Jared Bernstein Shows the Costs of Not Understanding Sovereign Currencies

William K. Black
September 26, 2017      Kansas City, MO

UMKC has just hosted a well-attended conference on Modern Monetary Theory (MMT) and job guarantee (JG) programs in which the federal government would provide the funds for employer of last resort programs.  In conjunction, MMT and JG allow full employment to become the norm.  MMT is based on reality, it explains how the monetary system in a nation with a sovereign currency actually functions.  Most monetary theory taught in conventional economic classes is a fiction arising from carryovers from the era of the gold standard in which nations lacked a sovereign currency.

Jared Bernstein has just published an op ed in the New York Times entitled “Do Republicans Really Care About the Deficit.”  Republican elites, of course, have not really cared about federal budget deficits for decades.  That is a good thing that Democrats should embrace in a bipartisan spirit.  Bernstein, of course, is correct that the Republicans are hypocrites about federal budget deficits, pretending to care about them when the Democrats hold power and displaying their lack of any real care when Republicans hold power and the context is tax cuts for the wealthy.

Democrats display a similar hypocrisy.  Even Democrats like Bernstein who know that the Republicans proposed expansion of the federal budget deficit through tax cuts is not a real economic problem are primed to attack Republican hypocrisy by falsely asserting that the Republican deficits would harm the Nation.  Democrats should embrace honesty as the best policy and stop embracing the politically attractive pose of claiming to be the Party that “really cares” about the federal budget deficit.  That politically attractive pose is not simply dishonest and financially illiterate, it is also a trap.

The Republican and New Democrat deficit strategy is to force Democrats to make an endless series of “Sophie’s choices.”  Choose which excellent program to kill in order to save (temporarily) another from the chopping block because we supposedly cannot afford to provide both.  Then repeat the process.  The Republicans and New Democrats constantly, and falsely, claim that the federal government cannot afford to provide medical care availability that is routinely provided in most of Europe and Canada.  It is a pure myth that the United States cannot afford to provide the safety net of Social Security, Medicare, and Medicaid.

We need to start with first principles.  In a nation with a sovereign currency like the United States, federal tax revenues do not fund federal expenditures.  If that sentence, which is indisputably correct, strikes you as bizarre then it is a measure of the force of the propaganda you have been fed throughout your life.  Today would be an excellent day to free yourself from the hold of that destructive lie.  This web site, the Levy Institute, and Bill Mitchell’s sites all have excellent resources that will help you clear out the falsehoods about money that you were force fed.  Money cannot be “scarce” for a nation with a sovereign currency.  Real resources can be scarce, not a nation’s sovereign currency.

Bernstein knows that federal tax revenues do not fund federal expenditures.  His column shows that he is worried solely about realpolitik rather than real economics, conceding that “deficits don’t seem to hurt the economy.”

Do these forces mean deficits don’t matter? Not at all. The problem with structural deficits — ones that go up even in good times — is that they reveal that we’re unwilling to raise the necessary revenues to support the government we want and need. This enables those who whose goal is to shrink government to point to deficits and debt as their proof that we can’t afford it, whatever “it” is, except when “it” is tax cuts.

We need to parse that paragraph carefully, because doing so reveals that Bernstein makes no economic argument that deficits “matter.”  He makes only a political argument.  Republicans and New Democrats “whose goal is to shrink government” will “point to deficits and debt as their proof that we cannot afford” the safety net.  Of course they will.  They constantly promote that propaganda.  The answer to that cynical, dishonest tactic is not Bernstein’s proposed strategy of embracing it and agreeing with the lies that federal budget deficits harm the economy or our children and grandchildren.  Even if Democrats were to heed Bernstein’s advice to base their budget policies on partisan political advantage, it is bizarre that Bernstein thinks that it would be good politics for Democrats to be known as the Party dedicated to increasing federal taxes.

Bernstein’s paragraph expressly makes a claim he knows is false – that federal taxes provide the “necessary revenues to [fund] the government we want and need.”  Bernstein makes an analogous criticism of Republicans.

Back in 2015, I testified at a hearing on these issues before the House Budget Committee. One after another, Republican members on the committee denounced rising debt levels. Why then, I asked, do you want to cut taxes? Their answer: It’s spending, not tax cuts that increases the deficit.

That, of course, is crazy. I don’t mean it’s bad economics, or lousy fiscal policy. I mean it’s disconnected from reality, or more precisely, from arithmetic.

Bernstein’s “crazy” claim that federal taxes provide “necessary revenues” is even more “disconnected from reality” than the Republican statements he rightly denounces.  Worse, Bernstein doubles and then triples down on this claim.

Do these forces mean deficits don’t matter? Not at all. The problem with structural deficits — ones that go up even in good times — is that they reveal that we’re unwilling to raise the necessary revenues to support the government we want and need. This enables those who whose goal is to shrink government to point to deficits and debt as their proof that we can’t afford it, whatever “it” is, except when “it” is tax cuts.

Note Bernstein’s critical concession – federal elected officials are often “unwilling,” not ‘unable’ to provide “the government we want and need.”  Even Bernstein’s sentence that makes this critical concession, however, doubles down on the “crazy” notion “disconnected from reality” that tax “revenues” fund government expenditures.  Bernstein closes his column by tripling down on this falsehood.

We need a functional government that raises ample revenues to meet the challenges we face, including an aging population, climate change (and the intense disasters it increasingly causes), inequality, poverty and the winds of geopolitical upheaval.

No, we do not need high taxes to raise “ample revenues” to meet these challenges.  Bernstein’s taxation recommendations are bad politics and bad economics.  They are so “disconnected from reality [and] arithmetic” that they are “crazy.”

What Bernstein is right about is that the Trump tax and revenue cut plans will increase the federal budget deficit and, vastly more importantly, that they will cause inequality to surge, harm the poor, and intensify CEOs’ already perverse incentives.  Democrats have valid, powerful arguments against Trump’s tax cuts.  Those are the arguments they should make.