TAYLORSVILLE — Rep. Ben McAdams’ pleasant, friendly demeanor belied his ominous message.
He told the small audience at the student center at Salt Lake Community College that the federal government’s $22 trillion debt is projected to grow faster than the economy — forever. That the annual interest of more than $300 billion paid on that debt is the fastest growing component of the federal budget. And, that a pending fiscal reckoning isn’t a burden only future generations face.
“I think we have to scrub the word future generations,” he said. “We have to talk about our immediate future and the consequences that we will have.”
About two months later, Congress passed a spending deal that raises spending by $320 billion offset by $77.4 billion in cuts during the next two years.
“It is another sign that a Capitol once consumed by fiscal worries simply no longer cares — even as the government’s deficit (for the current fiscal year) approaches $1 trillion a year,” The New York Times reported when congressional leaders and the White House agreed on the spending pact. The Congressional Budget Office projected Wednesday that next year’s deficit will exceed $1 trillion.
Or, maybe, those leaders and President Donald Trump are becoming believers in an obscure economic theory that has been gaining exposure and popularity the past year. Advocates of the “modern monetary theory” are telling everyone to chill when it comes to annual deficits contributing to a ballooning debt.
“I want to lower the temperature,” modern monetary theory evangelist Stephanie Kelton said in a lecture last year at Stony Brook University, where she teaches public policy and economics, and, “get us to the point where we ... see the headline, ‘National Debt is at an All-time High,’ and have that nice glow about us and feel at peace with world, right. There is no reason to panic.”
She points out that a government that pays its bills in its own currency can’t default on its debt and that the hand wringing shouldn’t be about the size of the annual deficit. Rather, with low interest rates making deficits cheap, policymakers should be debating how the money is being spent and not whether it can be paid back.
Commentators note that Kelton is an adviser to Sen. Bernie Sanders’ presidential campaign and that other progressive Democrats are embracing modern monetary theory to break through the opposition that ambitious ideas can only be paid for by raising taxes or cutting spending elsewhere. Under the headline, “MMT may be Democrats’ economic cure, but only Trump got the memo,” Reuters suggested Republicans and the president have inadvertently adopted the theory by not letting perceived fiscal restraints get in the way of their $1.5 trillion tax cut in 2017.
But McAdams, a first-term Democrat whose first bill he introduced proposes a balanced budget amendment to the Constitution, dismisses modern monetary theory as “fringe economics” that’s resonating with some members of Congress who don’t want to be “inconvenienced” with balancing a budget.
To be sure, he’s troubled by the current discussion as it puts off what he sees as inevitable.
“The fiscal state we’re in is not sustainable,” McAdams says. “I think that day of reckoning comes when the interest rate landscape changes. The tenuous situation we’re in is based on record low interest rates and when interest rates tick up it’ll have a devastating effect on the deficit and the conversation about fiscal responsibility will be immediate.”
Low interest
While modern monetary theory is having a moment in the national press and in academic circles, it’s not clear why the general public is at the same time caring less about federal deficits.
The Pew Research Center reported in January that fewer than half of Americans (48%) said reducing the deficit should be a top priority for Congress and the White House this year. That’s considerably lower than the 72% who listed cutting the deficit as a top priority in 2013.
In March, Pew followed up in asking more than 1,500 Americans to create their own federal budget and found “they have little appetite for austerity measures. Asked about 13 different government program areas, from veterans benefits to foreign aid, no more than about a quarter favor reducing spending in any specific area.”
McAdams invited constituents to Salt Lake Community College in late May to spend an evening going through a similar budget balancing exercise that he used to do for real when he was mayor of Salt Lake County. About 30 people showed up ranging from college students to retirees.
“It gave me some empathy for Congress,” said Hilary Melander, 38, of West Jordan. “But they still have to make some tough decisions.”
Phillip Smith, national field director for The Concord Coalition, ran the session. Budget exercises, campus lectures and speeches to business clubs about getting the nation’s fiscal house in order were activities the bipartisan organization hoped it wouldn’t have to be doing 27 years after it was founded by the late U.S. Sens. Paul E. Tsongas, D-Mass., and Warren B. Rudman, R-N.H., to champion their version of fiscal responsibility.
“Our original goal, when we were founded, was to put ourselves out of business,” Smith said in an interview this week. “It would be great to put the nation on a sustainable, long term fiscal course, and then there would be no need for The Concord Coalition. So that’s our ultimate goal, but we are nowhere near getting to that goal, unfortunately.”
The coalition’s mission was reasonable in the 1990s, when reining in spending and tax cuts made for good politics during the elections of 1992 and 1996. It was during President Bill Clinton’s second term that the government actually operated with surpluses for 4 years — only the second time in the nation’s history — and contributed to an economic boom.
But the economic forces that compelled policy makers to bring spending back in line with revenues in the 1990s, don’t exist today. In particular, long-term interest rates on government debt averaged about 4% and they are less 1% today, according to the Congressional Budget Office.
“I wouldn’t say they’re defeatists, but they’re tired. And they think it’s very difficult to get across the finish line unless you have a lot of pressure pushing for it. And there’s not a lot of pressure.” — Utah Sen. Mitt Romney
That makes long-term borrowing a bargain for the government, economists say, removing incentives to cut spending and pay down the overall debt.
Sen. Mitt Romney, R-Utah, was fired up about tackling deficit spending and debt reduction when he arrived in Washington in January. But he soon found many of his colleagues were still licking their wounds after a failed and contentious attempt in 2010 to adopt a plan — popularly known as the Simpson-Bowles report — that sought to balance the budget by 2015.
“I wouldn’t say they’re defeatists, but they’re tired. And they think it’s very difficult to get across the finish line unless you have a lot of pressure pushing for it. And there’s not a lot of pressure,” Romney said, noting he’s patiently working on a bipartisan group of senators who agree deficit spending needs to be reined in.
Smith notes that annual spending deficits and the growing government debt aren’t topics among Democratic candidates running for president. Instead, they are talking about ambitious ideas like free college tuition and Medicare for all. And Trump and Republicans have yet to champion any significant spending cuts that could offset their debt-compounding $1.5 trillion tax cut.
“That’s what’s so scary,” Smith says. “I mean, it’s one thing to have big deficits during a recession or a depression when you need that spending to revive the economy. But to have massive deficits, while the sun is shining, that’s when you need to be fixing your roof not punching holes in it. We’re worried that it’s going to leave us in a very weak position, from a fiscal standpoint, to deal with the inevitable next recession.”
Political reality
The combination of these unusual economic and political dynamics has sparked a lively discussion, however, in academic and policy circles on the true impact of deficit spending by governments.
Commanding a lot of attention are proponents of the modern monetary theory, who downplay talk of a pending fiscal crisis to be born by our children as fear mongering. They argue that today’s low interest rates and low inflation present an opportunity for government to spend more on infrastructure, health care, education and other critical needs that will shore up the economy long-term.
Because the government controls the money supply, it’s not possible to default on debt owed in its own currency. “It would be like a bowling alley running out of points to give players,” was how Vox’s Dylan Matthews described it in a piece on the ongoing debate.
As for the inflation that could result by creating too many dollars to finance the debt, modern monetary theory proponents say that can be controlled through forecasting inflation, tax policy and regulation.
But Smith says the theory ignores the political realities of elected officials reluctant to raise taxes to control inflation. “Congress having to act immediately to raise taxes to take care of the massive dangers associated with hyperinflation is a really, really scary road to walk down, if you think about it,“ he says. “My biggest fear of MMT is that if you inject it into the body politick, politicians will see this as a Santa Claus.”
McAdams agrees that deficit spending is necessary during economic downturns, times of war and other national emergencies, and his proposed balanced budget amendment would allow for those exceptions. He also agrees that government should take on debt for infrastructure and other social needs that have a long-term benefit for taxpayers.
But he’s concerned the debate in Congress is changing from kicking the deficit can down the road to deficits don’t matter.
In an essay published in Foreign Affairs, Harvard economists Jason Furman, who chaired the White House Council of Economic Advisors during President Barack Obama’s last term, and Lawrence H. Summers, a former Treasury secretary, stake out a middle ground between what they call “deficit dismissers” and “deficit fundamentalists.”
They agree that policymakers should focus more attention on social problems rather than obsess about annual deficits and paying down the debt. But they also point out that no one on either side of the debate really knows how costly huge budget deficits and a growing debt can be on the U.S. economy. The federal government has operated on budget deficits throughout most of the nation’s history.
But they caution against testing those limits “in case they turn out to be more harmful than expected.”
Accepting the fact that government spending and tax cuts have to be paid for at some point has another benefit beyond economics.
“It is hard to budget rationally and decide what expenditures and tax cuts are worthwhile when one obfuscates the ultimate cost of these policies,” Furman and Summers wrote. “Policymakers won’t be able to argue against a poorly designed but well-intentioned spending program or middle-class tax cut without any limiting principles for fiscal policy.”