A top economist says the $4 trillion federal deficit isn't the problem — it's how we're spending the money

• Paul Constant is a writer at Civic Ventures, a cofounder of the Seattle Review of Books, and a frequent cohost of the "Pitchfork Economics" podcast with Nick Hanauer and David Goldstein.
• On the latest episode of Pitchfork Economics, Professor Stephanie Kelton discussed Modern Monetary Theory, which rethinks the concept of government debt.
• Government debt shouldn't be thought of like personal finances — when the government has a deficit, that means that money is being spent in the economy.
• The current deficit could be put towards directly helping Americans, unlike stimulus money that's been directed to big business.

When the United States went off the gold standard in 1971, our monetary system changed dramatically. Rather than fixing each dollar's worth to an established amount of gold, we adopted a floating exchange rate, and the nature of economics changed. In the latest episode of Pitchfork Economics, Professor Stephanie Kelton explains that the complexity of our financial system means we should reimagine "what the government can afford to do using its budget to solve real problems in our economy."

Kelton rose to prominence as one of the foremost experts on Modern Monetary Theory, a branch of macroeconomics that rethinks the idea of government debt.

"We've been indoctrinated by the constant refrain that the government should put its fiscal house in order," Kelton explains. When they rage against the deficit, Kelton says trickle-downers who want to keep government as small as possible use "our understanding of our own personal finances" to convince us that government spending and the accrual of debt is "reckless and irresponsible."

But Kelton says we need to frame federal spending and deficits differently than household balance sheets: "When we're talking about the government's finances, we could just as easily substitute the word 'surplus' every time we see the word 'deficit' and the sentence would still have meaning."

"When the government's budget is in deficit, it simply means that the government is spending more dollars into the economy than it is subtracting back out, mostly through taxation," Kelton says. "So if the government spends a hundred dollars into the US economy, but it only taxes 90 of those dollars back out, we say the government's budget is in deficit."

Cue the hand-wringers making unrealistic analogies between your credit-card debt and government spending. "But what they forget is that if the government has spent $100 and only subtracted away $90, somebody's got $10, right? Their deficit is our financial surplus," Kelton explains.

That $10 is then spent in the economy, which creates jobs and grows the economy — and the tax base. Kelton sums it up neatly: "Every deficit is good for someone."

The Congressional Budget Office's latest estimates indicate that America's deficit this year will approach $4 trillion dollars. That number is high enough that Republicans have pumped the brakes on future stimulus packages. Mitch McConnell refused to consider sending stimulus money to states and cities, warning that "given the extraordinary numbers that we're racking up to the national debt … we need to be as cautious as we can be."

McConnell's ringing of the alarm bell over scary big numbers doesn't seem to reflect the reality of the situation. It's looking more and more like MMT is a clearer lens through which we can view the economic policies of our sophisticated federal government.

But that $4 trillion in debt could still represent a big problem, depending on how we choose to spend it. Going further into debt to pump money into already-profitable corporations would be idiocy. But at a time when tens of millions of Americans are out of work and some seven and a half million small businesses are in danger of closing forever, Americans should be demanding that more government spending directly benefits them.

In America, our deficits and spending almost always directly benefit big corporations and the extremely wealthy. You can see a perfect example in the stimulus spending we've seen so far: According to the Washington Post, some half a trillion dollars of the $2 trillion stimulus package went to large businesses — and many of those recipients have been largely shrouded in secrecy. More than a quarter of a trillion of the stimulus dollars went to business tax cuts. As we know from decades of experience, that money isn't going to trickle down to ordinary American neighborhoods and households.

Of course, the economic downturn that accompanied the coronavirus outbreak has proven that ordinary Americans are the real job creators, not the big corporations. And our economic recovery isn't going to happen until Americans are able to spend money in their neighborhoods, creating jobs through rising consumer demand. Imagine, then, if the surplus money created through those deficits benefitted ordinary Americans first and foremost?

It's easy to imagine what $4 trillion dollars could do for the economy if the federal government prioritized everyday Americans. Americans spent $3.6 trillion on health care in 2018, for example, and a federal single-payer plan would drive that number down considerably. The National Alliance to End Homelessness requested just $3.1 billion from Congress to address the housing crisis next year — imagine what they could do if that number increased tenfold. Kelton is a supporter of a federal jobs guarantee program which would keep Americans paid and working even in the midst of an economic depression; such a program could likely cost half a trillion dollars annually.

A budget is a values statement. Show me a nation's budget and I'll tell you who and what that nation really prioritizes, no matter what their leaders may claim to support. Modern Monetary Theory, then, represents a nation's values in action. Up until now, we've squandered the great opportunity that MMT offers on the usual trickle-down agenda of enriching the wealthy at every other Americans' expense. What would happen if we used that power to fortify Americans in the middle of this pandemic — to allow everyone the chance to come out of the coronavirus shutdown even stronger than they went into it?