America is not growing, it’s contracting

By Cate Long
May 30, 2013

The Guardian’s Heidi Moore wrote an epic screed about the illusion of economic recovery and waded through a river of micro data to prove her point. She highlighted how the housing recovery was driven by banks withholding their foreclosure inventories from markets and how three large banks halted foreclosures, which slowed supply. Unfortunately, she only had anecdotal evidence to support these ideas. She berated consumers for their increasing confidence in the economy and called it unfounded. She blasted the federal government, Congress and corporate CEOs for doing nothing to revive employment and stimulate economic growth. Moore writes:

The reason to maintain skepticism of good times a-coming is that an economic recovery can – and is – used to package a lot of political snake oil. As long as people believe in a recovery, Congress can keep ignoring the unemployment and equality crises and enjoy ginning up imaginary problems like the plague of corporate tax rates.

Actually, Congress is doing a lot to address the economy and unemployment. You can see it if you look at the macro data; specifically GDP growth versus the amount of debt that the U.S. Treasury is issuing. In fact, total U.S. growth in Q1 2013 came from issuing Treasury debt; not an increase in economic activity ($339 billion of new debt issued from 1/2/13 to 3/31/13 while GDP grew only $140 billion in same period).

In Q1 2013 the U.S. Treasury issued two and a half times more debt, which flows into the economy as cash stimulus through government spending, than the U.S. had in overall economic growth. To put that in reverse: If the Treasury had not issued that debt, the economy would have shrunk by approximately $199 billion. Instead it grew by 2.4 percent.

It could be argued that Congress and the federal government are doing more by issuing debt (deficit spending) than the Federal Reserve is doing by suppressing interest rates through bond purchases. Moore is on the right path, but she misses the point. Congress is issuing debt to keep America out of recession. Without that debt issuance, America would be contracting.


BEA and US Treasury: Graph data

MuniLand: Is the U.S. growing, or just issuing debt?


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Hi Cate,

As we discussed on Twitter yesterday I believe this post needs a correction because your premise is incorrect: Congress neither manages the monthly debt issuance — that is the job of the Treasury – nor has Congress authorized any more spending recently. Quite the contrary, the current sequester is a massive budget cut.

Congress authorizes the debt limit but that is a directive to spend; the debt limit is merely making good on our previously committed spending. Congress merely allowed the Treasury to pay last year’s bills.

The Treasury gets the budget from Congress on a yearly basis and then manages debt issuance and revenues according to its own wisdom. Thus you are totally incorrect to say that Congress has authorized spending and that recent debt issuance is due to Congressional action.

This primer on how the federal debt works is a useful guide that should clarify your misconception on this point. [ ons/detail/managing-the-federal-debt

Your claim here is so far from the fundamentals of the situation that I’m a little baffled by where you would have gotten the idea.

So I’m not really sure what to reply, except that naturally what I said represented the truth accurately: Congress is not doing its job. It is not legislating. It is not even authorizing the Treasury to spend. In addition, there is no recovery – on that we seem to agree.

So while I appreciate that you may have wanted to say, in a backhanded way, that I was right for the wrong reasons, I’m sorry to say that you are wrong for every reason in your post.

All my best,

Posted by moorehn | Report as abusive

Treasury debt sales have the opposite of the effect that you describe. In and of themselves, they suppress demand–they do not stimulate it.

This is obvious if you look at what happens at the concrete level. When the Treasury sells debt, dollars are transferred on the Fed’s balance sheet from the “bank reserves” line to the “Treasury General Account” line. This contracts the monetary base. How can doing that stimulate anything?

You may think that the subsequent government spending that is financed by selling the new Treasury debt is stimulative. Maybe, but at best the stimulus will do no more than offset the depressive impact of selling the debt in the first place. Physically, dollars will move from the “Treasury General Account” line on the Fed’s balance sheet back to the “bank reserves” line. How is this round trip supposed to stimulate anything?

Normally, creation of new monetary base (with or without a fiscal deficit) would stimulate demand. However, under current conditions, the Fed’s policy of paying “interest on reserves” immobilizes the newly-created money and prevents it from having any impact whatsoever.

Posted by LRW-SMIA | Report as abusive