STAB is the law of the land (plus ponies)

Politicians like to explain budgets as if governments are housewives checking the cookie jar and deciding whether Sunday dinner is going to be roast beef or Hamburger Helper. Aside from the obvious anachronisms—housewife? Sunday dinner?—governments aren’t households. We may get paid and then go grocery shopping, but governments don’t raise taxes and then call Raytheon to order a missile defense system. As economist Stephanie Kelton points out in this LA Times op-ed, they STAB—Spend, Tax, and then if spending outpaces tax revenue, swap the difference for government Bonds.

Consider the recent $700 billion defense authorization. Did we have $700 billion? Nope. “Without raising a dime from the rest of us, the Senate quietly approved an $80-billion annual increase, or more than enough money to make 4-year public colleges and universities tuition-free. And just where did the government get the money to do that? It authorized it into existence.”

Kelton was an economic adviser to the Bernie Sanders campaign. Sanders’ critics tried to boil his appeal down to “free stuff”—free health care, free college, and, in Hillary Clinton’s new book…

BERNIE: I think America should get a pony.

HILLARY: How will you pay for the pony?

The common sense approach is that goodies cost money that we don’t have. But the reality is that once we account for the internal limits of our economy “Congress can always afford the pony because it can always create the money to pay for it.”

The article is lively and fun and a good corrective to that housewife metaphor. But it’s only half right: when government spends more it has to borrow more or tax more, and if taxes stay flat, borrowing, mostly in the form of treasuries, takes money out of the economy just like taxes do. Eventually it comes back, and then some, in interest, but that takes time.

Increased spending can boost the economy and depending on what the money is spent on, can be a way of ensuring that more individuals and families share the wealth. That $700 billion that went to defense could have been much more of a prosperity multiplier if it went to education, infrastructure or human services—and in fact, a benefit of a Massachusetts public infrastructure bank is not just that it will make projects more affordable but that in building and repairing infrastructure we also create decent-paying jobs. In fact, military spending goes mostly to the already rich, where it sits in CD’s, treasuries, or brokerage accounts that don’t mix that much with the real economy, if it doesn’t leave the country altogether. Not to mention all the collateral damage the end product does. Come to think of it, that pony idea isn’t so bad…