US budget deficit: nobody cares
The US federal deficit rose to USD984 bn in fiscal year (FY) 2019, a sizeable deterioration from FY 2018. The FY 2019 deficit represented 4.6% of GDP, compared with 3.8% the previous year.
As things stand, it is difficult to see an improvement in budget metrics in FY 2020 and beyond. First and foremost, 2020 is an electoral year, which usually does not bode well for purse tightening. Second, lawmakers are in any case too busy electioneering to concentrate on budget matters in Washington. Third, the key element to watch is rather the denominator – i.e. how GDP growth will evolve given the various fragilities emerging the US economy.
Sentiment towards deficits has been changing in Washington DC, especially since President Trump’s election in November. But we believe a new stage towards espousing ‘loose-loose’ (loose fiscal and loose monetary policies) was reached this year, in part as a result of growing interest in Modern Monetary Theory (MMT). The result is there is increasing consensus around a durably easy policy mix in the US that involves maintaining both fiscal and monetary policies loose.
The pressure to maintain an easy policy mix comes from a wide number of sources, ranging from academics (including the growing cohort of MMT converts) to politicians left and right.
The momentum is now moving to much higher deficits in the coming years, with all major economic players having basically succumbed to the charms of some form of MMT – ranging from converts to MMT ‘light’, who see in recent Fed rate cuts additional room to spend, to MMT ‘purists’ who believe that further institutional steps must be taken to keep growing the deficit. This involves merging the Federal Reserve with the Treasury Department, thus ending the central bank’s independence.
While in many respects the repacking of existing ideas, the emergence of MMT is helping to provide intellectual legitimacy to a political class that has always been more keen on spending than on saving when it comes to election time – in other words, this year, MMT is the spark that lit the DC haystack.