modern monetary theory | Normative Narratives

Original article:

More than 63,000 bridges across the United States are in urgent need of repair, with most of the aging, structurally compromised structures part of the interstate highway system, an analysis of recent federal data has found.

The report, released on Thursday by the American Road and Transportation Builders Association, warned that the dangerous bridges are used some 250 million times a day by trucks, school buses, passenger cars and other vehicles.

Overall, there are more than 607,000 bridges in the United States, according to the DOT’s Federal Highway Administration, and most are more than 40 years old.

The Transportation Department routinely inspects bridges and rates them on a scale of zero to nine. Bridges receiving a grade of four or below are considered structurally deficient, and now account for more than 10 percent of all bridges.

“The bridge problem sits squarely on the backs of our elected officials,” [chief economist at the American Road and Transportation Builders Association Alison Premo] Black said. “The state transportation departments can’t just wave a magic wand and make the problem go away.”

The American Society of Civil Engineers, which separately produces a report card on U.S. infrastructure every four years, gave it an overall “D,” or poor, grade. Bridges received a “C+” grade for mediocre.

The U.S. needs to invest $20.5 billion annually to clear the bridge repair backlog, up from the current $12.8 billion spent annually, the ACSE has said.

The civil engineers’ group estimates that the U.S. will need to invest $3.6 trillion by 2020 to keep its transportation infrastructure in a good state of repair.

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America the short-sighted, America the reactionary.

In Washington’s Snohomish County, local governments OK the building of houses in areas where mudslides are inevitable, resulting in 41 deaths. Why? because bringing in taxpayer dollars and jobs looks good now, forget the potential negative consequences, those will be someone else’s problems.

We squabble over small (if existent) healthcare premium increases associated with Obamacare, unmindful of expanded access to mental healthcare and subsidies to the poor; at the same time we bounce from avoidable tragedy to avoidable tragedy, shaking our heads and asking “what could we have done differently?”

And we let our infrastructure fall into disrepair, setting ourselves up for who knows how many avoidable deaths (not to mention the economic arguments: high unemployment and low borrowing costs beg for stimulus spending, the long term economic costs of failing infrastructure). Nobody wants to be remembered as the person who “wasted” money on a bridge, and there is no accountability for allowing avoidable incidents to occur due to political inaction.

Subsidize for-profit corporations for doing what they would need to do anyways to maximize profits? Sure that brings in jobs. Prevent a bridge from collapsing? Ehhhhh let that be the next guys problem.

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It is telling that investors around the globe seemingly believe in America’s growth and ability to repay our debts more than our own lawmakers do. America’s strength is derived from it’s people, our ingenuity and work ethic. If we continue to under-invest in our people and our infrastructure, we are undermining the very things which made America a global superpower (and “safe haven” for investment) in the first place.

This is not to say that we should not pursue tax reform, and demand oversight / review to ensure programs run efficiently and effectively. But America must more fully embrace the concepts of fiat money and Modern Monetary Theory; past debt cannot be a reason to forgo our current needs, or in the future we will not even have the option of affordable deficit spending. The U.S. Federal government has, in essence, a “blank check”, so long as it is used responsibly; systematic under-investment in the American people and infrastructure is irresponsible and shortsighted.

Issues like this remind me of a favorite Abaraham Lincoln quote: “America will never be destroyed from the outside. If we falter and lose our freedoms, it will be because we destroyed ourselves.” Of course Lincoln was referring to Civil War, a more immediate threat. America seems to be able to deal with immediate/obvious threats. It is responses to impending threats to American prosperity that remain elusive, which is at the same time understandable and infuriating.

We wait for tragedy to strike, lament the dead and point fingers, instead of acting preventatively. Some tragedies are truly unavoidable; this truth should not be used as a free pass for saying all tragedies are unavoidable.

I have, like many an economist, been preoccupied by the possibility of a U.S. debt default. How could our politicians willingly do something that is so obviously detrimental to American and global economic interests? Is there any precedent or historical clue which may shed some light on this phenomenon? It is possible, I would argue, that such a default is the current (and most heinous) manifestation of “starve the beast” political theory:

“Starving the beast” is a political strategy employed by American conservatives in order to limit government spending^[1]^[2]^[3] by cutting taxes in order to deprive the government of revenue in a deliberate effort to force the federal government to reduce spending. The short and medium term effect of the strategy has dramatically increased the United States public debt rather than reduce spending

On July 14, 1978, economist Alan Greenspan gave testimony to the U.S. Finance Committee: “Let us remember that the basic purpose of any tax cut program in today’s environment is to reduce the momentum of expenditure growth by restraining the amount of revenue available and trust that there is a political limit to deficit spending.”^[5]

The earliest use of the actual term “starving the beast” to refer to the political-fiscal strategy (as opposed to its conceptual premise) was in a Wall Street Journal article in 1985 where the reporter quoted an unnamed Reagan staffer.^[7]

Since 2000

The tax cuts and deficit spending of former US President George W. Bush‘s administration were attempts to “starve the beast.” Bush said in 2001 “so we have the tax relief plan […] that now provides a new kind—a fiscal straightjacket [sic] for Congress. And that’s good for the taxpayers, and it’s incredibly positive news if you’re worried about a federal government that has been growing at a dramatic pace over the past eight years and it has been.”^[8]

Historian [Economist] Bruce Bartlett, former domestic policy adviser to President Ronald Reagan, has called Starve the Beast “the most pernicious fiscal doctrine in history”, and blames it for the increase in US government debt since the 1980s.^[18]

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For a historical look at government revenue and expenditure, please see here. The most useful number (IMO), is the % GDP comparisons.

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But what is the connection between “starve the beast” and the “debt limit”? The answer lies in a simple analysis of Modern Monetary Theory:

A pivotal issue in our discussion turns out to be whether the central bank can or should hold the nominal rate of interest on government debt, R, below the rate of growth of nominal GDP, G. (We could frame the discussion in real terms instead by subtracting the rate of inflation, ΔP, from both sides; it makes no difference.) If R is held below G, then essentially any level of the government’s budget deficit is “mathematically sustainable,” a term we have been using to mean that the debt-to-GDP ratio does not grow without limit over time. On the other hand, if R exceeds G, the budget balance must show a primary surplus, on average over the business cycle, to achieve mathematical sustainability of the debt. (See the first of the posts referenced above for a detailed discussion of the conditions for mathematical sustainability.)

The essential argument of MMT is that if growth rates are greater than interest rates, debt is sustainable and a government can run a budget deficit indefinitely (governments, unlike households, do not die). Japan, with its Debt/GDP ratio almost twice as high as the U.S., is a primary example the difference between debt sustainability versus total debt. Many of Europe’s “trouble countries” have trouble with much lower debt / GDP ratios (than Japan); without control of printing money, they are at the mercy of markets to borrow. These markets have been charging troubled countries a higher “risk premium”, pushing these countries into damaging austerity policies in the face of depressed demand. It is not the level of debt, but the interest that needs to be paid on it, that determines debt sustainability in a MMT model.

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In order to truly starve the beast, it is not enough to deny the U.S. government of tax revenue; the obstructionist must also increase the governments borrowing cost. This is exactly what a debt default would do, lead to higher borrowing costs. In fact, one of the main arguments by liberal economists for stimulus spending–other than the social and economic benefits of employing a substantial portion an idle workers and stimulating demand–is that the cost for doing so is for all intents and purposes the same as if we were running a government surplus! True the Fed can set the interest rate it pays by expanding it’s balance sheet, but this is an extraordinary role for the Fed to use only the most dire liquidity trap, not a viable long-term policy (due to inflationary effects of increasing the money supply when the economy is near or at full capacity).

There is certainly no proof that this is specifically anyone’s agenda. However, the same ideologies are behind “starve the beast” policies are behind holding the debt-limit hostage for fiscal concessions. We have to at least question the motives of these politicians; they are “rational” people, and until now I have heard no rational reason for such an unprecedented default. If the goal is to convince their opponents, who are likely to have Post-Keynesian if not MMT views of political economy, that certain policies are unsustainable, a default is–an irreversible way–to achieve such goals.

As the self-proclaimed party of fiscal responsibility, the GOP is leading America down the road of ballooning interest payments. Interest payments already make up a substantial portion of total expenditure (8% and growing, twice as much as the federal government spends on education). A default would cause these payments to be substantially bigger, further constricting fiscal space for important social programs. We wouldn’t be getting more for less, or even the same for the same amount, we would receive less services for the same levels of expenditure. It is not fiscally responsible, but then again “starve the beast” and their contemporary “Tea Party” advocates were never really about fiscal responsibility.

Furthermore, follow a debt default the ensuing global recession would greatly raise the unemployment rate, driving up the spending on “automatic stabilizer” welfare programs that would otherwise be trending downwards in tandem with a growing economy.

You may say that no elected official would ever act so heinously and against the interests of the government and the American people; I would say read up on the history of the “starve the beast” political philosophy. It should also be noted that a default does not actually need to pass in order to result in higher borrowing costs / lower growth (making borrowing unsustainable based on a MMT framework); the specter of a default is enough to achieve these goals (the next debt-limit debate is set for February 2014).