Monday, June 22, 2020

Content-free criticism

The Deseret News Editorial Board believes that Washington’s deficit spending is dangerous. However, their criticism is just that heterodox economics is heterodox.

Their key point quotes Fed Chair Jerome Powell: "'The United States federal budget has been on an unsustainable path for years now,' he said, adding 'the debt is growing faster than the economy, so debt-to-GDP is rising. That is, by definition, unsustainable.'"

But why should a present rise in debt-to-GDP during a severe economic crisis imply that debt-to-GDP must rise forever? If I heat my house in the winter, should I assume that I must necessarily run the furnace in the summer? If I incur \$300,000 debt this year to buy a house, should I assume that I will incur \$300,000 of debt every year for the rest of my life?

Of course, the board does not understand MMT or the operations of the federal government:
Interest on the debt is now \$385 billion. This is money that must be paid through taxes before the government can begin funding necessary programs. It also is money that otherwise could be in private hands, funding businesses and innovations that create jobs.
But these assertions are wrong.

First, interest on outstanding government securities does not need to be paid specifically through taxes. Taxes do not fund any government spending in the same way that income or revenue funds households' or firms' spending. The government spends what it chooses to spend, on purchases and interest payments, and then collects taxes.

Second, the government has chosen pay \$385 billion on interest payments; the government could, if it wished, choose to pay any amount, including \$0, on interest payments: the government, not the public, sets the interest rate on government securities.

Third, of course, the money that the government pays in interest goes to private hands, where it could, if the private sector wished, fund "businesses and innovations that create jobs."

The board also claims that "fending off a much more damaging fiscal day of reckoning, in which the world loses faith in the dollar, will take hard work and sustained effort." But why would the world lose faith in the dollar? Why should we even care if the world loses faith in the dollar? Literally, the worst that could happen is that the world starts using its dollars to buy stuff from the U.S., which would increase exports and GDP, hardly a catastrophe.

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