Capitol Hill Building in Washington DC with Vintage Filter

The debt ceiling hullabaloo: catastrophe averted, or much ado about nothing?

A Modern Monetary Theory Perspective

by Dr. Shantanu Bagchi, Associate Professor of Economics at Towson University

“I am sorry sir, but your card was declined because of insufficient funds,” says the customer service representative on the other end of the line. “Please contact your bank and pay off some of your balance, and then place a new order.” Then, with a customary “thanks for your business,” the line goes dead. You are simultaneously furious and stressed out: what other charges are going to get declined? How did you manage to lose track of your credit card balance? As these thoughts swirl around in your mind, through the corner of your eye, you see news breaking on TV: “President Biden and Speaker McCarthy reach deal to increase debt ceiling and avert a U.S. default.”

For countless American households, making ends meet has been a challenge in the post-COVID economy. Rising food and gas prices and sticky wages have left many of us wondering how to square the two pieces of our personal budgets: earnings and spendings. Some have been able to tap their past savings (excess earnings over spendings) to pool over these difficult times, but many have had to resort to borrowing (excess spendings over earnings). And many have been forced to cut their spending to stay within their borrowing limits. With all this going on, how many of us have seen a news headline like that and not felt burned: how is it that the public must live on tight budgets because no one will lend them any more money, but the federal government can just increase its debt ceiling and avoid default?

In general, the American public has believed in the principle that government debt should work much the same way as household debt (barring differences in default risk), a belief that can perhaps be traced back to the idea of “Ricardian Equivalence.” This idea, named after David Ricardo, the great British political economist of the early nineteenth century, avers that if everyone plays by the rules of credit markets, households will know that government tax cuts today will have to be financed through increased borrowing today. This increased borrowing, in turn, will need higher future taxes to pay off the accrued debt. Therefore, if the government racks up larger and larger deficits over time, it will take larger and larger future taxes to pay off the accrued debt.[1] So, if we are to spare future generations from having to pay these higher taxes, we must somehow limit the government’s ability to borrow money.

On the face of it this argument makes a lot of sense, but there is really no way to square it with reality: Congress has revised the debt ceiling 78 times since the 1960s. It turns out that the key fallacy in this argument is that it applies concepts from personal finance (i.e. households’ budgets) to evaluate public finance (i.e. the government’s budget). The two are similar only so far that the word “finance” appears in both. For households’ budgets (or personal finance), earnings typically happen before expenditures are made. Our decisions regarding which restaurants to eat at, which summer camps to send our kids to, and which coupons to use for which prescription drugs usually happen after we have some idea of our earnings. If unexpected things happen, we respond by engaging in short-term borrowing, such as temporarily running a credit card balance, or by breathing a sigh of relief that we were able to put some money away as savings. For the government’s budget (or public finance), the timing structure is very different. Roads and bridges must be built, the military must be hired, equipped, and trained, and social insurance payments must be made before the money needed to pay for them has been secured. In other words, unlike our personal budgets, earnings usually trail expenditures in the government’s budget.

Professor poses in front of dry-erase board with figures on it
Dr. Shantanu Bagchi is associate professor in the Department of Economics at Towson University. His areas of expertise include public economics, macroeconomics and mathematical economics.

The government’s ability to do things in the exact reverse order from the public is by no means an anomaly; it is by design. And the key to this design is the federal government’s unique position in the financial system: its ability to issue IOUs of dollars, and its ability to issue the very dollars that will be used to pay off those IOU’s. This insight is the foundation of a new philosophy on monetary policy in a modern capitalist economy: the Modern Monetary Theory (MMT). The basic premise of MMT is that in a world with low interest rates, loans are effectively free, so the federal government can choose to manipulate its debt however it may see appropriate.[2] And even though this idea may sound outlandish, politicians on both sides of the aisle understand this very well: over the last few decades, they have repeatedly revised the federal debt ceiling to avoid “default.”[3] In fact, from an MMT perspective, the federal government’s debt is not even a real thing, so “default” is not even a meaningful idea.

Unfortunately, the American public does not have the luxury to manipulate our personal debt, because no financial institution will give us loans in dollars and allow us to pay them back with something other than dollars. If they did, none of us would ever end up with insufficient funds to make our purchases. The bottom line: using concepts from our personal finance to understand the Federal government’s finances is a misguided endeavor, and all this cacophony about the federal’s government’s debt ceiling and possible “default” is nothing more than sensational TV.

This article represents solely the opinions of its author. This article is part of the college’s The Exchange series which offers readers in-depth articles and op-eds written by our faculty with fresh perspectives and innovative ideas related to business, the global economy and society.


[1] In macroeconomics, debt is a “stock” variable, which is essentially a cumulative measure of deficits, which is a “flow” variable.

[2] Most industrialized economies of the world have experienced persistently low interest rates at least since the 1980’s, until the aftermath of the COVID-19 pandemic.


a group of student consultants wearing business attired pose in the stairway of Stephens Hall

Student Consultant Program Celebrates 20 Years

By Laura Braddick

Each year since 1998, a special cohort of CBE students has played an important role in the college.

CBE Student Consultants are at the frontline of student services in the college, providing peer advising and office staff support as well as running programs, the student newsletter and more. Continue reading “Student Consultant Program Celebrates 20 Years”

two young girls working at a bloomberg terminal in the finance lab

Investing in the Future

By Laura Braddick

On a Friday morning in April, a class of fifth graders from Harford Hills Elementary School excitedly file into the T. Rowe Price Finance Lab. Stock prices scroll by on tickers above their heads.

Despite their age, the students know what the numbers mean.

For months, they have been playing the Stock Market Game—an online simulation of global capital markets where each student selects and manages a portfolio of stocks throughout the year.

Allen Cox, Ph.D, of the Maryland Council on Economic Education (MCEE) begins the workshop by asking how their stocks are doing.

“Let me guess,” he says. “Your stocks probably did okay at first, then in December you probably lost a bunch of money?”
“Yes!” the class responds.

“Then in January and February you started making money?” added Cox.

A girl in the back raises her hand.

“Are you a fortune teller?”

“No. I’m just pretty good at predicting,” answers Cox, “because what happened to your stocks happened to my stocks.”

The girl’s hand shoots up again, “Do you have real stocks?”

“Yes, I do,” he says. “Do you think you’ll have real stocks one day?”


Since 2013, nearly 2,000 K-12 students from across the state have experienced the thrill of investing and the magic of the stock market through workshops in the T. Rowe Price Finance Lab.

This number is just a fraction of the 250,000 students impacted each year by the Maryland Council on Economic Education, housed under the College of Business and Economics, through teacher development programs and competitions like the Stock Market Game.

“They actually track their portfolio and see what is happening to their money,” said Dana Livne, a fourth grade teacher at Garrison Forest School in Owings Mills, who uses the game in her class. “Even though it’s not real money, it makes it more meaningful to them than just reading about it on paper. They get more interested and engaged.”


1,945 K-12 students visited the lab since 2013

45 Schools

3,000 Teachers participate in MCEE professional development workshops annually

250,000 Maryland students impacted by MCEE programs annually

Winners who generate the most returns from each school and each school district are honored at an award’s ceremony each year. The yearlong competition not only teaches how capital markets work, but also imparts the advantages of saving and investing.

All of them will have to make important economic and financial decisions after high school,” said Cox, MCEE’s assistant director of financial education. “And, sadly, many high school graduates who did not obtain the financial education that is needed make very poor choices that they later regret.”

Field trips to the finance lab reinforce these financial lessons.

three boys working at a bloomberg terminal in the finance lab“We discuss what it takes to become a millionaire and the importance of understanding how compound interest accumulated over time is the most important contributor to becoming financially independent later in life,” he said. “We also discuss what to look for when researching stocks and other investments that are available in the Stock Market Game.”

Students play The Millionaire Game, where they are given true or false statements about millionaires based on the book, The Millionaire Next Door, by Thomas Stanley.

“They’re surprised to discover that many millionaires lead pretty ordinary lives; do not overwhelmingly buy expensive cars; are mostly college graduates (with some very famous exceptions like Steve Jobs and Bill Gates); often work long hours; and mostly did not inherit their money,” said Cox.

Concepts like compound interest and the intricacies of investing in the stock market may seem like complex topics for young children. But educators like Amy Cargiulo, a teacher at Pointers Run Elementary School in Clarksville, Maryland who’s been bringing classes to the lab for seven years, say it sticks.

“These kids are only in fifth grade, but it really makes an impression,” said Cargiulo. “Dr. Cox breaks it down to a level that makes the big ideas clearer. Learning from an expert on ways to build good financial habits and stay out of debt—these things are going to be the cornerstones for their financial future. These programs are really laying the foundation for a lot of them. It opens up their eyes to good spending habits and good saving habits.”

collage of hand-drawn thank you notes from children
The college gets bundles of thank you letters from excited students regularly.

“I’ve had kids come back as high schoolers and beyond and say they learned so much from the Stock Market Game,” said Cargiulo.

In addition to building a foundation for solid, lifelong financial skills and habits with the Stock Market Game, field trips to the finance lab expose kids to a college campus environment and a college learning experience.

“I’d be lying if I didn’t say that the cafeteria is their favorite part,” laughed Cargiulo.

In thank-you notes to Cox, the kids often write how they loved TU so much, they want to go there for college.
“It makes them feel like they’re special,” says Livne. “They think, ‘We’re learning about things that college students know.’ And it’s just exciting having a lesson in the lab on a college campus. It’s a big deal to them.”


Maryland Council on Economic EducationEmpowering Maryland Teachers and Students for More than 60 Years

Founded in 1953, the mission of The Maryland Council on Economic Education is to assure that Maryland’s school children leave high school equipped with the economic knowledge and decision-making skills they will need to make informed, rational decisions as consumers, workers, citizens, savers, investors and participants in the global economy.

Working through the education system to increase the quantity and improve the quality of economic and financial instruction provided in Maryland schools, MCEE provides free teacher workshops, individualized curriculum development, lesson plans, seminars for adults and community groups, as well as the Maryland-D.C. stock market game, a poster contest for students in grades 1 through 8 and the Maryland Economics Challenge.