Are Concerns over Growing Federal Government Debt Misplaced?

L. Randall Wray | November 10, 2021

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.

First the good news. The government’s “deficit” is our “surplus”: since spending must equal income at the aggregate level, if the government spends more than its income (tax revenue), then by identity all of us in the nongovernment sector (households, businesses, and foreigners) must be spending less than our income.[8] Furthermore, all the government debt that is outstanding must be held by the nongovernment sector—again, that is us. The government’s debt is our asset. Since federal debt outstanding is growing both in nominal terms and as a percent of GDP, our wealth is increasing absolutely and relatively to national income. Thanks Uncle Sam!

But the dismal scientists (economists) warn that all this good news comes with a cost. Deficits cause inflation! Debt raises interest rates and crowds out private investment! Economic growth stagnates because government spending is inherently less efficient than private spending! All of this will cause foreigners to run out of the dollar, causing depreciation of the exchange rate!

With two centuries of experience, the evidence for all this is mixed at best. Deficits and growing debt ratios are the historical norm. Inflation comes and goes. President Obama’s big deficits during the GFC didn’t spark inflation—indeed, inflation ran below the Fed’s target year after year, even as the debt ratio climbed steadily from the late 1990s to 2019. The initial COVID response—that would ultimately add trillions more to deficits and debt—did not spark inflation, either. (Yes, we’ve seen inflation increasing sharply this year—but as I noted, the evidence is mixed and many economists, including those at the Fed, believe these price hikes come mostly from supply-side problems.)

Interest rates have fallen and remained spectacularly low over the past two decades.[9] Anyone looking only at those 20 years could rationally conclude that interest rates appear to be inversely correlated to deficits and debt. While I do believe there is a theoretically plausible case to be made in support of that conclusion, the point I am making is that the evidence is mixed. And if you were to plot the growth rate of GDP against the deficit-to-GDP ratio for the postwar period, you would find a seemingly random scatterplot of points.[10] Again, the evidence is mixed at best.

Finally, the dollar has remained strong—maybe too strong for some tastes—over the past 30 years in spite of the US propensity to run budget deficits, and even trade deficits for that matter. Both of these are anomalies from the conventional perspective.

So, while there are strongly held beliefs about the negative impacts of deficits and debt on inflation, interest rates, growth, and exchange rates, they do not hold up to the light of experience. When faced with the data, the usual defense is: Just wait, the day of reckoning will come! Two centuries, and counting.







[6] Kelton, S. 2020. The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy. New York: Public Affairs..


[8], p.13.

[9], p. 17.

[10], p. 20.


2 Responses to “Are Concerns over Growing Federal Government Debt Misplaced?”

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  1. Comment by redge — November 13, 2021 at 2:53 am   Reply


    They hysteria about deficits/interest rates/inflation is increasingly becoming hollow. It hardly requires much effort to see.

    I will however raise a related point that maybe of interest to the deficit/growth debate and the interest rate crowding out issue that touches on your deficit lamentation.

    It is on the last paragraph but two. You say, “And if you were to plot the growth rate of GDP against the deficit-to-GDP ratio for the postwar period, you would find a seemingly random scatterplot of points. Again the evidence is mixed at best”.

    The purpose of deficits, at least according to Lerner, is to “increase the overall spending” in an economy. To plot the growth rate of GDP against the deficit-to-GDP ratio, and seek to find some meaningful relationship is to assume that every deficit spending increases overall spending. This is challenging.

    Tranfering your pocket dollar to me hardly increases the overall spending power of an economy, which is what happens when the deficit is financed by bonds. Lerner saw this and argued that both tax and bond financed deficits cannot grow the economy in any meaningful way as opposed to money financed spending.

    Elsewhere Wray (2001) also argues that if there is to be an effective fiscal policy, coordination between fiscal and monetary policy (monetary expansion) is crucial. However Wray frames it from a HPM perspective, which is wrong as such money hardly goes into the real economy. Friedman of 1948 also argues in the same vein.

    From an accounting perspective, money and bond financed money end up being the same but economically, they are different. Many bonds are held to maturity and also sometimes rolled over.

    The QTM defined money (M1-M4) is also not the correct money. It should be Fisher’s “effective money” that is supposed to be at play. Flow and not stock. Here again, it should be bank credit, not any other credit that can move GDP. Furthermore, it should be bank credit to the productive sector (Keynes’ industrial transactions).

    So the multiplier effect is thus larger when money financed deficit and not bonds are used to finance deficits. But also that the interest rate crowding out hasn’t much empirical support.

    Additionally, perhaps outside of just emphasising that govts deficits are our surpluses, we should go further and warn that crises like those of 2007 happened because of deficits being incorrectly financed by unproductive money.


  2. Comment by Bob Belovich — November 13, 2021 at 8:42 am   Reply

    Good piece. I hope you will get it published as an op ed piece in some newspapers.

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