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Fiscal Stimulus: Effective Replacement For Monetary Easing?

Published 10/20/2016, 12:10 AM
Updated 07/09/2023, 06:31 AM

Federal Government Budget Deficit and Borrowing 2002-2016

As ultra-easy monetary policies seem to be losing their effectiveness around the world, more economists are calling for more fiscal stimulus. Gaining altitude is the notion of “helicopter money”—i.e., that fiscal authorities should ramp up infrastructure spending with financing provided by the central banks. The problem is that the major central banks have been financing government deficits, which already are quite large but seem to have also lost their stimulative mojo. Let’s focus on the US:

(1) Measuring up the deficit. America’s taxpayers may need to hire a forensic accountant. There is a huge discrepancy between the official federal deficit, which totaled $587 billion through September, and the $1.05 trillion 12-month change in federal debt held by the public over the same period. In the past, these two ways of measuring the deficit have been nearly identical, as they should be. The previous exception was a large divergence in late 2008 related to accounting for TARP.

Apparently, a whole bunch of perfectly legit accounting maneuvers, which have gained currency recently, account for the discrepancy. An expert on fiscal matters explained them to me, but accounting was never my strong suit. Nevertheless, the bottom line is that the deficit is best measured as the change in debt.

(2) Lots of US and foreign helicopters. But wait: There are more accounting shenanigans, as you probably know. While Donald Trump has been trumpeting that the federal debt is $20 trillion, it’s actually $14.2 trillion excluding the $5.3 trillion held by the government itself. However, that’s because the Treasury issues mostly non-marketable securities to government trust funds as a way to plunder their surpluses. There are no surpluses. There are just more IOUs that will have to be covered by more taxes or more borrowing in the future.

But wait: If we consolidate the Fed’s holdings of $2.5 trillion in US Treasuries into the government’s account, then the debt actually held by the public is $11.7 trillion. In my opinion, the Fed’s holdings amount to helicopter money since it has been used to finance some of the deficits. The claim by a few Fed officials in recent years that they haven’t been monetizing the debt is—how can I put this delicately?—an Orwellian distortion of the truth.

But wait: Foreign central banks have also, in effect, monetized some of the US federal debt thanks to the role of the dollar as the leading reserve currency in the world. At the end of September, they collectively owned $2.8 trillion of US Treasuries. We are clearly dependent on the kindness of strangers.

(3) Not shovel ready. The American Recovery and Reinvestment Act of 2009 (ARRA) was supposed to boost the US economy by financing spending on public infrastructure that was presumably “shovel ready.” Apparently, there weren’t many such projects available. Census Bureau data on public construction put in place show that it peaked at a record high of $325 billion (saar) during March 2009 and drifted down to a low of $263 billion near the start of 2014. In August of this year, it was still 17% below the record peak.

Again, we should hire a forensic accountant to see what happened to all the ARRA money before we waste a bunch of helicopter money. By the way, there may already be a shortage of construction workers in the US, so we may need to ask Mexican construction workers to come back if the government actually succeeds in boosting construction.

Value Of Public Construction 2000-2016

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