#2

2 

Think of Inflation 

MYTH #2: Deficits are evidence of overspending. 

REALITY: For evidence of overspending, look to inflation. 

In 2015, I took a leave of absence from my job teaching economics at the University of Missouri–Kansas City and moved to Washington, DC, to serve as the chief economist for the Democrats on the US Senate Budget Committee. I thought it would be interesting to step outside the academic world, where anything is theoretically possible, and into the sausage factory, where budgets are formulated and spending decisions impact the lives of real people. I’m not sure exactly what I expected to find, but what I discovered was incredibly disheartening. None of the senators who sit on the powerful Budget Committee seemed to realize that the federal budget didn’t work like a household budget. The top Republican on the committee was its chairman, Senator Mike Enzi from Wyoming. Enzi had a background in accounting and had run a shoe-sale business before getting involved in politics. He spent a decade as a state legislator, serving in Wyoming’s house of representatives as well as its state senate. In all of these jobs, he operated under a constrained budget. As a businessman, he had to control costs, meet payroll, and turn a profit to remain viable. As a member of the Wyoming legislature, he operated in an environment where the governor is constitutionally required to submit a balanced budget each year. Before coming to Washington, he had only seen the world through the lens of a currency user. The committee held regular hearings on budget-related matters, and I typically sat close behind Senator Enzi and the ranking Democratic member of the committee, Senator Bernie Sanders, who had hired me for the job. At the start of each hearing, the chairman would read aloud several minutes of prepared remarks. Senator Enzi’s comments never changed much. He looked at the federal budget as if it was an income statement for his shoe-sale business. To him, the problem was obvious. Uncle Sam was operating at a loss. Deficits and debt had become a way of life, and the whole thing was just plain irresponsible. You didn’t need an accounting degree (like Senator Enzi) to see the problem. Time and again he would simplify the situation by declaring, “Deficits are evidence of overspending!” The economist in me wanted to leap from my chair. The chief economist in me was forced to sit quietly and hope that one of the other twenty-one senators on the committee had a background in economics. As we teach our first-year students, excessive spending manifests as inflation. A deficit is only evidence of overspending if it sparks inflation. Since prices weren’t accelerating, the deficit couldn’t possibly be too big. To my great disappointment, none of the other senators challenged Enzi’s claim. They were all using the same flawed lens and commenting on the need to match spending with receipts. Republicans saw too much on the expenditure side of the ledger—a spending problem. Democrats saw too little on the income side—a revenue problem. Everyone was convinced the deficit was too big. The argument was about whether to cut spending to match revenue or increase revenue to match spending. Kitchen-table budgeting. What were they missing? Three big things.