Who is Afraid of the Big Bad Debt? A Modern Money Theory Perspective on Federal Deficits and Debt

Abstract

The U.S. federal government's deficit is expected to grow to over one trillion dollars in fiscal year (FY) 2020, and the national debt held by the public will likely grow to over $16.7 trillion. Budgeting scholars in the field of public administration have expressed concern over the increasing debt levels. The field of public administration, however, is largely unaware of Modern Money Theory (MMT) and the mechanics of money, which is its focus. MMT argues that understanding the mechanics of money in the U.S. financial system should lead scholars to different conclusions regarding the debt and deficit. This article presents the core arguments of the MMT perspective in this regard, with the goal to trigger further debates about debt and deficit among the community of budgeting scholars.

What Is the Remedy for State and Local Fiscal Squeeze During the COVID-19 Recession? More Debt, and That Is Okay

“…Due to space constraints, we cannot address each in detail here. Detailed discussions of these issues can be found at Douglas and Raudla (Forthcoming), Mosler (2013), and Newman (2013).…”

The Politics of Fiscal Responsibility: A Comparative Perspective By Thornton, Tonya E. and F. StevensRedburn, Washington, DC: Westphalia Press. 2021. 166 pp. $22.50. ISBN‐13: 978‐1637238073

“…If they are running trade deficits, then their economies are losing Euros, a problem compounded by the fact that the EU budget, as Thornton and Redburn correctly point out (91), is too small to sufficiently redistribute money across the continent. In contrast, the United States has a fiat currency, so it has considerably more domestic policy space than the Eurozone countries because it has control over both its fiscal and monetary policies (Douglas & Raudla, 2020; Wray, 2015). The United Kingdom also has a fiat currency, making it more like the United States.…”

“…Thornton and Redburn do not define exactly what they mean by “unsustainable,” but they indicate that high debt loads will make it difficult for the federal government to fund important priorities in the future (4), lead to higher interest rates (4), and crowd out private investment (4 & 10). In regard to the first “danger,” the US federal government will never be in a position where it cannot generate sufficient revenues to pay for its priorities (see Douglas & Raudla, 2020; Wray, 2015). Unlike Eurozone countries, state and local governments, and private citizens and companies, the US federal government has the ability to create more money.…”

Budgeting for existential crisis: The federal government as society's guarantor

“…However, as debt has soared, debt service has not; a secular decline in market interest rates now permits the United States to borrow at near-zero or negative real rates, feeding complacency about the level of debt. New heterodox economic reasoningunder the label of Modern Monetary Theory (MMT)-has bolstered the attractive view that the historically high debt can be managed in a way to postpone the day of reckoning indefinitely (Douglas & Raudla 2020). 9 Many economists who do not subscribe to MMT now argue plausibly that in a low interest rate environment, lower priority should be given to limiting debt and that additional borrowing to finance prudent public investments is now desirable (Furman & Summers 2020, 9-36).…”