When Seattle became the first major city in the country to enact a $15/hour minimum wage back in 2014, mainstream economists and the business community predicted that it would end up hurting those low-wage workers it was meant to help. The cost of living would increase dramatically, as businesses increase prices in order to absorb their rising labor costs. Jobs and working hours in the service industry would be cut, leaving thousands of workers unemployed.

Five years have passed since then, and we now have a lot of data on the impact that the new minimum wage has had for Seattle workers. The evidence is clear: the wage hike has overwhelmingly benefited workers in Seattle, and the city’s economy as a whole. Employment in the food service sector has steadily increased since 2010, with no discernible slowdown due to the minimum wage increase, even though restaurants tend to have some of the highest labor costs of any industry.

The wage hike seems to have had little to no impact on the cost of living in Seattle, with consumer prices going up an average of 2.3% from 2014 to 2017, compared to 1.9% from 2011 to 2014. This could easily be statistical noise, but even if it isn’t, low-wage workers’ 50% wage hike (going from $9.57 before the increase to $15 today) more than makes up for the rising cost of living.

Seattle isn’t the only city that has increased its minimum wage in recent years, and the data from those municipalities tell the same story. But have you ever wondered why minimum wages don’t lead to unemployment and major price increases? This is the question I’d like to answer.

The argument against the minimum wage

The basic argument that mainstream economists make against the minimum wage is quite simple; it’s based on a naive supply-and-demand model of the labor market. These economists argue that when the price of any commodity goes up, the demand for that commodity will go down. Since labor is a commodity under capitalism, it is assumed that firms will demand less labor if the price of labor (the wage) is propped up to an artificially high level. You may remember these supply and demand diagrams if you ever took an introductory economics class in high school:

The market wage is plotted on the vertical axis, and the number of jobs offered is plotted on the horizontal axis. Demand for labor is assumed to be “downward-sloping” because less labor is demanded as the wage increases. It’s argued that a minimum wage reduces demand for labor without reducing its supply, leading to unemployment.

The Keynesian critique

The flaw in this point of view was exposed by the British economist John Maynard Keynes in the 1930’s. The thirties were a time of mass unemployment, and mainstream economists were using the exact same supply-and-demand model of the labor market to argue that mass unemployment was a result of wages being too high. Workers were simply too prideful to accept lower wages in the midst of the Great Depression, and they were getting in the way of the market automatically self-adjusting to return to full employment.

But Keynes pointed out that there is a kind of feedback loop between workers’ wages and employment. Businesses will only employ more workers if they need to boost production in response to increasing demand. But most demand comes from workers’ wages— if wages fall, demand will also fall, causing businesses to lay off even more workers, in a downward spiral. On the other hand, if wages rise, demand will rise, causing businesses to hire more workers. This is a fundamental instability in capitalism. Once the economy starts going downhill, market forces will tend to make the downturn even worse. Government intervention is needed to prop up demand during recessions and get the economy out of slumps.

Effects of the minimum wage

If we apply this Keynesian reasoning to the minimum wage, we will find that a minimum wage increase should increase consumer demand, and thereby create jobs, rather than destroying them. Of course, there are limits to this. If the minimum wage were increased to some very high level, say $100/hour, prices would have to increase dramatically in order to keep up with costs and the chaos and uncertainty involved would likely cause a recession.

Additionally, if a state with a lot of manufacturing jobs tries to boost its wages much higher than surrounding states, companies will likely start to move those jobs to lower-wage states. Service jobs are very unlikely to leave an area in response to wage increases, because they basically have to locate themselves wherever the customers are. The same is not true of manufacturing or tech companies, which is why it’s important for the federal government to implement strong labor protections and to pursue a trade policy that protects American workers from the global “race to the bottom.”

It is sometimes argued that higher minimum wages encourage the automation of low-wage jobs, because they make hiring human workers more expensive relative to robots. Over the long run, there is actually some truth to this— but this is a good thing. Here’s why. First of all, technological progress will eventually lead to the automation of most low-wage jobs anyway, so higher minimum wages simply speed up an inevitable process. Furthermore, in the context of high consumer demand created by a minimum wage hike, workers laid off by automation are likely to find other, better jobs relatively quickly. Besides, the Left should want to speed up the automation low-wage jobs. These are mundane, boring jobs that most people don’t want. They key thing is to use government policy to ensure that those who lose their jobs due to automation are able to find better, higher paying, more fulfilling jobs quickly. Free college and job training programs, along with aggressive stimulus programs to keep the economy running at full employment, can ensure that all workers benefit from automation.

American workers deserve a raise

To sum up, minimum wage increases have four positive effects:

1. Low-wage workers’ incomes increase, lifting many households out of poverty;
2. New jobs are created, due to increasing consumer demand;
3. Pressures to automate increase, eliminating the most menial jobs over time;
4. Inequality is reduced, as income is redistributed from profits to wages.

American workers could certainly use a substantial minimum wage increase. Income inequality is high, and the labor force participation rate, which measures the proportion of working-age adults who are either working or looking for work, has never recovered from the Great Recession. This means that there are millions of Americans out there who would like to work, but have given up the job search. Increasing the federal minimum wage to $15/hour would reduce income inequality, and would help to employ discouraged workers by stimulating the creation of new living wage jobs. Pegging the minimum wage to the cost of living and productivity gains would also help to ensure that workers share in economic growth going forward.

The next time an Econ 101 student tries to tell you that the minimum wage kills jobs, you can tell them that they simply don’t understand how the economy works.

There’s a common narrative about the national debt that is repeated over and over in the media. It goes like this:

Over the last 50 years, the national debt has increased dramatically. This is a very bad thing, because the government will need to repay this debt someday. We are passing on a huge burden to our children and grandchildren, who will have to live with greatly restricted government spending while we pay down our $21 trillion national debt. We need to start cutting public spending and raising taxes now before something very bad happens. We wouldn’t want the United States to become the next Greece, now would we?

Elected officials and pundits across the mainstream political spectrum buy into this narrative to one degree or another. It’s a very powerful tool in the hands of the Right, because they can use it to argue for massive cuts to public services. The good news, however, is that this narrative is completely wrong in every way.

The mainstream narrative is based on assumptions that can be traced back to the gold standard system, which the United States abandoned in 1971. Under the gold standard, the federal government voluntarily agreed to restrict its own spending by promising to exchange US dollars for gold at a fixed price. Since the supply of gold was finite, and much smaller than the total value of all US dollars outstanding, the government had to avoid creating too much money. There was always the risk that investors might try to exchange too many dollars for gold all at once, thereby depleting the stock of gold held by the government. The government was forced to restrict its own spending well before that point in order to avoid a crisis.

The government can never run out of money

Today, however, the American government no longer promises to exchange US dollars for gold. This is a dramatic change, which greatly increases the policy space that is available to us. It means that, because the American government is the monopoly issuer of the US dollar, it can never run out of money or become insolvent. The Treasury spends money by simply electronically crediting bank accounts, and taxes by debiting bank accounts. There is nothing to “run out of.” Unlike many European countries, which have agreed to use the euro as a common currency, the American government has complete control over the supply of dollars and can therefore deficit spend without limit.

This may seem like an extreme claim, but you don’t have to take it from me. Listen to former Federal Reserve chairman Alan Greenspan, a Reagan appointee, answer a question about the solvency of Social Security:

As Greenspan said, government spending is only limited by the real resources that are available. If the government spends too much, it could put a strain on the productive capacity of the economy, thereby driving up prices and creating inflation. But as long as the workers, the raw materials, and the tools are available, the government can “afford” anything. And even if the economy is at full capacity at the moment, the government may decide to use taxes or inflation to bring resources into public use that are currently being used by the private sector.

In fact, while taxes aren’t strictly needed to fund spending, they can be used to prevent inflation. If the government simply spent $4 trillion into the economy each year without taxing any of that money back out, the likely result would be a high rate of inflation. In other words, while the government doesn’t need your money in order to spend, it needs you not to have it, in order to prevent excessive inflation.

Public debt is private savings

But if the government doesn’t need to “get” money from the private sector before it can spend, this raises the question: why does the government bother with issuing debt at all?

The reality is that practice of selling government debt in the form of Treasury bonds is largely a relic of the gold standard era, when the government offered  Treasuries to investors as an alternative to exchanging dollars for gold. This is a public policy decision, which Congress could change at any time. Instead of issuing Treasuries, the government could directly create new bank reserves to finance its deficits. This would have the benefit of ending the $400 billion in interest payments on Treasury securities each year, which is paid disproportionately to investors with high incomes. On the other hand, there are some good reasons for the government to continue issuing these interest-bearing bonds. Treasury securities are a virtually risk-free asset that the whole world relies on to hedge against uncertainty in the market. Without Treasuries, capitalists might be tempted to invest their money in riskier assets with higher returns, which could increase financial volatility.

Those who ring the alarm about the growing national debt tend overlook the fact that any debt, whether public or private, is necessarily someone else’s savings. If you owe your bank $1000, your debt to the bank is an asset from the bank’s point of view. Similarly, all $21 trillion of the federal government’s debt count as savings for someone in the private sector. In fact, because the government will almost certainly never pay off its debts, it’s quite misleading to call government liabilities debts at all. It would be just as correct, and arguably more appropriate, to call the national debt “net private savings.” The national debt is the sum total of all the dollars that the US government has spent into the economy, without taxing them back. Government deficits increase private savings, while government surpluses reduce them.

Public deficits are private sector surpluses

Furthermore, history shows that expanding private savings is good public policy. The US government has run a budget deficit for all but four years since 1969. Those four years of surplus were during Bill Clinton’s presidency— and they were immediately followed by a major recession. This is not a coincidence. The private sector has a strong desire to save in the aggregate, in order to hedge against uncertainty and plan for the future. But if the private sector as a whole is saving— spending less than its income— then some other sector must be spending more than its income. This is usually the government (although trade deficits can also make up the difference).

Because of the private sector’s desire to save, there will always be demand for new Treasury securities. Even in the event that there is a shortage of demand for Treasuries, the central bank can buy them as a last resort, as it did during the 2008 financial crisis. This means that the government can run a deficit indefinitely. When the public sector tries to run a surplus, this usually forces the private sector into deficit, as it did during the Clinton administration. Neoliberal economists have it exactly backwards: public sector deficits are sustainable, private sector deficits are not.

The national debt will never be repaid

Now that we’ve established that there is always demand for new Treasury bonds, it should be clear why the idea of repaying the national debt is nonsensical. Barring some massive national catastrophe, bondholders will never try to “call in” their Treasuries en masse. And even if this did happen, the central bank could simply buy up the bonds as needed. United States Treasury securities are literally the most trusted financial asset in the world. If investors start to seriously question the full faith and credit of the US government, the national debt will be the least of our problems.

Furthermore, any attempt to repay the national debt would wreak havoc on the economy well before we could get anywhere near full repayment. The government would have to commit itself to unprecedented— say, $1 trillion a year— budget surpluses for decades. Just as budget deficits are a stimulus to the economy, budget surpluses are a contractionary force. If the United States made a serious attempt to repay its debt, it would experience a severe recession in just the first few years. At that point, the political pressure to resume deficit spending and stimulate the economy would be intense and irresistible. The national debt cannot and will not be repaid.

Even if it could be achieved, paying back the national debt would mean destroying the entirety of the net savings that the private sector has accumulated since 1836 (the last time the US government was debt-free). Owners of US Treasury securities don’t even want the US to repay all of its debts, since they would have to give up their risk-free, interest-bearing assets! The entire global financial system depends on Treasury securities. In a world where the United States had eliminated its debts, we could expect financial markets to be substantially more volatile than they are today. The idea that the national debt must be, should be, or could be repaid is totally absurd.

We need more deficit spending, not less

We’ve now established that governments with their own sovereign currencies should run budget deficits almost all of the time. The question is not whether to run a deficit, but how big the deficit should be. This depends largely on the amount of unused capacity in the economy, and particularly the unemployment rate. Maintaining full employment should be the primary goal of any government’s fiscal policy, because unemployment  causes suffering for those without jobs, and it makes us all poorer by failing to fully utilize the productive capacity of the economy.

While the unemployment rate in the US has been steadily falling since the 2008 financial crisis (it now stands at 3.7%), we know that there are still millions of Americans who would like a job but can’t find one. The labor force participation rate, which measures the proportion of working-age adults who are employed or actively looking for work, fell from 66% in 2008 to 63% in 2014, and has stayed constant since then. This means that, while the official unemployment rate is down, this is due in large part to unemployed people giving up on the job search and dropping out of the labor force. This is a human tragedy, which could be ended tomorrow with substantially more deficit spending targeted at creating new good-paying jobs. This could include a “Green New Deal” to rebuild our crumbling infrastructure and move toward renewable energy, or a federal job guarantee program. Despite what neoliberal economists may say, the federal budget deficit is actually too small, not too large. We really can afford nice things.