At the beginning of a new congressional session, virtually every elected official presents a legislative agenda. Usually these efforts fall victim to gridlock, but they almost always situate themselves within an acceptably narrow range of discourse in Washington. Sometimes, though, a politician offers more than a set of policy ideas, but a new way of thinking, a challenge to long-held orthodoxy. And that makes what Sen. Bernie Sanders (I-VT) has been doing this week critically important.
Sanders is the new ranking member of the Senate Budget Committee, and he has thrown out the rulebook for that leadership position. He hired a sharply progressive staff, including chief economist Stephanie Kelton, a leading advocate for Modern Monetary Theory (MMT), which warns of the dangers (yes, dangers) of balanced budgets that take money from the hands of ordinary people, and counsels that economies in control of their own currency can never “run out” of money.
According to this theory, federal deficits do matter, but only when the economy is at full capacity and full employment, and inflation starts to rise. We’re nowhere near there at the moment, so the goal of government should be to encourage full employment through broad investments.
The deficit has been the overwhelming concern in Washington for nearly the entire Obama presidency, of course, leading to sequestration, budget caps and a fiscal drag that objectively harmed economic growth. But MMT applies the words of economist John Maynard Keynes: “Look after the unemployment, and the budget will look after itself.”
Traditional economists and D.C. political operatives typically look at supporters of MMT as if they’ve sprouted horns. But Sanders hired one for a top policy job, and we’re starting to witness the effects of that.
You can see it in Sanders’ opening remarks to the Budget Committee, which described the budget as an expression of priorities, not a series of numbers that must balance out. “While we must continue to focus on the federal deficit, we must also be aware that there are other deficits in our society that are causing horrendous pain for the vast majority of the American people,” Sanders said. “There are deficits in decent-paying jobs. There are deficits in the infrastructure. There are deficits in income. Deficits in inequality. Deficits in retirement security. Deficits in education. And deficits in trade.”
This question of emphasis — on what deficits to fix — shows in Sanders’s first big bill, a $1 trillion infrastructure program called the Rebuild America Act. Over five years, Sanders’ bill would commit this money to upgrading roads, bridges, water systems, airports, shipping ports, mass transit, electrical grids and even broadband, a wider vision of infrastructure than the usual surface transportation bill, which expires this summer.
U.S. spending on infrastructure is just 2.4 percent of GDP, half of what it was 50 years ago. Ramping up this investment — much of it for deferred maintenance that could be costlier to fix later — would increase efficiency, productivity and public safety, while creating 13 million decent-paying jobs, according to Sanders. “If you want to create jobs, the fastest way to do it is through rebuilding infrastructure,” Sanders noted in remarks introducing the bill.
Both parties pay lip service to infrastructure spending, because the public overwhelmingly supports it. But Sanders’ bill is different, because he doesn’t include a way to pay for it. The official story is that everyone supports infrastructure until you get to the funding, and Sanders wants to get people to agree on this urgent need first.
There are many other reasons to put the funding aside, though. Democrats in recent years have been trapped by the burden of fiscal responsibility. Statutory language they supported called “paygo” forces them to find a funding source for every new program. Since that usually leads to endorsing increased revenues, it allows Republicans to easily demonize Democrats as the party of higher taxes.
But there’s ample reason to question this obsession with offsetting spending. The Congressional Budget Office’s recent forecast identifies the past few years as the largest period of deficit reduction since the end of World War II, with a massive $4 trillion slashed from budgets over a 10-year period, more than called for by deficit blueprints like Bowles-Simpson.
CBO also found a $600 billion drop in federal health care spending estimates, even with the coverage expansions in Obamacare. Since everyone agrees that health care represents the biggest driver of future deficits, this dramatic slowdown throws cold water on the often-hyped fears of runaway debt. In fact, the only reason CBO sees a return to higher deficits down the road comes from higher interest payments on the current debt, a dubious projection.
As Matthew Klein explains, the Federal Reserve has kept interest rates low for going on seven years. If the economy got strong enough to necessitate much higher rates, that would also mean that jobs would grow, tax revenues would rise and spending on things like unemployment and food stamps would fall, canceling out the expense of higher borrowing costs. The specter of interest rates is, to quote Paul Krugman, "just an assumption, with nothing solid behind it."
If austerity policies succeeded in bringing about broad prosperity, that would be one thing. But as Sanders pointed out in a remarkable speech on the Senate floor Thursday, the top 1 percent has taken all of the gains from the economy since the Great Recession, with real median household income dropping to 1996 levels. Despite massive supply-side support — deregulation and giant reductions in taxes for the wealthy and corporations — the only result has been widening inequality, sclerotic growth and slower recoveries from more persistent downturns.
There’s reason to wonder if Washington has it backwards. The only time we’ve seen balanced federal budgets recently was when full employment in the late 1990s brought in surplus tax revenue. This makes sense if you recognize that 2/3 of the economy comes from consumer spending: “Our economy runs on sales,” as Sanders put it. If all the benefits go to the top, the rich cannot possibly spend enough to sustain demand.
In Sanders’ view, infrastructure programs that inject spending into the economy give millions of people a decent salary to buy necessities, and cycle money through the economy. “Paying for” such investments by cutting elsewhere would only weaken their impact.
This idea of middle-class consumers as the real job creators turns the deficit argument completely on its head. It frames government as an aide to growth, not a scold that takes away jobs and opportunity. It sees an ambitious role for government as a way to achieve broadly shared prosperity through smart investments. It prioritizes full use of economic resources to solve society’s problems over constraining what government can do. And it rejects the argument of scarcity. “Spending isn’t just the right way to grow the economy,” Sanders concluded Thursday, “it’s the only way.”
Maybe that isn’t MMT precisely, but it’s shockingly close for a political culture that usually puts up walls to keep out new ideas. Those walls still remain, of course; at a time when Republicans control Congress, valuing full employment over so-called fiscal responsibility may never get a proper hearing.
Still, consider what else has happened recently. Not only has the Obama administration rejected its prior flirtation with cutting Social Security benefits, but its new budget next week will call for an end to sequestration, the automatic cuts to discretionary and military spending. Obama’s budget goes $74 billion higher than the sequestration caps. Sanders leaped to support the move to “end artificial spending limits,” in his words.
Sometimes, Washington backs into its best ideas without even knowing it. Sanders’s MMT-tinged push for higher spending comes at precisely the right time, when politicians are looking to respond to inequality and economic despair. If trillions can be committed to fight wars and save Wall Street, a trillion can certainly be committed to give millions of people good-paying jobs. Nobody may want to admit they’re relying on a theory that would get them excommunicated from the church of Washington seriousness. But it’s so crazy it just might work.
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