“What I had been trained to understand was just not applicable with the monetary system that we have today.”
Stephanie Kelton is a Stony Brook University professor of economics and author of the NYT-Best-Selling book The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy. Professor Kelton was also former chief economist on the U.S. Senate Budget Committee.
Professor Kelton discusses many of the misconceptions around the national debt vs. more normative thinking around financial management and fiscal responsibility. What does the national debt really signify and how can we rethink our approach to federal spending, especially as we work our way out of a pandemic-caused recession? “As I like to say, ‘every deficit is good for someone. The question is, for whom and for what are those deficits being run?’”
A leading voice in the Modern Monetary Theory movement, Professor Kelton offers a compelling case for a profound shift in our approach to the federal deficit and our ability to leverage it for good.
LISTEN AND SUBSCRIBE
SPEAKER
Stephanie Kelton
Author
The Deficit Myth: Modern Monetary Theory
MODERATOR
Anthony Scaramucci
Founder & Managing Partner
SkyBridge
EPISODE TRANSCRIPT
John Darsie (00:07):
Hi, everyone. Welcome back to SALT Talks. My name is John Darsie. I'm the managing director of SALT, which is a global thought leadership forum at the intersection of finance technology and politics. What we're trying to do with these digital SALT Talks is provide interviews with leading investors, creators and thinkers. Just like we do at our global SALT conferences, we're trying to provide a platform for big ideas and provide our audience a window into the minds of subject matter experts. And today we're very excited to welcome Stephanie Kelton to SALT Talks. It couldn't be more topical, her book couldn't be more topical. And we'll talk about that book in a second. But Stephanie is currently a professor at Stony Brook University. Earlier this month, she released a new book called The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy, which is already a New York Times bestseller. And congratulations to Stephanie on that.
John Darsie (00:59):
She is a leading authority on modern monetary theory, which is a new approach to economics that has gained increasing popularity in recent years. Her work is particularly relevant given the large deficits that have been run by the US government in the wake of the COVID-19 pandemic. So again, we're very excited to have her on given the timing. In addition to her many academic publications and the book that we mentioned, she has been a contributor at Bloomberg Opinion. She's written for the New York Times, she's written for the LA Times, US News and World Reports, contributed to CNN among many other outlets. She has worked both in academia and in politics. She served as the chief economist on the US Senate Budget Committee as a democratic staff in 2015, and as a senior advisor to the Bernie Sanders 2016 and 2020 presidential campaigns.
John Darsie (01:45):
Politico called her one of the 50 most influential thinkers in 2016 and Bloomberg listed her as one of the 50 people who defined 2019. Barron's named her one of the 100 most influential women in finance in 2020. So her work is gaining increasing visibility. She was previously the chair of the Department of Economics at the University of Missouri at Kansas city. If you have any questions for Stephanie during today's talk, please enter them in the Q&A box at the bottom of your video screen. Conducting today's interview is going to be Anthony Scaramucci, the founder and managing partner of SkyBridge Capital, a global alternative investment firm. Anthony is also the chairman of SALT, and I'm going to turn it over to Anthony for the interview.
Anthony Scaramucci (02:27):
John, thank you. Stephanie, congratulations on the book. I understand now it's a New York Times bestseller, and so fantastic on that. I read the book after I read Zack's book. So I think it's interesting. I would encourage everybody to go to the Politics and Prose Podcast where Zach Carter, who we had on last week, and Stephanie are together talking about John Maynard Keynes and deficits and why they do matter, but there are some myths related to deficits. But before we get in there, Stephanie, can you tell us a little bit more about your background? What got you so interested in this, and tell us a little bit about what you described to be a Copernican moment where you're having a Eureka about how economics is actually working?
Stephanie Kelton (03:13):
Sure. Well, first let me just start by saying thank you for the opportunity to come spend some time with you and your viewers today. I was studying economics, I did undergraduate degrees in both finance and economics. I picked up a couple of bachelor's degrees and then I really enjoy economics. So I went off to Cambridge University and started a graduate program there, and I was mostly learning the conventional approach to economics, just conventional macro stuff. I won a fellowship through Christ's College while I was at Cambridge. That sent me off to the Levy Economics Institute, which is a think tank in Upstate New York. That's where I first started to encounter really these ideas. They actually came to me through someone named Warren Mosler.
Stephanie Kelton (04:08):
Warren was a Wall Street guy, comes from the finance world. He had written a little book and he called it Soft Currency Economics. He called it that to distinguish it from hard currency, right from gold standard or fixed exchange rate frameworks, monetary systems. Warren wrote this little book and started circulating it. He really wanted to talk with economist at top universities. He was reaching out to people at Harvard and Stanford and Princeton and so forth. Nobody really wanted to engage with him. At some point, he stumbled on a group of economists in an online forum and started exchanging ideas. In 1997, I guess I got this little book and I read it and it flipped my worldview upside down. I couldn't wrap my head around it. It couldn't be right. I kept thinking it can't be right, it can't be right. Because it went so counter to everything that I had been trained to understand about government, finance and taxes and stuff.
Stephanie Kelton (05:13):
But here was this really smart guy and he had it all laid out. He had the accounting down, he had it all in balance sheet form. It's really hard to pull the wool over somebody's eyes when you're dotting the Is and crossing the Ts and writing it up the T accounts. So I kept looking at it and it just bothered me that I couldn't shake the idea. So I went searching to see if Warren might be right. I started reading treasury and fed manuals and talking to people at the debt management, trying to figure out all this stuff and whether it really worked the way Warren believed it did. I'm getting to the end of this story here. Basically, I convinced myself through a bunch of research that Warren's ideas were sound and that what I been trained to understand, some of the models about government budget constraints and that sort of stuff were just not applicable with the monetary system that we have today.
Anthony Scaramucci (06:10):
No, all right. I want you to keep going, Stephanie, where you feel you need to. This is an interview about you. You mentioned in the book, which I've also found fascinating, is that we see the government the way we see ourselves or our household or our business. But we're not originators of currency. We're actually users of currency, to use your words. So governments can effectively originate currency. Then you mentioned in the book, well, they give out our debt, it's 23 trillion. We could get rid of it with one electronic key stroke, but I don't think you 100% mean that either. So where should we be as it relates to deficits? You also write in the book that deficits do matter. So lay out for us what modern monetary theory is and put it into the context of people that got trained like me and people that got trained like you before you had this Eureka moment.
Stephanie Kelton (07:08):
Okay. So there's a lot there. Let me see if we can unpack it all in some bite sized pieces. The first bit you mentioned is really at the core of MMT, the idea that we have to recognize that the federal government's budget works differently from a household budget. The thing that distinguishes the federal government from everybody else is the fact that it's the issuer of our currency. In fact, it has the sole legal authority to create the US dollar. It's the issuer of our currency. I can't do it, you can't do it, private businesses can't do it, and state and local governments can't do it.
Anthony Scaramucci (07:44):
You're thinking, Stephanie, that some of my relatives have done that in the past, but I assure you that that's not true. Okay, keep going.
Stephanie Kelton (07:51):
Well, a lot of people try and you end up in an orange jumpsuit because it's illegal to counterfeit the currency. It would be nice if the rest of us could be currency issuers, you wouldn't have 50 governors running around imploring Congress to provide some aid right now. As their budgets are falling apart, if governors could take care of this themselves, because they could just issue the dollar, they'd be fine, but they can't. So we start with that recognition that the federal government is the issuer of the currency. Therefore, a number of things follow. One, it can never run out of money. President Obama, he comes into office, he's newly elected, and within a matter of months, he sits down for an interview. And you remember, the economy is falling apart, we're sliding into the great recession. He's asked, "At what point do we run out of money?" And his response was, "We're out of money now." Those were his words, "Were out of money now."
Stephanie Kelton (08:47):
Okay. The federal government can never run out of money. It can't have bills coming due that it can't afford to pay, unlike a household or a small business or a large business. It can't go broke. It can't be pushed into bankruptcy. What about the deficit? What are the implications for the deficit? Well, people get very anxious about the idea of the government running fiscal deficits. They believe that they're inherently irresponsible. It's evidence that you're mismanaging your finances. You should live within your means. Well, I hear that all the time. The deficit is just the difference between two numbers. One number is how many dollars the government spends into the economy. And the other number is how many dollars the government subtracts away from people in the economy. That's all it is.
Stephanie Kelton (09:36):
If the government is spending more dollars in than it is subtracting away, we label it a deficit. But what we forget, and this is something MMT helps to remind us, is that if they spend a hundred in and they only tax 90 away, somebody gets 10, that their deficits result in financial surpluses in some other part of the economy. That's a first and key point and it really comes from the work of Wynne Godley, who was a British economist who developed all this through sectorial balance framework and so forth. But their reading is our blacking. As I like to say, every deficit is good for someone. The question is, for whom and for what are those deficits being run?
Stephanie Kelton (10:21):
Then we get to the question of the debt because fiscal deficits result in the accumulation over time of what we call the national debt. And in the book, you just mentioned, I have a section where I say, "Look, we could pay it off overnight if we wanted to." We could talk about that section here in a minute. But I think it's really a misnomer. I don't think we should be calling it the national debt at all. I think of this thing as just a historical record of all of the past instances in our nation's history, where the government made a financial deposit to the economy. It ran a deficit, engaged in deficit spending, and it turned those dollars that it put in into treasuries. It turned them into interest bearing currency. And that's really all that is, it's an interest bearing for all of the US dollar.
Anthony Scaramucci (11:15):
Let me ask you this question, because I often get asked this question as an investor, if you go back to the gold standard, we unclipped ourselves on August 15th. Richard Nixon made that decision. He then quipped that we're all Keynesians now, meaning that he was going to allow the currency to float. It was going to become a Fiat currency. At that time, it was $35 an ounce. Today gold is trading at $1,700 an ounce. So strict monetarists would make the case while we devalued that currency by 98% in order to monetize and be able to pay our debt. One of the negative consequences potentially, and I'm interested in your opinion of this, is that it hurts middle-class people and lower middle-class people because assets are tied to the currency. The asset, if I'm in this home and it was worth a dollar in 1971, is now worth $10, but if I'm a wage earner with no assets, my wages, in fact, haven't caught up with that monetization, if you will. So what's your reaction to that?
Stephanie Kelton (12:21):
Well, I have a lot of concerns about the median income and average earnings and low wage earners and what has happened really to the pattern where wages used to keep pace more or less with productivity growth. Then something changed and productivity growth continued its upward trajectory and the real median wages just flattened out. I don't think that has to do with the fact that we untethered our currency from goal. I think it has to do with a lot of things, including overtime globalization, the decline of unionization rates and so forth. I don't see it as a by-product of abandoning the gold standard.
Anthony Scaramucci (13:12):
But we would make the case though, that there has been fairly dramatic inflationary periods in the United States. Some classical economic theory would suggest that that is related to things like Fiat currency. And it's related to things like not adhering to those classical principles that you and I both learned. And you would say, what about those periods of time?
Stephanie Kelton (13:39):
Well, we haven't actually had very many. It depends what kind of an arc of history you want to look at. When we were on the gold standard, what we confronted regularly was deflation. We had depression after depression, not recessions, but actual depressions. We had many of them, and those depressions occurred in an environment where prices would collapse. Deflation is a far more serious and was a regular threat under the gold standard. But we haven't had really periods of problematic inflation, post Bretton Woods, post Nixon [inaudible 00:14:17].
Anthony Scaramucci (14:17):
Let's go to the seventies for a second. We were running pretty high inflationary rates and we got the long-term bond up to 16% or 17%. So what would you say was the causality of that?
Stephanie Kelton (14:28):
Well, a lot of things. Oil price shocks, the Vietnam war, maybe [Volker 00:14:34]. Now, this might surprise you to hear me say this, but people assume that when the fed raises interest rates, that that is how you reduce inflationary pressures. MMT and I have a little bit about this in the book. I don't go into it in any detail, but I've written a paper on this as well. Raising interest rates raises borrowing costs. To the extent that firms are leveraged and they're able to pass on to end consumers, the increase in interest rates in the form of higher prices. It's possible that raising interest rates doesn't actually quell inflationary pressures, but it actually fuels an acceleration in prices. A lot of things could be happening there and some of them might be counterintuitive.
Anthony Scaramucci (15:25):
Let's fast forward right up to 2020, rates are low. We could argue they are at all time lows in some respects. Certainly measured by inflation and so forth. In some cases, the long bond is actually negative now even though Jerome Powell is saying he doesn't like negative rates. But is it even possible to raise rates at this point? And I'm talking about over the next five or 10 years, do you envision a scenario where we have rate hikes in the United States?
Stephanie Kelton (15:56):
My answer is I hope so. Because if we don't see interest rates go up, it's going to be because the economy is in such rotten condition for three or five years. That's the answer to the question. Could I see rates staying at zero or roughly zero for three to five years? Sure, I can. If we screw up the policy badly enough, that's exactly what the Central Bank's going to do.
Anthony Scaramucci (16:24):
So professor, let's say that you were economic czar and you could sit there and you could manage the budget, what would be the percentage that you would run of our GDP in a budget deficit? And then more importantly, how would you deploy that capital into the economy? What would you spend it on?
Stephanie Kelton (16:44):
Well, I think infrastructure has to be really high on the list. Now, that's a longer term. I would say recovery strategy, nearer term. I do believe Congress had the right idea with the small business association loans, the PPP, I think that was the right idea. Other countries do it and they execute well. We didn't have the infrastructure up to flip the switch and get that thing going and execute well immediately, but keeping workers on payroll and attached to their employers, I applaud that. I think it was the right move. I don't know how much more can be done now, clawing workers back or building on that program. I think getting money to state local governments immediately is absolutely critical. I would crank that up. I think the trillion that the house put in is a good number. I would do it.
Stephanie Kelton (17:37):
Looking longer term, yes, I think that a massive infrastructure project is the right way to go. We have deferred maintenance on our nation's infrastructure for probably a decade and the problem just grows bigger and bigger every year. There's so much work that needs to be done. That's usually a bipartisan thing. Both Republicans and Democrats understand that's a proper place for government to make investments. I would do lots of that. I can imagine a lot of other things. We've got now 30 million additional people who've lost health care. I think for me, I would tackle healthcare. Then you see what you're left with, and I think we're going to end up with situation where millions of people who have lost and have yet to lose jobs in this downturn are not going to find work again for years if ever. And for them, I think it makes sense to explore programs like FDR implemented in the new deal era. The Works Progress Administration, the CCC and National Youth. We can't have millions of young kids walking around unemployed in an environment where the tensions are high and people are desperate. You can't have that.
Anthony Scaramucci (18:52):
Well, I'm certainly in that camp. We certainly have to figure that out because just that inactivity, my grandmother would say that idle hands makes for the devil's work. Deficit spending, talking about percentages, so what would you spend? Would it be-
Stephanie Kelton (19:09):
I don't think anybody knows that because three years from now, it's just about the demand leakages, Anthony, for me. So how much space is opening up that needs to be closed off? And some of it will close itself as the government begins to spend through a multiplier effect, you'll get some bang for the buck, but then you just have to stand ready to keep in place enough fiscal support. Warren Mosler keeps talking with you. He'd probably say, you just count the bodies in the unemployment line, and then you'll know when to stop. When you get back to [inaudible 00:19:42].
Anthony Scaramucci (19:41):
Yeah, you do make that case, and I'm going to let you address that in a second. And John has some questions for you from the audience. So I'm going to let him interrupt, but I have one last question. I was on the phone with one of my clients who had worked in Brazil. And he said that he had experienced rapid inflation there as the government "printed money." We know that Argentina had rampant inflation and Greece has had rampant inflation. Do you think that your theories are tied to the US dollar because it's the reserve currency, or do you think your theory is applicable to any sovereign that can print currency? And if it is applicable to any sovereign, how do you explain those issues that places like Brazil and Argentina have had?
Stephanie Kelton (20:28):
Argentina and Brazil have a lot of external debt. They don't constrain their borrowing to their own currency. They borrow in foreign currency. You have countries that are very dependent upon a particular export, whether it's soybeans in Argentina, whether it's oil in Venezuela, you become really dependent upon revenues from one or two key export industries. Then all of a sudden, there's a collapse in the price of that thing and you're in real trouble because your budget is built around being able to finance spending based on that anticipated cashflow. When it starts to dry up, you're in trouble. You got countries like in Zimbabwe, for example, people often in Zimbabwe or Weimar Germany or something.
Stephanie Kelton (21:18):
Milton Friedman of course, famously quipped that inflation was always in everywhere a monetary phenomenon. People have said it's always because you got too much money chasing too few goods. But what usually happens in these hyper inflationary episodes is that you end up with a too few goods piece. Something happens on the supply side. There's a shock. In the case of Zimbabwe, Mugabe comes to power. He wants to reward the freedom fighters. He takes land away from white farmers, redistributes it to the blacks, the freedom fighters, and they don't know how to farm the land. So you end up initially with huge food shortages and an agricultural economy, and they're forced to import food to feed the population. Printing money to do that, and you get hyperinflation.
Stephanie Kelton (22:04):
So my answer is that, look to the supply side and look to countries that are borrowing in foreign currency. You don't have to look far to see Japan. Japan is not the US, Japan's got the largest debt to GDP ratio in the entire world. They still are battling deflationary pressures. They haven't been able to get inflation up to 2% in three decades or so.
Anthony Scaramucci (22:29):
Is that a demographic phenomenon exclusive to Japan or are there other factors there? Meaning that aging population and the upside down pyramid of that is causing that, or are there other things?
Stephanie Kelton (22:41):
Look, I think there are probably other things, but I think demographics matter a lot in terms of what's happening there. I think when you have an aging society, it makes sense that as people age and downsize, they consume less. So if you're trying to engineer rapid economic growth in a society where people are just trying to consume less as they age, it's not going to work out all that well. I also think that they may have the brake pedal and the gas pedal mixed up in terms of what they've done with interest rates and QE that a lot of what they think is monetary stimulus might actually be working the other way around. Then they get very anxious when the deficit increases. They keep hiking the consumption tax. So you get these fits and starts in Japan.
Anthony Scaramucci (23:30):
Okay, makes sense. John, do you have any questions?
John Darsie (23:33):
Yeah, we have several-
Anthony Scaramucci (23:35):
Before we end, I want to go to that employment thing, because I thought that was the more fascinating aspect of the book. I want to give professor Kelton an opportunity to talk about that, but go ahead. Fire her some questions from our audience.
John Darsie (23:45):
Yeah. We've talked a little about government spending, but we haven't talked about the other side of the ledger in terms of how to think about taxes within the MMT framework. In your book, you talk about if taxes are removed then demand for government currency will fall and people might stop working. Do we cut taxes in an MMT framework? Do we raise taxes on the wealthy? How do you think about how we should change tax policy in the United States?
Stephanie Kelton (24:11):
Well, it depends where we are in terms of the economic outlook. What would I do with taxes right now? I sure wouldn't be raising them. I think that certainly, I'm a Democrat, but I'm not allergic to tax cuts. I think tax cuts are perfectly reasonable fiscal policy provided that they are designed to aim that benefit on the other side, that the windfall goes to people who are going to turn around and spend that money back into the economy. So can you just eliminate all taxes and expect the economy to continue to function and government to be able to provision itself with resources? No. Yeah, you're right. In the book I talk about, if you want to start a currency from scratch historically, one of the ways that governments have done this is to impose a tax on a population of people. They say, you are now subject to this tax. What MMT points out is, the government can't collect the tax until it first spends that which is necessary to pay the taxes.
Stephanie Kelton (25:14):
You got to spend the currency first so that somebody can have it and turn around and use it to pay the tax. So taxes are important. They can help you start up a currency, maintain the value of the currency. They allow you to make adjustments to the tax code so you can impact distribution if you want to do that. They allow you to create incentives and disincentives. So lots of reasons, and they mitigate inflationary pressure, which is obviously an important one. If the government only spent its currency into existence, every time the government spends a dollar, it gives birth to a new dollar. And that dollar travels around the economy until it is removed by government. Only the government can take it back up. So you write your check to the IRS, that is the death sentence for the dollar. That is where the dollar goes to dot. It has a lifecycle and the government regulates inflationary pressure by avoiding spending too many of its dollars in and allowing them to travel around. So it subtracts some from our hands over time.
John Darsie (26:16):
Thank you. The next question, we have a couple of questions about universal basic income versus a federal jobs guarantee. You talk a lot about federal jobs guarantee as being a prescription for solving a lot of the ills that we have in our society. And you talk about how Warren Mosler believes that you should just continue to spend until you get that unemployment rate down to zero. In what scenarios do you think universal basic income is the most effective prescription? What scenarios do you think a federal jobs guarantee is effective? Right now, what would be your solution?
Stephanie Kelton (26:49):
Well, for me, it comes down to what problem are we trying to solve? I've engaged in a lot of conversations with people who are advocates of UBI. And very often they say the reason they like the UBI is because they want to fix poverty, they want to address poverty. I am an advocate of the job guarantee because I want to fix involuntary unemployment. I want to eliminate involuntary unemployment, but this is an environment where things have changed since 2019. Right now, we have millions and millions of people who need to pay their rent and eat some food and stay current on their bills, so they don't wreck their credit score and so forth. So what do we do for those people?
Stephanie Kelton (27:40):
There aren't jobs for them and we don't have a federal job guarantee in place. So am I supportive of providing disbursements, monthly income support? Absolutely, I am. But in more normal times, I think that some kind of a basic income, working alongside the job guarantee is the better way so that for people who want to work, but can't find a job anywhere else in the economy, let's create a job for them. There's plenty of work that needs to be done. For those who can't or shouldn't be working, let's provide the basic income support. That's how I look at it.
John Darsie (28:20):
Great. We have one more question then I'll kick it back over to Anthony. Can you envision a scenario in which inflation did become problematic? Let's say that we adopted a modern monetary theory framework and things went awry, what would that scenario look like?
Stephanie Kelton (28:36):
Well, let me tell you this, because I think it's so important for people to understand that. And I'm saying this as someone who worked as the chief economist on the United States Senate Budget Committee for a period of time. I listened to Republicans, I listened to Democrats. I saw a lot of legislation get introduced. I saw amendments proposed. Never once in my time in the Senate, did I hear a single staffer or a single member of the Senate raise concerns about inflation. Not once. It's not even an afterthought, it's just not a consideration at all. So what I'm saying is that MMT centers inflation risk. That is the relevant constraint. You have to identify and respect the economy's real productive capacity or you will run into a situation where you push things too far. What I'm proposing has to be an improvement on what we have today, because what we have today is nobody at all, connecting proposed new spending to concerns about inflation.
Stephanie Kelton (29:43):
The best way to fight inflation is before it happens. Not to start up an inflation problem. What I'd like to see is for Congress to change the federal budgeting process. Right now, somebody writes a bill and the legislation goes to the congressional budget office, and CBO scores that bill with one primary consideration. Does it add to the deficit? Yes or no? And if so, how much? That for me is the least important question we could ask CBO, the least important. Let's ask CBO and other agencies to help Congress figure out whether the proposed spending carries inflation risk. And if so, how can they mitigate that inflation risk? If they propose, let me give you one quick example, I know you probably have to wrap or somebody else wants in, but one quick example. Suppose that we were back in December of 2019, and we were looking at an economy that a lot of people would have said, this is basically a full employment economy.
Stephanie Kelton (30:43):
Unemployment's three and a half percent or so. Congress said, we want to do infrastructure. You remember that Trump met with Pelosi and Schumer. They went to the white house, sat down, they had a meeting of the minds on this two trillion dollars. Said, "Let's do two trillion dollars of infrastructure spending." Everybody said, "Great, let's do it." And then came to how are we going to pay for it stuff? But suppose, suppose that you ended up with Democrats in the house, in the Senate and in the white house, in the same economic environment. And somebody put an infrastructure built together for a couple of trillion dollars or more, and attached a wealth tax to it and said, this is our pay for, and it's going to raise all the revenue we need to cover the cost of the infrastructure. They send the bill to CBO, CBO looks at it. They say, it's beautiful, it's gorgeous bill. Doesn't add to the deficit. Wonderful, A plus. Send it back, now Congress can vote to pass that spending.
Stephanie Kelton (31:42):
What I'm saying is Kelton would go, Oh my God, are you crazy? Are you crazy? Because you've just authorized trillions of dollars of spending where your offset, your so-called pay for is a tax that falls exclusively on the tiniest sliver of people. What is it, like 78,000 people or whatever would be subject if it were Senator Warren's wealth tax? You're taking the dollars away from people, let's face it. They weren't going to spend them chasing real goods and services and the economy anyway. So you haven't mitigated the inflation risk with that particular offset. I think that we are more vulnerable to inflation risk under the current budgeting practice than we would be if we move to, as you say, an MMT model.
Anthony Scaramucci (32:37):
Talk a little bit more [crosstalk 00:32:39].
John Darsie (32:39):
[crosstalk 00:32:39] back over to you to continue your intellectual discussion.
Anthony Scaramucci (32:41):
I appreciate, John. I'm fascinated by this. Just talk a little bit more about the employment phenomenon. Let's go to the three and a half percent unemployment. Dr. Bernanke or chairman Powell would say that that's full employment. It felt like full employment to me. You would say what? That that's not quite full employment. We both are going to stipulate that there's going to be frictional activity in the economy that leads to some level of unemployment, but what's full for unemployment in your mind?
Stephanie Kelton (33:11):
Well, here's what I'll say. If we announced that the federal government was prepared to provide a job to anybody who wanted one but couldn't find one anywhere else in the economy, now frictional unemployment, somebody who's between jobs. They're not going to take that job. They know they're going to quickly find another private sector job. So they're not going to show up. But if you made the announcement, walk into your nearest American job center, the old unemployment offices, if you don't have a job and you want one, walk in, you can walk out with a job. If you make that announcement and nobody shows up, I will stipulate that we were at full employment. On the other hand, if 10 or 15 million people show up, then I think we have just revealed the true extent of the unemployment problem. In other words, you don't know unless you have an option in place.
Anthony Scaramucci (34:01):
But I think we also want... You're going to want to get a job that is paying you more than, say your unemployment benefits. Or you want to get a job that's paying you more than the worker's comp that you may be getting from some other job that you can no longer do. Would that be fair to say?
Stephanie Kelton (34:16):
Well, probably so. But your unemployment right now, unemployment insurance, I wouldn't eliminate that, by the way. Yeah, we let people who, you lose a job, you go on unemployment and you continue to look for work. Maybe you get lucky and you're reemployed in a short period of time. But when unemployment runs out and then people don't have another option, this would be an option for folks like that.
Anthony Scaramucci (34:42):
You brought up something that I think is brilliant. I want to reemphasize it because if I were essential banker, thank God I'm not, but if I were, that would be the number one thing I'm worried about is deflation. And I just want to remind everybody on the call, why are central bankers worried about deflation? They're worried because you can't pay the debt back with dollars that are worth more than the ones that you borrowed. You implode the society. That's clearly what happened in the 1930s. It wasn't until, and Liaquat Ahamed from the Lords of Finance book, I know you're familiar with, he points out. It was Franklin Roosevelt in his Common Sense in 1933 that unclipped us from that gold standard. And perhaps Benjamin Strong, if he didn't die, the first federal reserve chairman would have been able to figure that out.
Anthony Scaramucci (35:29):
Then the liquidity started entering the market and the unemployment numbers went down. Now it's 1933 to 2000s, or let's call that 87 years, we've had reasonably high to very high deficit spending. Since 1969, we've only had two surpluses. It was the 1969 surplus and the fiscal year 2000 surplus. And yet we've had unbelievable economic progress, professor Kelton. So I want you to tell the naysayers out there that are looking at this framework and saying, well, our grandchildren are going to pay for it, our great grandchildren are going to pay for it. It's all going to come home to roost, or it's a house of cards about the collapse on us. What would your response be to them?
Stephanie Kelton (36:18):
Well, my response is, just stop thinking of it as debt. That's the response. That's why I titled chapter three, the National Debt Parentheses That Isn't, because I think that's the problem. Once we start calling it debt and thinking of it in those terms, we personalize it. It's like corporate debt or it's like household debt or whatever. Eventually you have to pay it back. That's when things go awry. That's why I keep saying, just think of it as part of the net money supply of the US.
Anthony Scaramucci (36:51):
Not to interrupt, but let me just ask you this. We do the budget together, we come up with what we want to spend on, and we have infrastructure and we're taking in 3.7 to four trillion dollars of tax revenues, but we really need to spend six or seven trillion dollars hypothetically. Why wouldn't we just print that money and just pay it right there and then balance the budget every single year? What would be your economic policy answer to not doing that?
Stephanie Kelton (37:19):
There's only one way for the government to pay for anything already today. Every single payment that is made by government is carried out by the federal reserve changing numbers in the appropriate bank account. Congress authorizes the spending, and that effectively orders up new dollars from the federal reserve. And the fed fills the order by using the computer keyboard to make payments, to clear the payments on behalf of treasury. That's the way it works now. You're saying, I think, why do we bother messing around with the bond sale piece? Why not just let the fed mark the numbers up and be done with it? And then you could have deficit spending without an increase in the national debt. To which I say, good idea. Good question. The bond piece is optional. This is the thing people don't get. They don't understand-
Anthony Scaramucci (38:12):
Okay. But the people that are on this call that have to balance their checkbook every day and they're balancing their corporate checkbooks as well, you would say, well, because the federal government can issue the currency, they're able to do that. You don't issue currency, you use currency. So you're not able to do that. You don't think there would be inflationary consequences to us doing it?
Stephanie Kelton (38:31):
No. In fact, selling bonds is almost certainly more inflationary than not selling the bonds. Why? Because you're putting trillions of interest bearing dollars out there. Those are dollars that pay extra dollars on top of those dollars, versus just leaving the dollars in the system. We're multiplying them up by turning them into interest bearing dollars.
Anthony Scaramucci (38:57):
Okay. So you're basically saying that the national debt for a modern monetary theorist is a little bit of a Mirage, it does have that hangover effect of the interest bearing that you're suggesting. But if we just printed it and replaced it, sovereigns from around the world, people that invest in the US, they wouldn't lose confidence in us. They wouldn't lose confidence in the M1 or M2 production of our money supply. They'd be okay with that. They would say, okay, anytime the US government needs to spend money, they're just printing it. The rest of the world would be okay with that and still accept us as a reserve currency?
Stephanie Kelton (39:36):
Yeah, yeah. If they haven't figured out that that's how it works already, then they're being a little bit duped because we are already creating new digital dollars.
Anthony Scaramucci (39:46):
Well, that was the most fascinating part of your book. And that's the reason why I'm encouraging everybody on this call to read it, because we are in fact already doing that. It has worked and it's worked for the 87 years since Franklin Roosevelt began that more aggressive process of doing it. What do you say to the deficit Hawks out there? Which there are many on this call, trust me, because I'm getting text messages and all kinds of nonsense coming into my phone. So what do you say to those people?
Stephanie Kelton (40:17):
I just say, there is some iron clad logic behind this. And the iron clad logic is in the balance sheet entries. It is simply the case that on the other side of the government's deficit, lies somebody else's surplus. There are no two ways around that. We aren't going to debate that, or we can debate it, but whoever's taking the opposite position is going to lose because I'm right about this. Saying, I want the government to eliminate its deficit is exactly the same as saying, I want the government to eliminate the surplus in the non-government sector. They are identical statements. So you might believe that, you might be somebody who wants the government to siphon dollars out of the rest of the economy.
Stephanie Kelton (41:02):
A surplus works like a vacuum. It hoovers dollars off of balance sheets because the government's taxing more away from us than it's spending back in. If you believe that's a great idea, that's your prerogative. I would say the time in place for the government's budget to move to surplus is when the economy has reached its capacity constraint. You want to withdraw more than you spend back in. It's reasonable to see the government budget move into surplus at that point.
Anthony Scaramucci (41:31):
Stephanie, you have a couple of detractors. You know that and I know that. So Larry Summers, Paul Krugman, I don't even know what Calvin ball is by the way, but let me just describe it to you. It is changing your theory every time someone offers up tough questions, I guess that's Calvin ball. I've got to go look that up on my dictionary. But what do you say to your detractors that printing money isn't the answer, that it would cause some type of capital market destabilization? That we're in fact already doing it, so it's a duper. What is more a granular intellectual response to that?
Stephanie Kelton (42:07):
Look, again, I think that Larry understands this actually. The response is that MMT has nothing to do with printing money. It has never been about printing money. The way to hand wave or dismiss the work that we've done is to caricature it as something that it's not so that it looks and sounds silly so that you can wave it away and say, that's a silly proposal. We are not proposing that the federal government print money, we are explaining the monetary operations, which reveal how the government already spends today. And how the government already spends today is that, like I said, every piece of legislation, every spending bill orders up new dollars and the fed creates them when it carries out the payments.
Anthony Scaramucci (42:55):
Yeah. Assuming your theories are true, then there's great reason to be optimistic, I would think. We'll be able to solve the problem of the pandemic. We'll be able to figure out a way to produce infrastructure in the society, which will hopefully create more economic output and economic rent and potentially more fairness economically in the society. So there's great reasons to be optimistic basically. Right?
Stephanie Kelton (43:22):
I would hope so. Look, if we are facing problems, deep and serious problems in our economy and in our societies and we can't address them, then we're in real trouble. So I'm optimistic that we can address them. Sure. Look, if you say I got a bunch of idle resources lying around, I can see tens of millions of people who want to work but don't have any way to get a job. I can see businesses that have a lot of capacity. There's no construction boom going on. So I see all of these, it's heavy equipment. I see companies that can manufacture this stuff. I could do infrastructure. I could pay that company, and now they have some sales. So they have some revenue and some profit. I can hire these workers and they can go build infrastructure and fix things and I can pay them. The economy ends up with a bunch of people who are employed, who have income, who become spenders into the economy, who then support other jobs and we get a new bridge or better infrastructure or whatever. That sounds really [crosstalk 00:44:25].
Anthony Scaramucci (44:26):
That stuff makes sense. Let me ask you one more question and I'm going to kick it back to John because he's got just one or two more from our audience, and then hopefully you'll give me the chance to reconvene with you before the election, because I'm curious to see how this all lays itself out. But why not just have no taxes then? Why not just say, okay, listen, here's what we're going to do. This is what the government's going to spend in a year. We're going to put these entries computationally to a computer. The governor is going to go out and spend this money and we're just not going to have any taxes. By the way, I'll point out to everybody here because the government delayed the taxes in April, we haven't picked up that income for the government in the last three months.
Stephanie Kelton (45:09):
I don't think of taxes as income for the government. I don't think of it that way at all. Remember I said, when you send your check to the IRS, that's where the dollar goes to the graveyard. It's just done. It's subtracted away, it's gone. We put it to bed. New dollars are born when the government spends. The question is, how many times, how many dollars can the government safely spend in without killing off any of the dollars that it spends in, without taxing to take some of them away from us? The answer is, up to the point that the economy reaches full employment and then that's it. Right now, we watched Congress pass four bills. The biggest of course, is the CARE Act, 2.2 trillion, no offsets. That's pure spending, no paired with an increase in taxes. The house has passed a three trillion dollar bill.
Stephanie Kelton (45:57):
The HEROES Act, there are no offsets there. That's another three trillion that would enter, but over time, some of those dollars would come back because people earn a dollar, you pay tax. Some of that is going to get sent to the graveyard. The answer is that at some point, the economy, God-willing, recovers to the point that we are no longer able to spend without offsets. And at that point, Congress has to write bills and they have to pair that legislation, that proposed spending with some offset somewhere or we're going to get an inflation problem.
Anthony Scaramucci (46:32):
Okay. I think it's well said, Stephanie. You made your case brilliantly. I have to tell you, I loved your book. And I mentioned to you before this started that I grew up thinking more about [inaudible 00:46:43] economics and [inaudible 00:46:45] and obviously Milton Friedman. But the world around me was happening in a very Keynesian sort of way, which I find fascinating. Listen, you can't take away the economic progress that our society has had over the last 100 years, but we do have to figure out how to make that economic progress more fair, wider bandwidth for more and more people. John, do you have any more questions for professor before we sign off?
John Darsie (47:14):
Yeah, a couple more audience questions. I feel like we could go for another two hours, but I'll wrap it up just with a couple quick audience questions. What's your views on cryptocurrency and whether they have a place in modern society?
Stephanie Kelton (47:29):
Well, I think they have found a place in modern society. I don't spend a lot of time. I don't think I've ever written about crypto. I don't spend a lot of time agonizing over its existence or nonexistence or people want to invest in crypto. I have no problem. I don't see it as a threat to the existing monetary system. It's not going to replace the US dollar or anything like that.
John Darsie (47:58):
All right, last question. Do you think we could turn US States into quasi MMT sovereigns if we allow the fed to monetize the state issuance of US dollar denominated debt, which seems like what we're doing with the fed municipal lending facility?
Stephanie Kelton (48:14):
I think so in a sense. If I understand the question correctly, could we effectively free individual states from their limited capacity to spend by having the fed step up and effectively backstop them with currency issuing capacity? Yeah.
John Darsie (48:36):
All right. Well, that's all we have. Thanks for going a little overtime with us, Stephanie. Again, her book is The Deficit Myth. It's available at all major booksellers. As Anthony said, we would highly recommend that you buy it and read it. Even if you maybe have different preconceptions about economic theory, I think Stephanie's book, professor Kelton's book will open your mind to possibilities. As Anthony said, we hope that you're right and would allow us to spend more and solve a lot of problems in society. So professor Kelton, thanks so much for joining us and good luck. You're on the New York Times bestseller list now. We hope you continue to climb that list.
Stephanie Kelton (49:12):
Thank you both very much. Thanks for having me.
Anthony Scaramucci (49:14):
Congratulations, professor. We hope to see soon.
Stephanie Kelton (49:17):
Thanks, Anthony. Take care.