“Maddogg” - Budget Deficits Don't Matter... EVER!
March 4, 2011 Thu Mar 03, 2011 at 07:00 AM EST
http://www.dailykos.com/story/2011/03/03/952010/-Budget-Deficits-Dont-Matter-EVER!
If nothing else, I hope you take away two things from reading this diary:
1. Federal Budget Deficits Don't Matter(at least not in the way you think)
2. It is impossible for the federal government to be broke
The conservative movement in this country is attempting to eliminate all social programs. Most of these programs, like social security, medicare, and food stamps are popular so they are not trying to eliminate them directly. Instead they're using an end-run around them by claiming "we can no longer 'afford' these programs." It is a compelling argument that draws lots of people in. The problem is, the traditional counter-point to it is weak. Progressive's can protect these vital, popular programs, by obliterating conservatives claim that we're "broke".
We are not broke. If you think we're broke, then you're looking at the wrong data.
As you know, the United States monetary system is no longer on the gold standard. Our money isn't based on anything other than the fact that we can use it to buy goods and pay our taxes, but we can't exchange it for anything. When we went off the gold standard a lot of things changed, but we kept the old gold standard institutions and thinking. It's time to update how we think about the budget.
The United States government is the only entity that can create dollars. It's something that it currently delegates to the central bank(The Fed). When the government deficit spends it "borrows" the money from the fed. The Fed can create dollars at willl. It no longer even has to "print" the money since most money is now just numbers in a computer spreadsheet. So let me ask you something, how can an entity that can literally create money out of thin air be going broke? It can't be. It can always create more dollars. It is impossible for the federal government to go broke unless congress does something stupid(like refuse to raise the debt limit)
At this point you may say, "Of course we can 'print' more money, but zOMG! Inflation! Zimbabwa! Weimar! hyperinflation! Oh My!" To this, I respond by saying, thank you for proving my point. Federal spending is constrained by inflation, not revenue. As long as inflation is low(or worse, deflation), the federal government can keep spending whatever it wants and still maintain a healthy monetary system.
Now here's a convenient fact for you. In times of recession and economic downturn, inflation tends to be very low. So during recessions you'll want to INCREASE spending even though the recession might be causing a drop in tax revenue. When times are good and unemployment is low, you'll want to decrease government spending before it turns inflationary - even though tax revenues would indicate you can "afford" the spending. All of these decisions can, and should be, made completely independently of whether or not the budget is actually balanced, in surplus, or in deficit. That's because budget deficitssurpluses are just and accounting numbers and have very little useful information: i.e. they don't matter!
Now we can come back to conservative attacks on social programs. Normally when they say "we can't afford them" progressive's respond with either "we can if we raise taxes on the rich" or "but we can afford military spending?". Once we, as progressives, understand modern fiat-based systems we can demolish the entire premise of their attack. "There is nothing the government can't 'afford'. As long as this recession keeps inflation low, the government can 'afford' the program."
Obviously, you probably have more questions about this. I know I did when I first read that budget deficits didn't matter. I'll try to answer your questions in the comments as best as possible, or ask that you wait for my next diary on the subject to give a more complete answer.
The information in the diary is heavily influenced by a concept known as Modern Money Theory. It's a relatively obscure "post-keynesian" economic school of thought that starts with basic facts like "government can create all the money it wants" and ends with a way we could have both stable prices(i.e. low inflation) and truly FULL employment in this country. So if that sounds like a really good thing to do, or you just want to learn new ways to demolish false conservative talking points, I highly encourage you to follow me as I do more diaries on Modern Money Theory.