Jun 19, 2020 - Economy & Business

Democratic economist: U.S. should run deficits without debt

Stephanie Kelton

Stephanie Kelton. Photo via Stephanie Kelton

America should run deficits without issuing debt. That's the message from Stephanie Kelton, a member of the Democratic Party's economic task force whose new book, The Deficit Myth, argues that money spent by Congress does not need to be "paid for" with taxes or borrowing.

Why it matters: Monetizing the deficit involves simply printing money and handing it out to individuals, businesses, states, or anybody else, without issuing Treasury bonds or raising new taxes. It has been a fringe idea up until now.

What they're saying: Kelton — who is best known as the face of modern monetary theory, or MMT — spoke to Axios' Felix Salmon for an episode of his Slate Money podcast airing tomorrow, June 20. He asked her whether she would fund the current deficit by issuing Treasury bonds. Here's her reply:

I'm very open to the idea of having the deficits without the debt. We can do that. We can run fiscal deficits without increasing the debt, if we don't issue the Treasuries.
  • Kelton fears a re-run of what happened in 2009-10:
In the moment of the coronavirus, my great fear is that we'll see a repeat of something like what we saw in the early years of the Obama administration, where the run-up in the deficit and the additions to the debt gave people cold feet and led Congress to withhold fiscal support, to withdraw fiscal support too soon and to leave us with an economy that really languished for a long period of time.
We could have had a much more robust recovery, but we got anxious about the deficit and we didn't stick with the fiscal support.
  • Monetizing the debt won't cause inflation, says Kelton.
Selling bonds is almost surely more inflationary than not selling bonds.
If you just run the deficit then you're spending more money into the economy than you're subtracting out. Leave those dollars in the system, where they will earn zero. That's non-interest-bearing currency. If you replace those dollars with Treasuries, you're replacing them with an interest-bearing currency, and that's got to impart a higher inflationary bias than just leaving the non-interest-bearing dollars in the system.

The bottom line, per Kelton:

We would have a much harder time falling into panic mode if the CBO wasn't producing that graph that shows the debt-to-GDP ratio increasing very sharply because of the deficits. You just have a commitment to provide fiscal support to the economy without the national debt rising.

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