If you’ve been watching the news, you’ll have noticed that the narrative of the moment is the debt ceiling. From the mainstream media to the independent, media outlets are discussing the debt ceiling using the exact same status quo narrative of “federal taxes fund federal spending”. Federal taxes do not fund federal spending. Congressional appropriations also known as federal spending are what fund you, the reader, you John Citizen, Jane Citizen and Leaf Citizen, and every private entity such as a business or corporation. From most sources, the narrative you are being fed about taxes, debt, and deficits at the federal level is entirely false.
Before we go further let’s get two correct definitions down as the basis of our analysis.
- The side of the economic ledger that accounts for every dollar spent but not taxed back at the end of the federal government’s fiscal year.
The debt ceiling.
- The artificial limit on how much total untaxed currency issued by the federal government and represented by and in U.S. dollars can exist at any given time.
Why do these terms and what they represent matter? Why does everyone, it seems, get it wrong? Follow along as we help you build the analysis to counter the madness yourself.
In Democracy Now’s Headlines segment on May 19th 2023, Amy Goodman reported the following:
“Here in the United States, members of the far-right House Freedom Caucus are calling on Republican House Speaker Kevin McCarthy to suspend negotiations with the White House on raising the limit on the national debt. Caucus members said they’re willing to allow the U.S. to default on its debts — something that could happen as soon as June 1 — unless Democrats agree to sweeping cuts in federal spending on housing, education, healthcare, food assistance and the environment. They’re also demanding that Democrats agree to speed the approval of oil, gas and mining permits, and rescind most of the climate legislation signed by President Biden. In response, a growing number of Democrats are calling on Biden to invoke his authority under the Constitution to avert a debt default — a legal strategy that’s never been tested. This is Vermont independent Senator Bernie Sanders.
Sen. Bernie Sanders: “In fact, the 14th Amendment of the Constitution clearly states, quote — it’s not ambiguous — ‘The validity of the public debt of the United States … shall not be questioned,’ end-quote. Is this a perfect solution? Is imposing the 14th Amendment a perfect solution? No, it is not. But using the 14th Amendment would allow the United States to continue to pay its bills on time and without delay, prevent an economic catastrophe and prevent devastating cuts to some of the most vulnerable people in this country.”
Senator Sanders further commented via Twitter regarding the debt ceiling’s yearly counterpart- the deficit.
Bernie’s analysis is flawed, however.
Bernie Sanders has, it seems, never committed to fully understanding and promulgating an MMT analysis. Despite hiring Stephanie Kelton as his campaign’s economics advisor for the 2020 election, Bernie has apparently consistently chosen the rhetoric of deficits and surpluses as understood through the lens of mainstream media in order to dunk on Republicans and make his proposals appear more reasonable than theirs from a purely fiscal standpoint. While some of Bernie’s policies are generally less burdensome than their modern counterparts, if we understand MMT we understand that federal spending isn’t limited by some funny number, nor is it constrained by taxes at the federal level.
For example, Economist and President of the Global Institute for Sustainable Prosperity, Fadhel Kaboub, has analyzed Medicare for All and considers it to be dependent on productive capacity. Dr. Kaboub warns against agreeing to the “terms of the debate” as they are, which are the terms that we must tax the rich to pay for social programs. Researcher, entrepreneur and MMT proponent Warren Mosler believes the implementation of Medicare for All to be a “deflationary event.” Mosler and Kaboub share in their respective MMT-based analyses that the implementation of Medicare for All would be deflationary.
“[Y]ou have to realize that the current health care system, the massive health insurance program, massive in terms of cost, but in terms of employment, of people doing paperwork, mostly to deny services to people who buy health insurance from private insurers. So, with a universal healthcare system, you eliminate all of that administrative costs associated with processing and insurance and payments and accounting and billing….
…you maximize your profits is by charging them more premiums and copays and denying them as much as possible and forcing people to stay away from their doctor to minimize the cost, which means you maximize the pain eventually when untreated illnesses pop up, eventually. So, Medicare for all will be deflationary in the sense that it will reduce the cost at the national level and it will create unemployment, and unemployment is deflationary.
So, we need to figure out an alternative employment transition program, as Warren calls it. So, we have to recognize that this is part of the economics of Medicare for all. The argument that it’s going to cause hyperinflation is the exact opposite. It will be deflationary.”Dr. Fadhel Kaboub
However, today is a day for debunking debt ceiling fearmongering. As that is the case, let’s continue with Professor Richard D. Wolff. Professor Wolff is a self-described Marxist and a professor of economics. He is also an advocate of worker co-operatives and leaving capitalism behind. On May 20 2023, Professor Wolff tried to explain deficits using his own analysis and thereby revealed his lack of understanding of modern economics and how fiat currencies work.
To put it as simply as possible, Professor Wolff is wrong. Despite his studies of economics and his status as an economist of the Marxist variety, to write this publicly and stand by it means one of two possibilities:
- Professor Wolff doesn’t understand the hyper-accurate scientific understanding of fiat currency, known as MMT.
- Professor Wolff does understand MMT but for some undeclared reason is choosing not to use it in his public analysis.
If option two is the case, he is lying. If option one is the case instead, he should take time to update his knowledge. Professor Wolff has a lot of goodwill in the American Left, and his peddling of the same economic lies that the extremely right-wing use is not becoming of him, his position, or his reputation.
The reality is this: Deficits are an accounting measure. At the federal level, the deficit represents every dollar spent throughout the year minus every dollar deleted through the mechanism of federal taxation in that same fiscal year. The deficit is merely an incredibly large tally. It’s like a total line on a spreadsheet. No more, no less. Just like a total expressed on your personal spreadsheet, maybe for a household budget, the number you see doesn’t change the real world at all. What does change the real world is how you got to that number, in other words how the money is used.
Where the federal balance sheet and your personal balance sheet diverge is in monetary sovereignty. You, John, Jane, or Leaf Citizen, do not have your own currency. Even if you did issue your own currency and call it something like “Me, A Citizen Bucks” or whatever else, you have no legal means of enforcing value in your newly created currency. You can’t legally impose an obligation to trade, transact, or ultimately pay you a certain amount in your own created at-home currency. The federal government, as a matter of its very existence can, will, and does not only create a currency known as the United States Dollar, it also creates a legally imposed obligation to give it, the federal government, some of that currency on a recurring (usually yearly) basis or suffer unwelcome penalties. This is where the United States federal government and its spending differs from your household budget or even the municipal and state budgets where you live.
According to Warren Mosler, a tax obligation creates unemployment- by design. Before the imposition of tax, unemployment as we refer to it today didn’t exist. Government spending at the federal level creates currency to be circulated and eventually in some small part to be given back to the federal government. Taxes create unemployment, but so too does any private control of scarce resources. The form of unemployment created by taxes requires people to gain employment offering a sum of the taxing currency. In other words, taxation creates unemployment in the currency.
Logically then, we can extrapolate that the creation of unemployment creates the market forces to facilitate employment. This is why public, governmental fiscal and monetary policy control every level of the economy, even with private markets and a capitalist society. The programs, demands, and priorities that Congress communicates through fiscal policy and the signals sent to the capitalist class through the Federal Reserve’s implementation of monetary policy together create the pressure to employ or lay off, for example. You cannot honestly separate mass layoffs from the high interest rates the Federal Reserve keeps raising. In fact, even the chairman of the Federal Reserve admits that high unemployment is the goal of rate hikes. From CBS:
“In case the U.S. economy wasn’t hurting enough already, the Federal Reserve has a message for Americans: It’s about to get much more painful.
Fed Chair Jerome Powell made that amply clear last week when the central bank projected its benchmark rate hitting 4.4% by the end of the year — even if it causes a recession.
“There will very likely be some softening of labor market conditions,” Powell said in his September 21 economic outlook. “We will keep at it until we are confident the job is done.”
In plain English, that means unemployment. The Fed forecasts the unemployment rate to rise to 4.4% next year, from 3.7% today — a number that implies an additional 1.2 million people losing their jobs.
“I wish there were a painless way to do that,” Powell said. “There isn’t.”(Via: https://www.cbsnews.com/news/fed-interest-rate-hikes-unemployment-increase-layoffs-inflation/ )
What CBS doesn’t touch on is that the manufacturing of high unemployment is motivated by the capitalist need to depress wages and weaken labor. The pandemic and (increased unionization efforts pre-COVID that ramped up after COVID first hit) restored some primacy to the worker. It did this in the sense that members of the working class were able to reassert their value to a degree. In addition, the mass deaths that are still ongoing from the pandemic reduced the total supply of workers. Altogether this means that there is, or was at least, an upward pressure on the market value of wages and the workers who earn them. The “job” Chairman Powell refers to is the process of deflating the value of labor, depressing wages, and forcing working class humans to be either completely overworked or underworked, the former group not having time to agitate for change and the latter group to stand ready as part of what Marxists call “the reserve army of the unemployed”. The existence of high unemployment serves to discipline laborers and make them accept poor conditions without the threat to the capitalists of going on strike.
Of course, there isn’t a painless way to have 5-10% unemployment, which was been Chairman Powell’s stated goal since at least late 2022. The amazing amount of terribleness, the despair and death wrought by that level of unemployment isn’t merely insignificant to most capitalists- it is a benefit of their control of the socioeconomic order. Chairman Powell may honestly wish it was painless, he may genuinely think that inflation is a greater evil than forced unemployment, and he may even truly see the only way to fix inflation as being forced mass unemployment. Even if he does have those positive intentions, he is also wrong about this. If Chairman Powell does not have those positive intentions, he is merely a gleeful architect of mass murder through economic policy. Regardless of the intentions, the impact of what we do is what matters. In that sense, anyone who uses the power to set monetary policy to manufacture unemployment is creating the impact of mass death and despair.
Other than a lack of political will, there is nothing stopping the federal government from maintaining a policy of full employment through offering a community stewarded job to every American who wants one.
“[Federal Job Guarantee], on the other hand, would provide these resources that benefit communities and encourages people to participate in their communities. It would allow for work that serves the public purpose rather than private profit. Moreover, Dr. Tcherneva explains that many on the right who are proponents of the UBI want it to replace other social safety net programs such as food stamps, Medicare, Medicaid, child care, etc. all of which produce more resources in the economy.”– Steve Grumbine, Founder and CEO of Real Progressives and host of Macro N Cheese.
Further discussion of the Federal Jobs Guarantee isn’t relevant here, but the fact that it is possible is the relevant piece of information in developing our honest analysis of the debt ceiling.
On May 22, 2023, in his fourth press conference of the day, and one that followed his meeting with President Joe Biden, Speaker of the House Kevin McCarthy made some remarks. Highlights from that speech (as documented by the speaker’s website at speaker.gov) follow:
“I’ve been very clear with the President from day one. We’re not going to raise taxes. We have more revenue coming into government in a 50-year average than any other time in history, only two other times did we have a higher percentage — but the problem is that we are spending more than almost any time in modern history. It’s a spending problem…”
“My whole goal here was, always from the beginning, we want to be responsible. Being responsible would have been to negotiate this like we wanted to, being reasonable that we would find common ground, being sensible that we spend too much money. Unfortunately, we are where we are today. Thankfully, the Republicans have passed a bill…”
“We’re going to find a baseline that we agree to that will be less than what we spent this year and appropriators are going to sit together and prioritize… how about helping people get back into the workforce so they pay into Social Security and Medicare. I don’t think it’s right to take from a hardworking taxpayer and go borrow from China to pay an able-bodied person with no dependents to sit on a couch.”– Kevin McCarthy, Speaker of the House
Before we begin to work together in debunking this narrative of the Speaker’s, ask yourself one question: How can China, a foreign government who issues the Yuan, lend to our government any United States Dollars, a currency that our federal government alone issues?
We’ll circle back to that answer in a moment.
Congress, during Biden’s first two years did create unprecedented amounts of deficit reduction through the raising of taxes as part of President Biden’s agenda. The statement “We have more revenue coming into government in a 50-year average…” is true, or nearly true. What isn’t true is McCarthy’s conclusion used with that assertion: “It’s a spending problem.”
If we understand MMT, we understand that the federal government can’t run out of dollars any more than a carpenter can run out of inches, or a mechanic can run out of millimeters. The constraint on the size of the things being built by the carpenter, fixed by the mechanic, and spent by the federal government is tied to the real world. In other words, they all share a limit based on real resources. Those are the labor power, the materials, the infrastructure, and the technology available to them. The federal government can spend enough money to purchase anything purchasable in the USD, without a monetary constraint or a reality-based maximum number. This is true even though we call created (spent) but undeleted (taxed) dollars “the federal debt”.
Unbalanced monetary and/or fiscal policy can increase or otherwise impact inflation. This is true. So can supply chain and labor market changes or disruptions. Speaker McCarthy, in his remarks, stresses the value of “being responsible.” This is a subjective measure and does not in and of itself give us much value in analyzing the debt ceiling realities. There are some people who honestly believe saber rattling and trying to spark a hot war with Russia or China is the responsible measure. “Being responsible” is a vague platitude, as it sounds good and reasonable but doesn’t tell us anything about the real goals of Speaker McCarthy or any other member of the federal legislature.
As for the final set of key remarks, even President Reagan was honest enough to admit that the deficit doesn’t pay for Medicare. He of course wasn’t fully honest about how it all works, but he was closer to honest during the era of his administration than any modern politician is today in our current era. With an MMT-based analysis we know that the federal or public deficit is the private sector surplus. If there were no federal government deficit there would be none of its money in the economy for everyone to circulate.
Of course, Reagan was also wrong in his public messaging about taxes in general. The truth is Medicare is fully paid for by congressional appropriation, as is every federal program. Every dollar in existence, regardless of where it is now, is either reflected in the debt tally or it has been destroyed through the mechanism of federal taxation, which serves as currency deletion.
As for the current President, Joe Biden has consistently been wrong about deficits. In his pre 2022 election remarks, he often cited what his administration did in terms of deficit reduction as some sort of win and some sort of proof that Democrats had been responsible with the economy. The only aspect of the economy that is actually stronger right now is the profit margins for capitalists and bosses. If you don’t believe me, do an exercise with me:
- Pick a large corporation reporting record profit.
- Listen to or read the CEO remarks, shareholder reports, or other quarterly earnings publications.
- Catch them admit the profits are massive.
- Watch for them to mention price increases or wages as a reason why.
Here is an example from the Kroger Q1 2022 Quarterly Earnings Call- (one of the analysts on the call asked specifically about the price raises and even pointed out the pressures raised prices are putting on the consumer)
“Our next question comes from Simeon Gutman from Morgan Stanley. Simeon, your line is now open.
Simeon Gutman — Morgan Stanley — Analyst
Hey, good morning, everyone. I’ll ask my question and follow-up, one shot here. First, Rodney, I want to ask about the competitive environment. It feels like it’s pretty rational out there, and it seems like the consumer has been price taking for the last, call it, number of months.
And even Walmart mentioned a week and a half ago, they’re not getting in too aggressive on price. I want to ask you, now that the consumer basket or consumer behavior is starting to change, might this environment change? Do we think — do you think we’re at a new normal in terms of promotional activity? Or do you think this is — yes, I don’t want to put it like a house of cards, but it feels like everyone’s kind of playing nice, and something can break.
Rodney McMullen — Chairman and Chief Executive Officer
Yeah. Well, it’s a good question. And obviously, we always spend a lot of time focused on it. Your first comment, we are seeing the competitive environment pretty similar to what it’s been.
As you know, our go-to-market strategy really is Leading With Fresh. And what we find is it’s the most important reason why somebody decides where to shop. And our teams are really working hard to take our fresh experience to the next level, and our customers are telling us they appreciate what they’re doing and they’re seeing that improvement. So when you look at it, we think price is just one component.
We’re going to make sure that we always maintain a reasonable spread in the things that we’re good at with our rewards program, our fuel rewards, and our fresh go-to-market strategy. Those things matter, and that’s where we’re going to win in the marketplace. And we expect that to continue to be important in every imaginable environment going forward. So to me, it’s one of those things where it’s important, we continually check.”
Not every CEO will be nakedly honest enough to admit it outright, but if you listen to their reports to the stockholders, you’ll catch at least a few saying the quiet part out loud.
President Biden performed a speech on the debt ceiling from Japan. These remarks were made after his attendance at G7. Biden’s speech waxed poetic about how we shouldn’t be cutting social welfare programs and how all four congressional leaders agreed with him before he left for G7 that a bipartisan agreement must be the solution. He also boasted about the nearly $3,000,000,000,000 or $3 trillion (about $9,200 per person in the US) that has been deleted out of the economy through his administration’s deficit reduction efforts.
This boast was tied to the Democrat side agreeing to cut spending by an additional trillion dollars while the Republican side was now demanding too many cuts. Spending cuts have the effect of withholding new public currency from the economy and the people in it. The alternative to new spending creating cash circulation is the private sector, especially working class people, being forced to take on higher and higher private debt just to maintain their households and, ultimately, to stay alive.
Biden’s remarks ended with: “America has never defaulted — never defaulted on our debt, and it never will.”
Let’s address that last line. America doesn’t have to make debt payments to anyone. It pays interest on bonds to the rich as a matter of political choice. There is no debtor for the US dollar from the perspective of the federal government. The federal government is not a debtee. It has no creditors which it must pay back. If the government doesn’t raise or eliminate the debt ceiling the consequences will be massive but not because there was some payment not made to China or anyone else. The consequences will be solely from the lack of new money circulating in the economy.
With the amount of wealth consolidation and wealth inequality larger than before the French revolution for years now, most dollars are held by the richest and most powerful.
They’ll be fine in case of default, but everyone else won’t be. Additionally, the capitalists would lose the ability to hoard new dollars (because there aren’t any being issued) until the debt ceiling changes upwards or is removed and the federal government allows itself to spend again. Old dollars, without an alteration to the power balance of the capital order, would continue to circulate upwards into the hands of the ruling class. In other words, recessions tend to bring the greatest upward transfers of wealth.
To drive the point about income inequality and wealth inequality in our analysis, we can also look at the wealth distribution of the region that became the United States in 1774, 1860, & 2011.
Again: How can China, a foreign government who issues the yuan, lend to our government any US dollars, a currency that our federal government alone issues?
The answer to our now twice-asked question is simple: China can’t lend the USD to anyone.
A bipartisan agreement is now necessary to get appropriations through Congress and for the federal government to allow itself to spend again, but what that agreement looks like is not required to exist on the terms of either partisan side as they stand today. The Democrats could mint the coin, creating a trillion dollars in new currency, but an honest analysis of their performance as rulers tells us they won’t.
The debt ceiling can be removed. Economist Stephanie Kelton has advocated publicly for the elimination of the debt ceiling. Kelton has always recently used Twitter to state that the “Clinton surplus” was not something to be lauded.
Kelton’s reasoning? “The Clinton surpluses were built on the backs of unprecedented and unsustainable deficits in the private sector.” When economists like Kelton refer to the private sector, they’re referring not only to industry and businesses but also to private citizens and residents like you and me.
The chart above shows us how the balances of the public sector and private sector mirror one another. The larger the federal “debt” the equally larger the private surplus becomes. If the government has a balanced budget or a surplus at the federal level, then private hands are now all collectively in deficit. In other words, without a federal government deficit there would be zero or less than zero dollars in circulation for that fiscal year, as evidenced by the Clinton Surplus and the recession it triggered.
House Minority Leader Hakeem Jeffries spoke in response to Speaker McCarthy on April 26th, 2023. An excerpt follows:
“The Default on America Act is a ransom note because effectively what you are saying is: pass our extreme MAGA Republican bill or else America is going to default. Now, we have a responsibility here in the United States Congress to uphold the full faith and credit of the United States of America, to make sure that as a country, we pay our bills. Bills that have already been incurred, not default. And that’s what our responsibility is, not as Democrats or as Republicans, as Americans. That’s why in a previous administration, Democrats – three times – worked with the Trump administration to avoid a default. No gamesmanship, no brinksmanship, no partisanship. Worked with the previous administration, to which we disagreed often, to make sure that America paid its bills, notwithstanding the fact that in our 247-year history, 25% of America’s debt was accumulated during the four years of the Trump administration. But we did our patriotic responsibility to make sure that America would not default on our debt.Rep. Hakeem Jeffries
But now, with a different president in office, you want to play games, you want to flirt with a default, take us down this dangerous path and you claim it’s all about fiscal responsibility. Give me a break. That’s rhetoric. That’s not what the record shows. As Mr. Neal articulated, this is not about fiscal responsibility. That’s rhetoric. What the record shows is that Democrats are the party of job creation and fiscal responsibility. And Republicans have been the party of tax cuts for the wealthy, the well-off and the well-connected and exploding deficits.”
It is true that social spending cuts, whether proposed by Democrats or Republicans, will hurt the average person in the United States. It is also true that during his time as President, former President Trump’s budgets accrued massive deficits. The rest of Rep. Jeffries remarks are as guilty of being mere rhetoric as he accuses Speaker McCarthy of engaging in.
To emphasize: the US government chooses as a matter of political convenience to maintain interest payments on bonds but does not need to actually engage in the mechanism of bond interest payments. Interest payments on bonds are generally a giveaway to the wealthy. Bonds are an artifice of the gold standard and are, in the modern era, purely economic jelly. They sweeten the deal for the capitalist class but are not required to make the sandwich that is the economy or the layer cake that is fiscal, social, and monetary policy or law.
There is now a congressional proposal to eliminate the debt ceiling. If it passes, however unlikely that may be, H.R. 415, “End the Threat of Default Act”, would render the political and media machinations around the maintaining of the debt ceiling as meaningless as they are in the real economy. The debt ceiling is artificially enforced and is not required for a healthy economy or a healthy country.
Additionally, Rep. Jeffries falls into the narrative trap of “taxpayer dollars”. Democrat-controlled policies to reduce the deficit are generally an unhealthy policy solution that makes the real economy worse for working-class people. In the extreme, deficit reduction also creates a larger private sector burden that affects every private entity, from John, Jane, or Leaf Citizen to the largest mega conglomerates and corporations.
We do not need the permission of the capitalists via collecting some of their accrued wealth in taxes to implement any monetary or fiscal policy, including those policies overseeing social and welfare expenditures at the federal level. We should tax their extreme wealth as a matter of logic because less consolidated wealth becomes less power and ability to corrupt public institutions.
Would billionaires willingly pay for our healthcare or another social program? It doesn’t matter. Once we understand Modern Monetary Theory (MMT), we know that the debt ceiling is artificial. We don’t need the permission of the ruling rich to have what we need.
President Joseph Biden, House Speaker Kevin McCarthy, House Minority Leader Hakeem Jeffries, Senate Budget Committee Chairman Bernie Sanders, Journalist Amy Goodman, and Marxist Economist Richard Wolff all get it wrong, but you and I – John and Jane and Leaf Citizen – can’t afford their ignorance.
“The debt isn’t the reason we can’t have nice things. Our broken thinking is. To fix our broken thinking, we need to overcome more than just an aversion to big numbers with the word debt attached. We need to beat back every destructive myth that hobbles our thinking.”― Stephanie Kelton, The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy