Thursday, June 8, 2023

Debt Ceiling Nonsense

Debt Ceiling Nonsense

Jim Kavanagh

“Could the Treasury skip the rigamarole and pay its bills without bonds? Economically, sure. Why doesn't it? Well, the Fed has regulations governing “overdrafts” -- but apart from these, the answer is plain: to do so would expose the ‘public debt’ as a fiction, and the debt ceiling as a sham.” - James K. Galbraith

It is infuriating to watch this “debt ceiling” charade play out again, and terribly depressing to see so many self-identified leftists accepting, and bargaining within, the ridiculous, fictional framework that guarantees their perpetual defeat within a never-ending cycle of such nonsense.

Just about everybody—certainly everybody with any “progressive” inclinations—recognizes what a tiresome farce this is. We all know the “debt ceiling” is the atavistic remnant of a 1917 gold-standard-era law that was ignored until Newt Gingrich dug it up in 1995 to start the now-perennial stunt cycle; that it exists in no other country besides Denmark, where it is set astronomically high precisely to avoid making it a political weapon; that it is used hypocritically by Republicans as a political weapon against Democratic presidents, to cut social spending and attack “entitlements” (Social Security and Medicare); that it enables a ludicrous, blatantly unconstitutional “do-over” by which right-wing legislators, who were unable to get the social program cuts they want through normal Congressional votes, try to force the Executive to stop spending that the Congress has already authorized, etc.  (For a nice critique of the constitutional pretzel-twisting the Republicans are engaged in, see Robert Hockett’s Stop the Charade: The Federal Budget Is Its Own ‘Debt-Ceiling’.)

Did I say “Republicans”? We all know, too, that the Democrats, who constantly moan and groan about the reactionary absurdity of the debt ceiling, refused to abolish it, even when they had a supermajority (Did someone say: “codifying Roe”?), and will always end up caving to the “fiscal cliff” blackmail.

When, during the last lame-duck session, some progressives called for using reconciliation to raise the debt ceiling precisely to preempt the extortion that’s happening now, Democratic senator Dick Durbin demurred, because “It takes too much time." When a group of House Democrats led by Pennsylvania Rep. Brendan F. Boyle suggested eliminating the statutory debt limit altogether (the proper thing to do),  Joe Biden’s response was firm: "You mean, just say we don't have a debt limit? No. That would be irresponsible." 

It’s almost as if both parties like—or think it’s necessary—to have this sword of Damocles hanging over the federal government’s social programs.

Biden, who has spent forty years calling to freeze/cut Social Security and Medicare and praising austerity hawks like Paul Ryan, does believe eliminating the debt limit would be “irresponsible”—i.e., agrees with the fundamental premises of the right-wing Republicans. He follows in the footsteps of Barack Obama, who, as a Senator in 2006, when it discomfited a Republican president, voted against raising the debt ceiling, saying: "America has a debt problem and a failure of leadership. Americans deserve better. I therefore intend to oppose the effort to increase America’s debt limit"—i.e., agreeing with the fundamental premises of right-wing Republicans.

Five years later, when the shoe was on his presidential foot, Obama, having embraced “entitlement reform” and Paul Ryan’s “serious … entirely legitimate proposal” for austerity, explained his senatorial vote thusly:

I think that it's important to understand the vantage point of a senator versus the vantage point of a president. When you're a senator, traditionally what's happened is, this is always a lousy vote. Nobody likes to be tagged as having increased the debt limit - for the United States by a trillion dollars. As president, you start realizing, you know what, we, we can't play around with this stuff. …And so that was just an example of a new senator making what is a political vote as opposed to doing what was important for the country. And I'm the first one to acknowledge it.

(Amazing, isn’t it, how, by claiming “the first one to acknowledge it” prize, Obama makes an admission that he acted out of political opportunism as opposed to doing what he considers “important for the country” seem so inconsequentially banal.)

So, not only was Obama as hypocritical as right-wing Republicans in his partisan weaponization of the debt limit, he and Biden and virtually all Democrats are as committed as right-wing Republicans to the necessity and importance of the debt limit, and to the notion that those—including Democrats—who cannot respect it are “failing”: "The fact that we are here today to debate raising America's debt limit is a sign of leadership failure. It is a sign that the U.S. Government can't pay its own bills." 

The fundamental point is that the Clintons, Obama, Biden, and all the “moderates” and virtually all Democrat and independent “progressives” agree with the Republicans that borrowing (along with taxes) is necessary for the government to “pay its own bills.” That’s why Hakeem Jeffries finds consideration of a spending freeze—cuts to social programs, in effect—"inherently reasonable”; that’s why Biden has been preaching for decades about the need to save reform freeze/cut Social Security and Medicare; because, well, they just have to, or the government won’t be able to “pay its own bills.” Indeed, Obama would have, with pride in doing what was “important for the country,” thrown those social programs over the “fiscal cliff” in his “Grand Bargain,” if he hadn’t been blocked by right-wing Republicans who were too stubborn to accept any tax increase—a stance for which we should be grateful.

And now, we have the Democrats to thank (more Republicans voted against it) for passing a debt ceiling deal that “pares back federal spending by at least an estimated $234 billion over the next two years…at the cost of massive automatic spending cuts that both sides see as too steep.”

It’s a deal that betrays student loan holders and imposes gratuitously cruel and fiscally meaningless work requirements on SNAP recipients, while explicitly ensuring that the growing costs for “overseas contingency operations [i.e., war] … and certain other funding,” remain explicitly “not…constrained.” It’s a deal that cements the precedent of allowing a minority congressional faction to hold the economy and government operations hostage whenever. Oh, and it “barely dents” the “debt.”

Well-intentioned progressives see all this and say: “Why don’t they raise taxes? The Democrats are betraying us by cutting spending instead of raising taxes to enable the government to “pay its bills”—in this case, the debt bill.” Here’s David Sirota:

Biden could close a $50 billion tax loophole that mostly benefits the very rich. 
He could do this right now to deal with the debt. 
He refuses.
Instead, he’s joining with Republicans to try to limit food stamps. 
Really think about that.

In fact, according to the Washington Post, Biden’s opening “pitch” to McCarthy was right along that standard left-ish line: “A proposal to raise the debt ceiling that didn’t just slash spending but also generated new revenue, particularly through tax increases targeting the wealthy.”

But there is no problem here that can be, or is being, solved by spending cuts or tax increases. Squeezing people who have about $9 a day ($281 per month max SNAP benefit) to buy food is not going pay the government’s bills. And no tax increase is going to pay infinitely expanding “overseas contingency operations” bills, or the ever-growing non-discretionary spending (Social Security and Medicare) bills, or the $6 trillion dollars the government created in 2020-21—i.e., the $50 trillion+ “debt” expected by the end of the decade.

The problem here is not whether to cut spending and/or raise taxes to pay the government’s debt; the problem is thinking that spending or taxes has anything to do with the government’s debt. And everybody—Democrat or Republican, left, right, or center—who continues to promote that idea is part of the problem. Because they all agree with the framework given in this New York Times “debt ceiling” explainer:

What is the debt ceiling? The debt ceiling, also called the debt limit, is a cap on the total amount of money that the federal government is authorized to borrow via U.S. Treasury securities… to fulfill its financial obligations. Because the United States runs budget deficits, it must borrow huge sums of money to pay its bills. [my italics]

If this is correct, then Obama and Biden and Jeffries and Ryan and McCarthy are right: it is “reasonable”—indeed, necessary—to consider spending cuts as part of an important-for-the-country solution, no matter what tax increases you want to insist on.

But it is not correct. The second sentence of the NYT explainer is false—the USG does not have to, and does not, borrow money “to pay its bills,” and the second sentence does not follow (there is no “because”) from the first.

In regard to the second point: The “debt limit/ceiling” itself says nothing about spending. It sets a maximum amount the government is authorized to borrow via selling Treasury securities. It does not explicitly set a maximum amount the Congress is authorized to spend via legislation. Nor does it require or authorize the government to “default” on, stop making, payments that are extant legal obligations mandated by legislation the Congress itself passed.

It’s prima facie constitutionally ridiculous to think that any legislation could authorize such a default. Could a law Congress passed in 1917 require it, in 2023, to ignore all the budgetary legislation it has passed in the intervening years? That absurd notion has been invented by enemies of social programs to create an infinite series of Groundhog Day “do-overs” where legislators get to renege on popular legislation they have passed, while pretending it’s not because they oppose the programs but only because they have to “pay the government’s bills.”

But what does limiting the government’s authorization to borrow going forward have to do with the government’s legal obligation to spend what it has already authorized? To pay recipients what they are legally entitled to?

And please understand what “borrow” means here: selling Treasury securities. Why can’t the government stop selling Treasury securities (I’m all for it!) and keep on spending as authorized and obligated by law?

Because there’s an assumption—an implicit policy—that is not part of the 1917 “debt limit” law,  but upon which it rests, that if the government’s tax receipts don’t equal the spending authorizations it has made, it “must borrow”—must make up the difference by selling Treasury securities—in order to “fulfill its financial obligations” and pay its bills, But that assumption is wrong.

I repeat, and ask you, dear reader, to stop and think whether you agree or not: That assumption is wrong. It’s politically persistent, but it’s economically wrong. As Galbraith says: “Could the Treasury skip the rigamarole and pay its bills without bonds? Economically, sure.”

Indeed, that assumption has been known to be wrong for decades, and was flatly contradicted by a Chairman of the New York Fed, Beardsley Ruml, in 1946: Because the U.S. is a country “whose currency is not convertible into gold or into some other commodity…our Federal Government has final freedom from the money market in meeting its financial requirements.”

Economically, there was some reason for that assumption in 1917, when “everybody knew” that our monetary system was based on the gold standard, and spending was constrained by the need to control the ratio of currency in circulation to gold—which was the real money and something the government did not create and had to get from somewhere else.

That reason no longer exists. See what it says on that lovely $100,000 bill that’s my headline image (It’s a receipt for a quantity of gold) and what it doesn’t say on the dollar bill in your pocket (It’s a receipt for…a dollar). As Galbraith says, the notion that the government needs to borrow money is “an anachronism… based on the idea that the government must raise money from elsewhere, before it spends.”

But the implicit assumption and policy persist—in the form of the household paradigm, where the government, like a household, must get its money from somewhere outside of itself to “pay its bills.” It persists in the minds of the masses of people because they have been thoroughly ideologized to accept it as a natural fact, and it persists in the hands of the few people who oversee the actual money system we have because they benefit from everyone else clinging to that anachronistic framework, which hides the progressive potential of that system. It persists so that we will continue to argue, irrelevantly, about raising taxes and/or cutting spending to “pay the bills.”

Please read James Galbraith’s words above carefully: the “debt ceiling” is a sham because the “public” debt is a fiction. The solution to this problem is not to cut spending or to raise taxes; it's to recognize that there is no problem. There is no “debt ceiling” problem because there is no “debt” problem that has anything to do with spending or taxes or “paying bills.” Bargaining about how to solve the fictional “public debt” problem is as ridiculous as arguing about how many dollars can fit on the head of a pin (or in a “Tax the Rich” gown).

Please, please, take a moment or two to register and think about—not just give it an obligatory nod and pass over—the fact that makes such bargaining ridiculous: We have a fiat money system, which means the federal government creates money. And it creates money by spending. No matter what circuitous route they take to get various places, all—every single one—of the interest-free dollars in every nook and cranny of the economy, including your pocket, has been created by the federal government and spent into the economy. There is no place else they can come from.

Ask yourself, and give a minute or two to think through the answer: Why, and from whom, would the institution that creates dollars have to borrow them? The answer is obvious: It doesn’t. And that answer—also obviously, if you give it a moment more thought before retreating to the comfort of the conventional framework—abolishes the fiction of “public debt” and the sham “debt ceiling” that derives from and depends on that fiction. If you could create dollars, would you have to go around borrowing dollars from someone else? Really, think about that.

Please understand what “borrow” means here for the federal government, which is nothing like what it means for your household to use a credit card. Ordinary households borrow money they don’t have and can’t create because they need to use it immediately for some purpose. When the Fed sells a Treasury bond, it takes money that it has created and already exists, money that’s held in what’s effectively a “lender’s” checking account, and moves it into what's essentially a CD account, where it sits for a specified time and is used for nothing.  The government does not spend that money; it holds it.

The entire amount of the principal of all that Treasury bond “debt” sits in those “CD” accounts, could right now be, and will at the end of the bond’s term be, transferred instantly back into the lender’s checking account.  The government "pays back" those bonds by moving the extant money back into a checking account, along with the new interest money it creates.

The purpose of selling these bonds is not to get money for the government to spend, it’s to prevent spending, to hold money out of the economy for a while. These bonds are used not as a funding source but as an anti-inflationary offset. They are explicitly used as the favored tool against inflation, whether related to government spending or not. The cost of that—the reward the government pays the bondholders for not spending money for a while, and the only new money created in the transaction, is the interest paid. That is, indeed, a lot of new money created—which means selling the bonds just defers and tends to increase inflation.

If you could create dollars, would you go around borrowing dollars from someone else, so that you could hold them in your pocket for a while and then create and pay that person more dollars for that service? Really, think about that. Because you do that, through (what’s ostensibly) “your” government, which obscures the real process in a “pay the bills” fiction.

The whole rigmarole of the government borrowing money it doesn’t need for the spending it has already approved, by selling Treasury bonds, is a relic of the gold-standard age and an unnecessary gift to the wealthy, sold to us under the false pretense that it’s necessary to “fulfill its financial obligations.”

The need to borrow is half the “public debt” fiction; the need to tax is the other. It’s an anachronism that “the government must raise money from elsewhere, before it spends,” and “elsewhere” includes taxes. For the same reason—because it creates money—the federal government does not need to borrow money to “pay its bills” (and does not actually use the money it “borrows” for that purpose), it does not need to collect money from taxes to enable its spending (and does not use the taxes it collects for that purpose).

First of all, spending precedes and is the source of taxes, not the other way around. It's not tax and spend; it’s spend, then tax. Taxes are a portion of that money the federal government has already created and spent into the economy—there’s nowhere else taxable money comes from—that it takes back. It's a good thing only a portion is taken back—creating a “deficit"—or there would be no interest-free dollars left anywhere in the economy, including your pocket. The federal government’s deficit is the economy’s surplus, a good thing.

There are very good reasons to levy taxes. To enable spending is not one of them. Ruml again, in 1946: “The public purpose which is served should never be obscured in a tax program under the mask of raising revenue.” (The managers of our monetary system all know this. The Fed chairmen—Greenspan, Bernanke—keep telling us this. Leftists should listen.)

Taxation is not a collection plate, where everybody “chips in” money that the government needs but does not have;  it's a drain valve, through which the government removes excess money that it has created and spent into the economy.

A primary purpose of levying taxes—progressively, surtaxing the rich—is to limit inequality. We need to surtax the rich not because the government needs their money to pay its bills, but because they are too rich, and that excess wealth gives them excess power that inevitably undermines democracy.  That’s a social purpose, not an economic need. A conservative Fed chairman understood this in 1946. You’d think today’s leftists and socialists might:

[A] principal purpose of federal taxes is to attain more equality of wealth and of income than would result from economic forces working alone. The taxes which are effective for this purpose are the progressive individual income tax, the progressive estate tax, and the gift tax. What these taxes should be depends on public policy with respect to the distribution of wealth and of income. … These taxes should be defended and attacked it terms of their effects on the character of American life, not as revenue measures.

Instead of constantly arguing about whose taxes to raise how much to meet a revenue need that doesn’t exist, leftists should start with proposing that there should be no income tax on lower (than median?) income levels, and that the most regressive and burdensome taxes on working people— payroll taxes—be eliminated. People “chip in” by working to produce goods and services of value (and “value” is not to be confused with money). It’s ridiculous and unnecessary to require anybody who was paid just enough to have a decent life for the work they have done, for the value their labor helped to create, to “chip in,” “tighten their belt,” or “contribute” money to a government that can literally create an infinite amount of it.

Then, yes, argue for extremely high rates of taxation on upper tiers of income—at least the 94% highest marginal rate in place in 1946, which was understood and accepted by Fed Chair Ruml and most of the country as not a revenue but a wealth-equalization measure. Nothing but ignorance of how the monetary system works, and/or cowardice about their own persuasive powers, and/or contempt for their working-class audience prevents leftists from making that argument today.

Leftists who continue to argue about taxes within the collection plate theory are avoiding arguing and giving the real justification for very high taxes only on the rich: Nobody earns $100 or $50 million a year; nobody’s labor creates that much value in a year. Nobody deserves to hoard that much of the public money the federal government has created and spent into the economy. Why not take 94% or more of every dollar over $3 million—as we did with the equivalent ($200,000) in 1946? Not for the false economic purpose of revenue, but the real social purpose of limiting inequality. It’s not a matter of asking the wealthy to “contribute” some of the public money they’ve appropriated; it’s a matter of taking it. Nobody’s belt will be too tight.

Leftists who are reluctant to argue for that had better give up trying to argue for socialism.

Leftists should refuse to engage in adjusting the elements of an activistic, regressive tax system based on the false premise that taxes pay the government’s bills, and instead propose a truly progressive tax structure based on how our monetary system actually works.

We also levy taxes to prevent an inflationary excess of money in the economy. In this respect, taxes, like bonds, offset, not enable, spending.  Again, if there’s an excess money supply that needs to be drained, we surtax the rich because, as the man said, that’s where the excess money is.  You don’t address inflation by limiting the spending of people who have barely enough money to buy the necessities of life; you do it by retrieving the excess money from the wealthy, who use it for their private jets, precious gems, and Met Gala gowns.

The fundamental point, from which all of this follows, is that Maggie Thatcher is exactly wrong: There is no such thing as “taxpayer” money; there is only public money. Neither ‘taxpayers” nor “lenders” are the source of the money used for—actually created by—federal spending.

Leftists have to realize that by accepting the “taxpayer money” framework, and the notion that taxes and borrowing are necessary to enable spending, they are accepting the whole anti-social Thatcherite paradigm in which private wealth is the source of public wealth. Somehow, in a polity where the federal government creates money, it has to go to the wealthy to borrow or collect the money for all public programs? If that’s true, we owe every public good to the quantitatively ranked contributions of “taxpayers” and “lenders.” Which means we depend on the wealthy and must keep them around. That’s the framework you place yourself in, and help reproduce for everybody, every time you use the term “taxpayer money” or argue for raising taxes to pay bills. Really, think about that.

There is an alternative framework out there, which comports with the facts of our monetary system, has been explained a number of times, avoids all this nonsense, and is actually kind of obvious. That most leftists continue to avoid it is another sign of what a weak, confused, self-destructive “left” we have.

Leftists who do not recognize that the federal government creates money and does not need borrowing or taxes to “pay the government’s bills” are helping to reproduce the “public debt” fiction and the perennial "debt ceiling" crises that flow from it, which they know will always end badly for progressive social programs.

Everyone who wants to defend and promote progressive social programs should understand what a grim fairy tale it is and stop engaging in it. Those who think adding a “tax the rich” prince to the “borrow money” frog can make it a happily-ever-after story, are perpetuating our imprisonment in the private money market castle from which, we were told long ago, we can be free.

Really, think about that.


Related articles: The Polemicist: Reconcile This: Lessons From The Latest Legislative DebaclePayroll Taxes Are the Achilles Heel of Social Security“Taxpayer Money” Threatens Medicare-for-All (And Every Other Social Program)

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