It now seems obvious that with the coming of the corona virus, some sort of fiscal stimulus will be required. The proposals for exactly what kind of stimulus to provide are legion, but the basic idea is the same: the federal government increases the net amount of money which it distributes into the economy. There are proposals to give money (“tax breaks”, loan forgiveness, or “relief” funds) to companies. Payroll tax reductions, expanded unemployment compensation, and a handout to every citizen are options for the general public. But there is one form of stimulus that the administration has been demanding a reduction in and which the Federal Reserve caved into this month: the de facto elimination of interest payments on future Treasury debt.
Calling interest payments on the national debt a form of stimulus might seem contradictory, but consider the matter structurally. Interest payments are an outflow from the Treasury paid to (generally speaking) Americans. In this sense, they are no different from Social Security checks, Medicare reimbursement, payments to defense contractors, or relief for the needy. The crux of stimulus resides in who gets what, and for what reason. In cutting rates to near zero at the behest of the administration, the Federal Reserve is cutting the income of American savers, with a substantial drop in the flow of federal dollars into the real economy at a time when they are needed most.
Think of it this way: if the Social Security Administration announced that they were unilaterally reducing monthly stipends, or if the Department of Defense said they were only going to pay 80% of the cost of a weapons system, or if Medicaid subsidies to the states were cut, or farm supports, or a million other programs, the recipients of those dollars would be up in arms about reductions in their payouts. Savers, in contrast, say nothing. In fact, we are all told that interest rate cuts are good for us and will produce growth, despite any evidence thereof in our current low rate regime. If the Fed and the administration really wanted to boost the economy, they would raise Treasury rates immediately and substantially—but old paradigms learned in the much different interest rate environments of the 80’s and 90’s die hard, and we find ourselves strapped to the orthodoxy of defunct economists.
This reluctance to raise rates is even more striking when one considers the budget-busting stimulus measures being proposed in response to the corona virus disruption. While still uncertain at the time of the composition of this piece, the number now exceeds two trillion dollars, on top of an annual deficit that was already projected at a trillion dollars. Washington no longer offers even the pretense of fiscal rectitude; in the all-consuming push to win elections, the powers that be are willing to run deficits of any size without a thought for the future. Isn’t it ironic that their most treasured economic lever—reducing interest rates– is producing the opposite effect that they intend?
A Trillion Here, a Trillion There
The topic of Modern Monetary Theory (MMT) has faded into the background with the arrival of the corona virus. As a refresher, MMT suggests that sovereign governments which have their own currencies can create money at will—spending it into existence and afterwards soaking up enough of it in taxes to prevent inflation from too greatly eroding the value of the money. And while the economists and pundits are still arguing over its validity, as a practical matter, Washington is behaving as though it were gospel. Every day brings new proposals—checks for everyone! money for small businesses! bailouts for the airlines, the hotels, the oil business, etc.. If this promised largess needed to be paid for it might give a pause to the considerations of the august minds in the capital. But instead the sum keeps expanding—just one week ago Congress and the administration were balking at a trillion dollars and today the pitch is up to $2.5 trillion. Of course, the government lacks the ability to quickly spend this amount, wisely or unwisely. But the fact that the number grows with the panic in official circles it seems clear that MMT has won.
Remember all the pundits and politicians who told us that Social Security was going to “bankrupt” “us” because in twenty years it would be a trillion dollars in the hole? You can be sure that the same people who are wildly espousing trillions in fiscal stimuli and bailouts now will one day once again be telling us that they need to cut benefits to “fix” Social Security.
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