May 10, 2016

by Robert Huebscher

The much-ridiculed plan to build a wall on the Mexican border has dominated the political discourse since Donald Trump proposed it last June. But, according to Stephanie Kelton, we already have a wall and it is very tall and nearly insurmountable. It is the national debt.

Until about a year and a half ago, Kelton was the head of the economics department at the University of Missouri at Kansas City. She took a leave of absence to serve as the chief economist for the Senate Budget Committee, representing the Democrats. Bernie Sanders is the ranking Democrat on that committee, and Kelton has more recently served as his economic advisor for his presidential campaign.

Kelton spoke on April 12 at the 25th Annual Hyman P. Minsky Conference on the State of the U.S. and World Economies at Bard College in New York. Copies of her slides are available here.

“There is a lot of talk about building a wall in the U.S,” Kelton said. “I can assure you we have already built it.”

The belief that the growing national deficit will constrain growth and burden future generations acts as a wall that is a barrier to doing “almost anything sensible,” according to Kelton. It stands in the way of nearly everything policymakers would otherwise do as good economic policy, she said.

Kelton has spoken at several conference for financial advisors (see here, for example). In this talk, she provided the additional context from her work in Washington about how policymaking ignores the economic theories that she – and many others – have articulated.

The gatekeeper of the wall

The congressional budget office (CBO) is the institutional gatekeeper of the wall. That agency, she said, is meant to assure that the federal government behaves in a fiscally responsible manner, by “scoring” legislation and running short- and long-term budget forecasts.

In her work with the Senate budget committee, she met regularly with the CBO to discuss its budget forecasts. During her first several months, she said the Republican majority called five or six hearings to deal with the debt crisis.

What is the CBO telling us? “Budget deficits drive up interest rates and that results in the crowding out of investment,” according to Kelton. That statement is taken as an unassailable fact, she said.

The prevailing doctrine, according to Kelton, is that federal borrowing is not a source of net saving to the non-government sector, but a use of savings. Therefore, more borrowing results in less investment, slower growth and lower productivity. That leaves the government with less revenue and higher deficits – and a higher probability of a fiscal crisis.

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 Image credit: Gage Skidmore | Flickr