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Deadly Myth: “Cut spending today to save for tomorrow”

This sounds nice.  Any politician that utters these words is either lying or doesn’t understand how our government fiscal/monetary system operates.  If an economist utters these words they are either lying or incompetent.  It’s time to end the game playing or ignorance.

Warren Mosler covers this deadly myth in his book “Seven Deadly Innocent Frauds”.  It’s DIF #2: “With government deficits we are leaving our debt burden to our children.” 

The myth is based on the flawed idea that somehow current spending will deprive future generations of a standard of living or goods and services.

Oh really.  Check this graph out:

The above graph shows federal budget deficit as a percentage of GDP.  So when has our government ever “saved” for future generations?  Never, because it can’t.  Look at the period of Great Depression/World War II - did that huge deficit/spending deprive future generations of a productive standard of living or economy - hardly.

Think about this: the budget deficit/surplus is an accounting number.  In the very rare instances that federal government did run a budget surplus there was not actually billions and billions of dollars stashed in an account at Treasury Department or Federal Reserve Bank to be used in the future.  It doesn’t work that way. 

Someone may say: “oh yeah, but the less we spend means more money goes to paying down debt.”  First, contrary to what we been brainwashed into believing - federal debt doesn’t finance budget deficits - I will explain that in another story.  Second, but why is paying down federal debt necessarily a good thing.  That government debt is an asset to you and me and that means one less asset earning interest in our portfolio. 

Warren Mosler explains it this way:

Of course, we all know we don’t send real goods and services back in time to pay off federal government deficits, and that our children won’t have to do that either.

Nor is there any reason government spending from previous years should prevent our children from going to work and producing all the goods and services they are capable of producing.  And in our children’s future, just like today, whoever is alive will be able to go to work and produce and consume their real output of goods and services, no matter how many US Treasury securities are outstanding. 
There is no such thing as giving up current year output to the past, and sending it back in time to previous generations.  Our children won’t and can’t pay us back for anything we leave them, even if they wanted to.

Nor is the financing of deficit spending anything of any consequence.  When government spends, it just changes numbers up in our bank accounts.  More specifically, all the commercial banks we use for our banking have bank accounts at the Fed called reserve accounts.  Foreign governments have reserve accounts at the Fed as well.  These reserve accounts at the Fed are just like checking accounts at any other bank.

When government spends without taxing all it does is change the numbers up in the appropriate checking account (reserve account) at the Fed.  That means when the government makes a $2,000 social security payment to you, for example, it changes the number up in your bank’s checking account at the Fed by $2,000 which also automatically changes the number up in your account at your bank by $2,000.

This is simple.  Why are we making simply concepts our enemy?  Is it because difficult concepts (that are flawed) require paid consults and economists to figure them out?

Good luck.