This post is the second of a two-part series on the debt ceiling and the government's problematic approach to monetary policy. Click here to read the first piece, "There is No Debt to Have a Ceiling."
Language is powerful. We have come to believe certain things about our government because we have been fed a steady diet of metaphors that embed scary images in our minds. These analogies are all based around the image of an irresponsible person or business that gets into financial trouble, spending more than they earn.
Look at these common phrases and think how they make you feel:
- Exploding budget deficit
- Mountain of debt
- Mortgaging our future
- Living beyond our means
- Spending is unsustainable
It all just sounds bad, right? These word images make us fearful or angry. But what if the underlying metaphor is actually wrong? Do you or I issue the nation’s currency? Do other nations save and trade in currency that I’ve issued? Of course not!
Our government issues the nation’s currency and is therefore nothing like a household or business. When there is a single supplier of something that serves the general public, what does that remind you of?
Think about a public monopoly like a city water utility, an analogy first suggested by Warren Mosler and Matthew Forstater.
Picture a water utility that limited the supply of water only to what it measures coming out our drain pipes, keeping the amount flowing in and out of the city’s pipes exactly the same. Would we be happy that it was being responsible, or would we be upset that we didn’t have enough to drink or shower? What if we were saving water by filling up a swimming pool, or we were a beverage business that uses gallons of water every day to brew beer for export? It is completely normal for this city to need more water flowing in that what flows out the drains.
A failure to meet this demand for water that exceeds the amounts flowing out in the drain would cause massive problems for our city. Surely we would hold our public water utility accountable to make sure it is meeting the full demand for its water. It exists to serve the all people, businesses and organizations that rely on it. Anything less is a breach of its public duty to service.
As the sole issuer of the US dollar, our nation’s currency, the US government is like a public water utility that should always meet demand for its product.
Now, let’s look at some new word images based on this metaphor and see how they make us feel. Nothing about the actual facts on the ground has changed, but our new perspective leads to a different understanding of the underlying issues at play.
- The government invested more currency into our economy than it taxed out this year (formerly “deficits”)
- Due to higher domestic savings levels and imports, the government increased its flow of currency into the domestic economy to maintain full employment (formerly “higher deficits”)
- Savings of US dollars are at an all-time high – our currency remains in high demand (formerly “national debt reaches $XX trillion”)
- Congress is studying the real resources needed and the impact on the domestic economy for a planned federal interstate high speed rail investment (formerly “where will the money come from?”)
Any metaphor has its limitations, but I trust you can see the stark comparison between the household budget and the public utility analogies. For those still struggling with the mental leap, let me paint a bit more of the picture.
- The government has a monopoly on the issuance of US dollars – we’d go to jail trying to counterfeit them! In this analogy, they are the public water utility monopoly with an unlimited source of clean water.
- The water is, of course, the currency. Our government can never run out of money since it creates money on demand, under authority of Congress. Money is not scarce!
- We can think of the utility’s pipes and pumping stations as the financial and regulatory systems that provide for the distribution of currency from the government to the households and businesses that need it.
- Drains and sewage pipes are like taxes – they remove currency that has previously been spent into the economy. Note the sequence – spending precedes taxing, like water additions precede drainage!
- Let’s say our water utility gave away free water to households and businesses that stored excess water – maybe to make up for evaporation or just as an incentive to store water for unknown reasons! That’s akin to our government paying interest on government bonds, which are just savings of its currency that has, again, already been spent into the economy.
- We could go on to talk about banks as special public-private water franchises, but our water utility metaphor is starting to get a bit strained and I fear my reader’s patience might wear thin!
By now I hope you can see that this metaphor provides a very different way to describe the responsibility of our government’s fiscal policy. Should the water utility balance its water flows like a household, or does it have a responsibility to provide for the needs of the whole city, factoring in the demand for water storage and the amount of water leaving town in product sales? Does it make any sense to put a “water ceiling limit” on how much water the utility provides over and above what flows out the drains?
Yes, this presents a new challenge to Congress. It is easier to claim “fiscal responsibility” under the household budget metaphor simply by limiting the use of the currency to what we now see are arbitrary and harmful levels. But real fiscal responsibility for the currency issuer involves much more than this. They have a duty to account for imports and savings when determining how much currency the economy needs to maintain full employment and growth. Congress clearly needs a different method to debate how best to use the currency. Just look at the results of our current model – sluggish growth and frequent periods of high unemployment. What we’ve been doing is simply not working.
We live in an age where our government’s fiscal activity disproportionately harms the weak. Imposing unnecessary austerity has become the norm under a pretense of market discipline, and the suffering that results is very real.
Congress should seize on this opportunity for reform, ending the debt ceiling, ending the harmful Budget Control Act limitations, and begin using its fiscal power to serve the people’s interest and invest in America again.