What we know and don’t know about money

Economics is a hard subject. On a given day, you can read that inflation is just around the corner and that the COVID-19 stimulus bill will lead to an increase in the price of goods and services, or a more optimistic view that post-pandemic spending will generate growth in the U.S. economy, low interest rates and stable costs. The same newspaper can carry a story about looming federal debt that could bankrupt future generations and a story about the newly revised Modern Monetary Theory allaying any concern about U.S. government borrowing. 

So, will we have money today and tomorrow… or not? 

The truth is we don’t know. A new survey of America’s top economists by the National Association for Business Economics finds that despite predictions by the Federal Reserve of an expansion of the economy by 6.5 percent this year, the fastest growth since 1984, many in the field are still concerned about the future.

A majority of the 205 members surveyed say they believe the risks to inflation are greater today than those seen in the past 20 years. Most said they are concerned about the trajectory of public debt even though the Federal Reserve thinks our strong economic growth will not generate lasting inflationary pressure because we have tools to prevent that like hiking up interest rates. 

But a majority of the same group of business economists think that the Biden rescue package will help the economy by distributing $1,400 checks to most adults, renewing federal aid for the unemployed and supplying another round of help to small businesses, among other things. Forty-one percent describe the government’s current fiscal policy, including such spending, as “about right,” and an additional 25 percent call it too restrictive.  

If you feel like you are in the middle of a familiar, cyclical and never-ending debate about whether or not our government can spend what it wants and just print more money, it is because America has a never-ending debate about whether we can spend what it wants and just print more money.

Every year fiscal hawks warn us about the U.S. deficit, which is currently about $22.5 trillion (or 135 percent of GDP), which is the highest debt-to-GDP ratio ever, beating the previous record of 118 percent in 1946.  

We are told to beware of entitlement programs going broke because the biggest drivers of the U.S. debt are from “mandatory spending,” which refers to ongoing obligations the government is legally required to pay every year that are not subject to annual appropriations from Congress. This includes programs such as Social Security, Medicare and interest payments on the debt. In 2021, these programs will cost the federal government $2.966 trillion. 

But now to complicate things, we have renewed emphasis on the so-called MMT theory (Modern Monetary Theory) that says that the Federal Reserve controls money and can bail us out anytime.

Yep, that old argument is back in vogue after many years of discussion because of renewed attention after the COVID-19 pandemic of deficits, spending, taxes, unemployment and potential inflation. Modern monetary theorists aim to soften the stigma associated with deficit spending; remind us that the United States has run a federal budget deficit in 46 of the last 50 fiscal years; and tell us that our government will never go broke as long as it issues its own currency. That means that a large fiscal deficit can be addressed by simply “monetizing deficits,” which is akin to printing more money.

Critics of MMT push back, saying it is old, outdated and dangerous thinking to suggest that we can just borrow, spend, owe and print our way out of any problem and that the lessons of other countries demonstrate that unchecked borrowing gets you in big fiscal trouble

What all this means for those of us who don’t study macroeconomics or crunch numbers for a living is that we should manage our own finances and let others do the big worrying. For now, our country needs a real shot in the arm via vaccines, jobs and a return to something “normal” so that we can digest all these competing arguments.

Tara D. Sonenshine is a former U.S. under-secretary of state for public diplomacy and public affairs.