Modern Monetary Theory is an attempt to accurately describe how government debt and complex financial systems actually work. MMT can help us responsibly use our resources, and no one is more knowledgeable on the subject than our returning guest this week, Professor Stephanie Kelton. As Congressional debates over the need for a new stimulus package heat up, Kelton explains the myths surrounding MMT and what a new understanding of the budget could do for our economy.
Stephanie Kelton is a Professor of Economics and Public Policy at Stony Brook University. She is the leading expert on Modern Monetary Theory. Her new book, The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy, shows how to break free of flawed deficit thinking.
Twitter: @StephanieKelton
Further reading:
The Deficit Myth: https://www.indiebound.org/book/9781541736184
Learn To Love Trillion-Dollar Deficits: https://www.nytimes.com/2020/06/09/opinion/us-deficit-coronavirus.html
Website: https://pitchforkeconomics.com/
Twitter: @PitchforkEcon
Instagram: @pitchforkeconomics
Nick’s twitter: @NickHanauer
Speaker 1:
We’ve been running an experiment in MMT for the last 20 or 30 years. The country went into the crisis with 20 trillion in deficit.
Speaker 2:
And virtually no inflation.
Speaker 1:
We were already doing it, just calling it a different thing.
Speaker 3:
Well, that’s how we think about deficits. There’s something wrong with them, there’s something you want to eliminate, they’re a problem. Plus higher what worries me right now that we may let the deficit get too small.
Speaker 4:
From the offices of Civic Ventures in downtown Seattle, this is Pitchfork Economics with Nick Hanauer, a conversation about how capitalism actually works.
Nick Hanauer:
I’m Nick Hanauer founder of Civic Ventures.
David Goldstein:
I’m David Goldstein, senior fellow at Civic Ventures
Nick Hanauer:
Well, Goldie today we get to interview the woman of the moment, our friend, Stephanie Kelton, who is one of the nation’s biggest proponents of Modern Monetary Theory.
David Goldstein:
And it’s the moment because one of the things that MMT says is that federal debts and deficits don’t really matter in and of themselves, a deficit doesn’t matter, it’s inflation we should be looking at. Are we maxing out the resources in the economy rather than these fictional numbers about dollars in the deficit. And right now Nick, we are just racking up huge deficits all of a sudden and nobody seems to care.
Nick Hanauer:
Yeah. We are running a giant natural experiment, as we have been for the last 30, 40 years, as the deficit has gone from essentially zero to 20 trillion or more on MMT. What’s fascinating of course, is that none of the predictions of doom that conventional economic thinking has made have come to pass. And when I first heard about MMT, I was deeply skeptical. When you first hear it you think, well, that’s just crazy talk. The truth is, the more you think about it, more ways you turn it over in your head, the more sense it makes, particularly in the context of the actual evidence available.
David Goldstein:
Real life experience. It’s so odd Nick, that this is another example of something where orthodox economics, the theory seems to contradict the empirical evidence.
Nick Hanauer:
Yeah. And it’s just like, maybe that’s why we don’t have runaway inflation. That’s just not a thing that’s going to happen given the circumstances.
David Goldstein:
In addition to being of the leading experts on MMT, Stephanie Kelton is a professor of economics and public policy at Stony Brook university. And she is the former chief economist for the Democrats on the US Senate Budget Committee.
Stephanie Kelton:
My name is Stephanie Kelton and I’m the author of a new book called The Deficit Myth, Modern Monetary Theory and The Birth of The People’s Economy.
Nick Hanauer:
So Stephanie, let’s start with a quick recap of what Modern Monetary Theory is. And then go on to describe what the deficit myth is.
Stephanie Kelton:
So Modern Monetary Theory is a framework, a branch of macro economics. I would say it is our attempt to provide a coherent macro economic framework that best resembles the actual monetary system that we have today, as opposed to one that we had, let’s say pre 1971, when the US dollar was still tethered to gold. So we’re recognizing that the monetary system has changed. We have what’s called a Fiat currency. It is a floating exchange rate, not a fixed exchange rate. And that opens up policy space, both in terms of monetary policy, what the federal reserve can do and fiscal policy, how Congress can run its budget.
So the implications are very different when you recognize that you’re working with a monetary system that is no longer tethered to gold, it’s not a fixed exchange rate. And it should change the way we think about the public sector or government finances and what the government for example can afford to do using its budget to solve real problems in our economy.
Nick Hanauer:
Yeah. And so at the most basic level, the old way of understanding the economy and the government was in the same way that people understood their own personal households, is that they’re suspending would be constrained by their income, right?
Stephanie Kelton:
Yeah. That’s right. We’ve been basically, I don’t want to say brainwashed, but in a sense, we’ve been indoctrinated by the constant refrain that the government should put its fiscal house in order. When you hear language like that, the reference to the house, they are implicitly telling us to think in terms of our own personal household finances. And they’re asking us to think about how reckless and irresponsible it must be for the government to continually spend more than it takes in and to borrow and take on debt. And they want us to draw certain conclusions about the way the federal government is behaving based on our understanding of our own personal finances.
David Goldstein:
Yeah. And it’s not just that deficits aren’t bad. You say that, and this is a quote in almost all instances, federal deficits are good for the economy, which must have a lot of head spinning.
Stephanie Kelton:
Well, you know what, because it’s so counterintuitive for so many people because the word deficit itself is problematic. You turn on the TV and let’s imagine that we were back in a world where we can still turn on the TV and see sports. You turn on the TV and you’re checking in on your favorite team and you hear the announcer say, boy, the Chiefs aren’t going to be able to pull this one off unless they can overcome a 14 point deficit in the next half. Well, that’s how we think about deficits. There’s something wrong with them. There’s something you want to eliminate. They’re a problem. And when we’re talking about the government’s finances, we could just as easily substitute the word surplus every time we see the word deficit and the sentence would still have meaning.
So let me give you an example. When the government’s budget is in deficit, it simply means that the government is spending more dollars into the economy than it is subtracting back out, mostly through taxation. So if the government spends, let’s say $100 into the US economy, but it only taxes 90 of those dollars back out, we label that a fiscal deficit, we say the government’s budget is in deficit. And then a lot of people get very anxious. But what they forget is that if the government has spent 100 in and only subtracted away 90, somebody’s got 10. Their deficit is our financial surplus. Their red ink is our black ink. They’re are two sides of the same coin.
We choose to dialogue using one word, deficit, to describe what’s happening, when we could just as easily substitute the word surplus and talk about the same outcome from the perspective of the non-government part of the economy. So yes, you’re right, every deficit is good for someone. The question is for whom and for what purpose? Who got that 10? And was it used to make investments in our critical infrastructure, in healthcare, in education in R&D, or did it become simply a windfall to the people in our society who least need the help? But at the end of the day, every deficit is good for someone because it is somebody else’s surplus.
David Goldstein:
And as you pointed out in the book, this isn’t theory, this is math. That is an accounting identity that you just described.
Stephanie Kelton:
That’s right. It falls right out of the national income and product accounts and the flow of funds data. It is an irrefutable statement, it’s like saying, how else could it work if the government spends 100 in and taxes 90 out? Somebody gets 10 and you can see it. You can see it in the data. It’s a one-to-one relationship.
Nick Hanauer:
And the flip side of that is that if the government runs surpluses, it means that the private sector is running a deficit.
Stephanie Kelton:
Well, I would be a little bit careful. It might mean the private sector is running a deficit. It definitely means the non-government sector is in deficit. Okay. So you’re exactly right. A fiscal deficit, a government deficit works like a blower. If you imagine a leaf blower, except that the blower is blowing dollars out of it. And it’s blowing those dollars onto somebody’s balance sheet. When the government’s budget is in deficit, dollars are being emitted and they’re going somewhere. When the government’s budget is in surplus, the reverse happens. It’s like a vacuum, it’s hoovering dollars off of our balance sheets. Because if the government is in surplus, it means, let’s say they tax $100 out of the economy, but they only spend 90 back in. So somebody is down 10, the result of their surplus is somebody else’s now in the red.
David Goldstein:
So this way of viewing federal budgets for governments like the US who have a sovereign currency, or who are issuing their own money, actually raises, as you pointed out in the book, there’s several deficit myths. Could you just step through them very quickly?
Stephanie Kelton:
I don’t know, but I’ll try.
David Goldstein:
I know you have a whole book to do it, but well, we’ll give you a few minutes.
Stephanie Kelton:
Yeah. Each one gets its own chapter. So just as quickly as I can. The first chapter is called, don’t think of a household. And we have already touched on that. Don’t think of the federal government, which is the issuer of the currency, the way you think of a household, a private business, or even a state or local government, which are all currency users. The federal government gets to run its budget differently from the rest of us, because it doesn’t have to go out and find the money in order to spend.
The second chapter is about inflation. So once you recognize that the federal government faces no purely financial constraint, and then people go, oh my God, what’s to stop them from spending to infinity and beyond? And the answer is our economy is real resource constraint, there’s an inflation constraint.
So you have the power of the purse. Congress has the power and the purse, and we should be able to all agree having watched what they’ve done over the course of the past few months, kicking piece of legislation after piece of legislation, through trillions of dollars being authorized that Congress can do that. The House has already passed, let’s say three trillion, the CARES act was 2.2 trillion. The House has moved forward with another bill, three trillion HEROES bill.
The Senate hasn’t taken it up, but if they do, we could pass another three trillion. So Congress has the power of the purse. The limit is in our economy’s ability to safely absorb whatever new spending Congress authorizes. So you could imagine that at some point, if Congress stayed very aggressive and kept passing bills and committing more and more spending, eventually this economy will recover and return to something like full employment.
At that point, if Congress kept trying to spend trillions of dollars into the economy, well, it’s obviously going to create an inflation problem because the businesses can’t keep up with the demand by producing more supply, they’re at their capacity constraint. So that’s the second myth, is that deficits are evidence of overspending, they’re not. Inflation is evidence of overspending. And then we get to the national debt and we have to dispel with all of these myths about how we’re borrowing from China. And if the Chinese get very unhappy with us, they might turn off the dollar spicket and then no more dollars will come out into the US economy. And the government won’t be able to cover its bills because China has decided to stop lending to the US, that’s all completely nonsense. The US government is the issuer of the dollar, it doesn’t have to get it from China or anywhere else in order to spend.
The fourth chapter is about crowding out the wonkiest myth that economists talk about with respect and deficits. I say, well, the reason that deficits are dangerous is because when the government runs a deficit, it has to borrow to finance the extra spending, and the place that it goes to get the money is from savers. And there are only so many dollars available to be loaned out. And if the government wants to gobble up a bigger share of that stockpile of dollars, then it leaves behind fewer dollars for private industry, businesses will get crowded out and so you get less private sector investment, and over time a less dynamic, slower growing economy. So deficits are bad because they drive up interest rates and elbow the private sector out of the market. So we go through why that’s wrong.
David Goldstein:
And it’s wrong because it’s actually the opposite.
Stephanie Kelton:
Exactly. See, that’s what’s so powerful I think about that chapter. And what MMT demonstrates is that not only is it not the case that the government is gobbling up part of the pool of loanable funds, it’s actually augmenting the supply of savings that’s available to the rest of the world, including the domestic economy. So it adds the dollars in, and then transforms some of those dollars into interest bearing currency, which is US treasury bonds. But unfortunately we label these things, the national debt, and that causes people to get very nervous.
And then there’s a chapter on the trade deficit that asks us if we really want to think about trade deficits as evidence of “losing at trade.” You hear president Trump talk and he looks at a trade deficit and he is convinced that it’s evidence that America is losing at trade. He would like to eliminate the trade deficit, but I look at the trade deficit and MMT points out that a trade deficit means in dollar terms that we are buying more goods and services from the rest of the world than they’re buying from us. But that in real terms, our trade deficit is our stuff’s surplus.
So the challenge really comes down to jobs and the impact on communities and industries and let’s say supply chain issues, all of that is relevant. But the way we think about the trade deficit is often incomplete at best, let’s say. And then there’s a chapter on social security, which all of us have heard at some point somebody say that social security and Medicare are unsustainable, that we can’t afford these programs any longer, and that they’re driving some longterm debt crisis in America. And eventually we’re just going to have to come to terms with this and “reform these programs,” which is call for cut.
David Goldstein:
And that’s a fiction.
Stephanie Kelton:
Yeah. Well, if the promise the federal government is making to future retirees, their dependents and the disabled is a financial payment. Once a month you get a social security check, then even Alan Greenspan recognized. And I quote him in the book in this chapter, even Alan Greenspan said under oath in testimony before Congress, that there’s nothing to prevent the federal government from creating as much money as it wants and paying it to someone. This was in response to a question from then Congressman Paul Ryan, who desperately wanted to privatize social security. And he was trying to talk Greenspan into agreeing with his premise, that the system is unaffordable, that it’s running out of money and Greenspan didn’t play the game.
Greenspan told him no, actually there’s nothing to prevent the government from mailing benefit checks to everybody in the future. The question he said is how do you make sure that when those checks go out in five, 10, 20 years, that the US economy is productive enough at that time with a shrinking workforce of larger retired population, how do you make sure that people who receive those checks can turn around and spend them into an economy that is productive enough to produce the goods and services that everybody’s trying to buy so you don’t get an inflation problem? It just comes down to the inflation question. It can not be a question of affordability or ability to make those payments to future retirees.
Nick Hanauer:
And Stephanie, I think one of the things that is quite remarkable about this moment is that when people talk about modern monetary theory, they often bring to it this notion that this would be a giant departure from our current practice. And in fact, we’ve been running an experiment in MMT for the last 20 or 30 years. The country currently went into the crisis with 20 trillion in deficit already.
David Goldstein:
And virtually no inflation.
Nick Hanauer:
No inflation. We were already doing it, just calling it a different thing.
Stephanie Kelton:
It’s funny because MMT has been from the very beginning an attempt to provide an accurate description of how the monetary system works and how government finance works. So it is a narrative description. Yes, there are empirical and theoretical aspects, but that’s what it is. The project is about describing to us how our monetary system and government finance works. So it works now, it worked 10 years ago. It worked 20 years ago. It worked 30 years ago because all the way through, we’ve just been describing. We provided an accurate description during the Clinton years when the budget was in surplus.
So I was an MMT works when the government budget is in surplus too in the sense that it’s a descriptive project and we could explain then when many others, in fact very few people at the time made the argument that we did, which was that those Clinton’s surpluses were being built on the backs of the US private sector. And it was private sector leverage, which was unsustainable and unprecedented. And that those surpluses were going to have to disappear. We were not going to be running budget surpluses as CBO and others were projecting for the next decade. And they actually said the government’s budget was going to be in surplus for so many years that we were going to end up retiring the entire national debt. And only a handful of NMT economists said this is preposterous. It just won’t happen.
David Goldstein:
I think that understanding these dynamics in terms of modern monetary theory is that it highlights not whether we’re going to do these things, but what we actually spend the money on. So for instance, we took down approximately $2 trillion more debt, you would call it, I guess, under the Republican tax cuts of 2017, but we actually didn’t make investments with any of that money. We basically moved money into the bank accounts of big corporations and rich people.
Stephanie Kelton:
Absolutely correct. Yes, that’s exactly what we did. The tax cuts were structured in such a way that 83% of the benefits on the personal income tax side went to folks in the top 1% of the income distribution. And I think we probably all agree that the marginal propensity to spend out of that additional income for folks at the very top is quite low. So you didn’t get much economic bang for the buck with respect to those. But what MMT would say is that also means that it didn’t eat up a lot of real resource space in the economy. In other words, there are some economists who looked at what the Republicans were doing, and they said, oh my God, this is terrible. If these tax cuts pass, then it’s going to leave the US government living on a shoestring for decades to come. That’s actually something a former us treasury secretary and someone who worked in the Obama administration said, if the tax cuts pass, we will be living on a shoestring for decades to come.
We will be unable to deal with the next downturn. When it arrives, we won’t have the fiscal capacity to respond. And we might even be in jeopardy in terms of military engagement if something were to happen, he mentioned North Korea because we pass these tax cuts. Now look, here we are, the tax cut is passed. You’re correct, they add something like two trillion to deficits over the next 10 years. A couple of trillion more to the national debt, and where are we? We are kicking out legislation for trillions of dollars to respond to the coronavirus pandemic and the ensuing economic meltdown. There is nothing that we did in the past that is constraining Congress from taking action today from using the power of the purse to move legislation, commit trillions of dollars and so forth.
So I think that it’s important that people understand that the deficits that we ran in the past, well, I didn’t like them, I didn’t like the use of the federal budget for that purpose. Delivering windfalls to people who least need the help was bad, it widens income in wealth inequality, it didn’t do much for jobs and the economy, but it also didn’t do the very bad things that a number of economists told us that it was going to do.
David Goldstein:
So this brings us to one of the things I really loved about your book Stephanie, is that you’ve moved from being descriptive to being prescriptive. And I was particularly struck by your explanation of a federal jobs guarantee and how it works as in my work as an automatic stabilizer. If you could briefly explain what a federal jobs guarantee would look like and why we can afford it and why we should move towards a program like that.
Stephanie Kelton:
Sure. And I know that you’ve had a Pavlina Tcherneva in your program before and I know that she’s got a book, I think it’s called A Federal Job Guarantee and it’s out maybe in the UK. And I think coming out in the US here basically any day. So anybody who’s interested can also look at her book for a much more thorough going discussion. So just the thumbnail sketch in the last bit of time I know you have, I think of a federal job guarantee like a public option in the labor market where you could imagine a public option in healthcare or a public option in a banking. Here’s a public option in the labor market. And it says to people, if you want a job and you cannot find work anywhere else in the economy, you can walk into one of the thousands of American jobs centers that exist all over this country, and they’re the old unemployment offices. You can walk in without a job and walk out with a job.
You don’t have to move, you don’t have to leave your community, your family to go find jobs where you think they’re geographically located. You don’t have to go get a new degree and upgrade your skills in order to make yourself employable, we will employ you. The federal government funds the program. So the funding is provided by the issuer of the currency, they can fund it. But the program itself is locally administered. So the people living in the communities all across this country. Now we have tens of millions of people who are jobless, largely as a consequence of the health pandemic. Some of them will go back into private sector employment, but a lot of them won’t. For many of these people who lost jobs, they will remain unemployed for months, years, and some of them may never find work again.
So the idea is to set up a program that ensures that anybody who wants to work can have meaningful work and a living wage, doing things that serve the community. We say that the job should all be oriented around building a care economy, caring for people, caring for communities, caring for the planet. And so people transition into this program of public service employment. They work until such time as the economy begins to recover and private businesses start hiring workers out of this program and back into the private sector.
So it works like an automatic stabilizer. You can imagine if we had it in place now, before all of these people lost jobs, instead of joining the ranks of the unemployed, standing in lines for unemployment insurance and filling out paperwork and trying to get through to somebody on the phone, you would instead have a job. Now many of these people because of the health risks, you wouldn’t send out to start doing things, but some of them you could, some of them could do contact tracing, some of them could help deliver meals or medicines. You can do this safely and have some people in the program go out, but many others, maybe their job right now is to just stay home and prevent us from overwhelming the healthcare system. And you could still provide the income support for people. So that’s essentially how it would work.
David Goldstein:
That’s right. And it becomes an incredibly efficient way for us as a country to sustain the economy without shoveling money into the bank accounts of big corporations, who would just give it to shareholders.
Stephanie Kelton:
You’re exactly right. It targets the resources in terms of the dollars exactly into the hands of people who need them. It is a very targeted program and it right-sizes itself. It makes the budget responsive to changing economic conditions. So it doesn’t take an act of Congress. Right now they extend unemployment insurance, they top it up with an extra $600 a week, but then that runs out and then you have to have another act of Congress and will they, or won’t they extend it? And then when you lie the unemployment insurance runs out, but you still don’t have a job, then does Congress extend? You have to keep waiting for Congress to act.
If you had a federal job guarantee, would take one act of Congress. You have to get them to act one time and then the program is in place and it works like a new entitlement program. It’s there and if you qualify, you get the payment and the payment doesn’t run out. There’s no time duration. It’s not like you get kicked out of the program after a certain period of time. But it would protect us in good times and in bad. And so when the economy is in a downturn, it absorbs workers into the program, supports incomes, but then as the economy recovers, it releases workers and the budget automatically begins to shrink because you don’t have as many people in the program. So it really does in a sense control, or it has self-limiting properties. You don’t hire to infinity.
David Goldstein:
Right. And here’s another frame I think you’ll love Nick. So I’m going to ask you, Nick, what is the minimum wage?
Nick Hanauer:
This is a trick question.
David Goldstein:
It’s a trick question. What is the minimum wage Nick?
Nick Hanauer:
$7.25 an hour.
David Goldstein:
Stephanie, you cared to correct him.
Stephanie Kelton:
Well, Hyman Minsky famously said the minimum wage in this country is zero, because that is the wage you earn if you are unemployed, only employed workers who are employed at the federal minimum wage gets $7.25 an hour, but the minimum wage is effectively zero.
David Goldstein:
And so a federal jobs guarantee would essentially set the minimum wage to whatever the wages that it pays.
Stephanie Kelton:
Yeah. You would basically establish a wage and compensation package because the way we envision it, you have a living wage and benefits as well. So that wage and benefit package then sets a floor to which any worker in any part of the country, if their employer cannot provide at as good a deal is at risk of having their employee opt into the public service employment.
Nick Hanauer:
Right. For sure. I know a lot of the biggest proponents of a wage guarantee think that one of its biggest benefits is the upward pressure it places on wages and benefits in the private market.
Stephanie Kelton:
Yeah. I would think that depending on where you introduce this, if you come in much higher than the current federal minimum wage, you would presumably get a bigger one time adjustment upward. But it wouldn’t be inflationary because inflations of course are continuous increase in prices. So I would expect you to get a onetime realignment as businesses adjust the compensation package recognizing that there is no competition at the bottom. And that’s a good thing. That’s a feature, not a bug.
Nick Hanauer:
Absolutely.
David Goldstein:
So I know we’ve gone past our time already. I’ll finish on one last question. Do we need to worry about the federal deficit and debt?
Stephanie Kelton:
Well, I don’t worry about the debt because I view it as just a historical record of all the past deficits that have been run, where the government spent more dollars into the economy than it subtracted out, and those dollars are sitting there on somebody’s bank account portfolio, whatever you want to call it, ledger, in the form of us treasuries, that’s all it is. Do we need to worry about deficits? I’ll tell you what worries me right now, that we may let the deficit get too small. That’s what worries me. That’s what we did after the 2008 financial crisis. Congress responded with the American Recovery and Reinvestment act, the so called Obama stimulus, it became evident I think to most economists pretty quickly that it wasn’t enough that the economy needed more fiscal support. Congress did not have the appetite for that.
By then there was too much anxiety about what was happening to the deficit and the national debt. And we didn’t get another piece of bold legislation to support our economy instead we relied on the federal reserve. And poor Ben Bernanke was there trying to do everything in his power to sustain an economic recovery, but it was a very tepid recovery. It was anemic. The jobs that came back were largely as good as the jobs that were lost. They were lower wage, lower hour jobs.
And so what worries me isn’t that we have a $3 trillion or $4 trillion deficit, but that we don’t have a $3 trillion or $4 trillion or $5 trillion deficit long enough that Congress doesn’t remain committed to supporting this economy for as long as it takes. And we ended up in a situation where tens of millions of people are without jobs and maybe without the income support that they need. And that domino effect in terms of bankruptcies and people losing their homes, being evicted. It’s more than I really want to imagine.
Nick Hanauer:
And if I could just add though, I think there’s another danger too, which is that we do spend more money into the economy than we take in, but we spend it on the wrong things. That we do these egregious buyouts and supports for corporations and industries that frankly don’t deserve to be saved or have acted so irresponsibly and so profligately up to this point that by so doing we erode public trust. And we prove to ordinary citizens that these programs are just part of the corruption that has characterized how we’ve run the economy over the last 30, 40 years, that it’s all a rigged game designed to make a few rich people richer and leave everyone else behind. And when you do that, you erode the political capacity to do the right thing even if the tools are available. Now I think that’s a very great danger.
Stephanie Kelton:
I hear you Nick and I share that. As I say, every deficit is good for someone. The question is for who and for what are we doing this? That you can use the power of the purse, but you can also abuse the power of the purse. To the extent that Mitch McConnell and the Republicans are going to try to find ways to any additional legislation that comes through has to include payroll tax or whatever it is, they’re going to work into this thing. I think you’re absolutely right, not all deficits are created equal and some are going to deliver broad based benefits to meaningfully improve life for the majority of people who are struggling and others are going to continue to serve the interests of the people who are already doing extraordinarily well.
Nick Hanauer:
It’s not completely a coincidence that the wealthiest 1% of Americans have gotten about $20 trillion richer, at exactly the same time the federal deficit has grown by about $20 trillion. These two things are not completely cause and effect, but they are correlated.
Stephanie Kelton:
Well. You’re you’re right. I would love to be able to inherit if I were part of an administration coming in and could run the table with the house and the Senate and the White House. I would love to inherit a $4 or $5 trillion deficit and just realign the thing. I would not want to eliminate it, provided that the economy still needed the fiscal support and so forth. But to be in a position where somebody has already handed you a $5 trillion deficit, and then to be able to rewrite the budget and direct those resources to the places where they can do the greatest good and still just take ownership of the $4 or $5 trillion deficit, you can transform this country.
David Goldstein:
I want to thank you so much for your time Stephanie.
Nick Hanauer:
Thank you so much for being with us again.
Stephanie Kelton:
Thank you both. I always enjoy coming on.
Nick Hanauer:
Talk soon.
Stephanie Kelton:
Bye.
David Goldstein:
Bye. So Nick, I think my big takeaway from both reading the book and our conversation with Stephanie is that we need to really concentrate on keeping our eyes on the prize that often we’re distracted by the wrong things. The conventional way of looking at economics tells us that deficits matter, when in fact it’s inflation we should be looking at as a sign of whether we’re spending too much, not the size of the bet deficit.
And it’s the capacity of our economy to absorb this spending that is really an issue, not the spending itself. And throughout on all of these deficit myths keep coming back to that we’re focusing on the wrong thing. With social security, it’s not the health of the trust fund because the trust fund is fictional, it’s do we have the capacity in the economy to provide the services that seniors will want and need to purchase.
When it comes to trade, it’s not the trade deficit that matters, it’s really jobs we should be looking at. What is trade doing to American jobs? And so on and so on and so on. But the more I read and the more I understand about MMT, the more I realize that it is an intellectual framework for having us focus on how to maximize the full potential of our economy and our society instead of being distracted by all these numbers we’ve been taught are important but in the end aren’t.
Nick Hanauer:
I think you’re correct. As Stephanie pointed out in the interview, we’re not inventing a new thing, MMT is an attempt to describe accurately what we have been doing for a very long time. And when you describe it accurately, it changes your perspectives on what you’ve been up to and why you’ve been doing it and what the upsides and downsides are. And I find it to be incredibly refreshing and it for sure highlights both the opportunities that the country has to use the capacity of the federal government to spend more money and more, I guess that’s the best way to put it, to spend more money into the economy in productive ways, to enhance the actual fundamental aspects of the economy in positive ways. How big the “deficit” is on paper has almost no bearing on how fundamentally productive the actual economy is, like how well educated people are, how good our infrastructure is, how the rate at which we are actually innovating on important things.
Those things are what we should be focused on, what the real unemployment rate is in the economy, what the actual minimum wage is in the economy, how easy is it for the typical family to live a productive, stable, and secure economic life. These are the things we should be focused on, not this accounting number that reflects the difference between what we spend and how much taxes people pay.
David Goldstein:
Right. And of course the flip side to all this, and maybe this is an uncomfortable realization for many of our listeners is that in a recession like this, where there is so much fiscal space to operate, we don’t actually need to tax rich people like you Nick, to pay for the things we want and need to do. That doesn’t mean we don’t need to tax you, but we don’t need to tax you to pay for these things because we can run deficits at the moment and quite large deficits at the moment, without the risk of inflation. Where we need to tax rich people like you is to address the gross inequality that also threatens to really undermine democracy itself because with great wealth comes great power. And that outsize power is part of what’s preventing us from doing the things we need.
Nick Hanauer:
There are two sides to the ledger. And somebody is getting the money.
David Goldstein:
Somebody and it’s like you and you’re friends.
Nick Hanauer:
Somebody is getting the money. And the question is, who’s getting the money and what are they doing with it? And it’s not surprising that you can point to the Trump administration for the most egregiously stupid examples, but like the 2017 tax cut where you took 83% of this $2 trillion in deficit spending and just gave it to rich people for no other reason than that would just be a fun thing to do. It’s just a great example of the wrong kind of government spending, which is what it was. It was just government spending by another name to contrast with what we should have done, which is to take that $2 trillion and to build bridges and solar panels and God knows what else that the country could you really have used to increase its productive capacity.
David Goldstein:
I wish we could have talked to her for hours Nick. I recommend you all go out and, whether you read or listen to it, you get a copy of The Deficit Myth. It is a great descriptive explanation of how MMT works and also a conversation on how we might use MMT in this moment.
Nick Hanauer:
In next week’s episode of Pitchfork Economics, we get to talk to our friend, Tom Friedman.
Speaker 2:
Pitchfork Economics is produced by Civic Ventures. If you like the show, make sure to subscribe, rate and review us wherever you get your podcasts. Find us on Twitter and Facebook at Civic Action and Nick Hanauer, follow our writing on medium at Civic Skunk Works and peek behind the podcast scenes on Instagram at PitchforkEconomics. As always from our team at Civic ventures, thanks for listening. See you next week.