Deconstructed: Economist Stephanie Kelton on the Debt Limit

Ever since Congress created a federal debt limit, it has managed to raise it before U.S. borrowing reached the limit. For the first time, it looks as though that may not happen, and the government could conceivably default on its obligations. Today on Deconstructed, Jon Schwarz is joined by the economist Stephanie Kelton to talk about the history that brought us to this moment, why both political parties may take us over this ridiculous and dangerous brink together, and what it all means for now and the future.

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Jon Schwarz: Welcome to Deconstructed. I’m Jon Schwarz, a writer at the Intercept, and I’m substituting for Ryan Grim this week.

Today, we are going to be talking about the federal debt limit, and the bizarre, nonsensical, pointless catastrophe it is on the verge of causing. It seems like it can’t be that interesting, until you understand that, because of it, you may momentarily lose your job, and your parents may not get their Social Security payments, and your cousins won’t have enough money to buy food. So, that is actually pretty compelling.

And, speaking of Social Security, that’s what this makes me think of. The most important political experience of my life was when, as a youth, just by weird accident, I learned a ton about Social Security. Before that, I believed all the Social Security hype and propaganda about how it was going to collapse, and that nobody my age would ever see a check, and stuff like that, but then I learned that was all complete nonsense. There is no reason to worry about Social Security, it will be fine.

That’s why I was prepared for the Iraq War, because all the same people who’d been telling me about how Social Security was dying were now informing me about the terrible danger of Saddam’s weapons of mass destruction.

George W. Bush: I take the fact that he develops weapons of mass destruction very seriously.

JS: And you may recall that did not pan out.

And so, that brings us to the debt limit. The basic fact of U.S. politics is that, just as with Social Security and the Iraq War, the people in charge constantly lie about everything, to the degree that reality is generally the exact opposite of what they say.

We’re going to be discussing this aspect of this, regarding the debt ceiling with Stephanie Kelton, who is a Professor of Economics and Public Policy at Stony Brook University. She was a senior economic adviser to Bernie Sanders’ presidential campaigns in 2016 and 2020, and she is the author of the fantastic book “The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy.”

I should say that I have a horrible cold, and so I’m not talking like Barry White on purpose. I just can’t get enough clear heterodox thinking about economics.

Professor Kelton, thanks very much for making the time to be here on Deconstructed. We know that there are a lot of people who want to talk to you about the debt ceiling this week, as we wonder whether the world economy is going to implode.

Stephanie Kelton: Thanks for having me.

JS: So, you know, most of the people listening to this are the kinds of oddballs and miscreants who know what the federal debt ceiling is. But for those who are listening who don’t know, can you explain it?

SK: Sure. The debt ceiling is basically a limit on the number of a very specific, kind of — call it a debt instrument — security that can be issued by the United States Treasury. We basically think of things like U.S. government bonds, short term T-bills, and the like. So, what we often hear of is U.S. treasuries.

And so, the debt limit says, at the moment, you can’t have more than 31.4 trillion, basically, of these things in existence. That’s the maximum that we’re prepared — Congress is saying — that we are prepared to allow the world to hold at this moment in time.

JS: Right. And, crucially, this is the face value of the bonds.

SK: Right.

JS: Which is something that we’ll come back to later, I suspect. Can you tell us the history of the debt limit?

SK: Yeah. So, this dates back to, essentially, 1917; really, [it] comes into its more modern form in 1931.

Back in the day, long before, let’s say, World War I, Congress was very specific, and it would give specific spending authority to the government on an individual basis. So, it would say, we’re going to spend money on the military, we’re going to spend money on the customs office, we’re going to spend money on X, Y, and Z.

And they would say how much they’re going to spend. And then, in each spending bill, they would also be very specific about the financing mechanism: We’re going to use this kind of borrowing, we’re going to issue this instrument for this spending, we’re going to rely on seigniorage for this other type of spending, we’re going to have customs duties pay for this type of spending.

And, basically, over time, the government grew, the operations became more complicated, especially in World War I. And so, Congress decided it was essentially too cumbersome to continue to do things the way that they had been doing it with this very specific nature. And, instead, they would just put a ceiling, and say to the Executive Branch, to Treasury, you have the discretion to figure out what kinds of instruments you want to issue. Ten-year treasuries, shorter term, T-bills, and so forth. You figure out how you want to arrange the financing, and we’ll just put a cap up very high, and then we’ll leave it to you, because we’re not going to micromanage the way that we have been. It’s just not feasible at this point.

And so, that’s where this idea of putting a limit on the borrowing authority. But, you know, it was really done to make it easier for the Executive Branch to carry out the spending that had been authorized by Congress. It wasn’t to slow things down, it wasn’t meant to obstruct, and it certainly was never meant to be a break on spending.

And, so that’s the irony, is that the debt ceiling in its origin was about making it easier for the treasury to facilitate the payments that had been authorized by Congress.

JS: Right. And you’ve used an analogy of people going to a restaurant and ordering dinner. You wouldn’t, when the bill arrives, just say, “Oh, by the way, we’re not going to pay that. We’ve decided that we have a limit on how much money we’re going to spend with our credit card.”

SK: That’s right. So, Congress appropriates, and Congress passes legislation that commit the government to making certain payments. There are programs like Social Security and Medicare, veterans’ benefits, you enter into contracts with defense contractors, and federal employees, and on and on and on. And so, Congress has already decided on the spending; that’s where the commitments come from. And so, the debt limit is this sort of secondary check, an opportunity for Congress to come back at a later moment and say, do we want to allow the Treasury Department to facilitate the payments that we are on the hook for in the usual way? Do we want to let them issue the bonds, and the T-bills, and so forth, the way they always do.

And, when they refuse to raise the debt limit, what I think [they’re] essentially doing is saying to the Treasury Department, “Well, we’ve told you to spend, but now we’re telling you we don’t want you to facilitate the spending the way you usually do, so figure out how you’re going to do it.” They’re not saying, “We’ve decided we don’t want you to pay the bill.”

So, in the restaurant example, they’re not saying: “We’re all going to get up and leave and stiff the restaurant. We’re going to eat the food, we’re going to drink the drinks, and then we’re all going to walk out without paying.” That’s really not what Congress is saying. I think what they’re saying is, we have to pay, because there is a legal commitment to spend that money, but we are telling you we don’t want you to do it the way you normally do. And that then puts the ball in Treasury’s court.

Now they have to figure out how they’re going to meet their legal obligation to spend the monies appropriated by Congress without doing it the way they normally do it.

JS: And so, in theory, I think a lot of people listening to this know that there are some options that the Biden administration, the executive branch and the Treasury Department would have. But, in practice, this has never ever happened, that Congress has failed to raise the debt limit.

And so, let’s just imagine a world in which they failed to raise the debt limit. The Treasury Department does not have the money to pay its bills, does not have the money to service its debt, does not have the money for all the things that you were talking about, like sending out Social Security payments. Like paying the soldiers, things like that.

So, what are, as I say, the theoretical options, if you were at the Treasury Department, that you would have at that point?

SK: Well, they actually have ways to sort of move — the money is, in a sense, fungible. And so, they will embark on this for a short period of time, efforts to embrace what Secretary Yellen — and before Secretary Yellen, Secretary Minuchin under Donald Trump — these extraordinary measures.

So they can sort of stretch things out, and everybody’s probably heard references to “the X-date,” which is, basically, what Secretary Yellen is saying. Well, we can practice these extraordinary measures for a period of time. And then, when the X date arrives, as you just said, there’s no more money that can be accessed. And, at that point, we can’t meet all of the commitments as we are supposed to under the law.

And, you know, people are talking about things like, well, there are actually ways to top up the government’s bank account. So, basically, when the government spends, it does so by drawing on what’s essentially a checking account, just like you and I have. This is called the Treasury General Account, and it’s the Treasury’s checking account at the Federal Reserve.

And so, what people are saying is, well, you’re not allowed to run an overdraft on that account. From day to day, you can’t run it into negative, day after day after day, so you’ve got to top up the account somehow. So, how do you get numbers into the account so that it doesn’t go below zero?

And so, one of the things people are saying is, well, you could mint this platinum coin. And we can talk about that, I don’t know if you want to get into it right now, but people have probably heard the trillion-dollar platinum coin idea. Some people have said the treasury can issue instruments that aren’t like the instruments that they currently issue to facilitate spending, which are the 30-year treasuries, or 10-years, or T-bills. They could issue something called a consol.

And you mentioned a little bit earlier that it’s about face value. Staying under the debt ceiling limit is about not allowing the total outstanding stock of these government instruments to exceed $31.4 trillion at the moment. So you issue something called a console, which has no face value, it’s just interest. And, since it has no face value, it doesn’t count against the debt ceiling, and that would be a way for the Treasury to sell something and bring in cash that it could then use to continue to meet payments by topping up that checking account.

Another idea is to issue something called premium bonds. A premium bond has a very small face value. So, as the maturing bonds, those that are already out there, they start maturing with higher face value, you are issuing bonds with very small face value and a very big interest rate. And so, you can stay under the debt limit that way.

Some people are saying, just invoke the 14th Amendment. Section Four of the Constitution, 14th amendment to the Constitution says, “The debt of the United States of America shall not be questioned.”

And so, you just basically ignore the debt ceiling limit, and you continue issuing the same kinds of instruments we issue today, and let the courts weigh in at a later date. So, all of these things are being talked about, and including some combination of these, like minting the platinum coin, issuing premium bonds or consols, and invoking the 14th. But there’s a sort of order in which I think it’s preferred to do these things.

JS: And what is that order? I should say that, I think for anybody who has understood the basics of how the government works – which is something that you have been trying to educate people about for, it seems, decades at this point — is that the government creates money. It doesn’t need to get money from anywhere; it creates the money. It doesn’t need to tax people to get the money, it just generates the money itself. And so, that’s the foundation of silliness, that we’re worried about where the U.S. government is going to get the money to pay its bills from.

And then, these entire mansions of silliness are built on top of that foundation, and all of these methods are silly. Even if they may become necessary, it’s ridiculous, because they’re built on this foundation of just being ridiculous to start with.

But, in any case, you mentioned these various methods. What is the order that people generally believe you would try these in?

SK: Well, it will differ, the answer will differ depending on who you ask. And even legal scholars, there are differences of opinion about which one to invoke first. And, for some people, some of them are not defensible; for other legal scholars, you could do all of them.

I think I’m very influenced by the arguments of a colleague, Rowan Gray, who is a law professor at Willamette. And Rowan says, and others do as well, that you’re running a risk if all you do is invoke the 14th Amendment, because you’re saying, I have no other options, I’m just going to ignore the debt ceiling limit, and continue to spend as I am required to do under the law.

And the problem is that you’re violating a statute. You are supposed to do both things under the law. You are supposed to spend the money that Congress has authorized and appropriated, you’re on the hook for the spending, and you’re supposed to spend it under the law. And you’re not supposed to issue the kinds of instruments that you normally would issue to facilitate that spending. That is a statute, so you’re not supposed to violate that.

Rowan argues you would only invoke the 14th as a standalone if you had no other options. And so, there are legal scholars out there — Rowan is one — who say, because you have other legal ways to top up the Treasury’s general account, including the coin, consols, premium bonds, because you have other ways to facilitate the spending without ignoring the debt ceiling limit, you should exhaust other options before invoking the 14th, so that you don’t run the risk of invoking the 14th, and then the courts get involved and say: “No, you can’t ignore the debt ceiling. You could only do that if there was no other option available to you.”

JS: Okay, so let’s go through these other options in a little more detail.

You mentioned minting the platinum coin, which, like, when I first heard about this it seemed so preposterous, that I could not imagine that the U.S. government would ever do it. But, in fact, it does seem to be lawful. What is the law here, and how did this happen?

SK: So, the platinum coin is an option, because of the 1997 Coinage Act, and former director of the U.S. Mint Philip Diehl had a very big hand in drafting the legislation that includes this provision that allows the Mint to issue proof-platinum coins of any denomination it chooses. It’s got to be platinum though, that’s the trick, it has to have platinum content. And, beyond that, the Coinage Act does not specify any limit on either the number or the denomination of the coins that can be created.

So, the Mint is already making coins. That’s where we get pennies, and nickels, and dimes, and quarters, and, you know, commemorative coins. You’ll remember those quarters that came out some number of years ago that had each state on it; that’s Philip Diehl. And he had this idea that he was going to find a way to issue coins that would be collector’s items, commemorative coins, things that other countries would want to invest in, bullion coins and so forth. And what it costs to mint the coin, or to manufacture, I should say, the coin. And then there’s the face value of the coin.

And so you’re reaping seigniorage, which is, essentially, revenue, from the difference between what it costs you to make or manufacture the money instrument and its face value. And so, what people will pay for it. So, we have this provision, because it’s in the Coinage Act, that would give the Mint the ability, and then through the Treasury Secretary, to instruct the Mint to strike a platinum coin. We could put any face value you want on it. You always hear “a trillion,” it could be a half a trillion, it could be, you know, two half-trillion dollar coins, it could be ten $1 trillion coins; as I said, there’s no limit on either the number or the denomination. It is at the discretion of the Treasury Secretary.

And so, you manufacture this coin, and you deposit it into the Treasury’s general account at its bank, its fiscal agent, the Federal Reserve. The Fed credits the account of the Treasury, and you carry on spending without breaching the debt ceiling limit, and without missing a single payment, so you make good on your commitment under the law to spend as instructed by Congress.

JS: Right. And, as they say, part of what was always preposterous to me when I was reading about this was something that you’ve mentioned; there are no limits to the denomination, there are no rules about anything. Like, who’s going to be on the coin? It could be George Washington, but he has three heads, you know? Like, it’s anything at all that people want it to be.

And so, just to explore the strange machinations of this a little further: like, what happens? They, like, walk the coin over to the Fed? How does that work?

SK: Well, so, just to be clear, there are limits. I mean, it does have to be a proof-platinum coin, so it has to have a bit of platinum in it, and you have to manufacture it in a specific way. Those are technical details, but the bigger point is that there aren’t limits on the denomination or the number of coins that you can make this way.

So, how does it get over there? I think Philip Diehl has explained this, and I don’t know that I recall exactly what he said would have to happen. But I think, you can imagine, it’s a pretty high-value coin, so probably, you’re not going to just put it in your pocket and walk from Treasury down to the Federal Reserve. I imagine there would be some security involved, and a lot of coordination ahead of time between the Treasury and the Fed.

But it would physically be transported from the Mint to the Federal Reserve, and you would have the account marked up. The balance in the treasury’s general account would just suddenly increase by a trillion dollars, let’s say.

JS: And so, an important issue here is, like, does the Fed have to accept this money and put it into the Treasury Department’s account?

SK: Well, again, it depends who you ask. If you ask the Secretary Treasury, Janet Yellen, she may say that she’s not certain that the Fed would accept the coin. In fact, that’s what she has argued. When she’s been asked about the coins, she says, “Well, I don’t know that they would take it. In fact, I think maybe they wouldn’t take it.”

That’s rather hard to believe. I mean, the Federal Reserve already credits the Treasury’s general account with seigniorage revenue. I mean, at the end of the day, the Fed is the government’s, the Treasury’s, fiscal agent. And I think acting in its capacity as fiscal agent to the Treasury, it would, in all likelihood, not refuse to credit the account.

And, you know, Jerome Powell, the Federal Reserve Chair’s been asked this question, everybody’s getting asked about the coin, right? So, what would you do? Would you mint the coin? Would you accept the coin? They’ve answered all of these questions. And Chairman Powell, he doesn’t say, we would accept it, he doesn’t say, we would not accept it. What he does say is, “We are the fiscal agent.” And I think what he’s effectively saying when he uses that term is, you know — it would be like, when you go to your bank and you have a legal deposit, you can expect your bank to credit your account.

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JS: All right. So, these are some of the methods that could be used to deal with Congress not passing an increase in the debt limit. What are the reasons why it would be so important to find some way of dealing with a lack of an increase in the debt limit? Like, what would happen if the Treasury didn’t have any options?

SK: Well, in some respects, we don’t know how to answer the question, because we’ve not defaulted before. But I think we can say some pretty general things about the kind of financial chaos that it would set up if, suddenly, millions and millions of payments that were scheduled to be made by the federal government weren’t made.

You know, every dollar that’s spent by the government is received by someone, right? There’s someone on the receiving end. And people are counting on those dollars, whether they’re expecting them in order to be able to meet their own debt payments; credit card payment, rent, mortgage, buy food, fill a prescription. Just imagine what it would look like in a world where millions and millions and millions of payments that were supposed to go out didn’t go out.

Government is defaulting on obligations. The system is not set up to keep track of which government instruments were defaulted, which were not defaulted. What happens if you try to go back later on and say, “Oh, we’re going to not default in the sense that you never get paid. Eventually you’ll get your interest and principle because you’re a bond holder. We’ll figure it out later on.”

I think that people who are thinking about this for even ten seconds are saying, you know, we don’t actually have a system that’s set up to allow us to do that. And so, this cavalier attitude that some Republicans have taken about, “Well, it would be a technical default. It’s mostly just a pause on payments, and then they would restart, and the world wouldn’t really spiral downward, financial markets, global…”

U.S. treasuries are the most important financial instrument in the global financial system. They’re at the center of the financial world. And people who’ve given this any real thought at all, I think, have very quickly come to the conclusion that the dominoes would start falling. And, you know, there isn’t a point at which you say, oh, we can just sort of contain the damage.

I think I said in another interview once before, it’s not like, you know, you burn part of the house down and you say, well, we’re going to lose the spare bathroom and the guest bedroom, but the rest of the structure will be okay. It will just rip through the system in ways that touch virtually everyone.

And that’s the thing. I think people are imagining that, somehow, this is not really a big deal, and even if the government does end up defaulting, it’s not going to impact my life. This is something that somehow hits people I don’t know, hits investors. I’m sort of separate and distinct from all of the trauma that would unfold here.

And I just don’t see it that way at all. It would bleed through the financial system, and the payment system, and the lives of not just millions of Americans, but people all over the world.

JS: Yeah, I think that it certainly would have terrible effects that are predictable. It yanks tons of money out of the economy, and suddenly people can’t pay for all the things that they need to pay for every week, every month. My impression is also that the international financial system is so complex that literally no one can predict with any kind of certainty about what something like this would do, and that the system would begin to break and leak in all kinds of ways that, right now, are very difficult to foresee.

And, you know, my understanding is that a lot of financial institutions around the world, they have regulations that require them to hold debt that has a AAA rating. And that U.S. government debt is one of the first and foremost kinds of assets that places like that would hold. And so, what happens if the U.S. stops paying on debt like this, and the debt gets downgraded, it’s no longer AAA? And, all over the world, these places would have to get rid of the U.S. government debt and find something else.

So, who knows? Who knows what would happen? And you would find banks imploding in Singapore, where you couldn’t predict that before. But it would happen.

SK: Millions of job losses, very deep recession. I mean, these are the kinds of things that people, analysts, whose job it is to try to come to terms with what would the fallout actually look like. This is the kind of stuff that people like Mark Zandi at Moody’s Analytics, for example [do]. He will put numbers to this kind of stuff and tell you, we’ll go into a recession, and there would be millions of jobs lost as a consequence.

And so, yeah. It is kind of unimaginable. Which is, frankly, why I’ve been saying for a long time, I just don’t think it’s going to happen.

JS: Yes. And so, that is a key question that I was hoping that we could engage in some informed speculation about. You may have heard people using the analogy in the past, that Republicans would never actually force this to happen. Like, at the last moment, they would always come to some kind of agreement because, in some sense it, was like somebody holding a gun to their own head and saying, “Give me everything I want, or I’ll shoot.”

Because it would, first and foremost, it would be terrible for everyone. Lots and lots of people on earth, lots and lots of people in America, but it would damage the corporate and financial interests that they are often directly representing. And I think that was true in the past, that they would never truly contemplate something like this happening.

But my, as I say, speculation — but hopefully informed by something — is that things have changed. And, first of all, as you were just saying, they have persuaded themselves that shooting themselves in the head is not going to hurt that much. And, secondly, we are sort of conjoined twins, right? We’re connected to them. And they are capable, I think, of hurting themselves very deeply, but it’s going to hurt us a lot too.

SK: So, it’s interesting, because there are reports that Secretary Yellen did attempt to appeal to, let’s say, Wall Street, right? Big investment banks and so forth. And tried to get them to be more vocal, and sort of say, “We are really worried, and we want a clean increase in the debt ceiling limit. Don’t play games. No hostage taking. Just do what you did three times under the prior administration. Vote for a clean increase in the debt ceiling, and kind of bring Wall Street on side, and get them to help in that effort.”

And I think that didn’t happen, and one possible reason it didn’t happen is because the rhetoric has been, from the administration, that they are thinking about ways to prioritize payments so that, in the event of a default, you’re not defaulting on the obligations to pay interest and principle to bondholders. You may default on — or delay payment, which I think is a default — to seniors, to hospitals You know, you’re supposed to make reimbursements for Medicare, and so forth, and so on. Maybe you don’t meet those payment obligations on time, but you continue to pay the bondholders. And maybe that explains why there isn’t more anxiety and uproar from investors about where we are today, you know? Days away from this so-called X-date.

But the other thing you said, I think it’s worth saying, to say that Republicans would be forcing the default. I’ll go back to what I said earlier in the conversation, which is, Congress is instructing the executive branch to do two things. It is instructing the Executive Branch to spend, because it passed legislation, and the government is on the hook to spend money that’s appropriated by Congress. So, it’s got to do that. And, if it refuses to raise the debt ceiling limit, it is saying to the Executive Branch, don’t issue those instruments you would normally issue to facilitate the spending that you are legally obligated to undertake.

And so, I think that puts the ball in the court of the executive branch, and any default, then, is not so much Republicans pushing the country into default, because there are these other options available. You don’t have to default.

So, I think we really have to start thinking about it more as Congress saying to Treasury, effectively challenging the Treasury Department: “Find another way to do it.”

JS: Yeah, that’s right. And I think it is important for people to understand that the consequences that we’ve been talking about would be ones that, first, would be caused by Republicans not being willing to raise the debt limit without catastrophic cuts to government spending, but also, it would be the fault of the Biden administration.

And so, I would like to engage in some informed speculation, if we can do so, about what they’re thinking. Because I have to say, viewed from the outside, it is absolutely inexplicable. Ideally, we’d be able to go back in time 30 years and get the Democratic Party to stop constantly talking about the terrible danger that the federal debt poses to us and our children. Because, number one, that’s not true, and number two, they’ve sort of put themselves in the position where they’re the party of cutting spending, whereas the Republicans are always willing to spend as much money as they possibly can when they’re in power.

And so, we can’t go back in time 30 years, but how do you see their strategy, or what do you see their strategy as having been, and what should they do now, given that we’ve gotten to this place?

SK: Well, I don’t think they have a strategy. I think they were just very much hoping that, somehow, there would be a willingness on the part of Republicans to work in a bipartisan way, that he would get the same sort of treatment that Donald Trump got. Just give me the clean debt ceiling increase. If that was the calculus, that was certainly a very mistaken one. And I think a lot of people saw well in advance that that would be a big mistake, not to plan for contingencies where the debt ceiling was weaponized, where what was on offer was something so unacceptable to Democrats that they were going to be backed into a corner where they end up where we are today, which is this hostage taking situation.

Republicans definitely feel right now like they have the upper hand in this, and I think they do have the upper hand in this, because the White House is not signaling that there is any plan B, that there is an escape hatch, that they are prepared to explore some of these other options. They’re negotiating, where they started off saying, “We’re not going to negotiate an increase in the debt ceiling. We want a clean increase.” And Republicans said, “Well, you’re not going to get that. So, let’s start negotiating.”

And what you hear every day, multiple times a day, is House Speaker Kevin McCarthy going on television, and saying: How many days, keeping track, how many days, the White House refused to engage on this. And he’s out there saying: They waited until virtually the last minute to come to the table, and now here we are, we’ve put forward a plan. The House has passed a bill to lift the debt ceiling, and all we have to do are these series of very reasonable things. This is what McCarthy’s saying, right? “Very reasonable things.”

And I think they’re starting to sound persuasive to the American people. You’ll see polls out there that say — You know, people don’t know the specifics, so they hear “deficit,” they hear Republicans have a plan to cut spending and get control of the government’s finances, and they’re prepared to avoid default and all of this. And the way that it gets presented through the media and so forth is that there’s this somewhat reasonable offer on the table, and that the administration, if it doesn’t like bits and pieces of it, should be negotiating. And that surely the two sides will come together and will end up with some kind of bipartisan agreement to lift the debt ceiling limit, and I suspect that that’s how this will play out.

Although, you know, I don’t discount the possibility that we’re so close now to this so-called X-date that there may not be enough time to actually get the legislation drafted. There are questions about what would happen in the Senate. So, I still think a default is something that’s possible, I just — I guess my instincts tell me that, when push comes to shove, something will be done.

If they need a bit more time, maybe they extend the debt ceiling, cleanly for a few weeks. Or I don’t know what ends up happening, but I do think it’s a huge problem, in terms of the way that the White House and Treasury have commented on the viability of different options for months now.

People will say, “Well, Democrats should have taken advantage of the option to raise the debt ceiling on their own, when they could have done so through reconciliation or something.” That was not ever in the cards. You had people like Senator Manchin who did not want to do that, [who] wants to be able to negotiate some spending cuts and deficit reduction in order to increase the debt ceiling limit.

So, I don’t think that was ever really in the cards for Democrats. And so, we are where we are.

JS: Yeah. And where we are is a place in which the Democratic Party’s story makes no sense whatsoever to any human being. People hear Biden, having said that getting rid of the debt limit — which is what, obviously, we should do — would be irresponsible. But, as you say, they didn’t raise it when they controlled power, either recently or further back in the past.

And, also, the Democrats cannot stop talking about how our debt is a dangerous problem, and we must do something to address it. And, also they won’t negotiate over the debt limit with the Republicans, except they will.

So, it is, I think, maddening, and it’s probably particularly maddening to you. Because, certainly, my understanding of how the world works, how federal spending works has been wrenched around — maybe not 180 degrees, but 170 degrees — by reading your book “The Deficit Myth,” and also just thinking about this, and realizing…

Well, why don’t you tell us about Modern Monetary Theory, and what its implications are for deficit spending in general, and the government’s control of public money.

SK: All right. Well, let’s get you the last 10% of the way there.

MMT, or Modern Monetary Theory, is a framework for analysis. It’s an economic framework — macroeconomic framework — through which you can understand how, let’s say, a sovereign currency works. We are not on a gold standard anymore. When people talk about, you know, “Well, where will you find the money to pay for this program or that program?” This is like, a crazy question, right? And yet you hear it all the time. “We have to find the money,” as if you’re out there digging, mining for gold or something in order to pay the bills.

We’re not on the gold standard. We have a fiat currency and we have floating exchange rates. We have a sovereign currency. The federal government, the United States of America is the issuer of our currency, the U.S. dollar. Issues the dollar, the sole legal authority to issue the currency.

The rest of us just use the currency. I can’t create manufactured dollars, right? I can try, but if I do, it’s called counterfeiting, it’s illegal. I’ll end up in an orange jumpsuit somewhere. Businesses can’t do it. State and local governments can’t do it.

So, think back to Covid, right? March of 2020, Covid hits the U.S. in earnest, and millions of people start losing their jobs. Governments, everybody panics. We say to almost all businesses, you can’t be open right now. Only essential things that need to be done, those go on. Everything else, we want to try to basically keep people at home, so don’t go to the nail salon, don’t go to the gym, don’t go to the theater, don’t go to a restaurant, right? All that stuff.

And people said, what in the world is going to happen? If you grind the wheels of commerce to a halt, you’re going to throw, the economy’s going to go into recession. Millions of people are going to lose their apartments, their homes. They won’t be able to buy food and medicine, and so forth.

So, the federal government says, don’t worry, right? They passed the CARES Act in March of 2020. $2.2 trillion right out the door. Money for the unemployed, that first round of stimulus checks. Payroll protection programs, you name it. There’s trillions of dollars going out the door, right?

How come they could do that? Why was the federal government able to come up with trillions of dollars when everybody else was crying poor? “I’m running out of money, I’m running out of money, I’m not going to be able to pay my vendors, I won’t be able to pay my landlord. I won’t be able to buy food.”

It’s because the federal government’s not like the rest of us, its budget doesn’t work like a household budget. And that’s what’s so maddening when you listen to Speaker McCarthy. Every single day talking about the federal government’s finances, as if they are akin to our own personal finances. He’s out there talking about how we’ve got a national credit card and we keep charging it up, and then every time we hit the limit on our credit card, we have a big fight over increasing the limit so that we can spend even more irresponsibly. And every household knows that you can’t do that. And he’s tapping into that idea that our government is just like we are.

And MMT is about helping people understand why that’s not the case. Why the monetary system that we have today, what I said is, you know, a sovereign currency, fiat money, floating exchange rate, not a gold standard — which is a fixed exchange rate system — gives the federal government the capacity to spend in ways the rest of us can’t. That Congress can literally write legislation like that CARES Act and commit to spending $2.2 trillion that it doesn’t quote-unquote “have,” right?

It didn’t go around and scoop up $2.2 trillion from taxpayers, and from investors around the world, and China, and everybody else, and then come back and say, “Okay, we’ve got the 2.2 trillion. Now we can tell the world we’re going to spend this money.” No. You write the legislation. If the votes are there, the money will be there. The money is created in the act of spending.

So, MMT is about trying to explain how the monetary system we have today actually works, and the mechanics of government finance, and why the government’s budget doesn’t function like a household budget.

JS: Right. And, as I say, it completely wrenched my perspective on these issues around. But once you have had your head successfully wrenched in this way, then it is just obviously true, it’s just a straightforward description of reality.

And I think you and other people have used the analogy of, like, asking people who run the scoreboard at a baseball game. Like, where are you going to get the points to put up on that board? And it’s just like, “Well, we have as many points as we need.”

SK: Jon, what we’re arguing about right now is, literally, the points in the Treasury’s general account. There is nothing in the account that you and I can grab hold of that we can touch or feel. It’s not physical money, we’re talking about digital entries. Just like when you watch a baseball game, or go to a football game, and the points appear on the scoreboard, nobody’s sitting in the crowd, [looking] up at the scoreboard, and says, “Wow, this team is on fire. They’re scoring a lot of points.” Like at a basketball game, right? And you say, “I wonder if the arena is going to be able to put up more points if the team continues to score. Where are the points coming from? What if they run out of points?”

Nobody has that thought, ever. You don’t look at the scoreboard and say: “Wow, the arena’s really in the hole here, because the teams have all the points, so the arena must be running out of points, or borrowing points from—” we don’t think like that. But, somehow, when it comes to the federal government, we hear these words – deficit and debt and so forth — and we think, wow, if the Treasury doesn’t have the points in its account, it won’t be able to continue to pay veteran’s benefits, and social security, and all the rest of it.

It’s just maddening, because we’re literally talking about an accounting system where, as long as we can just put some more numbers on a spreadsheet called the Treasury General account, then everything is good, and we can all go back to living our lives. But until we figure out how to do that, we have 24/7 drama around the debt ceiling, and default, and what will happen to financial markets, and if they tank, that’s people’s 401ks. And it’s your saving, and what does it mean for jobs? And will millions of people be thrown out of work because we couldn’t figure out how to put some digits on a ledger?

I mean, it’s just frankly insane that humans have evolved, as many millions of years as we have, and we’re so dumb that we cannot figure out something as simple as an accounting solution to an accounting problem. It’s just as ridiculous as it sounds.

JS: Yes, and I think that an indication of what a terrible idea the debt limit specifically is, is illustrated by the fact that, essentially no other country on earth has a system like this. My understanding is that Denmark has some kind of nominal debt limit in its law, but they’ve raised it so high that it’s essentially irrelevant, and that’s that. And then nobody else uses this particular dumb scheme.

SK: Exactly. So, go back to your earlier point, when you referenced President Biden being asked whether the U.S. should even have a debt limit, maybe we should abolish it. He was asked the question, “Would you be in favor of abolishing it?” And he laughed. He said, “no.” “No,” he said. “That would be irresponsible.”

We’re the only country – you just said it — we’re the only country in the world that has a debt limit that works like this and, somehow, doing what the entire rest of the world does would be irresponsible? Are you kidding me? And I will say, you know, it’s not just a moderate Democrat like President Biden. Bernie Sanders, Senator Sanders was asked whether he would be in favor of abolishing the debt ceiling. He said no, for the same reason.

JS: Amazing. And yet, as you’ve quoted, Alan Greenspan, the former head of the Federal Reserve — and, by no means, a fervent liberal, I think it’s fair to say — has said that the debt ceiling should be abolished. Ben Bernanke, also a former head of the Federal Reserve has said that.

SK: Janet Yellen.

JS: Our current Treasury Secretary and former head of the Fed herself.

SK: Yup.

JS: And so, in fact, it is the height of irresponsibility to continue to have it, it’s absolutely preposterous. And yet here we are.

SK: You know, I heard on television about a month ago or so, a Republican House member was being interviewed, CNBC, and I happened to be listening. And he was talking about the debt ceiling limit, and he said, these were his words, “It’s an anachronism, financially.” It’s an anachronism, financially. He understands. But he said, “The reason I like it,” and he said, “I like it. I like it because it periodically affords us the opportunity to do exactly what we’re doing right now. Which is to leverage it, to weaponize it, and to try to claw some money back out of programs we don’t like.”

And so, he was very candid. “It’s an opportunity for us, so I like it. It’s an anachronism, financially.” He knows we shouldn’t have it, don’t need it. It serves no useful purpose, in terms of economics, but he likes it for the political reasons.

JS: Yes. And we’ve taken up a lot of your time discussing this, but I would like to hold onto you for just a little longer, to say that, I see this in a specific historical context, which is that what we’re talking about here is, really, different philosophies about what the federal government should be doing. And they want to use the debt limit as an opportunity to kill off as much of the parts of federal government as they can that they don’t like.

And, you know, people have sort of forgotten all about this, it’s lost to living memory now. But, to me, this does kind of go back to the Great Depression in the 1930s, and what happened in the United States and elsewhere to deal with a worldwide economic collapse, and there were three choices that faced every country where their economies were absolutely dead. People were desperate, and it seemed to a lot of people that human beings simply couldn’t live with capitalism, at least in places with any kind of democracy.

And so, one option would be to keep capitalism, get rid of democracy, which was essentially what fascism was. And they could get rid of capitalism and try to keep democracy, but attempts at that were crushed pretty much everywhere. Or they could try to find some kind of compromise between capitalism and democracy. And that is what happened in the United States; so, the New Deal, at least as I see it.

The New Deal was triumphant for a long time in America. And I’m sure you know the famous letter from Dwight Eisenhower to his brother when he was president, when he told his brother that the federal government cannot avoid or escape responsibilities which the mass of the people firmly believe should be undertaken. And there is this tiny splinter group, of course, that believes that you can do these things, but their number is negligible and they are stupid.

And people like this, who want to get rid of the new deal, they’re still around, they’re still stupid, but their numbers are not negligible anymore. And this is what they mean when Republicans like Steve Bannon, they talk about getting rid of the administrative state. They genuinely sincerely believe the New Deal was a terrible wrong turn in American history, and they want to turn things back in the other direction.

Do you see it like this? Am I missing something?

SK: No. I think that what’s basically a war on what remains of the New Deal and the great society has been an objective of many in the Republican Party for decades. It’s just a slow, steady grind, a whittling away of programs that are part of the social safety net. You know, Medicare, Social Security, obviously the two most important and, arguably, most successful government programs; you can add veterans benefits in there.

But these are wildly popular. Bipartisan, right? Republicans like these programs. Independents, Democrats, these aren’t programs that are easy to go after, which is why they’re referred to as the third rail, right? But they’re always in the bullseye. And, to the extent that we’re talking about trying to find some path to increasing the debt ceiling limit without making cuts to Social Security or Medicare, I guess that’s sort of a triumph in its own right.

But, of course, we’re looking at — the house proposal includes cuts to veterans, Medicaid, nutrition programs for women and infants. Rental assistance, low-income housing, head start programs. Not the military, though.

Those kinds of programs that I think you just described as the best of what we tried to build in terms of income security and so forth, coming out of World War II, and building on programs like that, it’s just been a slow, steady grind to whittle away at what remains of those ideals, championed by FDR and Lyndon Johnson.

JS: Yeah. And so, looked at from a certain perspective, the Republican Party’s behavior makes no sense. Like, why would you get yourself into a situation where so much damage could be caused to so many lives? But, for them, the prize really is enormous, and I think that people do not understand how peculiar and how radical the Republican Party has become.

Like, they genuinely do believe that the New Deal was a disaster, and that the best thing that they can do for America is get rid of it. But they can’t explain that very straightforwardly because, as you say, all of it is extremely popular.

SK: Yeah. I mean, what, are they just sort of shorthanded? “It’s all socialism.” If you have programs like this that serve millions of Americans, Social Security and Medicare and so forth, then you’re turning into a socialist society, right? And they just hide behind the cover of that word. And somehow voters, I don’t know. I don’t have the sense that there would necessarily be huge punishment at the ballot box for doing the kinds of things that Republicans sometimes talk about doing. I don’t know.

There are so many young people. You know, I teach. I used to ask my students, they’d come into the class, and teach economics, and I’d say, how many of you think that Social Security is going to be there for you when you reach the age of retirement? And, over the years, fewer and fewer hands would go up. And it always struck me that this is kind of like they’ve been primed for this along the way, for so many years, hearing about how these programs are unsustainable.

And, really, it’s not just Republicans. It’s both, it’s Democrats and Republicans reinforcing this idea that we can’t afford the kind of society that we want to live in, where we take care of people, where people can retire with dignity. Where, you know, if you lose your job, you have some income support. Where you can expect to have healthcare coverage and so forth. That all of these things are just unaffordable.

And we’ve heard both sides messaging that, you know, tough choices and all that kind of stuff. So, I think it makes the job of those who would like to whittle these programs down into nothing a lot easier, when the rest of us already expect them not to be there in the future.

JS: Yes. I would say that almost all political issues, including this, in the United States, are very much like the Iraq War. Where it was a program that was driven by a faction of the Republican Party, but lots and lots and lots of Democrats — including the current president of the United States, Joe Biden, including Hillary Clinton — were on board with it. And so, it was an obvious disaster from the beginning, if anybody who knew anything about the facts knew where it was headed. And we went there anyway.

And so, I think that we need to be very cognizant of the fact that that is possible. And, especially, now with the bill that the House has passed, if there’s any kind of compromise, this is probably going to require the votes of a lot of Democrats to get it through the House. Like, all the Republicans are not going to vote for it.

So, it’s going to be a bipartisan catastrophe. The Democrats will not be able to point to this and blame anyone because they did it, too.

SK: I think that’s probably the way this ends.

JS: Yes, I do too. And that’s extremely depressing.

Well, thank you for joining us on this depressing, distressing subject. And we would love to have you back at some point and talk to people more about the intricacies of Modern Monetary Theory, because it really does make you realize that we could have a much nicer world. We can’t have a utopia, probably, but life for everybody could be so much better if we just were able to get our minds around the concept of money.

SK: Yup. I’d be happy to come back, and thanks for having me this time.

JS: All right. That was Stephanie Kelton, and that is our show.

Please follow Stephanie Kelton on Twitter and elsewhere and, if you haven’t yet, read her book, “The Deficit Myth.” It can change your life like it changed mine.

Deconstructed is a production of The Intercept. Our producer is Jose Olivares, our supervising producer is Laura Flynn. The show is mixed by William Stanton. Our theme music was composed by Bart Warshaw. Roger Hodge is The Intercept’s editor-in-chief, and I’m Jon Schwarz, a senior writer at The Intercept.

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So, that’s Deconstructed’s quiet storm. We’ll see you next week.