kelton2020#4

2020#4

would reduce output in the long run. When the government borrows, it borrows from people and businesses whose savings would otherwise finance private investment in productive capital, such as factories and computers.” 1
    A professional class of budget wonks, academics, and Washington insiders treat it as an article of faith. Technical jargon and a heavy smattering of charts and data give the narrative an impressive veneer of credibility that can leave readers with the impression that crowding out is something that happens in a mechanical and inevitable way, much like a mathematical series of rigorously tested if-then statements. If deficits require more borrowing, then the supply of savings available to finance private investment is reduced. If the supply of savings is reduced, then interest rates will rise. If interest rates rise, then private investment will decline. If private investment declines, then the economy will grow more slowly over time. Tap the first domino, and the rest obediently give way.
    The whole story is rooted in a version of mainstream economics that dominates our public discourse. You hear it from liberal icons like the New York Times’s Paul Krugman2 as well as conservative commentators like the Washington Post’s George Will. 3 And if you do happen to watch C-SPAN, you might have heard someone like Jason Furman, a Harvard-trained economist who worked in the Obama White House as chair of the Council of Economic Advisers, invoking it in testimony before Congress. For example, on January 31, 2007, he appeared before the US Senate Budget Committee, urging members of Congress to “stem the flow of red ink.” He described the budget outlook as “a major fiscal challenge” that “drives down national savings.” He warned that the chain reaction of events that would ultimately jeopardize our economic well-being would be “slow and gradual but relentless and inevitable.” 4
    Crowding out is a story that depicts government deficits as the villains of progress. Saving is considered an act of virtue because it is believed to supply the fuel that is used to fund the kinds of private sector investments that make us a wealthier society. Deficits are said to undermine that prosperity by siphoning away some of that fuel for its own use. Fiscal deficits and private investment are therefore considered to be in tension with each other, as government borrowing necessarily leaves behind a smaller pool of savings to support the needs of private industry. 5 This is the conventional wisdom among mainstream economists. It may appear straightforward and compelling, but it is best thought of as a series of domino-linked myths.

    Two Buckets
When Furman urged lawmakers in 2007 to “stem the flow of red ink,” he was worried about a projected fiscal deficit of $ 198 billion, about 1.5 percent of GDP. He encouraged Congress to restore PAYGO to prevent deficits from climbing any further. He also complained that “the private savings rate [was] at its lowest level since 1939.” In his view, the deficit was “driving down national saving.” He had it completely backward.
   To see why, imagine two buckets. One belongs to Uncle Sam. The other belongs to the rest of us, a sort of collective bucket in the name of everyone who is not Uncle Sam.

Chapter 4: Their Red Ink Is Our Black Ink
1. Congressional Budget Office, The 2019 Long-Term Budget Outlook (Washington, DC: CBO, June 2019), www.cbo.gov/ system/ files/ 2019-06/ 55331-LTBO-2. pdf.

2. Paul Krugman, “Deficits Matter Again,” New York Times, January 9, 2017, www.nytimes.com/ 2017/ 01/ 09/ opinion/ deficits-matter-again.html.

3. George F. Will, “Fixing the Deficit Is a Limited-Time Offer,” Sun (Lowell, Massachusetts), www.lowellsun.com/ 2019/ 03/ 12/ george-f-will-fixing-the-deficit-is-a-limited-time-offer/.

4. Committee hearings are often carried live on C-SPAN 3. See Jason Furman, “Options to Close the Long-Run Fiscal Gap,” testimony before the US Senate Committee on Budget, January 31, 2007, www.brookings.edu/ wp-content/ uploads/ 2016/ 06/ furman20070131S-1. pdf. 5. Keynesian economists will often argue that there is a special circumstance under which crowding out doesn’t happen. It’s a situation—often described as a liquidity trap—where rising deficits don’t push interest rates higher because rates are stuck at zero. In that situation, the government can safely add to the deficit without worrying that rising interest rates will crowd out private investment (since rates are stuck at zero). That gives the government a window of opportunity to boost spending without any kind of trade-off. Once interest rates become unstuck, crowding out is immediately back in play. As we will see, MMT rejects the idea that crowding out is something that can only be avoided under highly unusual circumstances. 6. Jonathan Schlefer, “Embracing Wynne Godley, an Economist Who Modeled the Crisis,” New York Times, September 10, 2013, www.nytimes.com/ 2013/ 09/ 11/ business/ economy/ economists-embracing-ideas-of-wynne-godley-late-colleague-who-predicted-recession.html. 7. Ibid. 8. Post Editorial Board, “Locking in a Future of Trillion-Dollar Deficits,” New York Post, July 23, 2019, nypost.com/ 2019/ 07/ 23/ locking-in-a-future-of-trillion-dollar-deficits/. 9. Wynne Godley, Seven Unsustainable Processes (Annandale-on-Hudson, NY: Jerome Levy Economics Institute, 1999), www.levyinstitute.org/ pubs/ sevenproc.pdf. 10. “Life After Debt,” second interagency draft, November 2, 2000, media.npr.org/ assets/ img/ 2011/ 10/ 20/ LifeAfterDebt.pdf. 11. Godley coauthored some of his research with fellow Levy Institute economist and scholar L. Randall Wray. Both understood that the Clinton surpluses were possible only as long as the domestic private sector continued to spend more than its income (i.e., to deficit spend). The problem, they explained, is that the private sector is a currency user, not a currency issuer, so it cannot remain in deficit forever. Another economist who understood all of this was James K. Galbraith, who tells an incredible story of being laughed at by his fellow economists when he dared to suggest that the Clinton