“Reagan proved that deficits don’t matter,” Vice President Dick Cheney said when the Bush administration sought a second round of tax cuts in 2003. This fits with a rich tradition of conservative tax-cutters abandoning deficit hawkery when they want to hand money to favored groups. But some economists on the left agree with Cheney that deficits don’t matter—at least not as much as more jobs and prosperity for all—and their views are getting newfound attention because of an offhand comment by presumptive Republican presidential nominee Donald Trump.
Trump found himself well outside of mainstream thinking about deficits and debt last week when he suggested that the United States could borrow money to shore up the economy and simply ask for discounts on the debt later. Doing so would sap confidence in U.S. Treasury bonds, considered the safest financial investment in the world. The resulting interest rate rise would defeat the purpose of getting a discount on the debt, not to mention potentially triggering financial catastrophe.
Trump later explained that he was merely referring to buying back existing debt at a discount if interest rates went higher, lowering the nominal value. This is something the U.S. does routinely. But Trump went further when he told CNN on Monday, “This is the United States government… you never have to default because you print the money.”
Trump’s statement sounds a lot like Modern Monetary Theory (MMT), a tenet of economists who believe in de-emphasizing the need for deficit reduction because the U.S. controls its own currency. Balanced budgets, to MMTers, take money out of the hands of ordinary Americans who can put it to more productive use through job creation and consumer spending. The deficit only matters once you reach full employment, when overheated consumer demand can lead to inflation. But we’re nowhere near that point right now, meaning there’s plenty of room for deficits, without any possibility of default.
One MMT advocate, Stephanie Kelton of the University of Missouri-Kansas City, worked for Bernie Sanders in the Senate and now advises his campaign. But even Sanders emphasizes deficit reduction by promoting higher taxes on the wealthy and Wall Street transactions. Kelton’s worldview, and in this instance Trump’s, goes far beyond even Sanders’s comfort level on the issue.
I’m almost certain that Donald Trump had no intention of stumbling into this philosophical debate, traditionally fought between the left and the far left. But his freewheeling style of political rhetoric often drops him into uncharted territory. In this case, Trump exposed an unsaid but prevalent conservative hypocrisy about deficits.
As Cheney’s quote about Reagan shows, Republicans habitually ignore deficits when they obtain power. It’s a matter of convenience, a tempting way out of the fiscal responsibility trap that makes it difficult for politicians to keep their campaign promises. But every time a Bill Clinton or a Barack Obama gets the keys to the Oval Office, Republicans flip the script, generating a sudden fear of mountains of debt. Congressman Paul Ryan has been claiming the U.S. is about to turn into Greece for eight years. A deficit hawk industry in Washington comes alive to tell the nation that we’re broke. This creates practical constraints on liberal spending programs to help the poor and the elderly.
Trump’s comment that America can’t default on its debt, and can money-print its way out of trouble, shreds that Republican playbook. Deficit fear-mongering loses its punch if the GOP’s new leader dismisses an animating principle of how conservatives defend against social spending.
There’s a mirror for this on the left, too, where establishment economists criticize MMT for downplaying the deficit. Paul Krugman argued a few years ago that if you printed too much money, interest rates on government debt would spiral higher, leading to hyper-inflation. MMTers counter that Krugman is creating political constraints where none actually exist. The intricacies of this argument can make you woozy, but suffice to say that the divide between Krugman and Bernie Sanders supporters on display in the presidential primary are also evident here, only in far more technical form.
Wall Street, and Democratic frontrunner Hillary Clinton, have taken the Krugman side of the argument, but in a peculiar way. Financial executives who went nuts at the Trump comments acknowledged that the U.S. re-negotiates debt and prints money, but that someone running for president should never say this. “For a president to say these kinds of things publicly would have the opposite effect you would want in that they would put the economy into recession,” said Jim Paulsen, chief investment officer at Wells Capital, to Politico.
It’s true that confidence plays a role in capital markets, and if a national leader is openly devising schemes to lower our obligation to creditors, those creditors can get nervous. And questioning the full faith and credit of the United States isn’t just a bad look; it’s unconstitutional. But what’s really going on is that Trump is threatening an established order.
Liberals have used the constraint of deficits while in power even more strongly than Republicans. The Obama White House has boasted that, since 2009, the deficit has fallen at the fastest rate since the end of World War II. In 2009, under Nancy Pelosi and Harry Reid, Congress instituted a “paygo” rule that forced all spending to be paid for, made progressive priorities in social programs more difficult to achieve, and allowed Republicans to demonize Democrats as the party of higher taxes.
If the deficit really doesn’t matter, Democrats would have to live up to their image as the party of the people, and work to provide better opportunities for them. And they would have to spend federal money to do it. Behind the mockery of Trump’s monetary positions is the truth that mainstream Democrats aren’t prepared for the implications of an MMT world. They would rather hold off the left by claiming that their hands are tied because of the deficit.
Such moderation makes the wealthy funders of Democratic campaigns far more comfortable, and it leads many in the media to laud Democrats as the more responsible, serious party. But such cuts don’t lead to more jobs, higher wages, and a better life; spending on infrastructure or health care or education does. Democrats should listen again to Trump’s stray remark for the grain of truth in it: Deficits don’t matter. The sooner the party realizes that, the better off its constituents will be.