, yes, we have higher-than-normal inflationary pressures — not just here in the U.S., Fareed, but, of course, around the world.
And so you could look at these two things and say they’re happening alongside one another, therefore it must be evidence that the government has pushed too far with fiscal policy, that in fact the spending is creating the extra inflationary pressures we see today. I don’t think that’s right at all.
And if you look at what, let’s say, the San Francisco Federal Reserve Bank, they’ve got a research staff. And some of their researchers, just within the last two weeks, published a study asking this exact question, how much of the current inflation we’re experiencing can we trace to the $1.9 trillion COVID relief package that was passed in March?
In other words, is Larry right, is Larry Summers right that that is what’s been driving a lot of the inflation that we are currently experiencing?
What they found is that the answer is unequivocally no, that this year, that spending will add something like 0.3 percentage points to the inflation index that the Federal Reserve cares most about, and that next year, it will add about .2 percent to inflation.
In other words, it is practically negligible. And what we’re dealing with are supply chain and reopening, the pressures related to those kinds of challenges are pushing inflation higher. But it doesn’t appear that it is correct to say that the government pushed spending too far.
ZAKARIA: And what about the long-term issue of entitlement spending, Medicare, Social Security, all going — you know, people say, “Look, we’re facing a future where spending is going to take off, so we have to be careful today.”
KELTON: Well, look, we have commitments that we have made to retirees, to dependents, to the disabled, in the form of Social Security. And we have commitments that we have made…
(CROSSTALK)
KELTON: … to people receiving Medicare. And so there are two separate questions here, right? One is can the federal government afford…
ZAKARIA: Stephanie, I’m — I’m — I’m so sorry. I’m so sorry, I realize I got the timing wrong. We — we are out of time. We’re going to have you come back and talk about all of this more.
I just want to give one — one thought, leave viewers with one thought, which is the spending is over 10 years. It’s important to keep in mind, and it’s about $3 trillion. America’s GDP over that 10 years will be about $300 trillion. And we will be back.
FWIW, Krugman is basically saying the same thing. They could be wrong. But they could be right, too. All the crying of deficit wolf over the past 30 years should have made everyone skeptical of the scolds’ braying, especially since the Republicans have been crude political games with it for the past 60 years.