The U.S. deficit is rising again, a lot. The Congressional Budget Office just said it expects the deficit to top $1 trillion in 2019, a record. Some economists say that at some point, debt becomes a drag on growth. Is the U.S. approaching that threshold? Should we be worried? Bloomberg Opinion columnists Stephanie Kelton and Noah Smith met recently online to debate.

Stephanie Kelton: I don’t find the projections particularly interesting, nor do I find them disturbing — at least not in the “OMG trillion-dollar deficits are coming! Run for the caves!” sort of way. What I find interesting is not the budget forecast itself but the fact that Republicans added roughly $2 trillion in stimulus at a time when nearly everyone said it shouldn’t be done, citing proximity to full employment. “You don’t do stimulus at full employment,” was basically the argument. Well, here we are well into the experiment and … what’s the problem? Inflation remains in check, unemployment has ticked down a bit further, small business confidence is at a 45-year high and growth has accelerated. So that’s interesting.

Noah Smith: Here’s the problem. If you have a basic aggregate demand, Phillips-curve sort of view of the economy, then if stimulus is giving the economy a boost, it should also be raising inflation. Core inflation hasn’t accelerated and is right around the 2 percent target, even as unemployment has dropped, which raises the question of whether the tax cuts are really delivering much stimulus to the economy. We have reason to think that tax-cut multipliers are lower than spending multipliers, and that multipliers during booms are lower than multipliers during recessions, which tends to back up the notion that the tax cut probably isn’t doing much in the way of stimulus — the economy is recovering for other reasons. So really we’re just racking up debt in order to make the tax system more regressive. Is that wise?

SK: I agree that there were better ways to use the $2 trillion or so in fiscal space that we clearly had available at the start of the year. And, yes, the Republicans mostly used deficits to deliver a windfall to big corporations and the richest people in America, dishing out crumbs across the rest of the income distribution.

Here’s who benefited from the last round of tax cuts:

No one knows exactly how much of the pickup in economic activity is due to the tax cuts, but it ain’t zero. So they helped. And, as you note, they helped without raising inflation, which tells me they didn’t overstimulate, which further tells me there may be room to do even more. Tax Cuts 2.0, anyone?

Here’s who would benefit from the next round:

But here’s the thing Republicans seem to understand really well: The federal government’s deficit shows up as a surplus in some other part of the economy. And so while critics use terms like, “blowing up the deficit” or “drowning in red ink” to describe what’s happening to the government’s finances, Republicans seem more interested in the fact that their deficits will improve the private sector’s finances, especially the biggest corporations and wealthiest people in America. In other words, the GOP seems to understand that the government’s red ink is our black ink! It’s a point Goldman Sachs’ chief economist, Jan Hatzius, has made emphatically. And, of course, modern monetary theory folks routinely make the same point.

Instead of saying, “The 2018 budget deficit is expected to be $804 billion, rising to $1 trillion in 2019,” we could say, “The surplus in the non-government sector is expected to be $804 billion, rising to $1 trillion in 2019.” Is that disturbing?

NS: Why should we care about the private sector’s net surplus? According to the theory of balance sheet recessions, and to the theory of debt deflation, and also to the theory of the leverage cycle, it’s the private sector’s gross debt that poses a danger to the economy. In other words, what matters is how much companies and private individuals owe to each other, not how much the government owes them. So the point about the private sector’s net surplus is a bit lost on me. Who cares?

SK: Debt is only part of it. The other issue is the servicing of debts; if you moved everyone from 15-year mortgages to 30-year mortgages, you’d likely end up with higher debt-to-income and higher assets, since more people can handle the payments, and those that could already handle the payments can now afford the payment on more house. But the ability to service the debt is likely greater, all else equal. Even standard neoclassical macroeconomics on sustainable finance emphasizes the debt-service ratio over the debt ratio, even as the debt ratio obviously plays a role.

Setting aside the debate about the relative importance of debt-to-income or assets, or debt service, a government deficit adds to private-sector incomes (relative to debt or debt service) whereas a government surplus has the opposite effect. The most intuitive way to show this is through the sector financial balances. This becomes clear if you listen to Hatzius explain why he thinks sector-balance analysis can send a signal when the private sector’s financial positions are becoming overly fragile. And because it’s nothing more than accounting, it also tells us that the crowding-out story is 100 percent wrong — a government deficit raises private sector incomes; it doesn’t crowd out private finance.

NS: Putting aside the argument over financial crowding out, I still don’t see the relevance of all this. Let’s think in terms of real resources — not dollars, surpluses and deficits, but cars, pizzas, hours of labor. It seems clear to me that unless we have unused resources in the economy — idle workers and idle factories — that a government deficit can’t increase real output. At the end of the day, real output is what we care about — you can’t eat dollars, but you can eat pizzas. And if the U.S. economy is indeed nearing full employment, it means that there aren’t many unused resources lying around — and hence, the real benefit from deficits seems low. This is just standard Keynesian economics.

As for the financing side of things, the reason government debt matters is because of how government finances its borrowing. If it uses tax financing — including future tax financing — that can hamper the economy. If it uses monetary financing — getting the central bank to print money to finance the Treasury’s deficits — that could at some point explode into uncontrollable inflation. What do you have to say to those worries?

SK: This actually isn’t right. If the government were to finance itself by so-called money printing, that would mean either (a) the government runs an overdraft at the Federal Reserve, or (b) the Fed buys the government’s bonds, which leaves reserve balances in the Fed accounts of private banks instead. But, for the Fed to achieve a positive interest-rate target, it would have to pay interest on reserve balances at its target rate. In other words, printing money simply means that overnight central bank liabilities earning the central bank’s target rate replace, say, three-month government liabilities earning roughly the central bank’s target rate. And if the Fed doesn’t pay interest on these reserve balances, then that simply means it wants its target rate at zero. Overall, there’s little difference in terms of macroeconomic impact whether the government sells its securities or prints money because the latter isn’t actually a thing in the real world. And while this is something MMT has been saying for 20 years, it’s basically what Narayana Kocherlakota, former president of the Federal Reserve Bank of Minneapolis, said a few years ago, too.

So the point is that deficits, per se, are not disturbing. Is there a limit to how big the deficit can safely climb? Absolutely! Deficits matter. They can be too big — risking accelerating inflation. But they can also be too small, robbing the economy of a critical source of income, sales and profits. At some point, something will happen to undermine the strength of demand in the U.S. economy, and the expansion will end. Given the current inflation outlook, I see no reason to believe that trillion-dollar deficits pose a risk to the expansion. If anything, it will be the Fed’s reaction to those projected deficits that brings the expansion to an end.

NS: It seems like you’re agreeing with me that accelerating inflation is a risk of deficits. The question is whether that would come slowly or quickly. If deficit-induced inflation comes slowly, we don’t have much to worry about, because we can see it coming and adjust policy accordingly. But if it comes quickly — if the economy switches suddenly between a low-inflation equilibrium and a high-inflation equilibrium — then the dangers of deficits wouldn’t become apparent until it was too late. Of course, we can never know where that breaking point is, so it’s hard to decide just how much precaution to take. But with the labor market looking very strong, it seems like the potential benefit of large deficits at this point in time is small. So it seems like an unknown risk in exchange for only a small potential gain — not the most enticing of gambles.

Ten years ago, after making piles of money gambling with other people’s money, Wall Street nearly imploded, and the outgoing George W. Bush and incoming Obama administrations bailed out the bankers.

America should have learned three big lessons from the crisis. We didn’t, to our continuing peril.

First unlearned lesson: Banking is a risky business with huge upsides for the few who gamble in it, but bigger downsides for the public when those bets go bad.

Which means that safeguards are necessary. The safeguards created after Wall Street’s 1929 crash worked for over four decades. They made banking boring.

But starting in the 1980s, they were watered down or repealed because of Wall Street’s increasing thirst for profits and its growing political clout. As politicians from both parties grew dependent on the Street for campaign funding, the rush to deregulate turned into a stampede.

It began in 1982 when Congress and the Reagan administration deregulated savings and loan banks – allowing them to engage in risky commercial lending, while continuing to guarantee them against major losses.

Not surprisingly, the banks got into big trouble, necessitating a taxpayer-funded bailout.

The next milestone came in 1999, when Congress and the Clinton Administration, under then Treasury Secretary Robert Rubin, repealed the Glass-Steagall Act – a 1930s safeguard that had prohibited banks from gambling with commercial deposits. (For the record, I was no longer in the Cabinet.)

Then in 2000, Congress and Clinton barred the Commodity Futures Trading Commission from regulating most over-the-counter derivative contracts, including credit default swaps.

The coup de grace came in 2004, when George W. Bush’s Securities and Exchange Commission allowed investment banks to hold less capital in reserve.

All of this ushered in the 2008 near meltdown – which was followed by another attempt to impose safeguards, the Dodd-Frank Act of 2010.

And now? The Street’s political clout is as great as ever, which explains why the Dodd-Frank safeguards are now being watered down – clearing the way for another crisis.

The second lesson we should have learned but didn’t is how widening inequality makes our economy susceptible to financial disaster.

In the decades leading up to 2008, stagnant wages caused many Americans to go deep into debt – using the rising values of their homes as collateral. Much the same thing had happened in the years leading up to 1929.

Wall Street banks were delighted to accommodate – lending willy-nilly and often in predatory ways – until the housing and debt bubbles burst.

And now? The underlying problem of stagnant wages, with most economic gains going to the top, is still with us. Once again, consumers are deep in debt – inviting another crisis.

The third big lesson we didn’t learn concerned the rigging of American politics. After the crisis, many Americans realized that Wall Street, big corporations, and the wealthy had essentially bought up our democracy.

Americans saw the Street get bailed out while homeowners, suddenly owing more on their homes than the homes were worth, got little or nothing.

Millions lost their jobs, savings, pensions, and homes, but the bankers and big investors came out richer than before.

Bankers who committed serious fraud escaped accountability. No executive went to jail. Big banks like Wells Fargo continued to break laws with impunity.

Many officials involved in deregulating the Street became top executives in the Wall Street banks that benefited from deregulation. Some involved in writing the Dodd-Frank Act are now employed by the same financial institutions that are watering it down.

Meanwhile, big corporations and wealthy individuals continue to flood Washington with money, making it the capital of “crony capitalism.”

Widespread outrage at all this fueled the Tea Party on the Right and the brief “Occupy” movement on the Left. Both eventually morphed into the two anti-establishment candidacies of 2016 – authoritarian populist Donald Trump and democratic populist Bernie Sanders.

And now? Anti-establishment fury remains the strongest force in American politics.

Trump has been using it to conjure up racist and xenophobic conspiracies and to create the most authoritarian regime in modern American history. He promised to “drain the swamp” but has made it bigger and filthier.

Democrats don’t know whether to simply oppose Trump and his authoritarianism, or get behind a reform agenda to wrest control of politics and the economy from the moneyed interests.

But to do the latter they’d have to take on those that have funded them for decades. I wish I had more confidence they will.

Sad to say, ten years after the near meltdown of Wall Street we seem to have learned very little. Only worse: We now have Trump.

Stephanie Kelton, an economics professor at Stony Brook University on Long Island in New York, has a radical new way for thinking about the economy: Governments that print and borrow their own currency can’t go bankrupt, she says, and the current U.S. budget deficit is, if anything, too small.

That kind of thinking is part of a school of economic thought known as modern monetary theory, or MMT, which Kelton has helped develop. But she also wants to tell me a story from 2012, years before she became better known as an advisor to Sen. Bernie Sanders’ presidential campaign.

At that time, Kelton was invited to an all-male breakfast club of the Kansas City rich and powerful. Despite her left-leaning views—and being the only woman—she won the room over.

How she did it is a testimony to her rhetorical and intellectual skills and to just how much her thinking confounds a political graph that is defined solely by tax and spending axes.

Kelton, 48, explained to the room in Kansas City that the government budget is not like a household budget because the government prints its own money. But the problem is that Washington always wants to know how to pay for new programs.

That’s a problem for you, she says she told her listeners, because the conventional wisdom in the capital is that money “grows on rich people” and you pay for nice things by taking it from them.

“Don’t look at me,” she instructed her audience to tell lawmakers. “That’s where the money comes from. And you point at the Treasury. You point at Congress.” And she won the room over.

Insisting that government spending comes from taxes, she says, puts the rich at the center of American policy-making in an unhealthy way. And the very rich, Kelton’s experience shows, are pleased to hear that you don’t have to tax to spend.

Here’s what else she had to say.

Let’s start from the top. The way the federal government works is it takes in money from taxes, and then it spends it. Right?
Well, that’s the usual belief. How it really works is that there’s a constant overlap of things happening. That when Congress sits down, in an ideal scenario, the House and the Senate would come up with budgets. And in all likelihood, they won’t match exactly. And so there will be reconciliation. The budget will either pass or not. It gets signed by the president or not. Congress is writing down numbers and saying, “This is our intention, to spend in these amounts.” And the budget authorization is given that allows the heads of these agencies to go out and start hiring, engaging in contracts. It’s the authorization from Congress that provides the funding. That triggers the spending.

The conventional wisdom about deficits is that we should always be worried about them. When do you worry about deficits?
I worry not just about the magnitude, but about the purpose. We could add $1.5 trillion to the deficit over 10 years, as we just did with tax cuts that go disproportionately to people in the top-income distribution, and we could have done, for instance, student debt cancellation at virtually the same price tag. We could have done massive infrastructure investment, or R&D investment.

You can have the same budgetary outcome, but very different economic outcomes, in terms of the potential to boost long-term growth and productivity, impacts on the distribution of income, and so forth. Every economy has its own internal speed limit. You can only absorb so much additional spending at any point in time, given the slack that the economy has at that moment. So can the deficit be too big? Of course! But can it be too small? Yes. And that’s something you rarely hear people say. Or complain about it.

It seems like people forget that balance sheets have two sides.
Government debt is just the money the government spent into the economy and didn’t tax back. That’s all the national debt is. It’s a historical record of all of the times that they made a net deposit, spent more than they taxed out, and the bonds are the difference between those. One of the greatest cons ever perpetrated on the American people is this notion that the national debt belongs to us, that we are responsible in our individual capacity for a share of it.

The national debt clock that counts up exactly how much is owed by every man, woman and child in America!
When I worked on the Hill, one of my favorite exercises was to find elected officials, staffers, and ask them if you had a magic wand, and you could wave it, and eliminate the national debt tomorrow, would you do it? Of course. Who wouldn’t do that? Yes, I mean, the quickest “yes” you ever got in your life.

OK, what if I gave you a different wand, and I told you, you can wave the magic wand, and you can eradicate the world of U.S. Treasuries. There won’t be Treasury notes anymore. They’ll just all be gone. How many members of Congress, would do that?

Zero.
They looked at me with a total blank stare.

Why do you think that people generally, and politicians in particular, are stuck on this notion of the government spending being like a household or an individual?
In some ways, it’s rhetorically convenient. No politician wants to stand, I think, in a town hall meeting and try to explain the intricacies of government finance to constituents. So it’s a convenient narrative to just reinforce the conventional wisdom, the norms of understanding. And I think it also provides political cover.

You advised Sen. Bernie Sanders, and you’re a major proponent of a jobs guarantee, support Medicare for all, free college tuition, and on—all things the left wants. Do you think that modern monetary theory has an inherent set of politics?
No. When we started undertaking the research for this body of scholarship that’s now dubbed MMT, it was an exercise in trying to understand the monetary system, the way things work. We just wanted to get a better understanding of how the economy works, how fiscal and monetary operations work. At least 90% of MMT is descriptive in nature. But if you believe that the economy chronically operates under its full potential, then it makes sense to look for policy recommendations to make things more efficient, to maximize potential output. And MMT’s not the only school of thought that does that. You see that with classical supply-siders as well. They think the way to squeeze out the last bit of potential is largely through tax cuts and deregulation.

What about Greece, Portugal, Spain, Italy, Argentina, and their debt crises? They exist. Why don’t those things worry you?
Well, the debt crises in those countries are worrying to me. But it’s not a lesson for America. You know, back in 2010, at the height of the European debt crisis, I can remember standing in my kitchen with the TV on, and turning on the news, cooking dinner, and seeing the opening to the nightly news. And it goes, dah, dah, dah, the debt crisis in America. And I go, what debt crisis in America? But that is really what the narrative started to become: This is a warning for America. We need to get our fiscal house in order.

What’s different? Look, Italy in 1995 had a debt-to-GDP ratio of around 120%. Spain in 1995 had a debt ratio of 62%. Greek debt-to-GDP over 100% before joining the euro. These countries were borrowing and spending in a currency that they created. Who remembers the debt crisis in Europe in ’95? There was no debt crisis in ’95, because Italy could always meet every obligation that came due, on time, in full, because it was paying in lira. Where and how else is the lira going to come from but the Italian government?

Do you think openness to MMT and view of deficits and government debt is generational? Do old people just not get it?
I think so. For a certain demographic, the ’70s are still kind of a fresh memory, and you know, waiting in long lines to put gas in the car, high inflation. And so that’s a live memory for some demographic. But young people—I mean, Obama’s slogan was “Yes we can.” And then all hell breaks loose, and he’s on TV right after the inauguration saying, we ran out of money, so no, we can’t. And then you get Hillary Clinton’s message, which was pretty much, “Yes, we can a little bit.” And millennials see their future, they see climate change, and they take it seriously. They see the cost of college education. They see problems with health care. They can’t get out of the home and start a life. They’re open to a big, ambitious agenda. The threats are real for them.