Does No One Understand the National Debt?

In the debates, we could have heard adults talking about finances. But instead we heard infants yelling incoherently.

Here is a full exchange from the vice presidential debate:

QUIJANO: According to the nonpartisan Committee for a Responsible Federal Budget, neither of your economic plans will reduce the growing $19 trillion gross national debt. In fact, your plans would add even more to it. 

Both of you were governors who balanced state budgets. Are you concerned that adding more to the debt could be disastrous for the country. Governor Pence? 

PENCE: I think the fact that -- that under this past administration was of which Hillary Clinton was a part, we've almost doubled the national debt is atrocious. I mean, I'm very proud of the fact that -- I come from a state that works. The state of Indiana has balanced budgets. We cut taxes, we've made record investments in education and in infrastructure, and I still finish my term with $2 billion in the bank. 

That's a little bit different than when Senator Kaine was governor here in Virginia. He actually -- he actually tried to raise taxes by about $4 billion. He left his state about $2 billion in the hole. In the state of Indiana, we've cut unemployment in half; unemployment doubled when he was governor. 

PENCE: But I think he's a very fitting running mate for Hillary Clinton, because in the wake of a season where American families are struggling in this economy under the weight of higher taxes and Obamacare and the war on coal and the stifling avalanche of regulation coming out of this administration, Hillary Clinton and Tim Kaine want more of the same. It really is remarkable that they actually are advocating a trillion dollars in tax increases, which I get that. You tried to raise taxes here in Virginia and were unsuccessful. 

But a trillion dollars in tax increases, more regulation, more of the same war on coal, and more of Obamacare that now even former President Bill Clinton calls Obamacare a crazy plan. But Hillary Clinton and Tim Kaine want to build on Obamacare. They want to expand it into a single-payer program. And for all the world, Hillary Clinton just thinks Obamacare is a good start. 

Look, Donald Trump and I have a plan to get this economy moving again just the way that it worked in the 1980s, just the way it worked in the 1960s, and that is by lowering taxes across the board for working families, small businesses and family farms, ending the war on coal that is hurting jobs and hurting this economy even here in Virginia, repealing Obamacare lock, stock, and barrel, and repealing all of the executive orders that Barack Obama has signed that are stifling economic growth in this economy. 

We can get America moving again. Put on top of that the kind of trade deals that'll put the American worker first, and you've got a prescription for real growth. And when you get the economy growing, Elaine, that's when you can deal with the national debt. When we get back to 3.5 percent to 4 percent growth with Donald Trump's plan will do, then we're going to have the resources to meet our nation's needs at home and abroad, and we're going to have the ability to bring down the national debt. 

QUIJANO: Senator Kaine? 

KAINE: Elaine, on the economy, there's a fundamental choice for the American electorate. Do you want a "you're hired" president in Hillary Clinton or do you want a "you're fired" president in Donald Trump? I think that's not such a hard choice. 

Hillary and I have a plan that's on the table that's a "you're hired" plan. Five components. First thing we do is we invest in manufacturing, infrastructure, and research in the clean energy jobs of tomorrow. Second thing is we invest in our workforce, from pre-K education to great teachers to debt-free college and tuition-free college for families that make less than $125,000 a year. 

Third, we promote fairness by raising the minimum wage, so you can't work full-time and be under the poverty level, and by paying women equal pay for equal work. 

Fourth, we promote small business growth, just as we've done in Virginia, to make it easier to start and grow small businesses. Hillary and I each grew up in small-business families. My dad, who ran an iron working and welding shop, is here tonight. 

And, fifth, we have a tax plan that targets tax relief to middle- class individuals and small businesses and asks those at the very top who've benefited as we've come out of recession to pay more. 

KAINE: The Trump plan is a different plan. It's a "you're fired" plan. And there's two key elements to it. First, Donald Trump said wages are too high. And both Donald Trump and Mike Pence think we ought to eliminate the federal minimum wage. 

Mike Pence, when he was in Congress, voted against raising the minimum wage above $5.15. And he has been a one-man bulwark against minimum wage increases in Indiana. 

The second component of the plan is massive tax breaks for the very top, trillions of dollars of tax breaks for people just like Donald Trump. The problem with this, Elaine, is that's exactly what we did 10 years ago and it put the economy into the deepest recession -- the deepest recession since the 1930s. 

Independent analysts say the Clinton plan would grow the economy by 10.5 million jobs. The Trump plan would cost 3.5 million jobs. And Donald Trump -- why would he do this? Because his tax plan basically helps him. And if he ever met his promise and he gave his tax returns to the American public like he said he would, we would see just how much his economic plan is really a Trump-first plan.

One can see that the question is heavily weighted, and Pence laps it right up, going the moderator one better by calling the national debt "atrocious". Then he spins a total fantasy about how trillions on tax breaks for the wealthy will bring it down.

Kaine on the other hand does not address the question at all.

What was so unfortunate about this whole exchange is that it failed to give Americans an adult discussion about what the debt is, and its role in the government and the economy. And moderator Quijano led the way into this infantilism, though she is far from alone in sharing this tired, conventional wisdom.

Firstly, the federal system and debt are nothing like state debts or household debts. States do not issue currency and do not print money. Like the various Euro countries, states are bound by an income/outgo ledger. They have to fund their budgets from taxes, or if the federal government is generous, grants and other aid from above.

The Federal government uses taxes as well, but it has the additional job of running the whole economic system, including the currency. The national debt is in truth an economic management tool, whereby growth is accommodated and inflation managed by creating money to spend more than it receives in taxes. Yes, there is, and should be, a perpetual deficit so that economic growth can be met with the issuance of new money. Who gets that new money? The federal government does, to spend into the economy. Treasury bonds represent a legalistic (and in actuality unnecessary) tool to avoid issuance of more currency (which is also a debt/liability of the federal government) using the issuance of a longer-term debt that rewards rich people for saving, presumably with less inflationary impact than currency, but in practice with little different impact at all.

We have been brought up to think that the Fed manages the money supply. But it only controls interest rates, and even there can not get very far ahead of or behind the market. Interest rates have a profound impact on the money creation by banks. Yes, private banks create money too. Every new loan is a creation of new money, and every payment you make on a loan disappears into a monetary black hole. Banks can create money/loans on the strength of their capitalization, and on their regulatory authorization from the government, and lastly on their estimation of market conditions and the worthiness of particular borrowers.

But this new money is very unstable, as we learned in the last financial panic. Private loans can be called in, bank capital can vaporize, borrowers can skip town, and glitzy real estate developers can go bankrupt ... multiple times! Thus we need someone else and some other mechanism to keep the monetary system stable, and that is the federal government in its spending and money creation capacity, which is shared between the Fed and the Treasury.

The federal debt represents that part of the national liability pool that is stable, and is managed in part with an eye towards economic growth and inflation. If inflation and growth are both low, as they are now, the proper federal policy is to spend more money while taking in less tax. Which in turn implies growing the federal debt. The textbook case was in the depths of the banking meltdown, when congress reluctantly approved almost a billion dollars of extra spending and debt. That was far from enough, but certainly helped stabilize the monetary system and economy.

As Alexander Hamilton first said (or did he sing it?) "A national debt, if it is not excessive, will be to us a blessing". This was in the context of the new federal government taking on the various war debts of the former colonies, now states, in both a political sense and in a financial sense, that a well-managed debt is (as England had shown) a tremendous benefit to the national state and economy.

Secondly, the debt is not something that anyone has to "pay off". The calculations that state it in terms of each citizen's personal share are wildly off the mark. We may in sum have a cultural debt to our predecessors for creating that much wealth (the obverse of debt) that is now circulating through the hands of bondholders, other investors, our infrastructure, etc., but it is not a weight hanging over anyone's head. Even if interest rates were to rise, so would inflation and GDP, making the effective debt and its debt service little different. Bondholders like their bonds, roll them over perpetually, and would dislike being paid off in cash.

The real danger of excessive spending by the federal government is inflation. If federal spending (enabled by borrowing/printing in excess of taxation) rises too much, that excess money drives prices up, in a process that may be pleasant and politically easy at the beginning, but becomes very onerous to unwind later on. So there is certainly a point to keeping a lid on inflation, via Federal Reserve independence, etc. But of late, we have been too focussed on fighting the last war (that of the 70's inflation) and not enough on the current one of restoring growth and fighting deflation in the US (see also Japan on how diffucult this fight can be).

What is so ironic about all this is that during our painful recession, it has been the Republicans in congress who have been most vociferous in fighting more spending and debt (at least when a Democratic president is in office; otherwise, debt and spending go up dramatically). They are the ones who have put the brakes on macroeconomic management and growth, all in an effort to pin the resulting poor economic performance on Barack Obama. Well, we have eeked out a little growth anyhow, and Obama easily gained a second term, with a protoge ready to be shoed in to boot, so their destructive efforts have not, thankfully, been sufficiently effective politically, though they have been extremely damaging economically and socially.

And effectively, both parties have the same macroeconomic policy on the debt- expand it. Republicans do so by reducing taxes for their friends, and Democrats do so by spending, also often to help their friends. So all the bluster about how terrible the debt is turns out to be a back-door way to screw with the other party's ability to carry out its priorities, ending up in gridlock. We really can do better by having an adult discussion about finances, while judging those other priorities directly.

So to hear this debate moderator going on about the debt, which she, and the whole media, and the candidates themselves, so thoroughly (or willfully) misunderstand, is sad and disappointing, not to mention flagrantly biased. We need higher debt right now, and specifically we deperately need more spending on our infrastructure to get the economy back on track and pointed to the future. That would be far more productive than complaining about trade deals, or the manufacturing jobs that are long-gone, not to mention the immigration crisis that happened over a decade ago.

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