What Mitch McConnell Doesn’t Understand, Or Does He? QE Makes Federal Budget Deficits Practically Irrelevant And Non-Problematic.
Senator Mitch McConnell is against increasing federal financial assistance to states, cities, businesses, and the unemployed in dire need through no fault of their own, only due to the economic devastation brought about by the coronavirus. If his reason is not partisan antagonism, it is that he doesn’t want to increase the federal debt which is already enormous. He thinks such debt is very costly to current and future taxpayers, and will cause inflation. He goes so far as to suggest that states simply go into bankruptcy or raise taxes and cut spending to cover their budget deficits. Apart from being heartless and non-patriotic since we’re dealing with Americans’ lives, whether they are Republicans or Democrats, and whether they live in Republican or Democratic governed states, McConnell doesn’t see the extremely negative economic consequences of his suggestions for the entire nation, as they would result in a veritable depression. He reveals a scandalous degree of ignorance in economics and 20th Century American history. He is a reincarnation of Herbert Hoover!
The real problem is that McConnell doesn’t understand QE financing by the Federal Reserve, which would be the way federal financial assistance would be provided, otherwise he would not object to a further big bailout. QE actually does not increase the real national debt, it is cost free to current and future taxpayers, and it is not necessarily inflationary. How is that possible?
QE essentially consists of printed money by the Federal Reserve when it buys Treasury bonds for its own account by electronically crediting the Treasury’s bank account, as Fed Chairman Powell explained in a recent televised interview. QE-financed Treasury bonds do not increase the real national debt since they are held by the Fed, a government agency, which returns the annual interest payments on those bonds to the Treasury and cancels those bonds at maturity or rolls them over indefinitely, thereby avoiding the repayment of those bonds. In essence, QE-financed Treasury bonds are cost free to current and future taxpayers, both in terms of interest charges and capital repayment. They burden neither current nor future generations. They actually end up reducing real government and personal indebtedness by cutting short recessions and promoting economic growth. It is precisely the absence of QE in the 1930’s which resulted in enormous real indebtedness and the long Depression.
This sounds too good to be true for those who do not fully understand economics. Surely printing money is inflationary, it’s for “banana republics”, as the conventional economic wisdom postulates! But, as $3 trillion of QE following the 2008–9 financial crisis proved, printed money is not necessarily inflationary. In fact, over the succeeding 10 years, inflation has remained at historically low levels. The reason is that the $3 trillion of QE printed money never generated excess aggregate demand, the situation of demand exceeding supply, i.e., “too much money chasing too few goods”. With today’s sky-high unemployment and lots of excess production capacity, we can have another round of enormous QE money printing without causing inflation. Such a big QE, if properly calibrated and not excessive (i.e., so as to not cause excess aggregate demand), would only help quickly end the deep recession and bring down unemployment by increasing consumption and preventing bankruptcies. QE is magical in a way, but it is an entirely logical “thinking outside the box”. QE financing represents an enormous advance in economics, though it is not yet fully understood by many economists and certainly not by our politicians.
Returning to McConnell’s suggestion, if states are forced to go bankrupt or raise taxes and cut spending to deal with their budget deficits, the result would be a deepening national recession/depression, just like in the early 1930’s due to President Hoover’s counterproductive fiscal austerity policy. Furthermore, it makes no sense to say that the federal government can be fully bailed out of the Covid-19 crisis by the Federal Reserve’s QE purchases of Treasury bonds, but states, cities, businesses and the unemployed cannot be bailed out on a rational and equitable basis. In fact, the Fed should be QE-financing state and city bonds issued specifically to deal with the coronavirus crisis which increases public expenditures and reduces tax revenues. Better still, the Fed should actually reimburse states and cities the exact amount of revenue loss and extra expenditures they have incurred due to the Covid-19 crisis so that they can avoid issuing new bonds which increase their general indebtedness.
A full understanding of QE would have another enormous national benefit: Republicans and Democrats would understand that using QE appropriately means tax increases can be avoided to finance much necessary government spending, particularly when there is high unemployment and unused productive capacity. In fact, taxes are already too high, and some like long-term capital gains taxes are economically counter-productive (reducing investment and consumption) and not fair (consider those who sell their homes and after taxes have much less money to buy an equivalent new home). Furthermore high taxes increase the use of tax shelters, a serious misallocation of investment capital, hindering economic growth. Clearly, a full understanding of QE financing by the Fed would remove much of the partisan gridlock which has been blocking necessary government spending on infrastructure, education, health care, and defense, all being in the national interest. We would then be able to greatly improve our society and reduce political animus. Of course, increased government spending per se is not a solution, what is required is intelligent, effective spending capable of solving our social and economic problems.
Since a deficient education is the root cause of most of our social, political, and economic problems (such as poverty, all forms of violence including with guns, abuse, police brutality, addiction, unwanted pregnancies, even high taxes), it is of utmost importance that every single American youth receive a truly excellent high school education as a minimum, and that depends on having an ambitious and enlightened public high school curriculum. Critically important high school courses are 1) logic and critical thinking; 2) economics and investing, including explaining why QE-financed tax rebates (not ultra-low interest rates) should be the standard economic stimulus policy; 3) analysis of domestic and world history in great detail from 1900; 4) ethics and empathy; 5) the United Nations Universal Declaration of Human Rights and the history of human rights violations worldwide; 6) introductory law, including Constitutional law; 7) comparative religion; 8) history of art, architecture and design; 9) history of music; 10) psychology, accompanied by “group therapy” and “good parenting” workshops; 11) the major mistakes in economic, social, and foreign policy over the past 100 years and which would have been the correct policies (such course would lead to much better informed voters and politicians, and to much better economic, social, and foreign policy). For students having academic or psychological problems, individual assistance is absolutely necessary, as is lots of homework and study hall.
Ensuring that every single American youth receives a truly excellent high school education is a national interest, not only a state or city interest. Therefore, it deserves full federal funding. To guarantee uniformly high minimum standards, there should be an enlightened national core curriculum and an ambitious national high school graduation exam. We need everyone to understand that the key to our social, political, and economic prosperity depends on well calibrated QE financing and timely QE tax rebates to avoid recessions and high unemployment, to keep taxes low, and to fund essential well-devised programs.
© Edward Sonnino 2020
May 21, 2020
