Is the US government broke? How can that be?

US government broke? Image shows a man wearing a US flag tie with outturned pockets.

Is the US government broke? For real?

Actually no, the US government is not, and can not, go broke

Consider that the US federal government is the sole, monopoly, exclusive source of ALL US Dollars in existence.

Consider that the US federal government can, and does, create US dollars at will, whenever it is deemed necessary.

Consider that the US federal government’s ability to spend US dollars is not constrained by the availability of US dollars, as they can simply create more when and as needed.

Consider that there are occasional major expenses for which that question is never asked.

Specific examples from fairly recent history of spending without asking are:

  • The CARES act
  • The $2T tax cut of 2018
  • The invasion of Iraq
  • The invasion of Afghanistan

The largest example from US history of US government spending without asking “are we broke” was WW2.

What does constrain US government spending?

The real resources available within the economy.

In order for the US government to buy something, two things have to be true:

  • It has to be priced in US dollars.
  • it has to exist, it has to be available for sale.

Someone needs to grow it, dig it up, make it, or provide it as a service.

If no one is available or willing to do that, the US government can’t buy it, for obvious reasons.

This is not a constraint defined by the supply of money, but rather by the supply of real resources in the economy.

How did the US government pay for super expensive stuff in the past?

By shifting priorities, literally.

The US government can buy ANYTHING whose price is denominated in US Dollars. This does not mean the US Government can buy EVERYTHING whose price is denominated in US dollars.

Perhaps the most extreme example of this was WW2.

WW2 cost 36% of GDP. I believe this is the largest single expense ever incurred by the US government.

To give you an idea of what that really means, from 1941 to 1945, in support of the war effort, the US government bought about half of the GDP of the United States. About half of everything that the US economy produced was purchased by the US federal government to further the war effort.

To put this in perspective, the transcontinental railroad cost 2% of GDP, the moon landings cost 3%, and the current US government military activities around the world costs 3.5%.

So how did we manage to spend 36% of GDP on one project?

Again, by shifting resources.

During WW2, car manufacturers stopped making cars and trucks for consumers. They manufactured vehicles exclusively for the war department.

During WW2, all copper was diverted to the war effort. This is why we had aluminium pennies and some buildings still, to this day, have aluminium electrical wiring.

During WW2, households recycled stuff for the war effort.

My grandparents told me about everyone saving used tin foil (which was apparently made of actual tin at that time) for regular collection for the war effort.

Why did we shift resources in the economy to the war effort?

Because there was a sense it was important. It was important enough to do, even at the cost of other things.

It’s a question of priorities

WW2 was a priority for the national leaders.

The invasion of Afghanistan was a priority for the national leaders.

The invasion of Iraq was a priority for the national leaders.

The 2018 tax cut was a priority for the national leaders.

The CARES act was a priority for the national leaders.

The Green New Deal?

Medicare for All?

Right now, to our national leaders, they’re not important enough to do.

So they tell us “We’re broke. We can’t afford it”.

Video of an economist explaining this

In the video below, the economist Stephanie Kelton explains how a government who issues currency (for example, the US) pays for stuff.

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