Running deficits can help us in this moment of crisis with COVID\u002D19
For too long we have chosen to use words like “debt” and “deficit” — words that induce anxiety and evoke a strong negative reaction — for something that in reality is quite benign if we think about it the right way. The reality is that virtually everything that we have been taught to think and fear about federal budget deficits and government debt is either misleading, incomplete or just flat-out wrong.
What’s really happening, if we want to be transparent and tell people the truth, is that the government is supplying dollars through its deficit and then allowing people who have those dollars to trade them in for interest-bearing dollars. What I’m arguing for doesn’t depend upon the central bank buying bonds. It’s simply the case that any spending that is authorized by the United States Congress will be carried out by the government’s bank and that happens to be the Federal Reserve.
So, the deficit will shrink on its own, over time. It isn’t something that we need to actively pursue. The limit is in our economy’s capacity to safely absorb whatever spending Congress has authorized. If Congress continues to pass legislation providing too much stimulus as the economy recovers and returns to something closer to full employment, the punishment for that would be inflation.
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