It’s October 2021, and Congress is once again in a deadlock over the debt ceiling, this time threatening to stop payments on Social Security, Medicare, etc.
The debt ceiling has been raised or suspended 78 times since 1960 under presidents from both parties, but the action has become more contentious in recent years.
But where does the problem come from in the first place? Why is US debt/GDP at an 80-year high of 107% of GDP? And what does it mean?
Broadly speaking, some on the left have taken to declaring that the US, as a currency-issuer, can never go bankrupt, and “deficits don’t matter.” Some on the right have taken to declaring a looming disaster of hyperinflation and currency collapse.
Where does the truth lie? And is there a solution to rising national debt levels, if it is indeed a problem?
The “problem” of rising national debt is inextricable from the state of the economy. Since the time of Keynes and the Great Depression, the mainstream view in economics is that we use fiscal policy and monetary policy as tools to bring the economy out of a downturn.
When consumers and businesses are unable or unwilling to spend sufficiently to keep the economy moving and keep the nation employed, government deficit spending and Fed monetary stimulus are brought in to get things going again.
If we compare the economy to a car, when the car slows down too much, we press down on the accelerator of fiscal policy and monetary policy to speed it up again.
To carry the analogy further, we find ourselves in a situation where the accelerator is successful in bringing us back to speed. But, after each recession, we find that we can't ease the accelerator back up to its original position. Each recession leaves the accelerator closer and closer to the floor.
What happens when we’ve floored the accelerator, and the car slows down again?
Rather than continuing in a seemingly unsustainable fashion, we should be taking a step back, and considering what is causing the car to continue to slow.
One concurrent and relevant phenomenon is a rise in inequality.
The wealthy have gained an ever-growing share of income since around 1980, with inequality now reaching peaks last seen around the time of the Great Depression.
This is relevant to maintaining sufficient aggregate spending in the economy, because the wealthy have a much lower marginal propensity to consume (MPC). The wealthy tend to already have more than enough to meet their consumption needs, and tend to save substantial amounts of their income.
So, the persistent insufficiency in aggregate spending may not be, as envisioned in Keynes’s Paradox of Thrift, the result of temporary decisions by consumers and businesses not to spend.
It may be, rather, a more long-term and structural phenomenon, where income has concentrated in the hands of the wealthy, who tend not to spend it. And the non-wealthy, who do spend their income, are left with not enough to fully activate the productive capacity of the economy.
So what does this have to do with monetary and fiscal policy and the ever-slowing car of our economy?
To the degree our monetary and fiscal stimulus is misdirected towards the wealthy, and not to the everyday worker-consumers who comprise most of the consumption needs in the economy, it will be ineffectual over the long term, which is what we are seeing.
As a result, fiscal deficits and the accumulated debt increase to absurd levels without actually bringing us back to a healthy economy. And, despite record and ever-increasing monetary efforts by the Federal Reserve, the Fed is probably correct that a reduction in stimulus under this system and at this time would probably crash the economy.
The solution?
Both fiscal policy and monetary policy need to be re-directed back to the everyday worker-consumer in order to rebuild a healthy trickle-up economy.
One ideal way to do this to institute a monetary UBI at an initial level of $1200/month per person. This would represent an injection of money supply directly into the economy, rather than into debt markets, as the Fed does now.
As a more effective way to allow aggregate spending to rise to fully utilize the productive capacity of the economy, a monetary UBI would allow us “ease the accelerator” of traditional fiscal and monetary policy, back to a more neutral position, where they could be more effectively used in the next short-term recession.
In order to balance the budgets of the government and reduce the national debt, we must first bring the economy out of (capital-consumption) imbalance. Solving the capital-consumption imbalance, using monetary UBI or other similar means, is the *only* way to come off of the unsustainable path that we’re currently on.
I agree, as do many Fed officials, who have warned of the limits of monetary policy amid high inequality. And Congress listened: fiscal policy over the past 18 months has been overwhelmingly geared toward people at the bottom, and as a result poverty fell to its lowest level in history (inequality probably fell to some of the lowest ever too, though I haven't seen a study on that).