Democratic presidential front-runner Bernie Sanders is pledging to spend big and fund it all with new taxes, drawing flak from rivals and analysts who say his budget numbers don’t add up.
But bond investors say they don’t really need to. And more and more economists are inclined to agree.
It’s never been cheaper for the U.S. government to borrow money. In the past few days, as Sanders fended off the “how will you pay for it” questions about his plans for universal health and childcare, yields on 10-year and 30-year Treasuries were hitting all-time lows.
Fear of the coronavirus is driving the latest plunge. Yet interest rates have broadly been in decline for about 40 years, even as the national debt has lately headed in the opposite direction. That’s forced a big rethink among economists. They used to fret about the shortfalls that result when government spending exceeds revenue. They sound much more relaxed nowadays.
‘That’s the Worry’
Modern Monetary Theory, an unorthodox new school of economics, can claim to have been ahead of that curve.
“Putting too big a demand on resources, and causing inflation -- that’s the worry about deficit spending,” said Randall Wray, a senior scholar at the Levy Economics Institute and one of MMT’s founders. “But we don’t have any inflation pressures now.”
That used to be a lonely argument, but it’s becoming less so. Mainstream economists like Larry Summers and Paul Krugman have been critical of MMT -- and of Sanders’ expensive plans -- but they agree that public debt ranks way down America’s list of problems.
Bond markets have been unfazed as deficits widened toward $1 trillion, almost 5% of gross domestic product, under President Donald Trump -- likely pushing federal debt held by the public above 80% of GDP this year.
“I don’t think we can learn that much from debt ratios for advanced countries. What matters more is the market’s expectations of inflation,” said Kallum Pickering, senior economist at Berenberg in London. And those “seem to be pretty low for now.”
That could change if a Democratic president piled more deficit spending on top of Trump’s.
“If we turn on the fiscal taps through debt financing, as long as the politics doesn’t overwhelm the economic fundamentals, bond yields should gradually rise from here,” said Pickering. But he expects any increase to be “modest” by past standards.
MMT’s core argument is that countries like America, which borrow in their own currencies, can’t go broke. Until inflation kicks in, or threatens to, they don’t need to match every dollar of outlays by raising an equal amount of taxes –- and they can control borrowing costs via central banks.
Sanders has one of MMT’s leading lights on his team. Stephanie Kelton, a professor at Stony Brook University in New York whose forthcoming book is titled “The Deficit Myth,” has advised on both his presidential runs, after Sanders hired her to work on the Senate budget committee.
Still, Sanders -- who aims to spend federal cash on a scale unprecedented in recent U.S. history, isn’t framing his plans quite the way MMT would. He says he’ll find revenue to pay for them all.
Medicare for All on its own would cost an estimated $47 trillion over a decade, according to Sanders. That would be about 17% of GDP, based on government projections. It would be less than the U.S. is forecast to spend on health with its current public-private system, allowing Sanders to argue that his plan would save dollars as well as lives -– but the money would shift onto the government’s books.
Late Monday, Sanders published funding proposals including new taxes on households, businesses, financial transactions and personal wealth. Democratic rivals said the numbers fell short of covering the whole bill –- amplifying a case they’d already been making.
In Tuesday night’s candidate debate, Michael Bloomberg said that “we just cannot afford some of this stuff people talk about” and Amy Klobuchar said of Sanders’ plans: “The math does not add up.”
(Disclaimer: Michael Bloomberg is seeking the Democratic presidential nomination. He is the founder and majority owner of Bloomberg LP, the parent company of Bloomberg News.)
“Some of our opponents, who are good people, are struggling to tell you how in God’s name they’re going to pay for anything,” Joe Biden told supporters in November. Democrats need to get “more comfortable” with talking about how to rein in deficits and debt, Pete Buttigieg said in New Hampshire this month.
In November, whoever gets the nomination will be up against a president who’s taken the opposite approach. Trump has seemed comfortable expanding public debt –- and he’s gotten an economic boost as a result.
The U.S. is running “kind of Reagan-era deficits right now,” Trump’s economic adviser, Larry Kudlow, said this week. “I don’t think that interferes with growth whatsoever.”
‘Waves of Lending’
By using the budget to juice an economy that had already been growing for years -- something not attempted in the U.S. since the 1960s -- Trump broke with orthodoxy. But there are signs he’ll run a more fiscally conservative campaign in November.
Trump’s budget proposal to Congress this month, though it has little chance of getting passed, promised spending cuts almost across the board. Kudlow said he’s “staggered” by the scale of Sanders’ tax-and-spend plans. “This stuff is so far to the left, it does amount to socialism,” he said on CNBC.
Step back from the 2020 fray, and another reason for bigger deficits under both parties comes into view, according to James Galbraith, a professor of economics at the University of Texas.
Before the 2008 crash, private debt was driving the U.S. economy. Credit to households and businesses expanded for decades –- until it stalled. That’s when public borrowing stepped in to fill the gap, just as it had in Japan a decade earlier.
Since the early 1980s, “fiscal policy was withdrawn from the field -- except in a major emergency -- and the economy grew on waves of bank lending,” said Galbraith, whose father John Kenneth Galbraith was one of America’s most famous economists and served under four Democratic administrations from Franklin Delano Roosevelt to Lyndon Johnson.
Take that away and “you’ve got to have other things driving the economy, creating wages and jobs,” said Galbraith. “And this is going to show up in the budget on the fiscal side.”
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