Deficits, Debt and Dysfunctional Policy-Making

June 27th, 2011
in Op Ed

stimulus by Elliott Morss


The US government debt is defined as Treasury securities outstanding. At $14.5 trillion, the debt just over 100% of the projected 2011 US GDP. Of course, there is more, e.g. the debt of various Federal government agencies that is not guaranteed by the Treasury. But here, I want to concentrate on another Federal debt – that of the US central bank. The Federal Reserve’s liabilities are now $2.8 trillion.

Both Treasury and Fed “deficits” are used to reduce US unemployment. When Treasury deficits are used, we call it stimulus/fiscal policy. When Federal Reserve deficits are used, we call it quantitative easing (QE../open market operations)/monetary policy.

Follow up:

But there is one critical difference between how these two policies are enacted:

  • a fiscal policy stimulus, either in the form of an expenditure ase or a tax reduction, must be approved by the US Congress;
  • a monetary policy change, such as the Fed buying Treasuries to keep interest rates down, is decided on outside of the political arena by the Fed’s Board of Governors.

The Fed was set up as a semi-independent agency. This was to protect it from political pressure to spend excessively. Today, it is somewhat ironic that the Fed wants more spending while the Republican-led Congress expresses concern about government debts.

In a well-functioning government, monetary and fiscal policies are used in a coordinated fashion to insure near-full employment/with low inflation. But the US government is not a well-functioning government. The Republican-led Congress is worried about the Treasury deficit and is focusing on large expenditure cuts at a time when the economy is far from robust. A fiscal policy stimulus is out of the question. In contrast, the Fed believes more stimulus is needed to keep the country from slipping back into recession.

The following paragraphs document how monetary and fiscal policies have been used recently to get the US out of the global recession. I conclude the article with my own thoughts on what should be done now.

Fiscal Policy

  1. As I reported in an earlier piece, Paulson presented the first 3-page version of the Troubled Asset Relief Program (TARP) to Congress in September 2008. The $700 billion program did not get Congressional approval for almost a month – a long time given the gravity of the situation. It was too long for Paulson and Goldman Sachs, his former company, to wait. So Paulson got Timothy Geithner, then head of the New York Fed, to make an $85 billion loan to AIG, a loan that could and was made by the Fed without Congressional approval. As I indicated in my 3-part series review of TARP, TARP was capped at $475 billion and the Congressional Budget Office now estimates that it will only cost the US taxpayer $25 billion.
  2. In February 2009, Congress approved the $787 billion American Recovery and Reinvestment Act. According to, $483 billion paid out, resulting in 574,013 jobs created. At $841,444 per job created, this does not sound very efficient at creating jobs. And it was not. But keep in mind it that much of the funding went to state and local governments to protect jobs.
  3. At the end of 2010, Obama got Congress to approve another $915 billion stimulus bill.

Elliott-6-27-2011-Deficits-etc-Table-1 Table 1 summarizes stimulus outlays to date. The middle column provides the Congressionally authorized amounts. The right hand column provides data on how things stand today.

So while $2.2 trillion was approved by Congress, the net stimulus effect to date has only been $608 billion.

Monetary Policy

At the beginning of 2007, Federal Reserve liabilities were $1 trillion. By June 2011, they were $2.9 trillion. As Table 2 indicates, the increase came from paying the Crane Stationary Company to print $181 billion in currency notes and by “creating deposits” of $1.7 trillion. In short, the Fed has generated a “deficit stimulus package” of $1.9 trillion, a package more than three times larger than the net fiscal policy stimulus of $607 billion.



Of course, comparing such aggregates can be misleading in terms of effects, so read on.

Comparing the Stimulus Effects of Treasury and Fed Deficits

Fiscal policy job-creation stimuli can result from either reducing taxes or increasing expenditures. There is no guarantee that the recipients of tax reductions will spend what they get. But it is far more likely that lower income families will spend tax reductions than higher income families: poorer people need the money to “put bread on the table”. Increased government expenditures have a much higher probability of creating jobs.

Consider now the “stimulus effects” of the Fed actions by looking at the asset increases in Table 2. The Fed bought a lot of “junk” to shore up the financial system, e.g., more that $1 trillion of Federal agency debt and mortgage backed securities along with $62 billion of AIG “paper”. These purchases probably did very little to create jobs. Instead, its impact was probably to keep the bank collapse from being worse than it actually was.

The Fed also increased its holding of Treasury securities. These purchases have helped to keep interest rates down. But does anyone think high interest rates are in any way a problem? Does anyone think Bernanke believes his actions will help reduce the unemployment rate? I doubt it. I would guess that Bernanke believes the US needs another fiscal stimulus. But knowing there is no chance the dysfunctional US Congress will pass one, he will do all he can to pump up demand.

What is Needed Now

Two things are needed now:

  • The US unemployment rate is 9.1%. There are 14 million unemployed. For the rate to fall 5%, more than 6 million jobs need to be created. Further Federal government expenditure cuts will only make things worse. And further political wrangling over increasing the debt limit is, as the IMF warned, “playing with fire”. An additional stimulus package is needed, with a significant portion of it going to state and local governments to prevent more layoffs. How much? Congress should authorize another $1 trillion in expenditures. If the economy really picks up before all of it is spent, cut it back.
  • Congress is thinking “austerity”. Great. This would be the perfect time to approve a long term austerity plan along the lines laid out by Deficit Commission chaired by Alan Simpson. This austerity transition plan should be launched once the US economy is out of the recession.

Related Articles

Austerity Rather than Stimulus?  Wait a Minute! by Elliott Morss

From Stimulus to Austerity – What Role for Taxes? by ElliottMorss

Devil’s Bargain by William H. Gross

The Great Debate©:  Can Austerity Produce Recovery from the Great Recession? By Dean Baker

We Need to Change our Approach to Public Governance:  A Call for Fewer Uncoordinated Tactics, and more return-on-Coordination by Roger Erikson


Elliott Morss has a broad background in international finance and economics. He holds a Ph.D. in Political Economy from The Johns Hopkins University and has taught at the University of Michigan, Harvard, Boston University, Brandeis and the University of Palermo in Buenos Aires. During his career he worked in the Fiscal Affairs Department at the IMF with assignments in more than 45 countries. In addition, Elliott was a principle in a firm that became the largest contractor to USAID (United States Agency for International Development) and co-founded (and was president) of the Asia-Pacific Group with investments in Cambodia, China and Myanmar. He has co-authored seven books and published more than 50 professional journal articles. Elliott writes at his blog Morss Global Finance.

See articles by Elliott Morss in Analysis Blog

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1 comment

  1. Blue Jacket says :

    Elliott you make good points except;
    #1 - Basically you want to kick the can down the road.
    #2 - You must think that government orchastrated fiscal manuevers and Fed monterary manuveurs build wealth. I suggest they don't. It's mal-investment and debt continued.
    #3 - Private sector investment is needed. As long as we have tougher and costlier regulations than the EM producers, our middle class will continue to suffer. We either raise the bar for imported goods to match the reg's and costs our domestic producers incur or lower the bar for our domestic producers. Something has to give.



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