If you are like me, you go to work to make money to take care of your family and pay your bills. You expect the things you rely on from our government to work without much thought from you. We expect there to be well-maintained roads, that our favorite foods are in our favorite stores because they were able to get there through well-maintained ports and rails. These things happen because of the investment of our government.
Congress creates the laws and approves the funds. The president oversees the administration that implements the laws and spends the funds to provide the services of the government. While that may seem straightforward, there are many ways that the financing of our administration works. Let’s talk a little bit about these public financing areas that have been in the news – the debt, the deficit, and how our economy works.
What is the federal debt?
The federal debt is the amount the US government owes to creditors and it is owned by the public. Federal government debt has been carried by the US since the American Revolutionary War. Many people argue that America’s personal and economic growth is based on debt and therefore the ability to pay it is based on the strength of our economy. As of October 2021, federal debt was at $28.8 trillion. The best measure for stability is not the total amount but rather the ratio of debt to GDP, the record for this was set at 27% in 1943 as the US prepared to enter WWII. For 2021’s budget the ratio is 13.4% which is clearly manageable as US GDP in 2020 was $20.4 trillion. The US economy is the largest in the world and everyone has an invested interest in its stability as it is vitally important to all other economies.
Debt ceiling or debt limit
This is the total amount the US government is allowed to borrow to meet existing legal obligations. It was originally created to make it easier for the administration to pay the governments bills but unfortunately, it has become politicized by fiscal conservatives. It is reflective of costs already approved by Congress. The current debt limit is $28.4 trillion but Congress just authorized an additional $480 billion which is estimated to keep the government running through till December 3rd (2021). By continuously adding to this debt and not paying the government’s bills it destabilizes the economic outlook and could result in the lowering of the US creditworthiness, as it did in 2011 when the US credit rating was downgraded, making investing in the US less favorable. This debt portion will hurt everyday Americans through the inability to pay for government wages and things like Social Security and Medicare, and there is no magic date this debt will be called in. According to the credit rating agency Moody, the US debt is highly valued worldwide with a rating of AAA. The currency is stable and people still want to hold their investments staked in the US economy.
When the government spends more money than it brings in taxes this is known as a budget deficit or fiscal deficit. The US has been in a deficit since 1900, and achieved a budget surplus between 2000-2001 but created a large deficit in 2020 of $2.8 trillion because of COVID support investments. In The Deficit Myth, Stephanie Kelton argues that government budgets are not like household budgets and that governments do not face a budget constraint as they cannot run out of the currency that they issue. Tax revenues do not finance government expenditure, but regulate inflation, encouraging and discouraging certain activities, and redistributing income and wealth to reduce inequality. Taxation is only necessary to create demand for the currency issued by the government and to make people produce goods and services, therefore the amount of government deficit does not matter. The government should use fiscal policy to control inflation and get to full unemployment.
Money and economy
The US economy does not work like a simple household budget where cash in must equal cash out, although most American households are even more sophisticated than that with credit cards and mortgages. The US Treasury issues bills, notes, and bonds to finance the deficit as these are then brought by corporations, financial institutions, and governments around the world. Taxation creates demand for currency, currency is a way for us to provide value to the various good and services in our economy and therefore taxation gives everyone a stake in the economy.
The solution lies in minting a series of high-value coins to pay the federal reserve to pay debts and manage the interest rates to manage inflation. Secondly, we need to end the debt ceiling, what started as a way to free the administration to financially manage the country has become a political football. Time to stop the charade. Instead, we need to invest in what the American economy needs to grow, do not let the large numbers of the debt and the deficit fool you into supporting the idea of austerity, limiting government spending as this hurts the economy and hurts people. Our budget reflects our values. We need to invest in what matters to the everyday American people – health care, child care, roads. Our overall quality of life depends on it.