#MacroFriday: A billion here, a billion there

In the 1960s, US Senate Minority Leader Everett Dirksen warned about unchecked federal spending, famously saying, “A billion here, a billion there, and pretty soon you’re talking real money.”

Modern Monetary Theory

Modern Monetary Theory (MMT) is an economic framework that argues governments that issue their own currency can finance spending by creating more money rather than relying solely on taxes or borrowing. According to MMT, such governments can run large deficits to fund public programs without risking insolvency, as long as inflation remains under control.

Supporters of Modern Monetary Theory (MMT) argue that the U.S. government can safely run large deficits to fund social programs without any serious adverse economic or financial consequences. While MMT’s claim lost some credibility during the high US inflation of 2022 and 2023, recent government spending has helped offset tighter Federal Reserve policies, averting a recession. Even so, prices remain much higher than before the pandemic.

As Baby Boomers (those born between 1946 and 1964) spend their savings, the next generation will inherit what’s left  - along with a significant amount of government debt. In contrast, the Baby Boomers enjoyed the benefits of government spending without fully funding such outlays with tax receipts. U.S. public debt now totals $35.5 trillion, including $27.7 trillion in Treasury debt and $7.2 trillion in government IOUs for programs like Social Security and Medicare. This debt is expected to grow by over $1 trillion annually just to cover Treasury interest payments.

The US Treasury recently announced new borrowing projections: $546 billion in Q4 2024 and $823 billion in Q1 2025. This may explain why US bond yields have climbed from 360 basis points (bps) on September 16 to 430 bps now, even after a Fed rate cut of 50 bps on September 18.

Another billion there?

It will certainly be interesting to see how the November 5 elections will change the course of US fiscal policy.

Under Donald Trump, the U.S. deficit is likely to grow initially due to proposed tax cuts aimed at spurring economic growth and potentially additional spending on defense and infrastructure. Trump argues that economic growth will ultimately offset these costs by expanding the tax base.

Under Kamala Harris, the deficit could also increase, driven by spending on social programs, healthcare, and green infrastructure initiatives. However, Harris’s approach would likely involve progressive tax increases targeting higher-income individuals and corporations to fund these initiatives, potentially keeping the deficit from expanding as sharply as it might under Trump’s approach.

In both cases, without additional policy changes, the U.S. deficit would likely continue to grow, but the drivers and speed of growth would differ based on the tax and spending priorities each candidate would set.