The Great Deficit Scam

(Why Dick Cheney was right that “deficits don’t matter)

First of all, let’s tackle up-front the use of the word “scam,” rather than, say “misunderstanding” or “difference of opinion.” The reason is clear (and more than a little disturbing). The individuals and organizations who most often spread deficit hysteria know very well that it has no basis in economic fact. Their motivation is to intentionally mislead you. Why would they do such a thing? Because they are lobbyists serving the interests of a particular economic class (the very rich).

Like all scams, the Great Deficit Scam, is a transaction between two individuals (or groups). The first group is, of course, the scammers who know the scam is bogus. The second group are the “marks,” the people who innocently buy into the scam. The purpose of this article is to explain how and why the scam works, and how you can avoid it.

The Great Deficit Scam is not just any old scam. In fact, it’s probably the most powerful weapon the 1% has at its disposal to inflict harm on the 99%. Its destructive power is due to two factors: 1) it has a superficial aura of believability, and 2) many well-intentioned and sincere people have succumbed to it.

(For more information about some of the people and organizations behind the Great Deficit Scam, read this:'s_Leadership)

So just what is the Great Deficit Scam?

The basic misconception that lies at the heart of deficit hysteria is the mistaken notion that the currency issuer (the federal government) is equivalent to currency-users (you and I):

What our friend Alan is doing is making a fundamental distinction between the currency-issuer and the currency-user. The currency issuer can never “run out” of the currency it issues. This means it can buy any good or service produced in the private sector, subject to real world capacity and available workers in the labor pool. The government can never be forced into insolvency, nor is it subject to financial constraints in its spending.

The federal budget is simply a spending bill passed by Congress. So where, you might ask, does this money come from?

Here’s the incorrect answer: government collects revenue, stores it in a kitty, then doles it out. That’s not the way monetary mechanics operate for a government with the power to issue its own currency.

The correct answer is that money is created ex nihilo (out of nothing) by the act of government spending (remember it is the currency-issuer or money-creator). The money it spends doesn’t come from taxes.

When government collects taxes, that money is effectively “extinguished.” It doesn’t go anywhere, it isn’t stored — it just disappears.

This is well known to many economists and, especially, to central bankers (like Greenspan).

Consider the logical consequence of this insight. You may find it stunning, perhaps unbelievable. Nevertheless, it is true. So pay attention:

The government does not need tax revenue in order to spend money.

It issues (creates) money, so why on earth would it need some from you, the taxpayer? This is not, by the way, a new insight. Consider this article from 1946:

TAXES FOR REVENUE ARE OBSOLETE by Beardsley Ruml, Chairman of the Federal Reserve Bank of New York.

Quoting from Ruml’s article :

“The necessity for a government to tax in order to maintain both its independence and its solvency is true for state and local governments, but it is not true for a national government. Two changes of the greatest consequence have occurred in the last twenty-five years which have substantially altered the position of the national state with respect to the financing of its current requirements.

The first of these changes is the gaining of vast new experience in the management of central banks.

The second change is the elimination, for domestic purposes, of the convertibility of the currency into gold.”

In a more general sense, any currency-issuer whose currency is not “pegged” to a commodity or another currency is not subject to tax revenues in order to spend. Warren Mosler calls this “soft currency economics” and it is also know as Modern Monetary Theory (MMT) or Functional Finance.

Usually at this point, you will hear an angry retort that goes something like “Why don’t we just print all the money we need?” or “Aren’t you just debasing the currency?”

MMT is NOT saying that governments can spend without constraint. It simply says that spending constraints lie within the real economy itself: actual industrial capacity and labor availability. It’s worth noting that measures of capacity utilization have fallen consistently for decades. It’s also worth noting that labor force participation has tended downward. Taken together, these two facts mean that our economy has a lot of “slack” (that is, it has a lot of ability to produce more than it currently does).

This is a very strong clue that government spending has in fact been woefully insufficient over the decades. We have locked ourselves into a demand-starved economic trap: stagnant wages, low growth, and tremendous cash hoarding at the top. This is the classic description of austerity, and like lowering deficits, austerity accomplishes the opposite of what its advocates publicly endorse.

Politician captured by deficit delusion

The main points:
1) Deficits are irrelevant — they’re not a legitimate policy objective.
2) The government cannot run out of money.
3) Taxes do not fund spending.
4) Spending in excess of tax receipts is not a problem.

So when Orrin Hatch says “we don’t have any money” for CHIP, he is scamming you. We have all the money we need for CHIP, or any other service we ask the government to provide. These are political decisions, not economic ones.

When Paul Ryan says he will address fixing the deficit by reforming entitlements, he is deploying multiple layers of deception to mislead you:

Level 1) The deficit needs fixing (it doesn’t).

Level 2) “Reforming” is a weasel word for cutting.

Level 3) “Entitlements” is a way of framing Social Security and Medicare recipients as mooches, rather than as beneficiaries of a program they have paid into.

This is how the Great Deficit Scam plays out (according to time-tested principles):

Step 1) Propose massive tax cut oriented to big business and the wealthy.

Step 2) Make the false claim that cuts will stimulate job creation and will be “deficit neutral” (an absolute lie).

Step 3) Use the resulting increase in debt as a justification for cutbacks in Social Security, Medicare, Medicaid, CHIP, and other safety net protections. It is couched in terms of “reform.” Such reform is never proposed for favored programs in defense, however.

Step 4) Allow liberal defenders of social programs to fall into the carefully laid trap of buying into deficit framing. They make “responsible” compromises of accepting smaller cuts, in place of larger ones.

Don’t be a schmuck. Don’t be a mark. Reject deficit framing at the outset. Educate yourself in the economic realities.

For those who are interested, an exhaustive economic analysis of the subject of deficits:

Deficit Spending 101 — Part 1

Deficit Spending 101 — Part 2

Deficit Spending 101 — Part 3