Transcript: Stephanie Kelton on US Fiscal Policy and the ‘Deficit Myth’

The transcript from this week’s, MiB: Stephanie Kelton on US Fiscal Policy and the ‘Deficit Myth’, is below.

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Barry Ritholtz: This week on the podcast, I have another extra special guest. Professor Stephanie Kelton teaches Public Policy and Economics at SUNY Stony Brook. She really came to the fore in the 2010s when she was the chief economist for the US Senate Budget Committee, and had previously in her career, revisited the works of people like Hyman Minsky and Lord Keens and Warren Mosler, who’s really probably the single largest influencer of modern monetary theory, which looks at the overall economy, not from the perspective of federal deficits, but the federal impact on inflation. Really just a fascinating conversation talking about what is and is not heterodoxy in conventional thinking, in in economics, and why the field is so hesitant to change, even when the evidence is overwhelming that what they’re doing is false or, or based on data that just doesn’t seem to add up. Her book, the Deficit Myth was a surprise bestseller, came out right in the middle of the pandemic and did really well.

She’s been on all the, you know, top 100 lists, most influential thinkers, women in finance, policy influencers. She’s just really a fascinating person with a perspective that is kind of hard to argue with a lot of what she believes is outside of the mainstream, but it is really stood the test of time when the traditional economists have said and done things. They’ve made forecasts, they’ve made predictions about what will and won’t happen, and none of it’s come true. And so when the mainstream economists are getting it wrong, you have to look at people who approach the field from a different perspective. She’s done a really great job. I thought the conversation was fascinating. And I think you also, with no further ado, my conversation with SUNY Stony Brooks. Professor Stephanie Kelton. Thank you for having me. Nice to be here. Nice to have you. I’ve been wanting to have you here since the book first came out during the pandemic, and we’ll spend a lot of time talking about it. But before we get into that, I just want to get a, a handle on your background. You get a bachelor’s, a BA and a BS in Economics and Business at California Sacramento, then University of Cambridge, master’s in Philosophy and Economics, then a PhD in economics at the New School. That sounds like you were teeing up for a career in academia. What, what was the original plan

Stephanie Kelton: To be a dentist. Really? Yeah.

Barry Ritholtz: Why a dentist?

Stephanie Kelton: I have to think, you know, what do you do for a living where you have, you know, decent income and you know there’s gonna be a job and

Barry Ritholtz: High suicide rates.

Stephanie Kelton: I didn’t think about that at the time, but I learned later. I also didn’t realize that you had to work on cadavers. And so I figured out pretty early on that that wasn’t gonna be the path. And then I, you know, I switched, I, I was pre-law for a while. I was an accounting major for a good period of time. I got well into the upper division stuff, and then I couldn’t imagine myself as an accountant. And I thought, what do you do? You sit in a room all day doing tax returns or something, it’s just not, you know, that it seemed antisocial. And so then it became finance and series of accidents. You know, you have that one professor who you stumble on and it just changes your life. And my trajectory changed to economics by accident. Really,

00:04:17 [Speaker Changed] Really fascinating. So you end up teaching at the University of Missouri, Kansas City for 18 years, from 1999 to 2017. Tell us, I’m curious, California to Cambridge to the new school in New York and then Kansas City. Tell us about this geographic progression.

Stephanie Kelton: Yeah, so I was doing my undergraduate at Cal State Sacramento. And were

00:04:44 [Speaker Changed] You originally a California girl, or

Stephanie Kelton: No, we were living in North Carolina. I was a senior in high school. I was gonna go to the University of North Carolina. My dad was in the military, so we lived all over the place. Right. And one day he came home and he said, you know, we’re sitting at the dinner table and he announces that he put in his retirement papers and the family was going to go back to California and I could either stay on the other, you know, side of the country by myself at 17, well, you know, a college kid with a car that used to break down on me all the time, or I could follow them to California. Of course, I missed all the application deadlines. And so I ended up going with them and, and doing most of my undergraduate work at Cal State Sacramento. And that’s where I ended up taking a micro theory course with this guy named John Henry.

And, you know, I could have picked any course in the catalog, any, any Tuesday, Thursday section. I happened to pick that one. And he just kept encouraging me to keep going. And by the time I took the history of economic thought, I was really hooked. And he took me out to lunch one day I was thinking about graduate school. ’cause he said, you know, you ought to think about it. And so he took me to lunch and this guy named Randy Ray happened to be in town, and Randy is an economist. He did his PhD dissertation at Wash U under Hyman Minsky. So a lot of listeners will be familiar with Sure. Min Minsky, because it’s stuff like the Minsky moment and all that. And so Randy came to lunch. I’d never met him before I knew who he was, but John said to Randy, give her some advice, tell her what she should do about graduate school. And Randy said, go to Harvard. Really? And John said, no, no, no, no, don’t listen to him. And he was totally opposed. Why?

00:06:25 [Speaker Changed] Because

Stephanie Kelton: I think he rightly understood that if I had gone to Harvard, that I would’ve received a certain kind of training. And by that point I was already, you know, people will use the word heterodox. I don’t like that word, but for lack of a, a better synonym at the moment, I’ll just use it. But, you know, I had been reading people like Minsky and, and I was really into that kind of stuff. And vlan and, you know, the history of thought really grabbed me. And I think John understood that if I’d gone to Harvard, I would’ve gotten a really conventional training and I wouldn’t have been exposed to some of the really interesting thinkers and theorists. So John Henry said, go to Cambridge, not Harvard, but go to Cambridge University. And there were people there he thought were interesting. And that’s what I ended up doing. Huh

00:07:14 [Speaker Changed]  Thurston Veblen;  fascinating. Probably the earliest theorist on consumer spending Yeah. And materialism and kind of interesting that you gravitated towards that and away from just being cranked out of the factory to become another consultant. Not, not your path.

Stephanie Kelton: No, it wasn’t. And you know, when I was at Cambridge, I was there, it’s a very, it was a very unusual program because, you know, you show up straight out of undergrad, you do four courses, each course is one year long. Wow. And at the end of the one year period, you start writing a dissertation and then you’re, you’re a PhD economist having four courses at the graduate level under your belt. And I thought, how do you sell yourself as an economist? Really, it just didn’t feel right. And I wasn’t sure I could compete for a job in academia, which is four courses. And most of the, you know, kids, I’ll say kids, most of the people that I did the master’s degree with, they were flying back to the US and they were interviewing for Wall Street jobs. And I knew that that was not my path. Right. And I already gotten a fellowship from Cambridge University through Christ College to go to the Levy Institute and, and spend a year working on the dissertation. And so I went

00:08:29 [Speaker Changed] To, wait, so this is, this is a year of four classes I finished before that are full year classes. Yep. Kind of reminds me a little bit of law school where you’re taking the four gut courses, torts, civil procedure, property and Con Law. No, con Law was second year. What was the contracts? And they’re like killer courses. And you’re taking form at once, then you have a full additional year to work on your, not PhD dissertation, but master’s dissertation, is that right?

Stephanie Kelton: No, it would be the PhD.

00:09:02 [Speaker Changed] Oh, so you do, that’s the, a year of four classes and then the PhD, and

Stephanie Kelton: Then you write your dissertation and you have a PhD. So I mean,

00:09:08 [Speaker Changed] Hold ho, ho ho. So, so you get a PhD from Cambridge and then you go to the new school for a PhD in Economics?

Stephanie Kelton: No, so, so I started on the journey, I took, I got the fellowship, which was go to the Levy Institute. We have a partner’s

00:09:22 [Speaker Changed] Where that located.

Stephanie Kelton: It’s in upstate New York. It’s right there on the campus of Bard College, kind of in the Hudson Valley. Very

00:09:27 [Speaker Changed] Lovely up there. It’s

Stephanie Kelton: Beautiful up there. And so they gave me money and the Levy Institute gave me, you know, office space and housing. And they had this arrangement with Cambridge. And the idea was you go and you spend a year there and you start writing, and then you would return and finish up the PhD.

00:09:43 [Speaker Changed] So Walden Pond for economics, essentially,

Stephanie Kelton: It honestly, it was like magic. And I, I get there and Randy Ray is there, he’s on a sabbatical, I think, and he’s doing research there. But I meet this guy named Wynn Godley. And Godley is just a fascinating character. I write about him a little bit in the book. He really pioneers the work around sectoral financial balances and stock flow, consistent modeling. And he’s this old British guy who was, you know, quite famous in England as a policy advisor and an economic forecaster. He was known as one of the, I think seven wise men. And anyway, his office was right next to mine. We shared a wall. He would sit in his office and play the oboe and just a, an amazing person. And I learned so much from him that I got there and I thought, there’s so much more to learn. I’ve done four courses, but I don’t, I don’t know enough.

So I started taking the train once a week. I’d go down to, into New York City, and I would sit in on courses at the new school. And I mean, I was surrounded by people I thought were 10 times brighter than I was. They were more thoughtful. They were having conversations that felt, you know, important and weighty. And I thought, oh, there’s no way, you know, I’m not ready. I, I need to, to stick around and do some more coursework. And so that’s what happened. I, I transferred, I finished up at the new school when Godly served on my dissertation committee. And that’s, that’s kind of how the journey unraveled.

00:11:12 [Speaker Changed] Really fascinating. How, how do you end up in, in Missouri, Kansas City?

Stephanie Kelton: So another person who had a major impact on my life, a lot of people, if they hear his name and, and recognize it, they’ll say, oh, Warren Mosler, the father of MMT. Sure, sure. So Warren was funding a small program at the new school. He was supporting some graduate students and he had a faculty member there named Ed Ne who had students kind of working on Warren’s ideas. And I was part of that group. And Randy Ray, who was at the Levy Institute, another economist named Matt Forter, who was at Levy. And I all ended up going to UMKC in the same year because Warren, you know, provided some seed money to help the graduate student program really kind of build itself up there, bring some economists in, have a, you know, what an outpost I guess for m and t. And, and so we all, we all went together.

00:12:15 [Speaker Changed] So what brought you in 2017 to my alma mater, SUNY Stony Brook. What led you to move over there and and what’s your focus there?

Stephanie Kelton: Well, my husband was the associate dean at the University of Kansas, and I was the chair of the department at the University of Missouri in Kansas City. I had taken a bit of time away to work on the hill. And so anyway, we were, you know, the universities are about an hour apart. We lived in Lawrence, Kansas, it’s great little college town. We loved it, you know, season tickets to the men’s basketball games and all that kind of stuff. Sure. It was, it was a lot of fun. But he had one foot in the administration and one foot in academia. And you know, he, he’s a history professor. He writes a lot of books. And so he kind of put himself out there on the job market and he thought, well, I could either go for a dean position or I could, you know, go for some kind of endowed chair somewhere, you know, move up.

And so Stony Brook had a position for an endowed chair in the history department and he interviewed for it and they liked him. And then the provost at the time was an economist. I think he had been Jamie Galbraith’s roommate at Yale. Huh. And he found out who Paul Kelton was married to. And then I think the conversations between the dean and the provost started and they said, we gotta get this. We gotta get him. This is a too far, we gotta get him. Yeah. And so we did, we, we decided it was, it was a great opportunity to, you know, go and, and be together and, you know, build and I could do public policy and economics and that was gonna be, you know, really appealing for me. ’cause I was just teaching economics at UMKC.

00:13:53 [Speaker Changed] Now, you just briefly alluded to your time on the Hill. You were the Chief Economist for the US Senate Budget Committee during, was that during the Obama administration? Is that right?

Stephanie Kelton: For the democratic staff? Right. So, yep. There the Republicans have one, the Democrats have one.

00:14:09 [Speaker Changed] Yes. Who was your, who was your peer on the other side?

Stephanie Kelton: Mike Enzi. Senator Mike Enzi from Wyoming. Was

00:14:19 [Speaker Changed] The Democrat or Republican on the committee?

Stephanie Kelton: Well, the Republicans had the Senate, Democrats had the house at the time. And so Bernie Sanders was the ranking member and he hired me. Oh

00:14:31 [Speaker Changed] Really? Yeah. So wait, so you are the Chief economist for the Democrat US Senate Budget Committee, who is the chief economist for the Republicans

Stephanie Kelton: Bill something?

00:14:41 [Speaker Changed] I don’t, so not someone you interacted a lot with or really kind of got to know?

Stephanie Kelton: No, I, when I got to the hill, I think it was just the first few days after I arrived, he reached out to me. He was a really nice guy and he said, you wanna get together and have coffee and I’ll kind of tell you how this whole thing works. And I said, that would be, sure. Yeah, that’d be really nice. So the two of us sat and it was really interesting ’cause you know, he’s Chief economist for the senators on the budget committee, the Republican side. And I’m there for the Democrats. And he said, look, the, we’re in charge ’cause we have the majority. So periodically every week, couple of weeks or whatever we’re gonna call a hearing, we get to decide what the hearing is about and we’re gonna get usually three witnesses to testify. And you guys will get two and we’ll try to give you as much notice as we can to line your witnesses up.

We’ll go for a week. You won’t always get that. But here’s how it’s gonna go. You know, we’ll say we wanna have a hearing on, you know, I don’t know, disability fraud and disability or the budget crisis or whatever the hell it is. And you know, maybe we’ll reach out to the people at Heritage or Cato or a EI or someplace like that and we’ll say, I need a quick paper on X, Y, Z, you know, leading up to this hearing. ’cause they wanna make their points as strongly as they can. He said, you might wanna reach out to the people at Cap or the Center on Budget and Policy Priorities or Washington Center for Equitable Growth or EPI, you know, like, you know, you’re just

Stephanie Kelton: Sort of, it was that friendly and non, it was non, it was adversarial. ’cause the, you know, when I was growing up, there were different parties, but there was some bipartisan, everybody seemed to be focused on what are we gonna do to make life better for everybody. And then it just sort of devolved into this partisan wrangling where the sort of collegial, dare I say, academic relationship across the aisle. That seems to have gone away.

00:16:35 [Speaker Changed] Yeah. I, I mean, we had a nice report. I will say that, that most of it felt to me very performative. You know, it was, I you said making people’s lives better. I don’t think I ever really had the sense that that was what these hearings were about. A lot of it was allowing folks to have their five minutes of, you know, I don’t know. Oh, I

00:16:57 [Speaker Changed] Mean, this is long before Oh yeah, Obama long before w Right. George George W. Bush back in the, I don’t know, maybe I’m, maybe I’m romanticizing. Yeah.

00:17:10 [Speaker Changed] You know,

00:17:11 [Speaker Changed] I don’t the Johnson Nixon, Ford Carter Reagan era, but it seemed like Tip O’Neill and Ronald Reagan, the joke was they would argue all day and then they go out and have a beer together. Exactly. Yeah.

00:17:24 [Speaker Changed] Well, I think there was still some of that around when I was there. And, you know, there’s certainly, you know, Bernie Francis Sanders, for all the, you know, personality and so forth, people associate him with a really kind of cantankerous old guy. He, he’s just as friendly as anybody else on the committee. Mike Enzi, the chair of the committee was just like, you’d look at him and think, that’s my grandpa. You know, he’s just a mild mannered, soft spoken, very easy. But things have changed, obviously,

00:17:54 [Speaker Changed] To, to say the very least in a decade. So let’s talk a little bit about the book first. What was the inspiration to write this

00:18:03 [Speaker Changed] Frustration? I mean, really, you know, I don’t, I don’t enjoy writing. I don’t like the process. I don’t, I don’t like sitting still that much. I,

00:18:12 [Speaker Changed] That’s really interesting. Yeah.

00:18:15 [Speaker Changed] I could never write a book because I wanted to, I wrote it because I felt like I had to,

00:18:20 [Speaker Changed] I’ve had that experience. I’ve had, I’ve had both ex, I’ve had the, I just gotta get this out because it’s burning a hole in my brain. But I’ve also had the, oh, let’s have some fun and play with some interesting ideas that’s a little less tedious and, and cathartic. But this just how to come out is that, was that you had to get it out of your head or

00:18:46 [Speaker Changed] I had to get it out. It’s so funny that you use that, that metaphor or that kind of terminology. Because I had a conversation with Marianne Williamson,

00:18:56 [Speaker Changed] You know, you know, why do I know that name? Because 00:18:57 [Speaker Changed] She ran for president. Oh,

00:18:59 [Speaker Changed] Okay. Okay.

00:19:01 [Speaker Changed] And I had just moved out to Stony Brook. We, we just moved to Long Island and I get this email from this person I’ve never heard of before. And she said, we have a mutual friend. And he says that I need to talk to you because I wanna try to understand economics better. Can I, I will come to you. You know what I would you would you talk to me? And I said, I guess so. Sure. You know, sure. You’re gonna come to me. So one day I’m sitting in the house, sweatpants, whatever, you know, t-shirt, we’re in the basement, my husband, I think we’re watching a football game or something. And all of a sudden I get the notification on my phone, you know, and it says, Marian Williamson is coming at four o’clock or whatever. And I thought, oh,

00:19:43 [Speaker Changed] Was she running by that time with like secret service and everything?

00:19:46 [Speaker Changed] No, no, no.

00:19:47 [Speaker Changed] So just a very casual drop by

00:19:48 [Speaker Changed] Years before, years before that. And, and yeah, so I, I see this notification. I said, Jesus, you know, my husband said what? And I said, somebody’s coming over. He said, who’s coming over? I said, I don’t know. I said, you got somebody coming over and you don’t know who it is. So I Google and I see Larry King, New York Times best, best seller, seven books and all this stuff. I thought, oh Jesus, you know, I gotta change. So I changed clothes, I went to the grocery store. I got some, you know, things to put out and, and host her and so forth. So she’s a, she’s a very sweet lady, you know, she, she came to the house and I mentioned that I was kind of toying with the idea of, of writing a book. And she said, darling, you must be pregnant with a book.

00:20:32 [Speaker Changed] I said, I get that.

00:20:33 [Speaker Changed] Okay. I didn’t get it at the at the time she said it, but I understand it now that it’s exactly what you said. There’s something that’s in you that you just have to push out. And that’s the best I can,

00:20:48 [Speaker Changed] The best I can do is say No. That makes perfect sense. Makes sense. But pregnant with a book is a great pregnant with a book. Listen,

00:20:53 [Speaker Changed] I got pregnant, Barry. I wasn’t expecting

00:20:55 [Speaker Changed] It. I I, it’s funny because my last book was 15 years ago and now I have a new one coming out and the next one will be in 2040. I’m like, I’m clockwork every 15 years. ’cause it takes, not only does it take a lot out of you, but it’s, you have to really enjoy sinning alone in front of a screen typing and, and you end up spending writing is the easy part. It’s the eding that’s so difficult. ’cause the first draft is, you know, the final version is 10 steps removed from the first draft. And you don’t realize how much time you spend thinking about why a semicolon and not a comma in this par like just dumb things. But it is a birthing process and it is messy and painful to say the very least. But that brings me to a really interesting question. The book comes out in June, 2020, instant acclaim, New York Times bestseller list. How giant of a surprise was that reaction?

00:22:05 [Speaker Changed] Huge. Yeah, 00:22:06 [Speaker Changed] Huge. Right?

00:22:06 [Speaker Changed] For sure. The phone rang, my editor was on the line and he was just tickled, tickled pink. And he said, I wanna be the first to congratulate you. And he, he knew what the list was going to look like the next morning and so called. Really?

00:22:21 [Speaker Changed] Yeah. Wow. So number one on the New York Times list?

00:22:23 [Speaker Changed] Not number one, but it was in the top f whatever it made the list. Right? I think there were 15 and Oh really? Maybe August 13th or something. Yeah.

00:22:31 [Speaker Changed] Amazing. That, that’s amazing. So the book publishes June, 2020. I’m gonna assume you finished writing that before the pandemic before the largest government stimulus since World War ii. What was the reaction to putting a book out in the middle of the pandemic?

00:22:49 [Speaker Changed] I was, it was in January of 2020. I was in Australia and Oh, so

00:22:54 [Speaker Changed] You were out and about traveling?

00:22:56 [Speaker Changed] You know, we didn’t know. I, it was January and

00:22:58 [Speaker Changed] We were, we were in Florida in January, 2020. And like you didn’t have a clue what was coming at all. Yeah,

00:23:06 [Speaker Changed] We, I, I was there and I had the, the copy edited manuscript in front of me and I remember just going through it one, one last time and, you know, two months later the world changed. Right. And I, I managed to get, there was room on the last page of the introduction or preface or something like that. And they allowed me to add a paragraph

00:23:27 [Speaker Changed] As long as it doesn’t affect the pagination Exactly. Of the rest

00:23:29 [Speaker Changed] Of the book, book exactly what they said. That’s exactly, I got really lucky. And so there is some commentary in the hardback, the very first, you know, published edition of the book about the pandemic. But that left my hands in March and Wow. In June it was out and in stores.

00:23:44 [Speaker Changed] So, so let’s talk a little bit about the deficit myth. I’ve heard pretty much since Ronald Reagan was elected president in 1980, deficits are gonna crowd out private capital choke off innovation. It’ll reduce new company formation, it’ll make us borrowing costs skyrocket, it’ll devalue the US dollar, it’s gonna cause rampant inflation and it will act as a drag on the overall economy. None of these things have happened. So why should we really care about deficits?

00:24:18 [Speaker Changed] Well, so I wrote the book not to say we shouldn’t care about deficits, but to say, you know, to address a lot of what you just said, why do people continue to repeat these things decade after decade after decade?

00:24:30 [Speaker Changed] I mean, it’s, we’re talking literally my whole life. 45 years. 55 years. Yeah. Since 1980. Yeah. That, that’s a long time. Half a century. It,

00:24:38 [Speaker Changed] It’s funny because, you know, you got Dick Cheney saying, Def Reagan proof deficits don’t matter. Right? But everybody, you know, really believes that deficits have the potential. And in some respects, not all of it is wrong. You know, there are times where deficits can create problems, but so much of the commentary and the way we think about and, and talk about and and shape policy around beliefs around, you know, the dangers and risks of running budget deficits. I just thought, you know, you almost need a chapter for every one of these different myths. And it’s not that deficits don’t matter, it’s that they matter in ways that we aren’t paying attention to. And so the book was really to try to get us to, you know, flip our perspective around to see that every deficit is good for someone. I mean, that’s right. You know, so a lot of what the book does is to try to make clear why that’s the case.

00:25:31 Why is every deficit good for someone in purely financial terms, government deficits are just the mirror image of a financial surplus in the non-government part of the economy. So we should talk about deficits for whom? Deficits for what, right? Deficits can be used to accomplish big things like, you know, repairing crumbling infrastructure, improving our healthcare education systems and, and so on and so forth. And they can also get too big and they can also exacerbate or cause an inflation problem. So we don’t diminish or dismiss any of those things, but really have a, a very different conversation about the role of deficits in the economy. Alright,

00:26:13 [Speaker Changed] So let, let’s have that conversation. When you say deficits can get too big, I think it was rein hunt and Rogoff’s paper said a hundred percent GDP to debt ratio is problem,

00:26:25 [Speaker Changed] 90% tipping point,

00:26:26 [Speaker Changed] That kind of stuff, right? I mean that was, that was the problem. Wasn’t the Excel spreadsheet error, which changed their math. The problem is Japan is running two 50%. Yep. And their economy seems to be doing just fine. Their quality of life is higher than ours. Their life expectancy is higher than ours. Their income is comparable. If Japan can run, what are we running like 1 75, 200 in the us Oh,

00:26:52 [Speaker Changed] We just, I mean, publicly held, I think we just hit 99%.

00:26:56 [Speaker Changed] So we’re about a hundred percent. Japan is two and a half times our size. Yeah. Does that suggest we have a long ways to go before the deficit is a problem? Or are there other potential issues?

00:27:08 [Speaker Changed] Well, I just don’t think the ratio is a, a very useful metric in terms of, you know, thinking about when you’ve quote unquote gone too far. And I think, you know, it’s always interesting how Japan tends to get left out of the conversation, right? Because it really is the counterpoint to so many of these arguments. I mean, the Japanese government pre Covid had been running large per persistent fiscal deficits for three decades. Three decades. They had, you know, the 10 year interest rate pinned at zero more recently. Right? But they didn’t, interest rates didn’t go up, they didn’t suffer the, the crowding out problem of rising interest rates, you know, pushing investment down. They didn’t get an inflation problem. They’ve been battling deflationary pressures, right? Basically the entire time you never have a failed auction. You don’t have a situation where, you know, bond vigilantes show up and say, that’s it. 250% we’re outta here. All, all of those things kept not happening. And so we always pointed to Japan and people would say, well, it’s demographics. There’s some reason that Japan is an exception to the rule. But I think the, the truth is that it’s just we’ve got so much of it wrong that that’s been the reason that all these bad things that were supposed to happen kept not happening. Huh.

00:28:26 [Speaker Changed] I just got an email from Washington DC consultant Bruce Melman saying, please explain this chart to me showing all these deficits and how is the United States up here and how is Japan down here? And I go, the answer is the Japanese central bank is, has interest rates set at 0.5%. You can finance a lot of deficits when the fed is at, was at least over 5% for a while and now is barely below it When you’re a 10th of that interest rate, hey, it’s pretty easy to finance deficits. How do you look at the relationship between a country’s central bank and its ability to manage its own debt?

00:29:12 [Speaker Changed] Well, the central bank, so if we’re talking about a country like Japan or the US what I’ll call and what I call in the book, you know, countries that have issue their own sovereign currencies, it’s not even an issue at higher rates of interest. Right? Remember when Volcker was fed chair gr Reagan was tripling the national debt, right? A massive buildup in military, you know, couple of huge tax cuts deficits were increasing, the debt was increasing very rapidly. Interest rates were quite high. But it still doesn’t pose a financing challenge as the central bank is just crediting bank accounts. I mean, that’s how the payments are made, right? And you can do that at very high interest rates. You can do that at very low interest rates. But when you get that combination of high interest rates and high debt, right? You got a lot of treasuries or a lot of jbs, you got a high debt to GDP ratio and high interest rates, you can very easily get into a situation where the rate hikes themselves are generating enough additional interest income that it itself can become a source of inflationary pressure. Right? So I would say that’s always the relevant risk. It’s not that you’re gonna run outta money. It’s not that you’re gonna turn into Greece. It’s not that you’re gonna bankrupt the nation or burden future generations or any of that. It really is all about inflation as a constraint. And you can find yourself in a situation where you have quote, too much debt, but in combination with kind of a central bank policy that is pushing interest rates very up, then you can get into that sort of,

00:30:48 [Speaker Changed] So we, we had pretty high deficits in the filing the financial crisis in the 2010s. We had no inflation when there was a huge, and I mean huge bigger since the, the Marshall plan, since World War ii, 10% of GDP as a fiscal stimulus that combined with the shift to products over goods, over services and snarled supply lines and a lot of other factors led to a transitory inflation spike from 2020 peaked in June, 2022 at 9% came back down. Now we’re in a 3% era as opposed to a one to 2% era. But it’s not the deficit that caused that. It was the fiscal stimulus primarily as the driver. Where do we see, or, or, or is that the rule wrong?

00:31:42 [Speaker Changed] Did you mean is did you, I thought you were setting up a different argument then you went somewhere. I didn’t expect No,

00:31:46 [Speaker Changed] I’m gonna say it wasn’t the deficit that was a problem. That was, but you said it was the fiscal stimulus. It was the fiscal stimulus that was inflationary and that inflation seems to be transitory. We had, following the financial crisis, we had very modest fiscal stimulus and massive monetary stimulus. And we were in mostly a deflationary environment when we shifted from monetary to fiscal. Seemed that all at once seemed like that’s where we had our, our transitory inflation spike. Or do you see it? Am I framing it in a way that is incorrect? Tell me what, what you see here.

00:32:22 [Speaker Changed] Well, so I think a couple of things I would unpack, rewind a second and go to qe. And I don’t know if you think of that as monetary stimulus. I don’t, so

00:32:32 [Speaker Changed] Don’t, you don’t, you don’t think quanti, so the purchasing of bonds in order to lower interest rates, you don’t think of, of as a monetary policy. How do you contextualize

00:32:41 [Speaker Changed] That? No, I think of it as monetary policy to be sure the Central Bank was trying to achieve something by doing that. Right? And in part what they were trying to achieve was pushing down rates at the long end. I think from everything I’ve read, the evidence suggests that it didn’t do very much at the long end. I mean, I’ve seen estimates, you know, 20 basis points, right? Well, you just didn’t get a lot out of that. Now they hoped that, you know, people would reach for yield, you’d have a wealth effect. Maybe there was some of that kind of stuff going on. But in terms of stimulus, what I, what I see in retrospect and what I thought at the moment, right at the time was that, you know, Bernanke and, and the Fed were thinking that QE was gonna be like stomping on the gas pedal and revving up inflation. And we’d watch the Bank of Japan try and fail at this for at least a decade, right? I couldn’t figure out why we expected a different result here from what they got there. But we went ahead and tried anyway. And, you know, three rounds of QE and Operation Twist thrown in, in the middle, right? And still, we didn’t get to 2% over the course of a decade. So if that’s monetary stimulus, I, I don’t know. You know, I, I am struggling to see it that way.

00:33:58 [Speaker Changed] So let me, let me throw something at you that is not heterodox. And my economist friends disagree with me on this, but I’m pretty convinced I’m right. I find the wealth effect, at the very least is, has been greatly exaggerated. And then in the real world, I think it’s kind of meaningless because look, when you look at who, so the wealth effect is defined as a rising stock market leads to greater economic activity, which I think is backwards. I think you have good economic activity, people get hired, they get raises, they go out and spend money, you have earnings that ultimately leads to a rising stock market. And the reality is, when the stock market a a aside from crashes and like oh 8, 0 9, when people panicked, sold things, and I don’t mean just stocks, but houses, cars, collectibles, art, whatever. When you don’t have the stock market rising, that doesn’t affect 80% of the population.
00:34:58 You know, the vast majority of equities are held by the top 1%, 10%, 20%. I think top 20% of something like three quarters of all equities are less than the top quartile. So the wealth effect isn’t gonna affect people raising wages affects people spending. And by the way, the wealthy, however you wanna describe, it’s the top 1%, 10%. They tend to spend, no matter what the stock market’s doing. You know, if they want a new car or a vacation or a new house, they tend to go get it regardless. So the whole concept, if the Fed was engaging in qe ’cause they thought it would awaken the animal spirits via the wealth effect. Well, are, are we, you and I in agreement that their fundamental premise is just completely wrong? We

00:35:48 [Speaker Changed] Are, yeah. I mean, maybe there was some kind of placebo effect associated with qe if people thought it did a certain thing, they behave in that way and it has real impacts on the economy short term or something like that. But it sure didn’t appear to do what the central bank anticipated and hoped it would do. And one of the things I can remember, you know, people like Janet Yellen and Ben Bernanke, when they would get pressed on this, what do, what do you hoping will happen? You know, they would bring up the, the wealth effect and the reach for yield and that sort of stuff. But, you know, I remember Bernanke testifying before Congress, and Congress was really frustrated in the wake of the financial crisis. Like, you know, unemployment is still really high. The economy is clearly not getting juiced by whatever it is you’re doing. Which

00:36:30 [Speaker Changed] By the way, is a very typical post-financial crisis scenario. If you look at history, that’s what, what those recoveries tend to look like.

00:36:39 [Speaker Changed] Yeah. I mean, you know, you got one fiscal package, the American Rescue Recovery Act, right? Time, it, it seemed like a big number at the time, 787 billion. But it wasn’t nearly enough given what we were up against. And so

00:36:53 [Speaker Changed] A third was a temporary extension of unemployment. A third was a temporary tax cut. Yep. And a third was, remember shovel ready? I do $200 billion. I mean Yep. The first Cares act was 10 x that it’s, it’s a joke. It

00:37:08 [Speaker Changed] Was, it was way too small. And as you just said, the the way that it was put together was not gonna provide a big shot in the arm for the economy. And so here’s Bernanke sitting before Congress and congressmen are really upset. They’re saying, what is, what is going on? You’re supposed to fix stuff, you know, it’s your job. We gave you the dual mandate. Why isn’t it, why isn’t it being fixed? And Bernanke said, and I, I mean I remember this, you know, and it’s a quote. He said, let me just say that monetary policy is not a panacea, it’s not the ideal tool. Whoa. When he said that, I was like, you know what, when he’s not telling you that fiscal policy is the ideal tool, but he’s telling you that fiscal policy is the ideal tool. You

00:37:53 [Speaker Changed] Know, you have to, was that, was he too nuanced for the geniuses on in Congress?

00:37:57 [Speaker Changed] I, you have to think, you have to think, I mean, fed speak,

00:37:59 [Speaker Changed] Right? It’s like, Hey, I’m doing your job and I don’t have the tools that you have. Yeah. So don’t expect the same results.

00:38:04 [Speaker Changed] I’m pressing the buttons at the keyboard. I’m buying mortgage backed securities and treasuries and I’m hoping it does something. But you all have the real firepower and you’re not using it. That’s what he said. And so when Covid came, I think we really did learn the lesson this time. Maybe a little too

00:38:21 [Speaker Changed] Much

00:38:21 [Speaker Changed] And you know, but, but she had the collision. So yeah, you have an economy that is largely shut down. As you said. You’ve got consumers who can’t, you know, spend money on services. ’cause most of that part of the economy is, is closed, right? So we all try shoving what money we do have into the goods pipeline and goods have to be manufactured and shipped. And then we all remember what that was like. Sure. You know, backups at the ports and all the rest of it. So that collision of, of constrained supply and some demand, yes. To be sure the stimulus packages from cares on through, right. Helped people, right. Not only replace income, but in some cases people ended up with more income than they had when they were working. And so all of those things together. And then you have to remember that the pandemic came in waves.

00:39:09 It wasn’t just, you know, one time shock. We thought we were kind of, you know, moving beyond it. And then here came Delta and then here came omicron and then different parts of the world closing at different times. So I think Barry, when you look at the, the autopsies that people have tried to do, say, where did all this inflation come from? Was it really that last stimulus package? Was it the $1,400 checks that, you know, some economists warned were gonna put us over the edge. People who’ve gone and I think done the really serious work here. You know, Peter orAG, Robin Brooks and somebody else, they have a paper, Bernanke and Blanchard, Olivia Blanchard and Bernanke have papers. The IMF has looked at this different federal reserve banks have looked when you cut across all of the research that’s been published, I think virtually everyone lands in the direction of, it was overwhelmingly the supply side stuff. It wasn’t the demand stimulus that played a role, but it was a modest one. And I’m writing about this now. So I’m really steeped in, you know, going back and revisiting what

00:40:10 [Speaker Changed] Folks have. So, so when we say supply side, how much of this were the, were the, we remember seeing all the ships off of the port in Long Beach. I have a vivid recollection of interviewing Professor Jeremy Siegel of Wharton after, I don’t remember if it was the first Cares Act or the second Cares Act. I’m pretty sure it was before the Third Cares Act. So Cares Act one and two under, under Trump one Cares Act three under Biden. And I recall Siegel saying, we’re gonna have a massive seventies like spike in inflation. No one’s prepared for it. The only good news is it’ll be transitory. And he, like, long before anyone was even using the I word Siegel was all over this based on the fiscal side. Are you saying did he get lucky or was it fiscal plus supply shocks?

00:41:06 [Speaker Changed] Well, I’m saying it was fiscal plus. Yeah. I mean, you know, it, I, I had a piece in the New York Times in April of 2020.

00:41:13 [Speaker Changed] I kind of remember that piece.

00:41:14 [Speaker Changed] Do you? Yeah, I mean that was my sort of warning on inflation. I, I submitted it, it was just ready to go in March. But you know, they like to hold things. And so it was published in April, but I don’t think that that last fiscal package is what gave us that burst of inflation. This, this, this is what I’m suggesting is you go back and, and you do a really careful retrospective on this. And yeah, it played a role, but was it the reason that we tipped over, we wouldn’t have had the inflation that we had, you know, hitting 9% by the summer of that year by 2022, you know, getting that inflation, this was a global phenomenon, right. Countries that did massively less fiscal than we did still had the same impact, but the same or more in some cases more inflation. So I think, you know, the, the truth is it, it was pandemic, it was pandemic related, it was supply chain and it inflation went up for reasons mostly related to the pandemic and the disruptions. And it came down for reasons mostly related to the working out of the kinks and the supply chains and, you know, resolving some of those issues. So

00:42:25 [Speaker Changed] I have, I have a vivid recollection of Ed Yardi, another economist who wrote, when you have very rapid increases in inflation, they tend not to be structural and they tend to be resolved in almost a symmetrical way. The chart looks, you know, if you have a fast rise, you tend to have a fast drop off. He was pretty right about that. And when you go and he was basing this on, when you looked at the history of previous inflationary shocks, what you don’t want is a long, slow, gradual increase that suggests structural underpinnings. You want, oh, we have this temporary issue, it’ll eventually be resolved. I think the problem was that transitory took longer than everybody expected, but that still doesn’t mean it’s structural. It was still transitory.

00:43:09 [Speaker Changed] Look, you’re a brave man. I know, I know. Using the T word is still the kind of thing that gets your head lopped off in certain circles. But I think that’s right. And the, the part of the story that we haven’t mentioned, of course, is the war and ener the role of energy in food. And you know, I spent the last two days working on this new book. And so I went back and I reread every speech that Jerome Powell has has given at Jackson Hole from 2020 to 2024. And you, you can see, you know, his thinking in real time. And when you read them all, you know, one after the other, you really see his thinking initially with the transitory. And then the, the war starts and he starts emphasizing energy. It’s 2020

00:43:53 [Speaker Changed] Energy was the war be in Russian invasion of Ukraine. Yeah.

00:43:57 [Speaker Changed] Yeah. And, and so that becomes a much bigger part. And you can hear him saying, you know, this is where it’s coming from. This is what’s driving. We still have problems with supply chains, now we have this new problem. So it wasn’t a supply side shock, it was a series multiple. Yeah, yeah. We were just getting hit left and right. Shock after shock after shock. And they fed through the system. And then at some point when you get to energy, you know, then all bets are off because it’s transportation, it’s fertilizer which gets food, which gets, and then it’s just, you know, we, we sort of lived that before in the seventies. You know how quickly an energy price increase can bleed through into, you know, broader consumer good categories.

00:44:37 [Speaker Changed] I just read an article somewhere online recently about used car prices are still elevated and it’s directly related to semiconductors manufacturing. Were closed for a year or so. It takes a long time to ramp that up. So by 2023, when we finally get back to normal production, you have three, almost four years of new car production down substantially worldwide. Hey, fast forward two or three years now, you have a shortage of used cars that’s still out there. How long are we gonna be dealing with the fallout from the supply side? Shock of the pandemic in 2020? It’s half a decade later. Yeah. We’re we’re still feeling effects of that.

00:45:24 [Speaker Changed] Yeah. I mean there we have words for things like this when the labor market experiences a really negative shock and then the dis disrupt. It doesn’t sort itself out. We talk about labor scarring and hysteresis and this sort of stuff. I don’t know that there’s a, a term to use for stuff like this, but maybe there needs to be. And you’re right. I mean, once we finally got chips again, they weren’t the right kinds of chips. And so it, it does take a very long time. A an event like this is not something you flip the switch off and then, you know, I used to say when the pandemic started, you could park your car in the garage, turn the keys, you know, turn the engine off, toss the keys in the, in the front seat of the car and go on vacation to Europe and come back 18 months later and start the car and drive and everything would be fine. But you can’t shut the economy down that way and just turn it off and then expect to come back a year later. You got a vaccine, let’s open everything up, turn it back on and things work smoothly. It’s just not gonna happen.

00:46:22 [Speaker Changed] And, and then complicating things are following the financial crisis, at least in the US I can’t talk globally, we underbuilt single family homes here for pretty much a decade. That didn’t, lack of supply didn’t help pricing for either homes, starter homes or rentals. But I want to address labor, which you, which you mentioned and hysteresis and scarring that you have a very interesting line in the book that, that kind of struck me. Unemployment is always a policy choice. Explain what that means.

00:46:57 [Speaker Changed] Well it means that if you truly wanted to eradicate, I mean big thinking, right? Involuntary unemployment, what is involuntary unemployment? Anybody who you know wants a job is ready, willing and able to work, but can’t find a job, you’re involuntarily unemployed. Suppose you had a a, a policy whereby you said the federal government will fund a job for anybody who wants to work, wants to contribute, can’t find work anywhere else in the economy at some base wage, maybe benefit package. You have a federally funded, locally administered job, right? You can contribute, you could eliminate involuntary unemployment, I’ll say quote unquote overnight, right? Once the policy is announced and you’re prepared to funded to provide the jobs for people to have actual things for them to do, then anybody who’s still walking around without work is voluntarily unemployed. We tend to worry about people who are involuntarily unemployed.

00:48:00 [Speaker Changed] So, so what does MMT do for us in terms of this unemployment issue? We don’t, we don’t really worry about it these days ’cause unemployment has a four handle on it. But for most of my adult life we’ve had unemployment rates as high as five, six, 7% outside of crises. Why haven’t we been more aggressive the way, let’s say Germany or Japan or Switzerland act when there’s an economic contraction, there really isn’t a whole lot of people involuntarily unemployed in, in those countries.

00:48:36 [Speaker Changed] Well, I mean I think unemployment had a three handle before the pandemic hit. That would’ve been an outstanding time, my opinion, to introduce a program like this, right? Because the take up rate would’ve been relatively small,

00:48:50 [Speaker Changed] Would’ve been cheap to do.

00:48:51 [Speaker Changed] Yeah. So you put it in place then. And for people who say sometimes people say, well there was no unemployment. I say, great, then that’s exactly the right time to do it. Announce whatever you’re willing to pay and say that you’re willing to hire people. And if no one shows up, that’s just fine. Right? But now the policy, you’ve stood up the policy and the program is there so that when an event like covid happens, you don’t have to throw 20, 30 million people into the ranks of the unemployed. You can transition people from the job that they’re about to lose into some new job and would truncate the downturn. It would replace income or a portion of income, right? You’re probably not replacing full income for most people who lose jobs. But it would be a very powerful automatic stabilizer. Those people could transition into paid work. They’d have a job record, future employer could call and say, what kind of work is, you know, buried? Does he get there on time? Does he pick fights with his coworkers? Is he a pretty good guy? And then as the income is supported and the economy begins to recover, those people can transition back into private sector jobs. So it works like a very powerful buffer stock, like a cushion for the economy through the business cycle.

00:50:04 [Speaker Changed] Sounds a lot like what Claudia Som a former fed researcher and creator of the som rule has talked about putting automatic stabilizers in place so that it’s not a partisan hot potato when there’s a big downturn. There’s a, a way to to cushion the blow and, and reduce the unemployment rate. So we’re, we’re talking about modern monetary theory, we’re talking about spending, what we haven’t really talked about is taxes. What, what are the role of taxes in deficits and modern monetary theory?

00:50:39 [Speaker Changed] Well, taxes are for subtraction. That’s how I think of it. I don’t think at the federal level, I don’t think of taxes for revenue’s sake. Really. Yeah, I know it sounds,

00:50:53 [Speaker Changed] Well it sounds Trumpian because some people have argued that he wants to move to a tariff system, which is effectively like a European VAT tax only at the border instead of at consumption. I don’t know if it’s a negotiating stance or what have you, but less focus on federal taxes, more focus on other revenue sources.

00:51:16 [Speaker Changed] Right? So, but he’s still thinking of tariffs as a revenue source, right? So he just wants to change the, the allocation where the revenue comes from. I don’t think he’s thinking that, you know, that taxes or tariffs don’t generate revenue. That the federal government, in a sense needs to pay the bills. So what I’m saying is that the, at the, for the federal government, I don’t think of taxes or the role of taxes as generating revenue that the government needs in order to pay the bills. So what do taxes do? Well, they subtract money from the rest of us. So every dollar that’s taxed away from you is a dollar you don’t have. And you can’t use to chase after goods and services in the economy. So one important function of taxes is to reduce purchasing power in the non-government part of the economy, right?

00:52:04 So consumers, businesses have less to spend that makes room for the government’s own spending so that it can spend money into the economy without creating inflationary pressure. So right now what the federal government, this last fiscal year spent, let me just use rough numbers. Let’s call it 7 trillion, right? And collects 5.2 trillion in taxes and other revenue, mostly from taxes. So you get a $1.8 trillion fiscal deficit. So what does that mean? It means that they’ve made a deposit of 1.8 trillion. That’s a financial contribution that goes into the broader economy. And we can then talk about, you know, where it goes and what good it’s doing in the economy. But taxes are important ’cause they pull money out and are one potential way to regulate inflationary pressure. Obviously they can be used, make changes to the tax code if you care about the distribution of income and wealth and you wanna make some kind of change because you think things have gotten too concentrated. Or you can use it for incentivizing and disincentivizing behaviors. But the big one is regulating inflationary pressure.

00:53:13 [Speaker Changed] So let’s talk about the opposite of MMT, right after the financial crisis, when a lot of economies around the world were precariously balanced at the knife edge, you had the E Australians come out and very puritanical belief that deficits excess fiscal spending really any good time is, is problematic and we must all pay for our sins. And so we saw that in the uk. We saw it to some degree in Greece, other parts of Europe. How do you look at these folks that are pushing on, on austerity argument into a weak economy?

00:53:56 [Speaker Changed] I mean, it’s economically illiterate.

00:53:59 [Speaker Changed] Okay. I I mean it certainly didn’t work out well to say nothing will hold Brexit aside. The UK’s recovery was pretty weak. Yep. Europe generally was pretty weak of all places. Greece seems to be doing really well today. Germany is in and outta recession. Yeah. Like wherever you look around France and Poland and just Spain is doing okay, but all these countries have been having ongoing economic contractions. Do they need to raise their deficit? Do they need to do a little more fiscal spending? What’s the economic malaise source in Europe?

00:54:39 [Speaker Changed] Well, I mean it’s, it’s just what Kane’s told us in 1936. It’s a lack of effective demand. I don’t think it’s the necessarily the case that it’s gotta be government fiscal deficit, but somebody’s gotta spend more. So how do you do that? I mean, there are two ways to generate this thing we call economic growth. Somebody’s some, some part of the economy has to spend more than its income. And if the private sector does it, that can work for a period of time. But that generally involves leverage, right?

00:55:08 [Speaker Changed] A little bit of credit borrowing, what have you.

00:55:10 [Speaker Changed] Yeah, borrowing and that can be fine. But as the engine of growth, what we’ve seen is that when you rely disproportionately or sometimes entirely on private sector to generate that growth, it ends very badly. That’s basically what happened. You know, when Bill Clinton was president and you had the budget, federal budget in surplus for four years in a row, 98 through 2001, the government’s budget was in surplus. And a lot of folks looked at that and said, oh my God, we finally did it. You know, let’s celebrate the miracle of the federal surpluses. Isn’t this a great thing? And there were people like I mentioned earlier when Godly, who were writing about this in real time and saying, man, this is gonna end badly because those government surpluses that everybody is celebrating are being built on the backs of private sector indebtedness. That it was the private sector that was spending more than its income running deficits year after year after year. When said it can go on for a while, but it can’t go on forever. And when it ends, it’s gonna be really bad. And of course, we had a recession in 2001, and then the surpluses disappeared. Government’s budget moved back into deficit. So yeah, these countries have to figure out some way to generate the demand. And it doesn’t have to be from government, but it tends to be the more sustainable way to sort of create enough demand to keep an economy operating in close proximity to full employment.

00:56:40 [Speaker Changed] So, so following those four consecutive years of surplus, we had the dotcom implosion and then the recession. And then towards the very, the last month or two of the recession, we had September 11th. And then eventually we ended up with not just the creation of Homeland Security and a whole bunch of increase in wartime and defense spending, but you also had a pretty substantial tax cut under President Bush, did that giant tax cut. And although that extra deficit spending, did that then shift that private sector deficit over to the government and did things end up a little better balanced? ’cause the economy wasn’t terrible, it was just over leveraged as we head in headed into the financial crisis.

00:57:31 [Speaker Changed] Exactly. Yeah. I mean the, when consumers pull back, right, because the, the government surpluses are like, they work like a Hoover, they’re just vacuuming up net financial assets. They’re sucking dollars off of the balance sheets of the private sector. That’s what happens. And at some point, the private sector cries uncle and they wanna spend less and save more. That alone will tend to move the government’s budget back into deficit. So much of the, you know, year to year movement in the fiscal balance is driven not by what Congress is doing, but by what the private sector wants to do.

Do they wanna save more? Are they trying to save more or are they okay spending more and saving less government’s Budget is endogenous in that way. It will automatically move around. As the economy started to slow down, George W. Bush Republicans realized, oh, we should have a policy response. The economy’s slowing. So you got the tax cuts in 2001, and then you got another one in 2003. Right. Move, I mean, the right impulse was to relax fiscal policy. So I give ’em credit, maybe I wouldn’t have structured the tax cuts the way that they did. And you got a big expansion of Medicare as well on

00:58:41 [Speaker Changed] Part D, right, right. That was, that was really substantial. So last, last question on the book you write that Obama was essentially a, a, a fiscal conservative when it came to policy. I don’t think the average person thinks of Barack Obama as a fiscal conservative or certainly a fiscal policy conservative explained

00:59:05 [Speaker Changed] Well, like we were talking earlier about that fiscal package, you know, that $787 billion when he was coming in to office the first time the wheels were coming off, they were off the economy, right? That’s right. And he had people around him. You know, Christina Romer was an economic policy advisor, uc, Berkeley professor, she went on to become chair of the Council of Economic Advisors. But she told Barack Obama, this is your holy moment. She was trying to say, this is not going to be your garden variety recession. You can’t do some little, you know, tinkering and some modest fiscal package, and all of this is gonna be in the rear view mirror. This is, this is big. Right. And she could see that this had the potential to be the worst economic downturn since the Great Depression. And her memo was to encourage Barack Obama to go really big on fiscal. Now, a lot of people have written about this, and, and there were others in Barack Obama’s circle, the guys

01:00:04 [Speaker Changed] Larry Summer.

01:00:05 [Speaker Changed] Yeah, Larry Summers, David Axelrod, I think I put in my book, famously said, you cannot be talking about anything that has the T in it, not trillion meaning trillion Gotcha. Meaning trillion. You’re gonna give people sticker shock, he said. Right. And so, you know, they, the, I think the men basically said, don’t listen to Christina Romer. You gotta go for something more modest. And then what he did was try to negotiate with Republicans to try to bring some of them on board, didn’t get any right, but ended up changing the package so that you had about a third of it in the form of tax cuts, hoping to sweeten the deal and pull some Republicans in, didn’t work. And then when it became clear that the fiscal, that the fiscal response was too small, and voices came back, and you had people like Paul Krugman and all kinds of people saying, you know, Congress, you gotta get back in there, you gotta do another package. By that point, you know, Barack Obama and the economists around him had pivoted to austerity. They were talking about, you know, what can we do with a commission to try to get the deficit down by $4 trillion at least, and all this sort of stuff. And we’re looking over at what’s happening to Greece and Spain and some of the periphery countries that had a real,

01:01:16 [Speaker Changed] How, how can we make those same mistakes? Yeah. Right. Yeah, it seems sorta, I have a vivid recollection of having a dinner with about eight 10 people. And Paul was one of the people at, at the dinner around this time, and I remember sort of floating the idea, Hey, you know, this is the first time I’ve seen in my lifetime that the party that doesn’t hold the White House is actively trying to sabotage the economy to regain the, like we you mentioned economic literacy. I said, you can’t come out of a financial crisis and say no fiscal stimulus. And that’s effectively what Congress said, and it kind of got poo-pooed back in 2011 and 12, 10 years later, people were like, oh, okay, maybe this, you know, there was some purposeful economic illiteracy that conveniently made the economy less attractive for a president running for reelection.

01:02:20 [Speaker Changed] Yeah. So we ran the opposite experiment. It’s just too bad that it had to run against the backdrop of globally constrained supply chains. Right? ’cause we don’t still have an opportunity to just road test. What if we really just engage the fiscal lever and instead of relying so much on monetary policy, which is what we did for the previous three decades, it just, the central banks will take the economic steering wheel and fiscal can mostly worry about just trying to balance the budget or something. Well,

01:02:48 [Speaker Changed] Well certainly since oh eight, oh nine to, let’s call it 2017, the tax cuts and job act, pure monetary policy, almost no fiscal policy. That’s right. And we saw the results. That’s right. It was a subpar, weak job creation, little wage gains, poor sentiment, poor consumer spending. As soon as the fiscal spigots opened up, things seemed to begin to, by 2017 things, 17 things had already sort of gotten better. But, you know, that was a trillion and change certainly had a, a positive effect on GDP

01:03:26 [Speaker Changed] Monetary policy works by trying to get people to spend more out of the same income. And fiscal policy works by trying to get people to spend more out of more income. So it shouldn’t be a huge surprise which one tends to be the more, you know, have the more potent response in terms

01:03:42 [Speaker Changed] Of the, especially when you’re coming off a decade or two of low interest rates. It’s one thing when your mortgage goes from 8% to 4%, Hey, we could refinance and we have a little extra cash in our budget, but you can’t do that from 3% to 2%. It’s just there’s no juice left in the lemon. Yep. So let’s talk a little bit about what we’ve been seeing over the past couple of decades and what it means for public policy today. I, I have to start by talking about how few recessions we’ve seen over the past 20 years. We had the financial crisis that the recession began in, I think October oh seven or December oh seven, something like that. And then we ever so briefly had a pandemic recession. That’s pretty much it. It seems we’re having fewer recessions and we’re responding to them quicker than we used to. How do you see the, the depth and frequency of recessions these days?

01:04:43 [Speaker Changed] Yeah, it’s a good question. I definitely agree. We’ve had longer stretches between them when they’ve happened, with the exception of I guess the global financial crisis. They have been somewhat weaker. That was obviously a big one. Covid has, its, is its own unique thing. I don’t know, Barry, I mean, sometimes I feel like Larry Summers had it right. You know, years ago when he, he said, we only know one way to grow the economy. And that’s through bubbles that we, we get a good runup in, you know, whether it’s the SNL period or the.com era or the housing bubble, you know, something comes along and provides a, a nice tailwind and we get a, a what looks like a long, robust expansion, except it’s sort of sowing the seeds of its own destruction. And then we end up with a recession. But we’ve gotten very good at cleanup on aisle four. You know, we respond and then we set the table and we do it again.

01:05:48 [Speaker Changed] I I’m always happy to push back on anything Larry Summers says, because he’s so frequently wrong and yet so widely lauded and regarded, Hey, the 2010s a gradual slow recovery from the financial crisis, despite the lack of fiscal stimulus. And despite the Fed’s zero ERP policy that wildly stimulated asset prices. We didn’t have a bubble. The pandemic, we still don’t have a bubble. If you wanna say, maybe crypto is a bubble or AI is a bubble, I guess you can make that case. But so far there’s a difference between a broad society-wide bubble, like the led to the financial crisis where you had really, the bubble was in mortgages. We no longer care about your ability to service the debt. We just wanna, it’s all about our ability to sell the debt to a securitizer that was clearly a bubble. It’s kind of hard to say we’re in the midst of a big bubble economy today. It’s always obvious in hindsight. Are we in a bubble today? Can we say that this has been a pretty robust 15 year run with no bubbles?

01:07:14 [Speaker Changed] Look, I don’t, I don’t know. I think that things have felt awfully bubbly to me for, at at least a few years. I mean, you can, it was the spac fa, the SPAC craze.

01:07:28 [Speaker Changed] Oh God, that’s a decade ago

01:07:30 [Speaker Changed] Already. I know. But it, you know, these things come and then they transition and then it’s the next thing. It’s, you know, we did the meme stock thing. We are now, we have AI at crypto, and it, it feels tenuous.

01:07:43 [Speaker Changed] Let us say, I try and draw a distinction between these giant bilious impacting society things that, you know, feels like it’s just taken over everything. The dot coms felt like it just took over everything in the late nineties. And, and people forget the Greenspan speech was 96, the irrational, exuberant speech. You still had another four, almost five years of growth.

01:08:09 [Speaker Changed] Well, that was Kane’s point, right? The market can stay irrational longer than you can stay solvent, which is what makes it so tough to find the entry point to come in and say, yeah, we’re here. You

01:08:20 [Speaker Changed] Know, you know, Keynes had, I, I still don’t understand why so many people fight against what have been such self evident observations by Keynes. Of course, when you have a contraction, it’s the government that should spend. But no one wants to do the flip side of that, which is when you have a robust economy, that’s where the government should be. That’s where you can think about a deficit, not in a contraction. Why do so many economists ignore the brilliant insights that Lord Keynes had a century ago?

01:08:58 [Speaker Changed] Well, I, I think he got, you know, stripped of most of the really interesting stuff when Hicks and Hansen gave us the sort of ISLM interpretation of John Maynard Keynes, and took out a lot of the really interesting, you know, the, the role of expectations and psychological impulses and all of that sort of stuff. And it became this kind of static, you know, LM curve go up is curve go down. We pretend we can analyze the economy as having two separate and distinct spheres, spheres of monetary and a real side of the economy. And I, I, and I just don’t think people go back and read the original text. And so the, the rich stuff too often gets left out.

01:09:40 [Speaker Changed] There was something else I was meaning explain the rich stuff from, from Cannes, the animal spirits.

01:09:46 [Speaker Changed] Well, people use the phrase animal spirits, but they use it loosely to just mean that when people start feeling good, optimistic, that it means they’re willing to take on some more risk, make more investment. They’d sort of turn it into that. Where I would say chapter 17 is the most important chapter in the general theory. It’s also the hardest one for most people to understand. But that’s where Keynes deals with things like the own rates of interest and liquidity preference theory. And that’s what I’m talking about. That’s, that’s very hard to tease out and to bring forward in the ISLM framework. It’s, it’s kind that, you can argue that it’s embedded in the LM curve. It’s there somewhere, but nobody sort of manipulates the standard Keynesian model in ways that really reflect that deep concern of keynes’s in terms of the role of long-term expectations and liquidity preference and that sort of stuff.

01:10:42 [Speaker Changed] So we’re recording this towards the first quarter of 2025. We’re in full Doge administration mode, the Department of Government efficiency. How do you look at all these federal layoffs, all these people in DC that I, we don’t know if these job losses are gonna stick, what the courts are gonna say, but hypothetically we lose 10 or 20% of the federal government, 3 million workers. What does that do to the economy?

01:11:15 [Speaker Changed] Well, it throws a lot of people out of work and then through a multiplier effect. Now we go back to Kane’s. It’s not just the person who loses their job and now has no income or has income replaced on, you know, unemployment at a lower rate or whatever. It’s the jobs that are tied to those jobs. And so when millions of people, or hundreds of thousands of people in this case, I guess, start losing their jobs, it means less spending, which means less income for someone else, which means they go on to spend less. I think it was, you’ll you’ll probably know Barry better than I will. I think it was Torsten Lock, I think, who put out a note for clients just maybe a week or so ago that said basically three x whatever, you know, if you think that a hundred thousand people are gonna lose their jobs, it’s more like three, it’s it’s three to one, right? Right. You’re not just

01:12:02 [Speaker Changed] Losing that money. That’s the Keynesian multiplier effect of, it’s

01:12:04 [Speaker Changed] The turn of the, the macro effects. So I don’t know, this haphazard thing, do you respond to an email or this is no way to go about looking for smart ways to trim, you know, and find efficiencies in government.

01:12:19 [Speaker Changed] So from a a modern monetary theory perspective, what are the smart ways to approach public policy to think about deficits, to think about spending?

01:12:31 [Speaker Changed] Well, the big thing that frustrated me when I served on the budget committee was the fact that no one, and I mean, not a staffer, not a senator, not anyone on either side of the aisle ever gave the briefest moment of concern care, attention to inflation. You’re

01:12:49 [Speaker Changed] Sitting there. Oh, really? That, that is genuinely shocking.

01:12:52 [Speaker Changed] Absolutely shocking, frustrating, maddening. You got people writing bills, you know, a trillion dollar infrastructure bill, a Medicare for all bill of this bill, a budget, a, a whatever. And the mentality is, if you can just stitch up the numbers such that the amount of money you wanna spend is offset by, you know, savings elsewhere in the budget or new revenue, then you’ve done your job. Because now you have deficit neutral legislation and you’re good to go and you can go vote and you’ve been fiscally responsible. And Kelton is sitting in the room going, oh my God, you guys, you know, you, you’re talking about spending, let’s say trillions of dollars into the economy and let’s suppose it was some big ambitious green new deal infrastructure, whatever program, right? Trillions of dollars. And your plan is to completely offset that spending with new revenue. But you’re only gonna get the new revenue from a handful of people at the very top of the income distribution, a corporate tax increase, wealth tax or financial transac, whatever it is.

01:13:55 You know, they throw all this stuff around, you’re potentially opening us up to a huge inflation problem because you’re gonna broadly spend trillions into the hands of people in the economy while only removing by taxing money from people at the very top of the income distribution. And I look at that and say, this is not fiscally responsible. If you’re doing this in a fiscally responsible way with an MMT lens, you’re not asking, how do I ensure that my spending is deficit neutral? You’re asking how do I ensure that my spending will be inflation neutral? Huh. And that’s an entirely different problem for an agent, you know, congressional budget office for OMB, for other people who are thinking about and writing federal legislation, you have to approach this in a completely different way.

01:14:44 [Speaker Changed] So I’m gonna assume you’re not a big fan of the Elizabeth Warren Wealth tax sort of thing, or even some of what Bernie Sanders has proposed with another tax bracket for the wealthiest people. I don’t think that’s how people generally perceive MMT. Am I mischaracterizing this or is that accurate?

01:15:05 [Speaker Changed] I mean, you’re, you’re accurate. We talked earlier about what is the purpose of the tax? And I said the big one is it removes it, it removes income from somebody. And why would you wanna do that? Well, one reason is to make sure that they don’t have those dollars and they can’t spend them because it helps you regulate inflationary pressure. But I also said you could make changes to the tax code if you have, you know, deep concerns about concentrations of wealth and income. If you think things have gotten too extreme, there are things you can do. You can close loopholes, you can think about new ways to raise revenue. You can look at the estate tax, you can look at, and that’s a legitimate thing to do or to think about through an MMT lens, independent of how much revenue will it raise. And that’s how Senator Warren, Senator Sanders, they tend to think of these as, I need to get money to pay for X, Y and Z. Rich people have a lot of money, therefore, let’s tax rich people so that we can be fiscally responsible and pay for our spending. And I just think from an MMT perspective, that is not the way to go about it.

01:16:08 [Speaker Changed] The, the Willie Sutton Theory of Taxation. That’s right. So I doubt that you’re gonna get this phone call, but hypothetically, this administration reaches out to Professor Kelton and says, Hey, we’re really thinking about extending the 2017 tax cuts and Job Act. We could do it for 10 years, because that’s what the rule is. We could do it for five years and not worry about the offset at someone else’s problem. What do you tell them about the TCJA, which some people accused of being very, and, and a lot of the data supports it was very heavy towards the top, pick a number, 10%, 5%, 2% of, of earners.

01:16:53 [Speaker Changed] I mean, the number that gets quoted a lot is that 83% of the benefits went to people in the top 1% of the income distribution. That’s on the personal tax side.

01:17:03 [Speaker Changed] Have, have you seen the prices of Porsches and Ferrari? They’ve gone through the roof. They have, they, these people need some help.

01:17:11 [Speaker Changed] So, look, I mean, on the, I I always think of inflation, kind of, that’s my first stop on the train ride. So I heard a lot of people saying, if these tax cuts are extended, it’s gonna exacerbate the inflation problem. And I said, no, it’s not. I mean, come on. Right? We’re just talking about a continuation of what’s been in place already for the

01:17:30 [Speaker Changed] Better part of the decade. Right? Seven, eight years.

01:17:32 [Speaker Changed] This isn’t net new stimulus of any kind. So that I, I set that aside.

01:17:37 [Speaker Changed] So if this, if TCGJ is renewed non-inflationary, but there’s still some inflation out in the economy

01:17:46 [Speaker Changed] And they’re talking not just about an extension, but you know, they might have to fiddle with the numbers because they’ve only given themselves, I’m saying only, only given themselves four and a half trillion in headroom on the tax side. So if the president wants things in there like no tax on social security, no tax on overtime, no tax on tips, well, you, you’re not gonna fit that in that four and a half trillion. So now what are they gonna do? They’re gonna go and take a look at some of the corporate stuff, some of the personal stuff. Maybe they go for an extension of three or five years so that they can create a little bit of head room to add some of these other things. There’s inflation potential in that. Now you hear talk of a Doge dividend and $5,000 checks. I mean, we’re, we’re getting into some serious money here.

01:18:34 [Speaker Changed] If, if the $1,400 cares Act one was inflationary, what does that mean for, what would a $5,000 check do, do for

01:18:44 [Speaker Changed] People? Okay, so let’s remember the, the first CARES Act was March of 2020, and that package included $1,200 checks. That was President Trump. And then at the end of the year, in December of 2020, you got the $900 billion package that included a $600 check. That was President Trump. It was after the election, but he’s still president. He didn’t wanna send a $600 check. He was really mad about that. He said he wanted at least 2000, 4,000. Yeah,

01:19:15 [Speaker Changed] Really? That’s a big number. It’s

01:19:17 [Speaker Changed] A big number. And he said it ought to be 2000. He, in fact, he said 600 is like an insult. And he said, I want 2000 per the individual and 4,000 for family. But he couldn’t get it. So he had to settle for the $600 check. And then it was Biden three months later in March of 2021, who came in with the 1400, which when you add it to the 600 gets you, it’s 2000 to 2000, which is what Trump wanted all along. Ironically, it’s a lot of the Republicans who are the loudest at complaining about that $1,400 check being the thing that tipped us into, you know, the, the great inflation of, of the,

01:19:53 [Speaker Changed] It’s never one thing, it’s always a multiplicity of different factors.

01:19:58 [Speaker Changed] Yeah. So, so all of those things definitely put a lot of money into people’s hands and it definitely helped support consumer spending. And it, I I mean it modestly increased inflationary pressure. So now I think they’re talking about, you know, a a $5,000 check going to households, what, 70, 76 or so million households. Wow. Yeah. But they’re saying, no, don’t worry, because that money was gonna be spent by government anyway. And we’re finding all these efficiencies and so we’re just gonna let you spend the money instead of letting the federal government spend the money. Problem is, the math doesn’t work

01:20:33 [Speaker Changed] Well, you know, math, who really believes numbers should add up. Anyway. Alright, before we get to our favorite question, I just have a curve ball to throw at you. When I was an undergraduate at SUNY Stony Brook, the head of the math department was a guy named Jim Simons, who eventually set up Renaissance Technologies. You’ve been there. Did you ever get a chance to, to meet Professor Simons?

01:21:03 [Speaker Changed] I did not meet him, but I had a couple of encounters with him. One in particular was kind of funny. I was right in the middle of the pandemic, 2020, I don’t remember what month it was, but it must have been reasonably nice out because I was sitting in the house drinking coffee one morning, and I happened to look over my shoulder into our backyard and I see we live on the north shore of Long Island, and I see these two kayakers pulling this little dingy boat up to our dock, and there are two older people in the boat. And I said to my husband, go find out what is going on, who’s getting towed up to the dock. And so he leaves, he goes outside and I see the couple climb outta this little boat and they tie it up to the dock and they go walking up. And my husband’s gone for a while and he finally comes back and he says to me, you’ll never guess who that was. And I don’t know what made me say it, except I knew he lived in the area. I said, Jim Simons. And he said, how did you know that? I don’t, I don’t know. I, I just unbelievable. Yeah, there he was, you know, unbelievable. I pictured a yacht, but no, it was a, a tiny little outboard.

01:22:09 [Speaker Changed] I’m, I’m sure there’s a yacht or two floating. I be there somewhere in the Mediterranean or down in the Caribbean. All right. Let’s jump to our favorite questions while we still have you starting with, what have you been doing to stay entertained? What, what are you watching or listening to these days?

01:22:25 [Speaker Changed] I feel like it, it was a, a long dry spell where we couldn’t agree on anything. You’re talking about streaming, like Netflix or whatever, we could not agree. My husband will start something. I watch half of it, I hate it. We stop. So we went back and rewatched Miss Maisel because he loved that the first

01:22:41 [Speaker Changed] Time. So good. 01:22:42 [Speaker Changed] Yeah. And then,

01:22:44 [Speaker Changed] Although it did kind of go off the rails in the last couple of seasons. Yeah,

01:22:47 [Speaker Changed] Well we enjoyed, that was okay, we both loved that. And then two nights ago we started streaming 1923, the second season. Oh really? Which I love, I watched

01:22:58 [Speaker Changed] That’s part of the Yellowstone

01:23:00 [Speaker Changed] Series. Yeah, I was on an airplane and I’d never heard of the thing. And years ago I watched, I think they had five episodes available and I just ate ’em up. Right. And then I came home and said, you gotta, you gotta watch this with me. I’ll start it all over with you. And so a couple days ago, I think season two came out, so, huh,

01:23:16 [Speaker Changed] I’m gonna, I’m gonna definitely have to check that out. Tell us about the mentors who affected your career, who helped shape the Economist you are today?

01:23:25 [Speaker Changed] Well, I mentioned John Henry early on. That’s an undergrad mentor and then graduate kind of ma masters. That’s Randy Ray I also mentioned. And then when Godley came after, and then Warren Mosler. And those are the four men who I think more than anyone else shaped not just my professional life, but in a lot of ways just my life.

01:23:53 [Speaker Changed] Huh. Really, really interesting. Let’s talk about books. What are some of your favorites? What are you reading right now? Although I know when you’re wrapping up a book, there’s no time to read other books other than research. It’s,

01:24:05 [Speaker Changed] It’s exactly right. Yeah, I am, I go back and I consult books now mostly for the purpose of working on this book. But I’m a old school, you know, like I think people should read Beepin. I think they should read the Theory of Business Enterprise. I think they should read the Theory of the Leisure class. I think people should read Minsky. I think, you know, stabilizing an Unstable Economy is really hard to plow through. But Can It Happen Again is a wonderful little book. People should read Anything by John Kenneth Galbraith. Right now I’m reading GRE’s son, James Galbrath and his co-author Jing Chen have a new book. Just came out last month called Entropy Economics. So I just started that.

01:24:50 [Speaker Changed] Huh. You know, that’s the worst part about writing a book is you just have to put all your reading that’s not related off to a side. It’s, it’s no fun. Our final two questions. What sort of advice would you give to a recent college grad interested in the career in either economics or academia?

01:25:09 [Speaker Changed] I think anybody who wants to study economics should try to find a program where they can get exposed to a broad array of, you know, a diversity of views. A plural list program, if you like something where, you know, every class you walk into isn’t gonna be some version of itself. General equilibrium theory, right? And that sort of thing. Try to find places where to the, as much as you can, you get what might have one, one day been called political economy, you know, where you can actually read interesting thinkers and, and do more than just, I’ll say sterile agent based modeling and all that. You want the real world in there. You want finance and banking. You know, these people who came out of economic and finance programs ahead of the GFC. A lot of people said I couldn’t make sense of what was happening because we never, never had any room in our models for finance or banks or credit. We didn’t talk about any of those things.

01:26:08 [Speaker Changed] Huh. Really interesting. And our final question, what do you know about the world of, fill in the blank public policy economics deficit spending today? You wish you knew 25 or so years ago when you were first getting started?

01:26:23 [Speaker Changed] So that conversation I had when I was an undergraduate about, you know, where to go to graduate school, and I can remember Randy Ray saying, if you go to Harvard, you won’t suffer the slings and arrows that you’ll suffer. If you go to a program like Notre Dame at the time, or the new school or something like that. I’ll never forget him saying, you’ll, you can avoid the slings and arrows. That was 30 years ago. And I think I didn’t take the advice. I went to Cambridge England and then I went to the new school and I have definitely suffered the slings and arrows over many years. I think I wish I had known or understood better just how petty and aggrieve a lot of academics can be.

01:27:11 [Speaker Changed] What’s the old joke? What, why is academic politics so vicious? Because there’s

01:27:16 [Speaker Changed] So little,

01:27:16 [Speaker Changed] Right? There’s so little at stake. Little at stake. Yeah. It’s, it’s really true.

01:27:20 [Speaker Changed] Yeah, it is. I didn’t, I didn’t understand at the time, but I li I live to learn.

01:27:25 [Speaker Changed] Right. But you know, the academic lifestyle is, is of really not a bad lifestyle. You get to work with bright young students. It’s usually college towns are lovely parts of the country. I I, it sounds like you enjoy being a professor and your husband enjoys being a dean.

01:27:46 [Speaker Changed] Well, he’s a professor. So he, the job,

01:27:48 [Speaker Changed] Is he still teaching or is he head of the department or both? He is.

01:27:51 [Speaker Changed] He is a professor. He’s got an endowed chair in the history department, but as of a month or so ago, he is once again back in the dean’s office. He’s an associate dean now. So he’s doing both.

01:28:03 [Speaker Changed] Well, Stephanie, thank you for being so generous with your time. We have been speaking with Stephanie Kelton. She is Professor of Economics and Public Policy at Stony Brook University and author of the bestselling book, the Deficit Myth. If you enjoy these conversations, well check out any of the 550 or so we’ve done over the past 10 plus years. You can find those at iTunes, Spotify, YouTube, Bloomberg, wherever you find your favorite podcasts. And be sure and check out my new book, how Not to Invest The Bad Ideas, numbers, and Behaviors That Destroy Wealth Coming out March 18th of this year. I would be remiss if I did not thank the crack team that helps me put these conversations together each week. My audio engineer is Andrew Gavin. Anna Luke is my producer. Sean Russo is my head of research. Sage Bauman is the head of podcast here at Bloomberg. I’m Barry Ltz. You’ve been listening to Masters in Business on Bloomberg Radio.

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