Home > Economics > The Debt Ceiling is More Like a Sun Roof

The Debt Ceiling is More Like a Sun Roof

It’s election year and that means lots of debating about hot topics. The biggest single topic this year is the economy. The American’s Elect website shows more questions about the economy than the other 3 high-priority topics combined. If you listen to the talking heads on TV, you might have heard that the US is over $15 trillion is debt, official unemployment is just under 10% and if you include people who are employed, but not at the level that they really want to be, the number grows to 16.7%. That’s almost 1 in 6 people who either can’t find a job or have settled for part-time work because they can’t find full-time. (link)

To listen to Republicans or Democrats talk about the economy, you get a sense that the answer is only just right there, if only the other side would stop being idiots. The Republicans would have you believe that if you just cut taxes some more and stopped paying those lazy welfare recipients and old people, we could turn this country around. The Democrats would like you to believe that if we raised taxes on the 1% we could afford to help the unemployed and old people. This post is (hopefully) going to show you why they are both wrong.

What neither party realizes is that they are both making a fundamentally incorrect assumption about the way that the US economy works at the macro level. The current macro-economic picture that both parties have is derived from a micro-economic framework. It goes something like this:

If I consider a small business’ budget, they are constrained on what they can buy based on what they can earn. That is, I have to bring in money before I can spend it. I can take on debt if I don’t have enough money right now, but eventually that debt will come due with interest. If I take on more debt than I can service with my expected future income, I will go bankrupt. If we don’t want the country to go bankrupt, the government must take in more money than it spends or at least run a balanced budget.

All of that seems to make perfect sense. However, the last sentence is an un-truth that most people have trouble seeing. In terms of US Dollars, the US national government is called a “currency issuer.” You and I, corporations, state governments, foreigners, and anyone else who is not the US government is a “currency user.” The fundamental difference between the two (as can be evidenced from the labels) is that the US government has the power to create Dollars. Most people call this “printing money,” however paper currency is only a small fraction of total dollars. Most money that gets created is really just done by changing numbers in bank accounts.

To illustrate how this works, I’d like you to think of a video game. In this instance, I’ll use World of Warcraft (WoW) because most people have heard of it. The currency in WoW is Gold. However, there is no real gold anywhere, it’s just numbers on a computer. Gold (capital G) is earned for doing quests or selling picked up items to NPCs (computer characters) or to other players. When you do this, your number showing how much gold you have goes up. But what happens to Blizzard’s (the company who runs WoW) amount of Gold? If you think about it, it’s kind of a dumb question. Blizzard has as much Gold as they want. They can never run out. There will never be a situation where you turn in a quest and the NPC says, “I’m sorry, Blizzard ran out of gold.” They can always change your number up.

OK, that’s great you might say, but how is this similar to the US government? Isn’t a dollar more than just a made up number? Isn’t it worth a certain amount of gold or something?

Up until 1971, the US was on a gold standard. That meant that the federal government guaranteed that you could redeem a dollar for a certain weight of gold. However, in 1971, Nixon took us off the gold standard. Now the dollar is only worth what someone will give you for it. We call this “fiat” currency. All major world currencies are fiat currencies. The “value” (meaning how much real stuff you get for the currency) is determined by supply and demand just like any other commodity. The dollar is what we agree it is worth in terms of real stuff.

Why is this important? Because the US government has an unlimited supply of dollars. As long as real things are for sale in dollars, the US can afford as many as it wants. The deficit is just the difference between what the government spends and what it takes in in revenue (taxes). You and I and are constrained by only spending what we take in, because we can’t make more dollars. However, the US government can (to the extent that Congress allows).

Now all this spending and taxing on the part of government does change the money supply, which is the amount of money that the non-government has access to. If the government spends more than it takes in (runs a deficit), this typically increases the money supply. (There are several exceptions to this that I don’t want to go into here. Some government spending, such as Quantitative Easing does not increase the money supply). Since the “value” of money is determined by supply and demand, and deficit spending changes the supply, then it is possible that the “value” of the dollar could decrease (called inflation) if demand does not increase by a similar amount.

It’s important to point out here that inflation is a different concern that bankruptcy or insolvency. The fact that government spending can (notice I didn’t say will) cause inflation, does not change the fact that for any given price level, the government always has enough money. In other words, it doesn’t matter if a hamburger costs $5 or (because of inflation) costs $20, the government can always produce the amount of money needed.

Conclusion

My point with all of this, is that the discussion about whether or not we can afford government healthcare, social security, welfare, or any other government policy, most commonly focuses on the funding. As a country, we can always “afford” these things, if all you are talking about is the dollar denominated price. The discussion we should be having is how the policy will impact other, more important things. If we take government healthcare, for example, here are the points I’d like to see debated instead.

  1. What impact, if any, would it have on healthcare outcomes such as life expectancy or infant mortality rates. (Key statistics in which the US lags behind the rest of the Western world)
  2. What impact, if any, would this have on inflation.
  3. Other positive (e.g. no more healthcare bankruptcies) or negative  impacts will it have.
Every time I watch a debate in which one of the progressive policies is dismissed because “we just can’t afford it,” I get really upset. There are actual effects that these policies have and bankrupting the government just isn’t one of them.

P.S.

Thanks for reading my inaugural post. I’ll try to answer questions as best I can (trust me, I have a lot more I can say on this topic). In the coming days / weeks /months I’ll post some more about government spending, the national debt, the money supply, and inflation. I’m not sure where I’m going with this blog yet. It will probably focus mainly on economic issues, but I’ll try to hit all the big issues occasionally. Other topics might include abortion, religion, gay rights, politics and maybe just whatever random things I happen to be thinking about at the time. If you don’t like to discuss those things, maybe this isn’t the blog for you. If you do, leave comments.

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  1. jasph
    March 23, 2012 at 10:42 am

    Any ideas on how to get this information more widely distributed? The misconception about government debt is an easy fear-mongering tactic since most people’s knowledge is based on the way business or individual finances work. Hard to think like a “currency issuer” when you have the mindset of a “currency user”. Thoughts, ideas, suggestions on an ecomomic makeover?

  2. AJ
    March 23, 2012 at 2:24 pm

    jasph :

    Any ideas on how to get this information more widely distributed?

    Make more people read my blog! More seriously, most “mainstream” economic thinking comes from a period of time in which we were on some sort of monetary standard. Most recently (prior 1971) the dollar was convertible to gold. Gold is a finite resource and it can’t just be created at will. When the government needed more dollars that its gold stock allowed it legitimately had to go borrow them. Now, it is no longer the case, but the mainstream thinking hasn’t been updated. I don’t remember who said it, but the quote is, “Economics progresses one funeral at a time.”

    Edit – the quote above is by Steve Keen, the author of “Debunking Economics.” Here’s a link to a video

  1. April 4, 2012 at 2:18 pm
  2. May 15, 2012 at 5:56 pm

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