If the global financial crisis (GFC) of the mid-to-late 2000s and the COVID crisis of the past couple of years have taught us anything, it is that Uncle Sam cannot run out of money. During the GFC, the Federal Reserve lent and spent over $29 trillion to bail out the world’s financial system,[1] and then trillions more in various rounds of “unconventional” monetary policy known as quantitative easing.[2] During the COVID crisis, the Treasury has (so far) cut checks totaling approximately $5 trillion, often dubbed stimulus. Since the Fed is the Treasury’s bank, all of these payments ran through it—with the Fed clearing the checks by crediting private bank reserves.[3] As former Chairman Ben Bernanke explained to Congress, the Fed uses computers and keystrokes that are limited only by Congress’s willingness to budget for Treasury spending, and the Fed’s willingness to buy assets or lend against them[4]—perhaps to infinity and beyond. Let’s put both affordability and solvency concerns to rest: the question is never whether Uncle Sam can spend more, but should he spend more.[5]

If the Treasury spends more than received in tax payments over the course of a year, we call that a deficit. Under current operating procedures adopted by the Fed and Treasury, new issues of Treasury debt over the course of the year will be more-or-less equal to the deficit. Every year that the Treasury runs a deficit it adds to the outstanding debt; surpluses reduce the amount outstanding. Since the founding of the nation, the Treasury has ended most years with a deficit, so the outstanding stock has grown during just about 200 years (declining in the remainder).[6] Indeed, it has grown faster than national output, so the debt-to-GDP ratio has grown at about 1.8 percent per year since the birth of the nation.[7]

If something trends for over two centuries with barely a break, one might begin to consider it normal. And yet, strangely enough, the never-achieved balanced budget is considered to be normal, the exceedingly rare surplus is celebrated as a noteworthy achievement, and the all-too-common deficit is scorned as abnormal, unsustainable, and downright immoral. continue reading…

Lekha Chakraborty
(Professor, NIPFP, and Member of Governing Board, International Institute of Public Finance, Munich)

Climate change is about risks and uncertainty. How well the monetary policy stance can incorporate such risks and uncertainties is questioned by many economists. There is a broad consensus among economists that fiscal policy is capable of dealing with the climate crisis but monetary policy is not, due to the latter’s lack of tools. It is widely acknowledged that public finance commitments are essential to lowering carbon emissions. Public finance interventions—through taxation to reduce carbon prints or through public expenditure to support green energy and technology—have proven to be effective in reducing emissions. However, such empirical evidence is absent in the case of monetary policy.

India was the first to integrate a climate change criterion in its inter-governmental fiscal transfers. The macroeconomic policy channel of these “ecological fiscal transfers” works through the prioritization of public expenditure on climate change commitments by subnational governments, to make a “just transition” towards a sustainable climate-resilient economy. continue reading…