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Wednesday, February 17, 2010

L. Randall Wray and a bit deeper into Chartalist thinking

We got into chartalism about one inch on Friday's letters podcast. Here is a leading advocate, and here is a follow up post.

The Federal Budget is NOT like a Household Budget: Here’s Why
L. Randall Wray
New Deal 2.0
February 10, 2010

Whenever a demagogue wants to whip up hysteria about federal budget deficits, he or she invariably begins with an analogy to a household’s budget: “No household can continually spend more than its income, and neither can the federal government”. On the surface that, might appear sensible; dig deeper and it makes no sense at all. A sovereign government bears no obvious resemblance to a household. Let us enumerate some relevant differences.

1. The US federal government is 221 years old, if we date its birth to the adoption of the Constitution. Arguably, that is about as good a date as we can find, since the Constitution established a common market in the US, forbade states from interfering with interstate trade (for example, through taxation), gave to the federal government the power to levy and collect taxes, and reserved for the federal government the power to create money, to regulate its value, and to fix standards of weight and measurement-from whence our money of account, the dollar, comes. I don’t know any head of household with such an apparently indefinitely long lifespan. This might appear irrelevant, but it is not. When you die, your debts and assets need to be assumed and resolved. There is no “day of reckoning”, no final piper-paying date for the sovereign government. Nor do I know any household with the power to levy taxes, to give a name to — and issue — the currency we use, and to demand that those taxes are paid in the currency it issues.

2. With one brief exception, the federal government has been in debt every year since 1776. In January 1835, for the first and only time in U.S. history, the public debt was retired, and a budget surplus was maintained for the next two years in order to accumulate what Treasury Secretary Levi Woodbury called “a fund to meet future deficits.” In 1837 the economy collapsed into a deep depression that drove the budget into deficit, and the federal government has been in debt ever since. Since 1776 there have been exactly seven periods of substantial budget surpluses and significant reduction of the debt. From 1817 to 1821 the national debt fell by 29 percent; from 1823 to 1836 it was eliminated (Jackson’s efforts); from 1852 to 1857 it fell by 59 percent, from 1867 to 1873 by 27 percent, from 1880 to 1893 by more than 50 percent, and from 1920 to 1930 by about a third. Of course, the last time we ran a budget surplus was during the Clinton years. I do not know any household that has been able to run budget deficits for approximately 190 out of the past 230-odd years, and to accumulate debt virtually nonstop since 1837.

3. The United States has also experienced six periods of depression. The depressions began in 1819, 1837, 1857, 1873, 1893, and 1929. (Do you see any pattern? Take a look at the dates listed above.) With the exception of the Clinton surpluses, every significant reduction of the outstanding debt has been followed by a depression, and every depression has been preceded by significant debt reduction. The Clinton surplus was followed by the Bush recession, a speculative euphoria, and then the collapse in which we now find ourselves. The jury is still out on whether we might manage to work this up to yet another great depression. While we cannot rule out coincidences, seven surpluses followed by six and a half depressions (with some possibility for making it the perfect seven) should raise some eyebrows. And, by the way, our less serious downturns have almost always been preceded by reductions of federal budget deficits. I don’t know of any case of a national depression caused by a household budget surplus.

4. The federal government is the issuer of our currency. Its IOUs are always accepted in payment. Government actually spends by crediting bank deposits (and credits the reserves of those banks); if you don’t want a bank deposit, government will give you cash; if you don’t want cash it will give you a treasury bond. People will work, sell, panhandle, lie, cheat, steal, and even kill to obtain the government’s dollars. I wish my IOUs were so desirable. I don’t know any household that is able to spend by crediting bank deposits and reserves, or by issuing currency. OK, some counterfeiters try, but they go to jail.
5. Some claim that if the government continues to run deficits, some day the dollar’s value will fall due to inflation; or its value will depreciate relative to foreign currencies. But only a moron would refuse to accept dollars today on the belief that at some unknown date in the hypothetical and distant future their value might be less than today’s value. If you have dollars you don’t want, please send them to me. Note that even if we accept that budget deficits can lead to currency devaluation, that is another obvious distinguishing characteristic: my household’s spending in excess of income won’t reduce the purchasing power of the dollar by any measurable amount.

If you put your mind to it, you will no doubt come up with other differences. I realize that distinguishing between a sovereign government and a household does not put to rest all deficit fears. But since this analogy is invoked so often, I hope that the next time you hear it used you will challenge the speaker to explain exactly why a government’s budget is like a household’s budget. If the speaker claims that government budget deficits are unsustainable, that government must eventually pay back all that debt, ask him or her why we have managed to avoid retiring debt since 1837-is 173 years long enough to establish a “sustainable” pattern?
Roosevelt Institute Braintruster L. Randall Wray is Professor of Economics at the University of Missouri-Kansas City.


  1. Randy

    I have found that the interest payment on the government debt is the biggest problem for government in continuing to raise debt. The more you borrow, the more interest you have to pay, and that reduces the options that you have to spend money where you would like to.

    Servicing debt is a problem. I doubt that you would advocate government borrowing to service debt.

    From your other writing, it appears that you are promoting government debt as an alternative to bank credit as a source of stimulus for employment in the economy.

    However, it appears that government debt does not provide much of as stimulus to the economy. That is because it is financed by the sale of government bonds and those bonds appeared to be purchased by entities other than banks.

    If you look at the graph on the following website:


    you will see that the fiscal deficit does not appear to have any effect on excess demand that leads to current account deficits, except possibly since the GFC. All the demand that generates current account deficits before the GFC appears to have comes from the growth of bank credit.

    As you can see there are problems with bank credit as a source of stimulus.

    I do have an alternative approach to creating demand that generates employment and I propose doing it in such a way that it does not create current account deficits.

    But for the moment, I would be interested in your interpretation of the graph.


    Leigh Harkness

  2. Note:

    this comment appears to have been intended for L. Randall Wray, http://www.newdeal20.org/2010/02/10/the-federal-budget-is-not-like-a-household-budget-heres-why-8230/ is the link to his original post on New Deal 2.0.

  3. Leigh:

    Read the article carefully. Governments sovereign in their currency have no operational constraints on issuing (i.e. "spending") the currency, any more than a stadium has a problem issuing points to teams. Dollars are cyberentries on cyberspreadsheets. "Paying" interest is a matter of changing numbers in columns. The constraints on government spending are political and, if you will, psychological in nature. Fiat currency is non-convertible to specie. It is a totally--I repeat, totally--different entity from specie-back or convertible currency. Most politicians don't get it; the great banks get it very well, but they are not about to disabuse the public of its ignorance, so they can continue to concentrate their wealth, so they play along with the prevailing mindset which assumes the reality is the same as before Bretton Woods, which changed everything.