When Doves Get Hawkish
James Keenan
On my Substack blog, Political Economy Watch, I often have to deal with the nonsense perpetrated by elite journalists covering fights over the federal budget, budget deficits and the national debt. Most of the time, the guys on the business beat at the Washington Post, the New York Times and so forth are content to quote the "expert" deficit hawks at the Committee for a Responsible Federal Budget or the Peter G. Peterson Foundation. Less often do we hear from the so-called "deficit doves" -- the economists who (at least ten or twenty years ago) would argue that federal deficit spending is called for during recessions but during surpluses "we" should run budget surpluses to fend off inflation and start paying off the national debt.
My attention was therefore caught by a front-page article in the New York Times last week by Joe Biden's long-time economic advisor, Jared Bernstein: "Biden’s Chief Economist: The Chart That Convinced Me Our Debt Is a Serious Problem". In this article Bernstein announces:
"I, like many other longtime doves, am joining the hawks, because our nation’s budget math just got a lot more dangerous."
With the passage of Trump's OBBL budget and funding bill, Bernstein says that "... we are inviting a debt shock, a kind of crisis that periodically hobbles lower-income and developing countries." (Emphasis added)
An example of a "dangerous event" would be "lenders suddenly insisting on much higher interest rates .... [T]he interest rate our country pays on its debt has increased sharply, driven in part by government spending during the pandemic and by higher inflation." Factors leading to higher interest rates, per Bernstein, include tariffs and related uncertainty; OBBL increasing the debt load; and higher debt/GDP ratios.
Bernstein makes reference to a report he recently co-authored with Adam Shaw and Daniel Posthumus at a Stanford think-tank, "The US budget math is looking dangerous". This report, in turn, is methodologically an extension of a 2023 book by Olivier Blanchard, Fiscal Policy under Low Interest Rates. We'll get to the Bernstein-Shaw-Posthumus (B-P-L) report in a moment. First let's quote Bernstein's Times article one more time:
"The sustainability of our nation’s debt is determined by three variables: the size of our annual deficits, the rate of interest on the debt, and how fast the economy is growing. As shown by Olivier Blanchard, one of the most influential thinkers in this area, a government can sustain modest budget deficits so long as its economy is growing faster than the interest rate on its debt."
The crucial term there is sustainability. The deficit hawks are forever squawking that our deficit spending is UNSUSTAINABLE!, but they're always vague on where exactly that unsustainability actually lies. MMT advocates, however, have consistently observed that a country which only issues debt instruments in its own currency can never be forced into default. Japan has long survived with a higher debt/GDP ratio than that of the United States.
So when I saw mention of "sustainability," I wondered how Bernstein was going to define or measure it. Apart from the quotation above, he doesn't do that in his Times article. So let's turn to the B-S-P report.
B-S-P on the Sustainability of Budget Deficits
The B-S-P article, to its credit, acknowledges that what deficit hawks have typically meant by the "unsustainability" of federal deficits and national debt is murky, at best. Extending Blanchard's methodology to cover the years since 2021, they write:
"We show, for example, that the real interest rate, r, has risen sharply since the end of his analysis period (2021) and is now roughly equal to the growth rate, g. While we are appropriately humble about where r goes next, should this equality of r and g stick or worsen, the implications for debt sustainability are considerably more dire than if r were to revert back to its earlier, negative trend."
"All of which leads us to conclude that this time does appear to be different, that the moment deserves concern not just from the traditional hawks but the broader community of economists beginning to sound the alarm. We join a growing chorus who worry that the probability of a debt shock has risen and offer thoughts drawn from our own results and those of others as to what should be done."
B-S-P acknowledge: "It would not be credible to argue that a specific debt ratio or debt-service level is de facto unsustainable."
They propose to ask: "How heavy a fiscal lift would be needed in terms of revenue increases and spending cuts to stabilize the debt ratio?"
MMTers will quickly note that B-S-P are starting from the assumption that stabilizing the debt/GDP ratio can be and ought to be a policy target. MMT argues that the flows involved in government spending, taxation, and national production -- the things that ultimately go into the calculation of the debt/GDP ratio -- are so variable that that ratio is effectively not targetable. MMT further draws upon the Functional Finance tradition to argue that the proper policy targets are (a) the real needs of the population; and (b) the impact that taxation has upon inflation and the distribution of income.
B-S-P call for a focus on "[t]he holy trinity of debt stability: growth, interest, and primary balances[.]" But they do acknowledge that:
"... our definition of debt ratio stability says nothing about the actual level of the debt ratio, only its change over time. That is, debt can be stable at a ratio of 50 percent, 100 percent, 200 percent, or higher."
They concede:
"[W]e know of no credible arguments that any specific debt level is inherently unsustainable. As we noted, many countries, such as Japan, maintain high debt ratios for long periods of time."
"The level of the debt ratio, however, does matter in some respects. At a given interest rate, the higher the debt ratio, the higher the total debt service costs. And high debt service costs can lead potential creditors to assume higher risks when considering investing in sovereign debt, a feedback effect that pushes up the rate of interest. This implies an endogeneity between rising debt levels and the interest rate on that debt.
"A common rule of thumb is that an added point on the debt ratio raises the interest rate on government debt by one to three basis points."
It's not clear where they get this rule of thumb. Do any readers know whose thumb this is?
B-S-P present the rudiments of a mathematical model. If you're interested in the details, read their report.
"The (r – g) term has been highly scrutinized in research on debt sustainability. In this brief, we also focus on s, the primary surplus or deficit, as we expect the latter to become increasingly negative in coming years, posing a credible threat to future sustainability. We will also look at s to show the magnitude of adjustment needed to correct the fiscal path risks being outside the historical range."
So as I read B-S-P, they're saying that the primary balance (the size of the federal deficit or surplus) is one of the variables determining "sustainability." As this article proceeds, B-S-P increasingly tend to assume that there is some point at which sustainable becomes unsustainable.
"The formulas also suggest that if r>g in the long run, meaning borrow rates outpace growth rates, the government must run primary surpluses to keep the debt sustainable. The larger the debt, and the larger (r – g) is, the larger the surpluses must be. Again, this is intuitive: If growth is insufficient to service the debt because g<r, then government must save elsewhere. Conversely, this implies that if r<g, the government can run primary deficits without fearing a debt spiral. However, that outcome is less comforting than it sounds. While the debt ratio won’t explode with r<g, it can still relentlessly climb."
B-S-P, perhaps to their dismay, find themselves close to agreeing with Larry Summers:
"The recent jump in r partially explains why, as Summers puts it, the U.S. may be moving from the green-light region to the red-light region in terms of debt sustainability."
"Another source of pressure on debt sustainability comes from the fiscal path implied by the 2025 budget bill recently passed by congressional Republicans, particularly regarding its impact on higher primary deficits and interest rates."
To be fair, B-S-P do consider reasons why sustainability risks may not be higher, e.g., the unpredictability of Trump's tariff warfare might vastly diminish. "It is clear, however, that the likelihood of debt service requiring historically unprecedented adjustments in the primary balance is higher now than in recent decades."
What is to be done?
B-S-P throw shade on the past several decades worth of deficit-limitation measures: the debt ceiling; Gramm-Rudman enforced spending constraints; rating agency downgrades; "lines in the sand" more generally.
"The implications of these changes recall the end of the 1995 Ball et al. paper titled “The Deficit Gamble,” wherein they compare disregarding an unfavorable fiscal outlook to homeowners not purchasing fire insurance on their homes. Though homeowners can raise their near-term living standards by failing to insure against the low-probability event of their house burning down, it is a risky bet. We argue that recent evidence suggests the house is more fire prone than it used to be and the probability of a fire has gone up."
Their own policy recommendations, however, seem terribly vague:
"Come up with specific “break-glass moments” that would force a response; calibrate fiscal adjustments that respond to these triggers; and work with policymakers to set up binding responses to these crises."
B-S-P Decline to Go Where MMT Has Trod
They relegate the following observation to a lowly footnote:
"Countries that borrow in their own currencies, such as the United States and Japan, can clearly maintain higher debt-to-GDP ratios than those that borrow in foreign currencies. More in-depth analysis of this phenomenon lies outside the scope of this piece."
Along the Same Lines
Want to read more on the deficit-doves-getting-hawkish lines? B-S-P cite an article along the same intellectual lines by Rogé Karma, a former aide to Abundance-bro Ezra Klein, in The Atlantic, May 23, 2025: "The Debt Is About to Matter Again: When interest rates outpace growth, very bad things can happen.".
"When r remains higher than g for a sustained period of time, a vicious cycle emerges. Rising debt-servicing costs force the government to borrow more money to make its payments; investors, in turn, demand even higher interest rates, which pushes debt-servicing costs even higher, and so on."
"As more and more of the government budget is diverted to finance ever-growing debt-servicing costs, less room will be left to fund key social programs and productive investments; higher interest rates will mean less business investment and slower growth; and the government will be less capable of responding to a future economic crisis that requires heavy spending."
Karma's use of diverted in the paragraph above implies that spending on interest payments is crowding out "key social programs and productive investments ..."
"If, however, the debt snowball were to gather momentum quickly, the damage could be far worse. Investors might conclude that U.S. debt is no longer a safe investment, causing the equivalent of a bank run on the Treasury market as investors rush to sell their bonds for cash." He claims these fears are shared by Adam Tooze and Mark Zandi.
Jay Mills
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Andrew Bunker
To view this discussion visit https://groups.google.com/d/msgid/modern-monetary-theory/C82B5279-1423-42B8-A8E4-8315E982BFD8%40gmail.com.
Jay Mills
James E Keenan
> Yes! Andrew:
>
> maxresdefault.jpg
> Randy Wray Congressional testimony highlights <https://youtu.be/CaP2G_daig8>
> youtu.be <https://youtu.be/CaP2G_daig8>
>
> <https://youtu.be/CaP2G_daig8>
> Best,
>
> Jason
>
>> On Jul 15, 2025, at 8:22 AM, Andrew Bunker
>> <andrew.tho...@gmail.com> wrote:
>>
>>
>> Yes, thank you Jim!
>>
>> There was a House Committee hearing in Nov. 2019 where Blanchard and
>> Wray gave testimonies on public debt sustainability. I can't find the
>> recording of the whole hearing, but here is a PDF of Wray's written
>> testimony on the topic:
Jay Mills
Best,
Jason
> On Jul 15, 2025, at 8:58 AM, James E Keenan <jke...@pobox.com> wrote:
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Warren Mosler
Galbraith/Wray/Mosler submission for February 25
This is the paper being presented next week in DC.
Please distribute.
Comments welcome!
This is how it begins:
Comments on the FASB Exposure Drafts relating to “Comprehensive Long-term Projections for the U.S. Government (ED 1)” and to “Accounting for Social Insurance. (ED 2)”
Testimony Submitted by:
James K. Galbraith, Lloyd M. Bentsen, Jr., Chair in Government/Business Relations, Lyndon B. Johnson School of Public Affairs, The University of Texas at Austin, Austin
TX 78712 and Senior Scholar, Levy Economics Institute.
L. Randall Wray, Professor of Economics, the University of Missouri-Kansas City, and Senior Scholar, Levy Economics Institute.
Warren Mosler, Senior Associate Fellow, Cambridge Center for Economic and
Public Policy, Department of Land Economy, University of Cambridge, and Valance Co., St Croix, USVI.
Date: February 25, 2009
In this testimony we supplement our earlier letter, which responded to specific questions on the first exposure draft. Here we set out general principles of federal budget accounting, and then we offer specific comments on the proposed reporting procedures in both of the exposure drafts.General Principles of Federal Budget Accounting
Even though some principles of accounting are universal, federal budget accounting has never followed and should not follow the exact procedures adopted by households or business firms. There are several reasons why this is true.
First, the government’s interest is the public interest. The government is there to provide for the general welfare, and there is no correlation between this interest and a position of surplus or deficit, nor of indebtedness, in the government’s books.
Second, the government is sovereign. This fact gives to government authority that households and firms do not have. In particular, government has the power to tax and to issue money. The power to tax means that government does not need to sell products, and the power to issue currency means that it can make purchases by emitting IOUs. No private firm can require that markets buy its products or its debt. Indeed taxation creates a demand for public spending, in order to make available the currency required to pay the taxes. No private firm can generate demand for its output in this way. Neither of these statements is controversial; both are matters of fact. Nor should they be construed to imply that government should raise taxes or spend without limit. However, they do imply that federal budgeting is different from private budgeting, and should be considered in its proper, public context.
While it is common to regard government tax revenue as income, this income is not comparable to that of firms or households. Government can choose to exact greater tax revenues by imposing new taxes or raising tax rates. No firm can do this; even firms with market power know that consumers will find substitutes if prices are raised too much. Moreover firms, households, and even state and local governments require income or borrowings in order to spend. The federal government’s spending is not constrained by revenues or borrowing. This is, again, a fact, completely non-controversial, but very poorly understood.
The federal government spends by cutting checks – or, what is functionally the same thing, by directly crediting private bank accounts. This is a matter of typing numbers into a machine. That is all federal spending is. Unlike private firms, the federal government maintains no stock of cash-on-hand and no credit balance at the bank. It doesn’t need to do so. There are surely limits of wisdom and prudence on federal spending, as well as numerous checks, balances, and self-imposed constraints, but there is no operational limit. The federal government can, and does, spend what it wants.
Tax receipts debit bank accounts. So does borrowing from the public. These are operationally distinct from spending. There is no operational procedure through which federal government “uses” tax receipts or borrowings for its spending. If, perchance, one chooses to pay taxes in cash, the Treasury simply issues a receipt and shreds the cash. It has no need for the income in order to spend. This is why it is a mistake to look at federal tax receipts as an equivalent concept to income of households or firms.
As we discuss below, federal government spending has exceeded tax revenues, with only brief exceptions, since the founding. There is no evidence, nor any economic theory, behind the proposition that federal government spending ever needs to match federal government tax receipts over any period, short or long. The deficit per unit time is the difference between taxing and spending over that time. To repeat, the taxing on the one hand and the spending on the other are operationally independent. Any reasonable observer should conclude that federal government spending is not, and need not be, dependent on, constrained by (or even related to) tax revenues in the way that the spending of households or firms is related to their incomes.
The difference between microeconomic and macroeconomic accounting is also pertinent. An individual household or firm has a balance sheet that consists of its assets and liabilities. The spending of that household or firm is constrained, in a fairly concrete sense, by its income and by its balance sheet by its ability to sell assets or to borrow against them. It is meaningful to say that its ability to deficit-spend is constrained: a household must get the approval of a bank before spending can exceed income, and therefore its borrowing is subject to banking norms. But if we take households or firms as a whole, the situation is different. The private sector’s ability to deficit-spend, to spend more than its income, depends on the willingness of another sector to spend less than its income. For one sector to run a deficit, another must run a surplus. This surplus is called saving – claims against the deficit sector. In principle, there is no reason why one sector cannot run perpetual deficits, so long as at least one other sector wants to run surpluses.
To view this discussion visit https://groups.google.com/d/msgid/modern-monetary-theory/FEB54152-51F8-494F-AACD-E5DC2B056C54%40gmail.com.
Jay Mills
Warren Mosler
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Warren Mosler reacted via Gmail