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Misconceptions Regarding Economics Shouldn’t Stymy the Public Sector

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Ben Tafoya
November 7, 2022

Since the beginning of the COVID pandemic in 2020, the US economy has faced a series of challenges. The Bureau of Economic Research, the official designator of business cycles, dated the shortest recession on record from February 2020 through April of that year. Coming from that trough there was a sharp recovery. Then came rates of inflation higher than those experienced in the United States since the early 1980’s plaguing policy makers. In response, the US Federal Reserve has increased interest rates at a historic rate to cool the economy. The pandemic and recession, and now the inflationary surge, cause challenges for the average family. Inflation stretches budgets of the public sector, which must provide critical services. The dramatic nature of the events and the pain caused by economic dislocations lends itself to certain misconceptions about the causes and impacts of economic policies.

Pandemic relief caused inflation

There is a contention that the actions of the federal government through ARPA provided significant fuel to the inflationary fire. While the bill did include direct payments (based on need), aid to state and local government and expanded the child tax credit it is not likely that this was a major cause of the levels of inflation seen in 2021 and 2022. Rather this inflation is a supply shock driven by the energy and food price spikes from the Russian invasion of Ukraine as well as supply chain disruptions caused by China’s “zero COVID” policy and inadequate US infrastructure. Further, the support of the economy from all levels of government has decreased during this period.

Budget deficits mortgage the future

As pointed out by Stephanie Kelton in her book, The Deficit Myth, how the US Government chooses to finance its deficit is a policy choice. That it chooses to fund it through bonds, rather than another means such as expansion of the money supply, means there are payments for debt service. However, the federal government does not typically retire debt, but rather rolls it over. This does require interest payments that come from the budget (which is in deficit anyway) and those payments are a form of income for the holders of the debt. Much of the debt is held by government entities such as the Federal Reserve and the Social Security Trust Fund. In short, our grandchildren will not be sacrificing to repay these amounts.

Budget deficits crowd out borrowing by other sectors

There is a fear that budget deficits can crowd out borrowing by other sectors in the economy. Based on the belief fiscal capacity is finite, the theory poses that the limited amount of funds available for investment will compete with US government debt. However, this is not reality where there is an inexhaustible appetite for US government debt by economic actors from the US and around the world. In recent years, the debt holdings of all sectors in the US economy have grown. In fact, measuring debt from various sectors against GDP, households and non-financial firms have more debt outstanding than the US government. State and local government also have issued significant debt that rises each year even though principal is retired according to maturity. The Federal Reserve is a much more powerful indicator at the range and movement of interest rates than the borrowing of the federal government.

Economic actors from abroad finance the debt

US Government debt is an attractive investment by holders of US dollars from abroad. Because the United States runs a large and persistent trade deficit with the rest of the world, money flows back into the United States because holders of dollars must use them somehow. However, this ownership represents a small percentage of overall US debt. US Government agencies hold much more of the US debt than does the international sector. Overall, foreign entities hold about 25 percent of the US debt held by the public, with Japan and China being the two largest shares. China has lessened its holdings in the past year.


Significant parts of the federal government’s support for the economy declined starting in Q3 2020. As measured by GDP the trend has been down with a slight uptick in the last quarter. Transfer payments (which are not included in GDP) such as social security, unemployment compensation and the one-time checks sent via ARPA have increased over the pre-pandemic totals but their rate of increase is now small. In an inflationary period, there is a natural reluctance to pump more funds into the economy. Especially since the Federal Reserve is trying to cool economic growth down via interest rate hikes.

Yet the Federal Reserve is a rather blunt tool to attack inflation with very specific causes, particularly due to global oil price shocks and disruption in food shipments. Given the modest public sector in the United States, the still crushing income inequality and growing human needs from inflation in housing and food; there is a need for significant government action and these misconceptions should not get in the way of critical action.

Author: Dr. Ben Tafoya is an adjunct faculty member at both Northeastern University and Wentworth Institute in Boston. Ben is the author of a chapter on social equity and public administration in the recently published volume from Birkdale, Public Affairs Practicum. He can be reached at [email protected] or Twitter as @policyben . All opinions and mistakes are his alone.

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