Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. This is Master's in
Speaker 1: Business with Barry Ritholts on Bloomberg Radio.
Speaker 2: This week on the podcast, I have another extra special guest,
Speaker 2: Professor Stephanie Kelton teaches public policy and economics at sunny Stonybrook.
Speaker 2: She really came to the four in the twenty tens
Speaker 2: when she was the chief economist for the US Senate
Speaker 2: Budget Committee, and had previously in her career revisited the
Speaker 2: works of people like Hymen Minsky and Lord Keynes and
Speaker 2: Warren Mosler, who's really probably the single largest influencer of
Speaker 2: modern monetary theory, which looks at the overall economy not
Speaker 2: from the perspective of federal deficits but the federal impact
Speaker 2: on inflation. Really just a fascinating conversation talking about what
Speaker 2: is and it is not heterodoxy and conventional thinking in economics,
Speaker 2: and why the field is so hesitant to change even
Speaker 2: when the evidence is overwhelming that what they're doing is
Speaker 2: false or based on data that just doesn't seem to
Speaker 2: add up. Her book, The Deficit Myth, was a surprise bestseller,
Speaker 2: came out right in the middle of the pandemic and
Speaker 2: did really well. She's been on all the top one
Speaker 2: hundred lists most influential thinkers, Women in Finance, policy influencers.
Speaker 2: She's just really a fascinating person with a perspective that
Speaker 2: is kind of hard to argue with. A lot of
Speaker 2: what she believes is outside of the mainstream, but it
Speaker 2: is really stood the test of time. When the traditional
Speaker 2: economists have said and done things, They've made forecasts, they've
Speaker 2: made predictions about what will and won't happen, and none
Speaker 2: of it's come true. And so when the mainstream economists
Speaker 2: are getting it wrong, you have to look at people
Speaker 2: who approach the field from a different perspective. She's done
Speaker 2: a really great job. I thought the conversation was fascinating
Speaker 2: and I think you also. With no further ado, my
Speaker 2: conversation with Sunny Stony Brooks Professor Stephanie Calton.
Speaker 3: Thank you for having me, Nice to be here, Nice.
Speaker 2: To have you. I've been wanting to have you here
Speaker 2: since the book first came out during the pandemic, and
Speaker 2: we'll spend a lot of time talking about it, but
Speaker 2: before we get into that, I just want to get
Speaker 2: a handle on your background. You get a bachelor's a
Speaker 2: BA and a BS in economics and Business at California Sacramento,
Speaker 2: then University of Cambridge Masters in philosophy and economics, then
Speaker 2: a PhD in economics at the New School. That sounds
Speaker 2: like you were teeing up for a career in academia.
Speaker 2: What was the original plan.
Speaker 3: To be a dentist?
Speaker 2: Really? Yeah? Why a dentist?
Speaker 3: I think you just think, you know, what do you
Speaker 3: do for a living where you have, you know, decent
Speaker 3: income and you know there's going to be.
Speaker 2: A job and high suicide race.
Speaker 3: I didn't think about that at the time, but I
Speaker 3: learned later. I also didn't realize that you had to
Speaker 3: work on cadavers, and so I figured out pretty early
Speaker 3: on that that wasn't going to be the path. And
Speaker 3: then I, you know, I switched. I was pre law
Speaker 3: for a while. I was an accounting major for a
Speaker 3: good period of time. I got well into the upper
Speaker 3: division stuff, and then I couldn't imagine myself as an
Speaker 3: accountant and I thought, what do you do You sit
Speaker 3: in a room all day doing tax returns or something.
Speaker 3: It's just not you know that it seemed anti social,
Speaker 3: and so then it became finance and a series of accidents,
Speaker 3: you know, you have that one professor who you stumble
Speaker 3: on and it just changes your life. And my trajectory
Speaker 3: changed to economics by accident.
Speaker 2: Really fascinating. So you end up teaching at the University
Speaker 2: of Missouri Kansas City for eighteen years from nineteen ninety
Speaker 2: nine to twenty seventeen. Tell us, I'm curious. California to Cambridge,
Speaker 2: to the New School in New York, and then Kansas City.
Speaker 2: Tell us about this geographic progression.
Speaker 3: Yeah, so I was doing my undergraduate at cal State Sacramento.
Speaker 2: Were you originally a California girl or well, we were.
Speaker 3: Living in North Carolina. I was a senior in high school.
Speaker 3: I was going to go to the University of North Carolina.
Speaker 3: My dad was in the military, so we lived all
Speaker 3: over the place. And one day he came home and
Speaker 3: he said, you know, we're sitting at the dinner table
Speaker 3: and he announces that he put in his retirement papers
Speaker 3: and the family was going to go back to California.
Speaker 3: And I could either stay on the other side of
Speaker 3: the country by myself at seventeen, well you know, a
Speaker 3: college kid with a car that used to break down
Speaker 3: on me all the time, or I could follow them
Speaker 3: to California. Of course, I missed all the application deadlines,
Speaker 3: and so I ended up going with them and doing
Speaker 3: most of my undergraduate work at cal State Sacramento. And
Speaker 3: that's where I ended up taking a micro theory course
Speaker 3: with this guy named John Henry. And you know, I
Speaker 3: could have picked any course in the catalog, any Tuesday
Speaker 3: Thursday section. I happened to pick that one, and he
Speaker 3: just kept encouraging me to keep going. And by the
Speaker 3: time I took the History of Economic Thought, I was
Speaker 3: really hooked. And he took me out to lunch one day.
Speaker 3: I was thinking about graduate school because he said, you know,
Speaker 3: you ought to think about it, and so he took
Speaker 3: me to lunch, and this guy named Randy Ray happened
Speaker 3: to be in town. And Randy is an economist. He
Speaker 3: did his PhD dissertation at WashU under I'm in Minsky.
Speaker 3: So a lot of listeners will be familiar with Minski
Speaker 3: because it's stuff like the Minski Moment and all that.
Speaker 3: And so Randy came to lunch. I'd never met him before,
Speaker 3: I knew who he was. But John said, to Randy,
Speaker 3: give her some advice, tell her what she should do
Speaker 3: about graduate school. And Randy said go to Harvard, and
Speaker 3: John said no, no, no, no, don't listen to him.
Speaker 3: And he was totally opposed. Why because I think he
Speaker 3: rightly understood that if I had gone to Harvard that
Speaker 3: I would have received a certain kind of training. And
Speaker 3: by that point I was already you know, people will
Speaker 3: use the word heterodox. I don't like that word, but
Speaker 3: for lack of a better synonym at the moment, I'll
Speaker 3: just use it. But you know, I had been reading
Speaker 3: people like Minski and I was really into that kind
Speaker 3: of stuff and Veblen and you know, the history of
Speaker 3: thought really grabbed me. And I think John understood that
Speaker 3: if I'd gone to Harvard, I would have gotten really
Speaker 3: conventional training and I wouldn't have been exposed to some
Speaker 3: of the really interesting thinkers and theorists. So John Henry
Speaker 3: said go to Cambridge, not Harvard, but go to Cambridge University.
Speaker 3: And there were people there he thought were interesting. And
Speaker 3: that's what I ended up doing.
Speaker 2: Huh. So Thorstin Veblin fascinating, probably the earliest theorist on
Speaker 2: consumer spending and materialism, and kind of interesting that you
Speaker 2: gravitated towards that and away from just being cranked out
Speaker 2: of the factory to become another consultant. Not your path, No,
Speaker 2: it wasn't.
Speaker 3: And you know, when I was at Cambridge, i was there,
Speaker 3: it was a very unusual program because you know, you
Speaker 3: show up straight out of undergrad you do four courses.
Speaker 3: Each course is one year long, and at the end
Speaker 3: of the one year period you start writing a dissertation.
Speaker 3: And then you're a PhD economist, having four courses at
Speaker 3: the graduate level under your belt. And I thought, how
Speaker 3: do you sell yourself as an economist? Really, it just
Speaker 3: didn't feel right, and I wasn't sure I could compete
Speaker 3: for a job in academia, which is four courses, and
Speaker 3: most of the you know, kids, I'll say kids, most
Speaker 3: of the people that I did the master's degree with,
Speaker 3: they were flying back to the US and they were
Speaker 3: interviewing for Wall Street jobs. And I knew that that
Speaker 3: was not my path. And I've already gotten a fellowship
Speaker 3: from Cambridge University through christ College to go to the
Speaker 3: Levy Institute and spend a year working on the dissertation.
Speaker 3: And so I went away.
Speaker 2: So this is this is a year of four classes.
Speaker 2: I finished a full year class. This kind of reminds
Speaker 2: me a little bit of law school where you're taking
Speaker 2: the four gut courses towards civil procedure, property and uh
Speaker 2: law No klo was second year what was the contracts
Speaker 2: And they're like killer courses and you're taking forum at once.
Speaker 2: Then you have a full additional year to work on
Speaker 2: your not PhD dissertation. But master's dissertation. Is that right?
Speaker 3: No? It would it be the PhD.
Speaker 2: Oh. So you do a year of four classes and
Speaker 2: then the pH.
Speaker 3: And then you write your dissertation and you have a PhD.
Speaker 2: So I hold the who ho ho? So so you
Speaker 2: get a PhD from Cambridge and then you go to
Speaker 2: the New School for a PhD in economics.
Speaker 3: So I started on the journey I took. I got
Speaker 3: the fellowship, which was go to the Levi Institute. It's
Speaker 3: an upstate New York. It's right there on the campus
Speaker 3: of Bard College, kind of in the Hudson Valley. Very lovely,
Speaker 3: it's beautiful up there. And so they gave me money
Speaker 3: and the Levy Institute gave me, you know, office space
Speaker 3: and housing, and they had this arrangement with Cambridge and
Speaker 3: the idea was you go when you spend a year
Speaker 3: there and you start writing, and then you would return
Speaker 3: and finish up the PhD.
Speaker 2: So Wolden Pond for economics.
Speaker 3: Honest, it was like magic. And I get there and
Speaker 3: Randy Ray is there. He's on a sabbatical, I think,
Speaker 3: and he's doing research there. But I meet this guy
Speaker 3: named Wynn Godley, and Godly is just a fascinating character
Speaker 3: about him a little bit in the book. He really
Speaker 3: pioneers the work around sectoral financial balances and stock flow
Speaker 3: consistent modeling. And he's this old British guy who was,
Speaker 3: you know, quite famous in England as a policy advisor
Speaker 3: and an economic forecaster. He was known as one of
Speaker 3: the Seven Wise Men. And anyway, his office was right
Speaker 3: next to mine. We shared a wall. He would sit
Speaker 3: in his office and play the Obo and just an
Speaker 3: amazing person. And I learned so much from him that
Speaker 3: I got there and I thought, there's so much more
Speaker 3: to learn. I've done four courses, but I don't know enough.
Speaker 3: So I started taking the train once a week, I'd
Speaker 3: go down to New York City and I would sit
Speaker 3: in on courses at the New School. And I mean,
Speaker 3: I was surrounded by people I thought were ten times
Speaker 3: brighter than I was they were more thoughtful. They were
Speaker 3: having conversations that felt, you know, important and weighty. And
Speaker 3: I thought, oh, there's no way, you know, I'm not ready.
Speaker 3: I need to to stick around and do some more coursework.
Speaker 3: And so that's what happened. I transferred. I finished up
Speaker 3: at the New School when Godly served on my dissertation committee.
Speaker 3: And that's that's kind of how the journey unwrapped.
Speaker 2: Really fascinating. How do you end up in Missouri Kansas City.
Speaker 3: So another person who had a major impact on my life.
Speaker 3: A lot of people if they hear his name and
Speaker 3: recognize it, they'll say, oh, Warren Mosler, the father of MMT.
Speaker 3: So Warren was funding a small program at the New School.
Speaker 3: He was supporting some graduate students, and he had a
Speaker 3: faculty member there named Ednell who had students kind of
Speaker 3: working on Warren's ideas. And I was part of that group.
Speaker 3: And Randy Ray who was at the Levy Institute, another
Speaker 3: economist named Matt Forstatter who was at Levy, and I
Speaker 3: all ended up going to UMKC in the same year
Speaker 3: because Warren, you know, provided some seed money to help
Speaker 3: the graduate student program really kind of build itself up
Speaker 3: there bring some economists in have a you know what
Speaker 3: an outpost, I guess for tea and so we all
Speaker 3: went together.
Speaker 2: So what brought you in twenty seventeen to my alma matas,
Speaker 2: Junie stony Brook. What led you to move over there
Speaker 2: and what's your focus there?
Speaker 3: Well, my husband was the associate dean at the University
Speaker 3: of Kansas and I was the chair of the department
Speaker 3: at the University of Missouri in Kansas City. I had
Speaker 3: taken a bit of time away to work on the hill,
Speaker 3: and so anyway we were, you know, the universities are
Speaker 3: about an hour apart. We lived in Lawrence, Kansas. It's
Speaker 3: a great little college town. We loved it, you know,
Speaker 3: season tickets to the men's basketball games and all that
Speaker 3: kind of stuff. It was a lot of fun. But
Speaker 3: he had one foot in the administration and one foot
Speaker 3: in academia. And you know, he a history professor. He
Speaker 3: writes a lot of books, and so he kind of
Speaker 3: put himself out there on the job market and he thought, well,
Speaker 3: I could either go for a dean position, or I
Speaker 3: could you know, go for some kind of endowed chair somewhere,
Speaker 3: you know, move up. And so Stonywork had a position
Speaker 3: for an endowed share in the History Department, and he
Speaker 3: interviewed for it and they liked him. And then the
Speaker 3: provost at the time was an economist. I think he
Speaker 3: had been Jamie Galbraith's roommate at Yale, and he found
Speaker 3: out who Paul Kelton was married to, and then I
Speaker 3: think the conversations between the Dean and the provost started.
Speaker 3: They said, we got to get this two for we
Speaker 3: got to get him, and so we did. We decided
Speaker 3: it was it was a great opportunity to you know,
Speaker 3: go and be together and you know, build and I
Speaker 3: could do public policy and economics and that was going
Speaker 3: to be you know, really appealing for me because I
Speaker 3: was just teaching economics at UMKC.
Speaker 2: Now you just briefly alluded to your time on the hill.
Speaker 2: You were the chief economist for the US Senate Budget
Speaker 2: Committee during was that during the Obama administration.
Speaker 3: For the Democrats stuff? So, yeah, there are the Republicans
Speaker 3: have one, the Democrats have one.
Speaker 2: Who was your who was on the other side.
Speaker 3: Mike Enzi, Senator Mike Enzie uh huh from Wyoming.
Speaker 2: Was the Democrat or Republican on the well.
Speaker 3: The Republicans had the Senate. Democrats had the House at
Speaker 3: the time, and so Bernie Sanders was the ranking member
Speaker 3: and hired.
Speaker 2: Wait, so you're the chief economist for the Democrat US
Speaker 2: Senate Budget Committee, who was the chief economists for the
Speaker 2: Republicans bill something, so not someone you interacted a lot
Speaker 2: with you, No.
Speaker 3: I when I got to the hill. I think it
Speaker 3: was just the first few days after I arrived. He
Speaker 3: reached out to me. It was a really nice guy,
Speaker 3: and he said, you want to get together and have
Speaker 3: coffee and I'll kind of tell you how this whole
Speaker 3: thing works. And I said that would be sure, that'd
Speaker 3: be really nice. So the two of us sat and
Speaker 3: it was really interesting because you know, he's chief economist
Speaker 3: for the senators on the Budget Committee, the Republican side,
Speaker 3: and I'm there for the Democrats. And he said, look,
Speaker 3: we're in charge because we have the majority. So periodically
Speaker 3: every week, couple of weeks or whatever, we're going to
Speaker 3: call a hearing. We get to decide what the hearing
Speaker 3: is about, and we're going to get usually three witnesses
Speaker 3: to testify, and you guys will get two, and we'll
Speaker 3: try to give you as much notice as we can
Speaker 3: to liign your witnesses up. We'll go for a week.
Speaker 3: You won't always get that, but here's how it's going
Speaker 3: to go. You know, we'll say where you want to
Speaker 3: have a hearing on you know, I don't know, disability,
Speaker 3: fraud and disability, or the budget crisis or whatever the
Speaker 3: hell it is. And you know, maybe we'll reach out
Speaker 3: to the people at Heritage or CATO or AI or
Speaker 3: someplace like that, and we'll say, I need a quick
Speaker 3: paper on X y Z, you know, leading up to
Speaker 3: this hearing, because they want to make their points as
Speaker 3: strongly as they can. He said, you might want to
Speaker 3: reach out to the people at CAP or the Center
Speaker 3: on Budget Policy Priorities or Washington Center for Equitable Growth
Speaker 3: or EPI. You know, like you know, you're just so is.
Speaker 2: That friendly and non adversarial because the you know, when
Speaker 2: I was growing up, there were different parties, but there
Speaker 2: was some bipartisan everybody seemed to be focused on what
Speaker 2: are we going to do to make life better for everybody?
Speaker 2: And then it just sort of devolved into this partisan
Speaker 2: wrangling where the sort of collegial dare I say, academic
Speaker 2: relationship across the aisle that seems to have gone away.
Speaker 3: Yeah, I mean we had a nice report. I will
Speaker 3: say that that most of it felt to me very performative.
Speaker 3: You know, it was you said, making people's lives better.
Speaker 3: I don't think I ever really had the sense that
Speaker 3: that was what these hearings were about. A lot of
Speaker 3: it was allowing folks to have their five minutes of
Speaker 3: you know, I don't know.
Speaker 2: Oh, I mean, this is long before a long before W.
Speaker 2: George W. Bush back in the I don't know, maybe
Speaker 2: I'm maybe I'm romanticizing. Yeah, Johnson Nixon, Ford, Carter Reagan era,
Speaker 2: but it seemed like Tip O'Neil and Ronald Reagan. The
Speaker 2: joke was they would argue all day and then they
Speaker 2: go out and have a beer together.
Speaker 1: Yeah.
Speaker 3: Well, I think there was still some of that around
Speaker 3: when I was there. And you know, there's certainly you know,
Speaker 3: Bernie's Sanders for all the you know, personality and so forth,
Speaker 3: people associate him with a really kind of cantankerous old guy.
Speaker 3: He's just as friendly as anybody else on the committee.
Speaker 3: Mike Enzie, the chair of the committee, was just like
Speaker 3: you'd look at him and think that's my grandpa. You know.
Speaker 3: He's just a mild mannered, soft spoken very easy. But
Speaker 3: things have changed obviously.
Speaker 2: So let's talk a little bit about the book first.
Speaker 2: What was the inspiration to.
Speaker 3: Write this frustration? Really? You know, I don't. I don't
Speaker 3: enjoy writing. I don't like the process. I don't I
Speaker 3: don't like sitting still that much.
Speaker 2: That's really interesting.
Speaker 3: Yeah, I could never write a book because I wanted to.
Speaker 3: I wrote it because I felt like I had to.
Speaker 2: I've had that experience. I've had. I've had both. I've
Speaker 2: had the I just got to get this out because
Speaker 2: it's burning a hole in my brain. But I've also
Speaker 2: had the oh, let's have some fun and play with
Speaker 2: some interesting ideas. That's a little less tedious and cathartic.
Speaker 2: But this just had to come out. Is that was
Speaker 2: that you had to get it out of your head
Speaker 2: or I.
Speaker 3: Had to get it out. It's so funny that you
Speaker 3: use that metaphor or that kind of terminology. Because I
Speaker 3: had a conversation with Mary Ann Williamson.
Speaker 2: You know, why do I know that name?
Speaker 3: Because she ran for president? Oh yeah, okay, and I
Speaker 3: had just moved out to Stonybrook. We just moved to
Speaker 3: Long Island, and I get this email from this person.
Speaker 3: I've never heard of before. And she said, we have
Speaker 3: a mutual friend. And he says that I need to
Speaker 3: talk to you because I want to try to understand
Speaker 3: economics better. Can I? I will come to you. You
Speaker 3: know what would you talk to me? And I said,
Speaker 3: I guess, so you know, sure you're gonna come to me.
Speaker 3: So one day I'm sitting in the house sweatpants whatever,
Speaker 3: you know, T shirt. We're in the basement my husband.
Speaker 3: I think we're watching a football game or something, and
Speaker 3: all of a sudden I get the notification on my phone,
Speaker 3: you know, and it says Marian Williamson is coming at
Speaker 3: four o'clock or whatever. And I thought, oh, was.
Speaker 2: She running by that time with like secret service. Oh no, no,
Speaker 2: so just a very casual drop by years.
Speaker 3: Before, years before that. And yeah, so I see this notification.
Speaker 3: I said, oh jesus, you know. My husband said, what
Speaker 3: I said, somebody is coming over? He said, who's coming over?
Speaker 3: I said, I don't know. I said, You've got somebody
Speaker 3: coming over and you don't know who it is. So
Speaker 3: I google and I see Larry King New York Times Bestsellers,
Speaker 3: seven books and all the stuff. I thought, Oh Jesus,
Speaker 3: you know, I got to change, So I changed clothes,
Speaker 3: I went to the grocer store. I got some, you know,
Speaker 3: things to put out and host her and so forth.
Speaker 3: So she's she's a very sweet lady, you know. She
Speaker 3: came to the house and I mentioned that I was
Speaker 3: kind of toying with the idea of writing a book,
Speaker 3: and she said, Darling, you must be pregnant with a book.
Speaker 2: I get that.
Speaker 3: Okay, I didn't get it at the time she said it,
Speaker 3: but I understand it now that it's exactly what you said.
Speaker 3: There's something that's in you that you just have to
Speaker 3: push out. And that's the best I can.
Speaker 2: No, that makes perfect sense. But pregnant with the book
Speaker 2: is a great listen.
Speaker 3: I got pregnant, Barry. It wasn't expecting.
Speaker 2: It's funny because my last book was fit fifteen years ago,
Speaker 2: and now I have a new one coming out and
Speaker 2: the next one will be in twenty forty. I'm like,
Speaker 2: I'm clockwork every fifteen years because it takes not only
Speaker 2: does it take a lot out of you, but it's
Speaker 2: you have to really enjoy sitting alone in front of
Speaker 2: a screen typing, and you end up spending writing is
Speaker 2: the easy part. It's the eddling. That's so difficult because
Speaker 2: the first draft is, you know, the final version is
Speaker 2: ten steps removed from the first draft, and you don't
Speaker 2: realize how much time you spend thinking about why a
Speaker 2: semi colon and not a comma in this parrot? Like
Speaker 2: just dumb things. But it is a birthing process, and
Speaker 2: it is messy and painful, to say the very least.
Speaker 2: But that brings me to a really interesting question. The
Speaker 2: book comes out in June twenty twenty, instant acclaim New
Speaker 2: York Times bestseller list. How giant of a surprise was
Speaker 2: that reaction?
Speaker 3: Huge?
Speaker 1: Huge?
Speaker 2: Right?
Speaker 3: For sure? The phone rang. My editor was on the
Speaker 3: line and he was just tickled, tickled pink, and he said,
Speaker 3: I want to be the first to congratulate you, and
Speaker 3: he he knew what the list was going to look
Speaker 3: like the next morning, and really.
Speaker 2: Yeah, wow, So number one on the New.
Speaker 3: York Times, No number one, but it was in the
Speaker 3: top whatever it made the list. I think there were
Speaker 3: fifteen and oh really thirteenth or something.
Speaker 2: Yeah, amazing, that's amazing. So the book publishes June twenty twenty.
Speaker 2: I'm going to assume you finished writing that before the pandemic,
Speaker 2: before the largest government stimulus since World War Two. What
Speaker 2: was the reaction to putting a book out in the
Speaker 2: middle of the pandemic?
Speaker 3: I was it was in January of twenty twenty. I
Speaker 3: was in Australia and.
Speaker 2: Oh, so you were out and about traveling.
Speaker 3: You know, we didn't know it was January.
Speaker 2: We were in flight in January twenty twenty, and like
Speaker 2: you didn't have a clue what was coming at all.
Speaker 3: I was there and I had the copy edited manuscript
Speaker 3: in front of me, and I remember just going through
Speaker 3: it one last time, and you know, two months later,
Speaker 3: the world changed and I managed to get there was
Speaker 3: room on the last page of the introduction or preface
Speaker 3: or something like that, and they allowed me to add
Speaker 3: a paragraph as.
Speaker 2: Well as it doesn't affect the pagination the rest what
Speaker 2: they said.
Speaker 3: That's exactly I got. Really lucky. And so there is
Speaker 3: some commentary in the hardback the very first, you know,
Speaker 3: published edition of the book about the pandemic. But that
Speaker 3: left my hands in March, and in June it was
Speaker 3: out in stores.
Speaker 2: So let's talk a little bit about the deficit myth.
Speaker 2: I've heard pretty much since Ronald Reagan was elected president
Speaker 2: in nineteen eighty. Deficits are going to crowd out private capital,
Speaker 2: choke off innovation. It'll reduce this new company formation, It'll
Speaker 2: make us barring cost skyrocket, will devalue the US dollar.
Speaker 2: It's going to cause rampant inflation, and it will act
Speaker 2: as a drag on the overall economy. None of these
Speaker 2: things have happened. So why should we really care about deficits?
Speaker 3: Well, so I wrote the book not to say we
Speaker 3: shouldn't care about deficits, but to say, you know, to
Speaker 3: address a lot of what you just said, why do
Speaker 3: people continue to repeat these things decade after decade after decade.
Speaker 2: I mean, it's we're talking literally my whole forty five years,
Speaker 2: fifty five years since nineteen eighty. That's a long time,
Speaker 2: half a century.
Speaker 3: It's funny because you know, you got Dick Cheney saying
Speaker 3: Reagan proved deficits don't matter, right, But everybody you know
Speaker 3: really believes that deficits have the potential, and in some
Speaker 3: respects not all of it is wrong. You know, there
Speaker 3: are times where deficits can create problems, but so much
Speaker 3: of the commentary and the way we think about and
Speaker 3: talk about and shape policy around beliefs around, you know,
Speaker 3: the dangers and risks of running budget deficits. I just thought,
Speaker 3: you know, you almost need a chapter for every one
Speaker 3: of these different myths. And it's not that deficits don't matter,
Speaker 3: it's that they matter in ways that we aren't paying
Speaker 3: attention to. And so the book was really to try
Speaker 3: to get us to, you know, flip our perspective around,
Speaker 3: to see that every deficit is good for someone, I mean, right,
Speaker 3: you know, So a lot of what the book does
Speaker 3: is to try to make clear why that's the case,
Speaker 3: Why is every deficit good for someone? In purely financial terms,
Speaker 3: government deficits are just the mirror image of a financial
Speaker 3: surplus in the non government part of the economy. So
Speaker 3: we should talk about deficits for whom, deficits for what. Right,
Speaker 3: Deficits can be used to accomplish big things like you know,
Speaker 3: repairing crumbling infrastructure, improving our healthcare education systems, and so
Speaker 3: on and so forth, that they can also get too big,
Speaker 3: and they can also exacerbate or cause an inflation problem.
Speaker 3: So we don't diminish or dismiss any of those things,
Speaker 3: but really have a very different conversation about the role
Speaker 3: of deficits in the economy.
Speaker 2: All right, so let's let's have that conversation. When you
Speaker 2: say deficits can get too big. I think it was
Speaker 2: Ryan Hunt and Rogoff's paper set one hundred percent GDP
Speaker 2: to debt ratio is problems and tipping point right. I
Speaker 2: mean that was that was the problem. Wasn't the Excel
Speaker 2: spreadsheet error which changed their math. The problem is Japan
Speaker 2: is running to fifty percent and their economy seems to
Speaker 2: be doing just fine. Their quality of life is higher
Speaker 2: than ours, their life expectancy is higher than ours, their
Speaker 2: income is comparable. If Japan can run, what are we
Speaker 2: running like one seventy five two hundred in the US? Oh,
Speaker 2: we just I.
Speaker 3: Mean publicly held. I think we just hit ninety nine percent.
Speaker 2: So we're about one hundred percent. Japan is two and
Speaker 2: a half times size. Does that suggest we have a
Speaker 2: long ways to go before the deficit is a problem
Speaker 2: or are there other potential issues? Well?
Speaker 3: I just don't think the ratio is a very useful
Speaker 3: metric in terms of, you know, thinking about when you've
Speaker 3: quote unquote gone too far. And I think you know,
Speaker 3: it's always interesting how Japan tends to get left out
Speaker 3: of the conversation, right, because it really is the counterpoint
Speaker 3: to so many of these arguments. I mean, the Japanese
Speaker 3: government pre COVID had been running large, persistent fiscal deficits
Speaker 3: for three decades. Three decades they had, you know, the
Speaker 3: tenure interest rate pinned at zero more recently, but they
Speaker 3: didn't interest rates didn't go up. They didn't suffer the
Speaker 3: crowding out problem of rising interest rates, you know, pushing
Speaker 3: investment down. They didn't get an inflation problem. They've been
Speaker 3: battling deflationary pressures basically the entire time. You never have
Speaker 3: a failed auction. You don't have a situation where you know,
Speaker 3: bond vigilantes show up and say that's it, two hundred
Speaker 3: and fifty percent, we're out of here. All of those
Speaker 3: things kept not happening, and so we always pointed to Japan,
Speaker 3: and people say, well, it's demographics. There's some reason that
Speaker 3: Japan is an exception to the rule. But I think
Speaker 3: the truth is that it's just we've got so much
Speaker 3: of it wrong that that's been the reason that all
Speaker 3: these bad things that we're supposed to happen kept not happening.
Speaker 2: I just got an email from Washington, DC consultant Bruce
Speaker 2: Mellman saying, please explain this chart to me showing all
Speaker 2: these deficits, and how is the United States up here?
Speaker 2: And how is Japan down here? And I know the
Speaker 2: answers that Japanese central bank has interest rates said it
Speaker 2: zero point five percent. You can finance a lot of
Speaker 2: deficits when the FED is it was at least over
Speaker 2: five percent for a while and now is barely below it.
Speaker 2: When you're a tenth of that interest rate, Hey, it's
Speaker 2: pretty easy to finance deficits. How do you look at
Speaker 2: the relationship between a country's central bank and its ability
Speaker 2: to manage its own debt?
Speaker 3: Well, the central bank, So if we're talking about a
Speaker 3: country like Japan or the US what i'll call in
Speaker 3: what I call in the book, you know countries that
Speaker 3: if issue their own sovereign currencies, it's not even an
Speaker 3: issue at higher rates of interest. Right, Remember when Volka
Speaker 3: was fedchair, Reagan was tripling the national debt, right, a
Speaker 3: massive build up in military, you know, a couple of
Speaker 3: huge tax cuts. Deficits were increasing, that debt was increasing
Speaker 3: very rapidly. Interest rates were quite high, but it still
Speaker 3: doesn't pose a financing challenge is the central bank is
Speaker 3: just crediting bank accounts. I mean, that's how the payments
Speaker 3: are made. And you can do that at very high
Speaker 3: interest rates. You can do that at very low interest rates.
Speaker 3: But when you get that combination of high interest rates
Speaker 3: and high debt, right you've got a lot of treasuries
Speaker 3: or a lot of jgbs, you got a high debt
Speaker 3: to GDP ratio and high interest rates, you can very
Speaker 3: easily get into a situation where the rate hikes themselves
Speaker 3: are generating enough additional interest income that itself can become
Speaker 3: a source of inflationary pressure. So I would say that's
Speaker 3: always the relevant risk. It's not that you're going to
Speaker 3: run out of money, it's not that you're going to
Speaker 3: turn into grease. It's not that you're going to bankrupt
Speaker 3: the nation or burden future generations or any of that.
Speaker 3: It really is all about inflation as a constraint. And
Speaker 3: you can find yourself in a situation where you have
Speaker 3: quote too much debt, but in combination with kind of
Speaker 3: a central bank policy that is pushing interest rates very
Speaker 3: and then you can get into that sort of.
Speaker 2: So we had pretty high deficits in the following the
Speaker 2: financial crisis in the twenty tens, we had no inflation
Speaker 2: when there was a huge and I mean huge, biggest
Speaker 2: since the Marshall Plan since World War two, ten percent
Speaker 2: of GDP as a fiscal stimulus that combined with the
Speaker 2: shift to products over goods over services and snarled supply
Speaker 2: lines and a lot of other factors, led to a
Speaker 2: transitory inflation spike from twenty twenty peaked in June twenty
Speaker 2: twenty two at nine percent, came back down. Now we're
Speaker 2: in a three percent era as opposed to a one
Speaker 2: to two percent era. But it's not the deficit that
Speaker 2: caused that. It was the fiscal stimulus primarily as the driver.
Speaker 2: Where do we see or is that the region me?
Speaker 3: I thought you were setting up a different argument than
Speaker 3: you went somewhere. I didn't know.
Speaker 2: I'm gonna say it wasn't the deficit that was a problem.
Speaker 1: That was.
Speaker 2: It was the fiscal stimulus that was inflationary, and that
Speaker 2: inflation seems to be transitory. We had following the financial crisis,
Speaker 2: we had very modest fiscal stick and massive monetary stimulus,
Speaker 2: and we were in mostly a deflationary environment. When we
Speaker 2: shifted from monetary to fiscal seemed that all at once,
Speaker 2: seemed like that's where we had our transitory inflation spike?
Speaker 2: Or do you see it? Am I framing it in
Speaker 2: a way that is incorrect? Tell me what you see here?
Speaker 3: Well, so I think a couple of things I would unpack,
Speaker 3: rewind a second and go to QE. And I don't
Speaker 3: know if you think of that as monetary stimulus.
Speaker 2: I don't, So you don't. You don't think quantity, So
Speaker 2: the purchasing of bonds in order to lower interest rates
Speaker 2: you don't think of as a monetary policy. How do
Speaker 2: you know?
Speaker 3: I think of it as monetary policy. To be sure,
Speaker 3: the central Bank was trying to achieve something by doing that,
Speaker 3: and in part what they were trying to achieve was
Speaker 3: pushing down rates at the long end, I think from
Speaker 3: everything I've read, the evidence suggests that it didn't do
Speaker 3: very much at the long end. I mean, I've seen estimates,
Speaker 3: you know, twenty basis points, So you just didn't get
Speaker 3: a lot out of that. Now, they hoped that, you know,
Speaker 3: people would reach for yield, you'd have a wealth effect.
Speaker 3: Maybe there was some of that kind of stuff going on,
Speaker 3: but in terms of stimulus, what I what I see
Speaker 3: in retrospect, and what I thought at the moment, right
Speaker 3: at the time, was that, you know, BERNANKI and the
Speaker 3: FED were thinking that QE was going to be like
Speaker 3: stomping on the gas pedal and revving up inflation, and
Speaker 3: we'd watch the Bank of Japan try and fail at
Speaker 3: this for at least a decade. I think you figure
Speaker 3: out why we expected a different result here from what
Speaker 3: they got there. But we went ahead and tried anyway,
Speaker 3: and you know, three rounds of QE and Operation Twist
Speaker 3: thrown in in the middle, right, and still we didn't
Speaker 3: get to two percent over the course of a decade.
Speaker 3: So if that's monetary stimulus, I don't know. You know,
Speaker 3: I'm struggling to see it that way.
Speaker 2: So let me throw something at you that is not heterodox.
Speaker 2: And my economist friends disagree with me on this, but
Speaker 2: I'm pretty convinced I'm right. I find the wealth effect
Speaker 2: at the very least has been greatly exaggerated, and then
Speaker 2: in the real world, I think it's kind of meaningless
Speaker 2: because look when you look at who. So the wealth
Speaker 2: effect is defined as a rising stock market leads to
Speaker 2: greater economic activity, which I think is backwards. I think
Speaker 2: you have good economic activity. People get hired, they get raises,
Speaker 2: they go and spend money. That ultimately leads to a
Speaker 2: rising stock market. And the reality is when the stock market,
Speaker 2: aside from crashes and like eight or nine one, people
Speaker 2: panic sold things and I don't mean just stocks, but houses, cars, collectibles, art, whatever.
Speaker 2: When you don't have the stock market rising, that doesn't
Speaker 2: affect eighty percent of the population. You know, the vast
Speaker 2: majority of equities are held by the top one percent,
Speaker 2: ten percent, twenty percent. I think top twenty percent is
Speaker 2: something like three quarters of all equities are less than
Speaker 2: the top quartile. So the wealth effect isn't an effect
Speaker 2: people raising wages affects people spending. And by the way,
Speaker 2: the wealthy, however you want to describe, it's the top
Speaker 2: one percent ten percent. They tend to spend no matter
Speaker 2: what the stock market's doing. You know, if they want
Speaker 2: a new car or a vacation or a new house,
Speaker 2: they tend to go get it regardless. So the whole
Speaker 2: concept if the FED was engaging in QE because they
Speaker 2: thought it would awaken the animal spirits via the wealth effect,
Speaker 2: well are we you and I in agreement that their
Speaker 2: fundamental premise is just completely wrong.
Speaker 3: We are.
Speaker 2: Yeah.
Speaker 3: I mean, maybe there was some kind of placebo effect
Speaker 3: associated with QE. If people thought it did a certain thing,
Speaker 3: they behave in that way and it has real impacts
Speaker 3: on the economy short term or something like that. But
Speaker 3: it sure didn't appear to do what the Central Bank
Speaker 3: anticipated and hoped it would do. And one of the
Speaker 3: things I can remember, you know, people like Janet Yellen
Speaker 3: and Ben Bernanki, when they would get pressed on this
Speaker 3: what are you hoping will happen? You know, they would
Speaker 3: bring up the wealth effect and the reach for yield
Speaker 3: and that sort of stuff. But you know, I remember
Speaker 3: Bernanki testifying before Congress, and Congress was really frustrated in
Speaker 3: the wake of the financial crisis, Like, you know, unemployment
Speaker 3: is still really high. The economy is clearly not getting
Speaker 3: juiced by whatever it is you're doing.
Speaker 2: Which, by the way, is a very typical post financial
Speaker 2: crisis scenario if you look at history, that's what those
Speaker 2: recoveries tend to look like.
Speaker 3: Yeah, I mean, you know, you got one fiscal package,
Speaker 3: the American Rescue Recogniact, Right, it seemed like a big
Speaker 3: number at the time, seven hundred and eighty seven billion,
Speaker 3: but it wasn't nearly enough given what we were up against.
Speaker 2: And so a third was a temporary extension of unemployment,
Speaker 2: a third was a temporary tax cut yep, and a
Speaker 2: third was remember shovel I do two hundred billion dollars.
Speaker 2: I mean, yeah, the first Cares Act was en x
Speaker 2: that it's a joke.
Speaker 3: It was. It was way too small, and as you
Speaker 3: just said, the way that it was put together was
Speaker 3: not going to provide a big shot in the arm
Speaker 3: for the economy. And so here's Bernanki sitting before Congress,
Speaker 3: and congressmen are really upset. They're saying, what is going on.
Speaker 3: You're supposed to fix stuff. You know, it's your job.
Speaker 3: We gave you the dual mandate. Why isn't it Why
Speaker 3: isn't it being fixed? And Bernanki said, and I mean
Speaker 3: I remember this, you know it's a quote. He said,
Speaker 3: let me just say that monetary policy is not a panacea.
Speaker 3: It's not the ideal tool.
Speaker 2: WHOA.
Speaker 3: When he said that, I was like, you know what,
Speaker 3: when he's not telling you that fiscal policy is the
Speaker 3: ideal tool, but he's telling you that fiscal policy is
Speaker 3: the ideal tool.
Speaker 2: Was that was he too nuanced for the geniuses in Congress.
Speaker 3: You have to think, you have to think, I mean speak.
Speaker 2: I'm doing your job and I don't have the tools
Speaker 2: that you have. Yeah, so don't expect the same results.
Speaker 3: I'm pressing the buttons at the keyboard. I'm buying mortgage
Speaker 3: backed securities and treasuries and I'm hoping it does something.
Speaker 3: But you all have the real firepower and you're not
Speaker 3: using it. That's what he said. And so when COVID came,
Speaker 3: I think we really did learn the lesson this time.
Speaker 2: Maybe you a little too much.
Speaker 3: And you know, but you had the collision. So, yeah,
Speaker 3: you have an economy that is largely shut down. As
Speaker 3: you said, You've got consumers who can't you spend money
Speaker 3: on services because most of that part of the economy
Speaker 3: is closed. So we all try shoving what money we
Speaker 3: do have into the goods pipeline, and goods have to
Speaker 3: be manufactured and shipped, and then we all remember what
Speaker 3: that was like, you know, backups at the ports and
Speaker 3: all the rest of it. So that collision of constrained
Speaker 3: supply and some demand. Yes, to be sure, the stimulus
Speaker 3: packages from CARES on through helped people right, not only
Speaker 3: replace income, but in some cases people ended up with
Speaker 3: more income than they had when they were working. And
Speaker 3: so all of those things together, and then you have
Speaker 3: to remember that the pandemic came in waves. It wasn't
Speaker 3: just you know, one time shock. We thought we were
Speaker 3: kind of, you know, moving beyond it, and then here
Speaker 3: came delta, and then here came omicron, and then different
Speaker 3: parts of the world closing at different times. So I think, Barry,
Speaker 3: when you look at the the autopsies that people have
Speaker 3: tried to do, say, where did all this inflation come from?
Speaker 3: Was it really that last stimulus package? Was it the
Speaker 3: fourteen hundred dollars checks that you know, some economists warned,
Speaker 3: we're going to put us over the edge. People who've
Speaker 3: gone and I think, done the really serious work here,
Speaker 3: you know, Peter Orzag, Robin Brooks and somebody else. They
Speaker 3: have a paper Bernanky and Blanchard, Olivia Blansharp and Burnet.
Speaker 3: You have papers. The IMF has looked at this, different
Speaker 3: federal Reserve banks have looked. When you cut across all
Speaker 3: of the research that's been published, I think virtually everyone
Speaker 3: lands in the direction of it was overwhelmingly the supply
Speaker 3: side stuff. It wasn't the demand stamus that played a role,
Speaker 3: but it was a modest one. And I'm writing about
Speaker 3: this now, so I'm really steeped in, you know, going
Speaker 3: back and revisiting.
Speaker 2: What so when we say supply side, how much of
Speaker 2: this were the where the we remember seeing all the
Speaker 2: ships off of the port and Long Beach. I have
Speaker 2: a vivid recollection of interviewing Professor Jeremy Siegel of Wharton
Speaker 2: after I don't remember if it was the first Cares
Speaker 2: Act or the second Cares Act. I'm pretty sure it
Speaker 2: was before the third Cares Act. So CARES Act one
Speaker 2: and two under Trump, one, Cares Act three under Biden.
Speaker 2: And I recall Siegel saying, we're gonna have a massive
Speaker 2: seventies like spike in inflation. No one's prepared for it.
Speaker 2: The only good news is it'll be transitory. And he
Speaker 2: like long before anyone was even using the I word,
Speaker 2: Siegel was all over this based on the fiscal side.
Speaker 2: Are you saying did he get lucky or was it
Speaker 2: fiscal plus supply shocks?
Speaker 3: Well, I'm saying it was fiscal plus. I mean, you know,
Speaker 3: I had a piece in the New York Times in
Speaker 3: April of twenty twenty.
Speaker 2: I kind of remember that.
Speaker 3: I mean, that was my sort of warning on inflation.
Speaker 3: I submitted it. It was just ready to go in March,
Speaker 3: but you know, they liked to hold things, and so
Speaker 3: it was published in April. But I don't think that
Speaker 3: that last fiscal package is what gave us that burst
Speaker 3: of inflation. This, this is what I'm suggesting, is you
Speaker 3: go back and you do a really careful retrospective on this,
Speaker 3: and yeah, it played a role, But was it the
Speaker 3: reason that we tipped over? We wouldn't have had the
Speaker 3: inflation that we had, you know, hitting nine percent by
Speaker 3: the summer of that year, by twenty twenty two, you know,
Speaker 3: getting that inflation. This was a global phenomenon, right, Countries
Speaker 3: that did massively less fiscal than we did still the
Speaker 3: same or more in some cases more inflation. So I think,
Speaker 3: you know, the truth is it was pandemic. It was
Speaker 3: pandemic related, it was supply chain, and inflation went up
Speaker 3: for reasons mostly related to the pandemic and the disruptions,
Speaker 3: and it came down for reasons mostly related to the
Speaker 3: working out of the kinks and the supply chains and
Speaker 3: you know, resolving some of those issues.
Speaker 2: So I have a vivid recollection of ed Yardini, another economist,
Speaker 2: who wrote, when you have very rapid increases in inflation,
Speaker 2: they tend not to be structural, and they tend to
Speaker 2: be resolved in almost a symmetrical way. The chart looks,
Speaker 2: you know, if you have a fast rise, you tend
Speaker 2: to have a fast drop off. He was pretty right
Speaker 2: about that. And when you go, and he was basing
Speaker 2: this on when you looked at the history of previous
Speaker 2: inflationary shocks, what you don't want is a long, slow,
Speaker 2: gradual increase that suggests structural underpinnings. You want, Oh, we
Speaker 2: have this temporary issue. It'll eventually be resolved. I think
Speaker 2: the problem was that transitory took longer than everybody expected.
Speaker 2: But that still doesn't mean it's structural. It was still transitory.
Speaker 3: Look, you're a brave man. I know using the T
Speaker 3: word is still the kind of thing that gets your
Speaker 3: head lopped off in certain circles. But I think that's right.
Speaker 3: And the part of the story that we haven't mentioned,
Speaker 3: of course, is the war and entered the role of
Speaker 3: energy and food. And you know, I spent the last
Speaker 3: two days I'm working on this new book. And so
Speaker 3: I went back and I reread every speech that Jerome
Speaker 3: Pell has given it Jackson Hall from twenty twenty to
Speaker 3: twenty twenty four, and you can see, you know, his
Speaker 3: thinking in real time. And when you read them all,
Speaker 3: you know, one after the other, you really see his thinking.
Speaker 3: Initially with the transitory and then the war starts and
Speaker 3: he starts emphasized.
Speaker 2: Twenty twenty two was the war Russian invasion of UK.
Speaker 3: Yeah, and so that becomes a much big part, and
Speaker 3: you can hear him saying, you know, this is where
Speaker 3: it's coming from. This is what's driving We still have
Speaker 3: problems with supply chains. Now we have this new problem.
Speaker 3: So it wasn't a supply side shock.
Speaker 2: It was a multiple Yeah.
Speaker 3: We were just getting hit left and right, shock after
Speaker 3: shock after shock, and they fed through the system. And
Speaker 3: then at some point when you get to energy, you know,
Speaker 3: then all bets are off because it's transportation, it's fertilizer,
Speaker 3: which gets food, which gets and then it's just you know,
Speaker 3: we we sort of live that before in the seventies.
Speaker 3: You know how quickly an energy price increase can bleed
Speaker 3: through into you know, broader consumer good categories.
Speaker 2: I just read an article somewhere online recently about used
Speaker 2: car prices are still elevated, and it's directly related to
Speaker 2: semiconductor's manufacturing. We're closed for a year or so. It
Speaker 2: takes a long time to ramp that up. So by
Speaker 2: twenty twenty three, when we finally get back to normal production,
Speaker 2: you have three almost four years of new car production
Speaker 2: down substantially worldwide. Hey, fast forward to or three years now,
Speaker 2: you have a shortage of used cars that's still out there.
Speaker 2: How long are we going to be dealing with the
Speaker 2: fallout from the supply side shock of the pandemic in
Speaker 2: twenty twenty it's half a decade later, we're still feeling
Speaker 2: effects of that.
Speaker 3: Yeah, I mean, we have words for things like this
Speaker 3: when the labor market experiences a really negative shock and
Speaker 3: then in the disrupt it doesn't sort itself out. We
Speaker 3: talk about labor scarring and historyesis and this sort of stuff.
Speaker 3: I don't know that there's a term to use for
Speaker 3: stuff like this, but maybe there needs to be. And
Speaker 3: you're right. I mean, once we finally got chips again,
Speaker 3: they weren't the right kinds of chips, and so it
Speaker 3: does take a very long time. An event like, this
Speaker 3: is not something you flip the switch off and then
Speaker 3: you know. I used to say, when the pandemic started,
Speaker 3: you could park your car in a garage, turn the keys,
Speaker 3: you know, turn the engine off, toss the keys in
Speaker 3: the in the front seat of the car, and go
Speaker 3: on vacation to Europe and come back eighteen months later
Speaker 3: and start the car and drive and everything would be fine.
Speaker 3: But you can't shut the economy down that way and
Speaker 3: just turn it off and then expect to come back
Speaker 3: a year later. You got a vaccine, let's open everything up,
Speaker 3: turn it back on, and things work smoothly. It's just
Speaker 3: not going to happen.
Speaker 2: And then complicating things are following the financial crisis, at
Speaker 2: least in the US. I can't talk globally. We underbuilt
Speaker 2: single family homes here for pretty much a decade that
Speaker 2: didn't lack of supply didn't help pricing for either homes,
Speaker 2: starter homes or rentals. But I want to address a
Speaker 2: labor which you mentioned and hysteresis and scarring that. You
Speaker 2: have a very interesting line in the book that kind
Speaker 2: of struck me. Unemployment is always a policy choice. Explain
Speaker 2: what that means.
Speaker 3: Well, it means that if you truly wanted to eradicate
Speaker 3: I mean big thinking, right, involuntary unemployment? What is involuntary unemployment?
Speaker 3: Anybody who wants a job, is ready, willing and able
Speaker 3: to work, but can't find a job, you're involuntarily unemployed.
Speaker 3: Suppose you had a policy whereby you said, the federal
Speaker 3: government will fund a job for anybody who wants to work,
Speaker 3: wants to contribute, can't find work anywhere else in the economy,
Speaker 3: at some base wage maybe benefit package. You have a
Speaker 3: federally funded, locally administered job. Right you can contribute, you
Speaker 3: could eliminate involuntary unemployment. I'll scay quote unquote overnight. Right
Speaker 3: once the policy is announced and you're prepared to provide
Speaker 3: the jobs for people to have actual things for them
Speaker 3: to do, then anybody who's still walking around without work
Speaker 3: is voluntarily unemployed. We tend to worry about people who
Speaker 3: are involuntarily unemployed.
Speaker 2: So what does MMT do for us in terms of
Speaker 2: this unemployment issue. We don't really worry about it these
Speaker 2: days because unemployment has a four handle on it. But
Speaker 2: for most of my adult life we've had unemployment rates
Speaker 2: as high as five six seven percent outside of crises.
Speaker 2: Why haven't we been more aggressive the way let's say
Speaker 2: Germany or Japan or Switzerland act when there's an economic contraction. Really,
Speaker 2: isn't a whole lot of people involuntarily unemployed in those countries?
Speaker 3: Well, I mean, I think unemployment had a three handle
Speaker 3: before the pandemic. That would have been an outstanding time
Speaker 3: my opinion, to introduce a program like this, right, because
Speaker 3: the take up rate would have been relatively.
Speaker 2: Small, would have been cheap to do.
Speaker 3: Yeah, So you put it in place then, and for
Speaker 3: people who say sometimes people say, well there was no unemployment,
Speaker 3: I say, great, then that's exactly the right time to
Speaker 3: do it. Announce whatever you're willing to pay, and say
Speaker 3: that you're willing to hire people. And if no one
Speaker 3: shows up, that's just fine. Right, But now the policy,
Speaker 3: you've stood up the policy and the program is there
Speaker 3: so that when an event like COVID happens, you don't
Speaker 3: have to throw twenty thirty million people into the ranks
Speaker 3: of the unemployed. You can transition people from the job
Speaker 3: that they're about to lose into some new job and
Speaker 3: would truncate the downturn. It would replace income or a
Speaker 3: portion of income, probably not replacing full income for most
Speaker 3: people who lose jobs, But it would be a very
Speaker 3: powerful automatic stabilizer. Those people could transition into paid work.
Speaker 3: They'd have a job record, and future employer could call
Speaker 3: and say, what kind of work is you know buried?
Speaker 3: Does he get there on time? Does he picked fights
Speaker 3: with his coworker? Is you a pretty good guy? And
Speaker 3: then as the income is supported and the economy begins
Speaker 3: to recover, those people can transition back into private sector job.
Speaker 3: So it works like a very powerful buffer stock, like
Speaker 3: a cushion for the economy through the business cycle.
Speaker 2: Sounds a lot like what Claudia Sam form of FED
Speaker 2: researcher and creator of the Sam rule, has talked about
Speaker 2: putting automatic stabilizers in place so that it's not a
Speaker 2: partisan hot potato. When there's a big downturn, there's a
Speaker 2: way to cush in the blow and reduce the unemployment rate.
Speaker 2: So we're talking about modern monetary theory, we're talking about spending.
Speaker 2: What we haven't really talked about is taxes. What are
Speaker 2: the role of taxes in deficits and modern monetary theory?
Speaker 3: Well, taxes are for subtraction. That's how I think of it.
Speaker 3: I don't think at the federal level. I don't think
Speaker 3: of taxes for revenue's sake. Really, Yeah, I know it sounds.
Speaker 2: Well, it sounds Trumpian because some people have argued that
Speaker 2: he wants to move to a tariff system, which is
Speaker 2: effectively like a European vat tax only at the border
Speaker 2: instead of a consumption. I don't know if it's a
Speaker 2: negotiating stance, so what have you? But less focus on
Speaker 2: federal taxes, more focus on other revenue sources.
Speaker 3: Right, But he's still thinking of tariffs as a revenue source,
Speaker 3: so he just wants to change the allocation where the
Speaker 3: revenue comes from. I don't think he's thinking that. You
Speaker 3: know that taxes or tariffs don't generate revenue that the
Speaker 3: federal government in a sense needs to pay the bills.
Speaker 3: So what I'm saying is for the federal government, I
Speaker 3: don't think of taxes or the role of taxes as
Speaker 3: generating revenue that the government needs in order to pay
Speaker 3: the bills. So what do taxes do. Well, they subtract
Speaker 3: money from the rest of us. So every dollar that's
Speaker 3: taxed away from you is a dollar you don't have
Speaker 3: and you can't use to chase after goods and services.
Speaker 3: In the economy. So one important function of taxes is
Speaker 3: to reduce purchasing power in the non government part of
Speaker 3: the economy, right, so consumers, businesses have less to spend.
Speaker 3: That makes room for the government's own spending so that
Speaker 3: it can spend money into the economy without creating inflationary pressure. So,
Speaker 3: right now, the federal government this last fiscal year spent
Speaker 3: let me just use rough numbers, let's call it seven trillion, right,
Speaker 3: and collects five point two trillion in taxes and other revenue,
Speaker 3: mostly from taxes, So get a one point eight trillion
Speaker 3: dollar fiscal deficit. So what does that mean. It means
Speaker 3: that they've made a deposit of one point eight trillion.
Speaker 3: That's a financial contribution that goes into the broader economy,
Speaker 3: and we can then talk about, you know, where it
Speaker 3: goes and what good it's doing in the economy. But
Speaker 3: taxes are important because they pull money out and our
Speaker 3: one potential way to regulate inflationary pressure. Obviously, they can
Speaker 3: be used it make changes to the tax code if
Speaker 3: you care about the distribution of come in wealth and
Speaker 3: you want to make some kind of change because you
Speaker 3: think things have gotten too concentrated, or you can use
Speaker 3: it for incentivizing and disincentivizing behaviors, but the big one
Speaker 3: is regulating inflationary pressure.
Speaker 2: So let's talk about the opposite of MMT. Right after
Speaker 2: the financial crisis, when a lot of economies around the
Speaker 2: world were precariously balanced at the knife edge, you had
Speaker 2: the Austerians come out and very puritanical belief that deficits
Speaker 2: excess fiscal spending, really any good time is problematic, and
Speaker 2: we must all pay for our sins. And so we
Speaker 2: saw that in the UK, we saw it to some
Speaker 2: degree in Greece other parts of Europe. How do you
Speaker 2: look at these folks that are pushing on austerity argument
Speaker 2: into a weak economy.
Speaker 3: I mean it's economically illiterate, okay, I mean it certainly
Speaker 3: didn't work out well to say nothing, we'll hold Brexit aside.
Speaker 2: The UK's recovery was pretty weak, Europe generally was pretty weak.
Speaker 2: Of all places, Greece seems to be doing really well today.
Speaker 2: Germany is in and out of recession, like wherever you
Speaker 2: look around, France and Poland and just Spain is doing okay.
Speaker 2: But all these countries have been having ongoing economic contractions.
Speaker 2: Do they need to raise their deficit. Do they need
Speaker 2: to do a little more fiscal spending? What's the economic
Speaker 2: malaise source in Europe?
Speaker 3: Well, I mean it's just what Cain's told us in
Speaker 3: nineteen thirty six. It's a lack of effective demand. I
Speaker 3: don't think it's necessarily the case that it's got to
Speaker 3: be government fiscal deficit. But somebody's got to spend more.
Speaker 3: So how do you do that? I mean, there are
Speaker 3: two ways to generate this thing we call economic growth.
Speaker 3: Somebody's some part of the economy has to spend more
Speaker 3: than its income, and if the private sector does it,
Speaker 3: that can work for a period of time. But that
Speaker 3: generally involves leverage.
Speaker 2: Right, a little bit of credit, borrowing whatever.
Speaker 3: Yeah, barring, and that can be fine. But as the
Speaker 3: engine of growth, what we've seen is that when you
Speaker 3: rely disproportionately or sometimes entirely on private sector to generate
Speaker 3: that growth, it ends very badly. That's basically what happened.
Speaker 3: You know, when Bill Clinton was president and you had
Speaker 3: the budget, federal budget in surplus for four years in
Speaker 3: a row, ninety eight through two thousand and one. The
Speaker 3: government's budget was in surplus, and a lot of folks
Speaker 3: looked at that and said, oh my god, we finally
Speaker 3: did it. You know, let's celebrate the miracle of the
Speaker 3: federal surpluses. Isn't this a great thing? And there were
Speaker 3: people like I mentioned earlier when Godly who were writing
Speaker 3: about this in real time and saying, man, this is
Speaker 3: going to end badly because those government surpluses that everybody
Speaker 3: is celebrating are being built on the backs of private
Speaker 3: sector indebtedness. That it was the private sector that was
Speaker 3: spending more than its income, running deficits year after year.
Speaker 3: Wind said, it can go on for a while, but
Speaker 3: it can't go on forever, and when it ends, it's
Speaker 3: going to be really bad. Of course, we had a
Speaker 3: recession in two thousand and one and then the surpluses disappeared,
Speaker 3: government's budget moved back into deficits. So, yeah, these countries
Speaker 3: have to figure out some way to generate the demand.
Speaker 3: And it doesn't have to be from government, but it
Speaker 3: tends to be the more sustainable way to sort of
Speaker 3: create enough demand to keep an economy operating in close
Speaker 3: proximity to full employment.
Speaker 2: So, following those four consecutive years of surplus, we had
Speaker 2: the dot com implosion and then the recession, and then
Speaker 2: towards the very the last month or two of the recession,
Speaker 2: we had September eleventh, and then eventually we ended up
Speaker 2: with not just the creation of homeland security and a
Speaker 2: whole bunch of increase in wartime and defense spending, but
Speaker 2: you also had a pretty substantial tax cut under President Bush.
Speaker 2: Did that giant tax cut and all that extra deficit spending,
Speaker 2: did that then shift that private sector deficit over to
Speaker 2: the government, and did things end up a little better
Speaker 2: balanced because the economy wasn't terrible, it was just over
Speaker 2: leveraged as we had headed into the financial crisis exactly.
Speaker 3: Yeah. I mean when consumers pull back right, because the
Speaker 3: government surpluses are like they work like a hoover. They're
Speaker 3: just vacuuming up net financial assets. They're sucking dollars off
Speaker 3: of the balance sheets of the private sector. That's what happens.
Speaker 3: And at some point the private sector christ uncle, and
Speaker 3: they want to spend less and save more. That alone
Speaker 3: will tend to move the government's budget back into deficit.
Speaker 3: So much of the you know, year to year movement
Speaker 3: in the fiscal balance is driven not by what Congress
Speaker 3: is doing, but by what the private sector wants to
Speaker 3: do do they want to save more they're trying to
Speaker 3: save more or are they okay spending more and saving less.
Speaker 3: Government's budget is endogenous in that way, will automatically move around.
Speaker 3: As the economy started to slow down, George W. Bush,
Speaker 3: Republicans realized, oh, we should have a policy response. The
Speaker 3: economy is slowing. So you got the tax cuts in
Speaker 3: two thousand and one, and then you got another one
Speaker 3: in two thousand and three. Right move. I mean, the
Speaker 3: right impulse was to relax fiscal policies. So I give
Speaker 3: them credit. Maybe I wouldn't have structured the tax cuts
Speaker 3: the way that they did, and you got a big
Speaker 3: expansion of medicare as well r D.
Speaker 2: Right, that was really substantial. So last question on the book.
Speaker 2: You're right that Obama was essentially a fiscal conservative when
Speaker 2: it came to policy. I don't think the average person
Speaker 2: thinks of Barack Obama as a fiscal conservative or certainly
Speaker 2: a fiscal policy conservative.
Speaker 3: Explained, Well, like we were talking earlier about that fiscal package.
Speaker 3: You know that's seven hundred and eighty seven billion dollars.
Speaker 3: When he was coming in to office, the first time,
Speaker 3: the wheels were coming off, they were off the economy,
Speaker 3: and he had people around him. You know, Christina Romer
Speaker 3: was an economic policy advisor, you see, Berkeley professor. She
Speaker 3: went on to become chair of the Council of Economic Advisors.
Speaker 3: But she told Barack Obama, this is your holy moment.
Speaker 3: She was trying to say, this is not going to
Speaker 3: be your garden variety recession. You can't do some little,
Speaker 3: you know, tinkering and some modest fiscal package, and all
Speaker 3: of this is going to be in the rear view mirror.
Speaker 3: This is this is big, right, and she could see
Speaker 3: that this had the potential to be the worst economic
Speaker 3: downturn since the Great Depression. And her memo was to
Speaker 3: encourage Barack Obama to go really big on fiscal Now,
Speaker 3: a lot of people have written about this, and and
Speaker 3: there were others in Barack Obama's.
Speaker 2: Circle, the guys Larry Sommer.
Speaker 3: Yeah, Larry Summer's David Axelrod, I think I put in
Speaker 3: my book famously said you cannot be talking about anything
Speaker 3: that has the tea in it, not trillion trillion meaning trillion.
Speaker 3: You're going to give people sticker shock, he said. And
Speaker 3: so you know, they the I think the men basically
Speaker 3: said don't listen to Christina Romert, you got to go
Speaker 3: for something more modest. And then what he did was
Speaker 3: try to negotiate with Republicans to try to bring some
Speaker 3: of them on board. Didn't get any but ended up
Speaker 3: changing the package so that you had about a third
Speaker 3: of it in the form of tax cuts, hoping to
Speaker 3: sweeten the deal and pull some Republicans in. Didn't work.
Speaker 2: Uh.
Speaker 3: And then when it became clear that the fiscal uh,
Speaker 3: that the fiscal response was too small, and voices came back,
Speaker 3: and you have people like Paul Krugman and all kinds
Speaker 3: of people saying, you know, Congress, you got to get
Speaker 3: back in there, you got to do another package. By
Speaker 3: that point, you know, Barack Obama and the economists around
Speaker 3: him had pivoted to austerity. They were talking about, you know,
Speaker 3: what can we do with a commission to try to
Speaker 3: get the deficit down by four trillion dollars at least,
Speaker 3: and all this sort of stuff. And we're looking over
Speaker 3: at what's happening to Greece and Spain and some of
Speaker 3: the periphery countries that how can we.
Speaker 2: Make those same mistakes? Yeah? Right, it seems sort of
Speaker 2: I have a vivid recollection of having a dinner with
Speaker 2: about eight ten people, and Paul was one of the
Speaker 2: people at the dinner around this time, and I remember
Speaker 2: sort of floating the idea, Hey, you know, this is
Speaker 2: the first time I've seen in my lifetime that the
Speaker 2: party that doesn't hold the White House is actively trying
Speaker 2: to sabotage the economy to regain the Like we you
Speaker 2: mentioned economic literacy. I said, you can't come out of
Speaker 2: a financial crisis and say no fiscal stimulus, and that's
Speaker 2: effectively what Congress said, And it kind of got hooopooed
Speaker 2: back in twenty eleven and twelve ten years later, people like, oh, okay,
Speaker 2: maybe this, you know, there was some purposeful economic literacy
Speaker 2: that conveniently made the economy less attractive for a president
Speaker 2: running for reelection.
Speaker 3: Yeah, so we ran the opposite experiment. It's just too
Speaker 3: bad that it had to run against the backdrop of
Speaker 3: globally constrained supply chains, because we don't still have an
Speaker 3: opportunity to just road test what if we really just
Speaker 3: engaged the fiscal lever and instead of relying so much
Speaker 3: on monetary policy, which is what we did for the
Speaker 3: previous three decades. It's just the central banks will take
Speaker 3: the economic steering wheel and fiscal can mostly worry about
Speaker 3: just trying to balance the budget or something.
Speaker 2: Well, certainly, since eight oh nine, to let's call it
Speaker 2: twenty seventeen, the Tax Cuts and Job Act pure monetary policy,
Speaker 2: almost no fiscal policy, see, and we saw the result.
Speaker 2: It was a subpar weak job creation, little wage gains,
Speaker 2: poor sentiment, poor consumer spending. As soon as the fiscal
Speaker 2: spigots opened up, things seem to begin to By twenty seventeen,
Speaker 2: things seventeen things had already sort of gotten better. But
Speaker 2: you know, that was a trillion and change, so I
Speaker 2: only had a positive effect on GDP.
Speaker 3: Monetary policy works by trying to get people to spend
Speaker 3: more out of the same income, and fiscal policy works
Speaker 3: by trying to get people to spend more out of
Speaker 3: more income. So this shouldn't be a huge surprise, which
Speaker 3: one tends to be. The more you know, have, the
Speaker 3: more potent response.
Speaker 2: Especially when you're coming off a decade or two of
Speaker 2: low interest rates. It's one thing when your mortgage goes
Speaker 2: from eight percent to four percent. Hey, we could refinance,
Speaker 2: and we have a little extra cash in our budget.
Speaker 2: But you can't do that from three percent to two percent.
Speaker 2: It's just there's no juice left in the limit. Let's
Speaker 2: talk a little bit about what we've been seeing over
Speaker 2: the past couple of decades and what it means for
Speaker 2: public policy today. I have to start by talking about
Speaker 2: how few recessions we've seen over the past twenty years.
Speaker 2: We had the financial crisis, that the recession began in
Speaker 2: I think October seventh or December seven, something like that,
Speaker 2: and then we ever so briefly had a pandemic recession.
Speaker 2: That's pretty much it. It seems we're having fewer recessions
Speaker 2: and we're responding to them quicker than we used to.
Speaker 2: How do you see the depth and frequency of recessions
Speaker 2: these days?
Speaker 3: Yeah, it's a good question. I definitely agree we've had
Speaker 3: longer stretches between them when they've happened. With the exception
Speaker 3: of I guess the global financial crisis, they have been
Speaker 3: somewhat weaker. That was obviously a big When COVID has
Speaker 3: it is its own unique thing. I don't know, Barry.
Speaker 3: I mean sometimes I feel like Larry Summers had it right,
Speaker 3: you know, years ago when he said we only know
Speaker 3: one way to grow the economy and that's through bubbles
Speaker 3: that we get a good run up in. You know,
Speaker 3: whether it's the SNL period or the dot com era
Speaker 3: or the housing bubble. You know, something comes along and
Speaker 3: provides a nice tailwind, and we get a what looks
Speaker 3: like a long, robust expansion, except it's sort of sowing
Speaker 3: the seeds of its own destruction. And then we end
Speaker 3: up with a recession. But we've gotten very good at
Speaker 3: clean up on Aisle four. You know, we respond, and
Speaker 3: then we set the table and we do it again.
Speaker 2: I'm always happy to push back on anything Larry Summers says,
Speaker 2: because he is so frequently wrong and yet so widely
Speaker 2: louded and regarded. Hey, the twenty tens a gradual, slow
Speaker 2: recovery from the financial crisis, despite the lack of fiscal stimulus,
Speaker 2: and despite the FEDS zup policy that wildly stimulated asset prices.
Speaker 2: We didn't have a bubble the pandemic. We still don't
Speaker 2: have a bubble. If you want to say maybe crypto
Speaker 2: is a bubble or AIS a bubble, I guess you
Speaker 2: can make that case. But so far there's the difference
Speaker 2: between a broad society wide bubble like the led to
Speaker 2: the financial crisis where you had really the bubble was
Speaker 2: in mortgages. We no longer care about your ability to
Speaker 2: service the debt. We just want to It's all about
Speaker 2: our ability to sell the debt to a securitizer that
Speaker 2: was clearly a bubble. It's kind of hard to say
Speaker 2: we're in the midst of a big bubble of me today.
Speaker 2: It's always obvious in hindsight. Are we in a bubble today?
Speaker 2: Can we say that this has been a pretty robust
Speaker 2: fifteen year run with no bubbles?
Speaker 3: Look, I don't I don't know. I think that things
Speaker 3: have felt awfully bubbly to me for at least a
Speaker 3: few years. I mean, you can it was the spackfa
Speaker 3: the spack craze.
Speaker 2: Oh god, that's a decade ag, I.
Speaker 3: Know, but it you know, these things come and then
Speaker 3: they transition, and then it's the next thing. It's you know,
Speaker 3: we did the memes stock thing. Now we have AI
Speaker 3: at Crypto and it feels tenuous. Let us I.
Speaker 2: Try and draw a distinction between these giant, bubblicious, impacting
Speaker 2: society things that you know, feels like it's just taken
Speaker 2: over everything that dot COM's felt like it just took
Speaker 2: over everything in the late nine these and people forget
Speaker 2: the Greenspan speech was ninety six, the irrational exuberance speech.
Speaker 2: You still had another for almost five years of growth.
Speaker 3: Well that was Kine's point, right, The market can stay
Speaker 3: irrational longer than you can stay solvent, which is what
Speaker 3: makes it so tough to find the entry point to
Speaker 3: come in and say yeah, we're here.
Speaker 2: You know, you know Canes had. I still don't understand
Speaker 2: why so many people fight against what have been such
Speaker 2: self evident observations by Canes. Of course, when you have
Speaker 2: a contraction, it's the government that should spends, but no
Speaker 2: one wants to do the flip side of that, which
Speaker 2: is when you have a robust economy, that's where the
Speaker 2: government should be. That's where you can think about a deficit,
Speaker 2: not in a contraction. Why do so many economists ignore
Speaker 2: the brilliant insights that Lord Kaines had a century ago.
Speaker 3: Well, well, I think we got you know, stripped of
Speaker 3: most of the really interesting stuff. When Hicks and Hanson
Speaker 3: gave us the sort of islm interpretation of John Maynard Kaynes.
Speaker 3: It took out a lot of the really interesting you know,
Speaker 3: the role of expectations and psychological impulses and all of
Speaker 3: that sort of stuff, and it became this kind of
Speaker 3: static you know. LM curve go up, I curve go down.
Speaker 3: We pretend we can analyze the economy as having two
Speaker 3: separate and distinct spears of spheres, a monetary and a
Speaker 3: real side of the economy. And I just don't think
Speaker 3: people go back and read the original text, and so
Speaker 3: the rich stuff too often gets left out.
Speaker 2: Meaning explain the rich stuff from Canes the animal spirits.
Speaker 3: Well, people use the phrase animal spirits, but they use
Speaker 3: it loosely to just mean that when people start feeling good, optimistic,
Speaker 3: that it means they're willing to take on some more risk,
Speaker 3: make more investment. They sort of turn it into that.
Speaker 3: Where I would say Chapter seventeen is the most important
Speaker 3: chapter in the general theory, it's also the hardest one
Speaker 3: for most people to understand. That's where Caines deals with
Speaker 3: things like the own rates of interest in liquidity preference theory,
Speaker 3: and that's what I'm talking about that's very hard to
Speaker 3: tease out and to bring forward in the ISLM framework.
Speaker 3: It's kind that you can argue that it's embedded in
Speaker 3: the LM curve it's there somewhere, but nobody sort of
Speaker 3: manipulates the standard Canesian model in ways that really reflect
Speaker 3: that deep concern of Kynes's in terms of the role
Speaker 3: of long term expectations and liquidity preference and that sort
Speaker 3: of stuff.
Speaker 2: So we're recording this towards the first quarter of twenty
Speaker 2: twenty five. We're in full DOGE administration mode, the Department
Speaker 2: of Government Efficiency. How do you look at all these
Speaker 2: federal layoffs, all these people in DC that we don't
Speaker 2: know if these job losses are going to stick with
Speaker 2: the courts are going to say, But hypothetically we lose
Speaker 2: ten or twenty percent of the federal government three million workers.
Speaker 2: What does that do to the economy, Well, it throws.
Speaker 3: A lot of people out of work, and then through
Speaker 3: a multiplier effect. Now we go back to Keynes, it's
Speaker 3: not just the person who loses their job and now
Speaker 3: has no income or has income replaced on unemployment at
Speaker 3: a lower rate or whatever. It's the jobs that are
Speaker 3: tied to those jobs. And so when millions of people
Speaker 3: are hundreds of thousands of people in this case, I
Speaker 3: guess start losing their jobs, it means less spending, which
Speaker 3: means less income for someone else, which means they go
Speaker 3: on to spend less. I think it was You'll probably
Speaker 3: know very better than I will. I think it was
Speaker 3: Torsten's lock. I think who put out a note for
Speaker 3: clients just maybe a week or so ago that said
Speaker 3: basically three x whatever. You know, if you think that
Speaker 3: one hundred thousand people are going to lose their jobs,
Speaker 3: it's more like three. It's three to one. Right, You're
Speaker 3: not just.
Speaker 2: Looking canes and multiplier.
Speaker 3: Effective to the macro effects. So I don't know this
Speaker 3: haphazard thing. Do you respond to any email or this
Speaker 3: is no way to go about looking for smart ways
Speaker 3: to trim you know, and find efficiencies in government.
Speaker 2: So from a modern monetary theory perspective, what are the
Speaker 2: smart ways to approach public policy? Do you think about
Speaker 2: deficits to think about spending?
Speaker 3: Well, the big thing that frustrated me when I served
Speaker 3: on the Budget Committee was the fact that no one
Speaker 3: and I mean not a staffer, not a senator, not
Speaker 3: anyone on either side of the aisle ever gave the
Speaker 3: briefest moment of concern care attention to inflation.
Speaker 2: You're seeing there that is genuinely shocking.
Speaker 3: Absolutely shocking, frustrating, maddening. You got people writing bills, you know,
Speaker 3: a trillion dollar infrastructre your bill of Medicare for all,
Speaker 3: bill of this bill of budget or whatever. And the
Speaker 3: mentality is if you can just stitch up the numbers
Speaker 3: such that the amount of money you want to spend
Speaker 3: is offset by you know, savings elsewhere in the budget
Speaker 3: or new revenue, then you've done your job, because now
Speaker 3: you have deficit neutral legislation and you're good to go
Speaker 3: and you can go vote and you've been fiscally responsible.
Speaker 3: And Kelton is sitting in the room going, oh my god,
Speaker 3: you guys. You know, you're talking about spending let's say,
Speaker 3: trillions of dollars into the economy, and let's suppose it
Speaker 3: was some big, ambitious, green new deal infrastructure whatever program,
Speaker 3: trillions of dollars, and your plan is to completely offset
Speaker 3: that spending with new revenue. But you're only going to
Speaker 3: get the new revenue from a handful of people at
Speaker 3: the very top of the income distribution of corporate tax increase,
Speaker 3: the wealth tax, or financial trans out, whatever it is.
Speaker 3: You know, they throw all this stuff around, you're potentially
Speaker 3: open us up to a huge inflation problem because You're
Speaker 3: going to broadly spend trillions into the hands of people
Speaker 3: in the economy while only removing by taxing money from
Speaker 3: people at the very top of the income distribution. And
Speaker 3: I look at that and say, this is not fiscally responsible.
Speaker 3: If you're doing this in a fiscally responsible way with
Speaker 3: an MMT lens, you're not asking how do I ensure
Speaker 3: that my spending is deficit neutral? You're asking how do
Speaker 3: I ensure that my spending will be inflation neutral? And
Speaker 3: that's an entirely different problem for an agency, Congressional budget office,
Speaker 3: for omb for other people who are thinking about and
Speaker 3: writing federal legislation. You have to approach this in a
Speaker 3: completely different way.
Speaker 2: So I'm going to assume you're not a big fan
Speaker 2: of the Elizabeth Warren wealth tax sort of thing, or
Speaker 2: even some of what Bernie Sanders has proposed with another
Speaker 2: tax bracket for the wealthiest people. I don't think that's
Speaker 2: how people generally perceive MMT. Am I mischaracterizing this or
Speaker 2: is that accurate?
Speaker 3: I mean you're accurate. We talked earlier about what is
Speaker 3: the purpose of the tax, and I said, the big
Speaker 3: one is it removes It removes income from somebody, and
Speaker 3: why would you want to do that. Well, one reason
Speaker 3: is to make sure that they don't have those dollars
Speaker 3: and they can't spend them, because it helps you regulate
Speaker 3: inflationary pressure. But I also said you could make changes
Speaker 3: to the tax code if you have, you know, deep
Speaker 3: concerns about concentrations of wealth and income. If you think
Speaker 3: things have gotten to extreme, there are things you can do.
Speaker 3: You can close loopholes, you can think about new ways
Speaker 3: to raise revenue, can look at the estate tax, you
Speaker 3: can look at and that's a legitimate thing to do
Speaker 3: or to think about through an MMT lens, independent of
Speaker 3: how much revenue will it raise. And that's how Senator
Speaker 3: Warren's Senator Sanders. They tend to think of these as
Speaker 3: I need to get money to pay for X, Y
Speaker 3: and Z. Rich people have a lot of money. Therefore,
Speaker 3: let's tax rich people so that we can be fiscally
Speaker 3: responsible and pay for our spending. And I just think
Speaker 3: from an MMT perspective, that is not the way to
Speaker 3: go about it.
Speaker 2: The Willie Sutton theory of taxation. So I doubt that
Speaker 2: you're going to get this phone call. But hypothetically this
Speaker 2: administration reaches out to Professor Calton and says, hey, we're
Speaker 2: really thinking about extending the twenty seventeen tax cuts and
Speaker 2: job ACKed. We could do it for ten years, because
Speaker 2: that's what the rule is. We could do it for
Speaker 2: five years and not worry about the offset at someone
Speaker 2: else's problem. What do you tell them about the TCJA,
Speaker 2: which some people accused of being very and a lot
Speaker 2: of the data supports it was very heavy towards the top.
Speaker 2: Pick a number ten percent, five percent, two percent of earners.
Speaker 3: I mean the number that gets quoted a lot is
Speaker 3: that eighty three percent of the benefits went to people
Speaker 3: the top one percent of the income distribution that's on
Speaker 3: the personal tax.
Speaker 2: Have you seen the prices of portions and ferraris, they've
Speaker 2: gone through the room. These people need some help.
Speaker 3: So look, I mean, on the I always think of
Speaker 3: inflation kind of that's my first stop on the train ride.
Speaker 3: So I heard a lot of people saying, if these
Speaker 3: tax cuts are extended, it's going to exacerbate the inflation problem,
Speaker 3: and I said, no, it's not. I mean, come on right,
Speaker 3: we're just talking about a continuation of what's been in
Speaker 3: place already for the better part of that new stimulus
Speaker 3: of any kind, so that I set that aside.
Speaker 2: So if this is, if JA is renewed, non inflationary,
Speaker 2: but there's still some inflation out in the economy, and.
Speaker 3: They're talking not just about an extension, but you know,
Speaker 3: they might have to fiddle with the numbers because they've
Speaker 3: only given themselves I'm saying, only only given themselves four
Speaker 3: and a half trillion in headroom on the tax side.
Speaker 3: So if the president wants things in there like no
Speaker 3: tax on social Security, no tax on overtime, no tax
Speaker 3: on tips, well you're not going to fit that in
Speaker 3: that four and a half trillion. So now what are
Speaker 3: they going to do. They're going to go and take
Speaker 3: a look at some of the corporate stuff, some of
Speaker 3: the personal stuff. Maybe they go for an extension of
Speaker 3: three or five years so that they can create a
Speaker 3: little bit of headroom to add some of these other things.
Speaker 3: There's inflation potential in that. Now you hear talk of
Speaker 3: a doze dividend and five thousand dollars checks. I mean,
Speaker 3: we're getting into some serious money here.
Speaker 2: If the fourteen hundred dollars Cares Act one was inflationary,
Speaker 2: what does that mean for what would a five thousand
Speaker 2: dollars check do for PEDA.
Speaker 3: Okay, so let's remember the first Cares Act was March
Speaker 3: of twenty twenty and that package included twelve hundred dollars checks.
Speaker 3: That was President Trump. And then at the end of
Speaker 3: the year, in December of twenty twenty, you got the
Speaker 3: nine hundred bills billion dollar package that included a six
Speaker 3: hundred dollars check. That was President Trump was after the election,
Speaker 3: but he's still president. He didn't want to send a
Speaker 3: six hundred dollars check. He was really mad about that.
Speaker 3: He said he wanted at least two thousand, four thousand.
Speaker 2: Yeah, that's a big number.
Speaker 3: It's a big number. And he said it ought to
Speaker 3: be two thousand. He's in fact, he said six hundred
Speaker 3: is like an insult, and is said, I want two
Speaker 3: thousand per the individual and four thousand per family. But
Speaker 3: he couldn't get it, so he had to settle for
Speaker 3: the six hundred dollars check. And then it was Biden
Speaker 3: three months later in March of twenty twenty one, who
Speaker 3: came in with the fourteen hundred, which when you added
Speaker 3: to the six hundred two thousand, which is what Trump
Speaker 3: wanted all along. Ironically, it's a lot of the Republicans
Speaker 3: who are the loudest at complaining about that fourteen hundred
Speaker 3: dollars check being the thing that tipped us into you know,
Speaker 3: the great inflation.
Speaker 2: Of the It's never one thing, it's always a multiplicity
Speaker 2: of different Yeah.
Speaker 3: So all of those things definitely put a lot of
Speaker 3: money into people's hands, and it definitely helped support consumer spending,
Speaker 3: and I mean it modestly increased inflationary pressure. So now
Speaker 3: I think they're talking about you know, a five thousand
Speaker 3: dollars check going to households what seventy seventy six or
Speaker 3: so million households.
Speaker 2: Wow.
Speaker 3: Yeah, but they're saying, no, don't worry, because that money
Speaker 3: was going to be spent by government anyway. And we're
Speaker 3: finding all these efficiencies and so we're just gonna let
Speaker 3: you spend the money instead of letting the federal government
Speaker 3: spend money. Problem is the math.
Speaker 2: Doesn't work well, you know math who really believes numbers
Speaker 2: should add up anyway? All right, before we get to
Speaker 2: our favorite question, I just have a curveball to throw
Speaker 2: at you. When I was an undergraduate at sunny Stony Brook,
Speaker 2: the head of the math department was a guy named
Speaker 2: Jim Simons who eventually set up Renaissance Technologies. You've been there,
Speaker 2: Did you ever get a chance to to meet Professor Simons?
Speaker 3: I did not meet him, but I had a couple
Speaker 3: of encounters with him. One in particular, it was kind
Speaker 3: of funny. I was right in the middle of the
Speaker 3: pandemic twenty twenty. I don't remember what month it was,
Speaker 3: but it must have been reasonably nice out because I
Speaker 3: was sitting in the house drinking coffee one morning and
Speaker 3: I happened to look over my shoulder into our backyard
Speaker 3: and I see we live on the north shore of
Speaker 3: Long Island, and I see these two kayakers pulling this
Speaker 3: little dinghy boat up to our dock, and there are
Speaker 3: two older people in the boat. And I said to
Speaker 3: my husband, go find out what is going on. Who's
Speaker 3: getting towed up to the dock. And so he leaves.
Speaker 3: He goes outside, and I see the couple climb out
Speaker 3: of this little boat and they tie it up to
Speaker 3: the dock and they go walking up and my husband's
Speaker 3: gone for a while and he finally comes back and
Speaker 3: he says to me, you'll never guess who that was.
Speaker 3: And I don't know what made me say it, except
Speaker 3: I knew he lived in the area. I said, Jim
Speaker 3: Simon's and he said, how did you know that? I
Speaker 3: don't know.
Speaker 2: I just un believe.
Speaker 3: Yeah, there he was. You know, I pictured a yacht,
Speaker 3: but no, it was a tiny little outboard.
Speaker 2: I'm sure there's a yacht or two flowing somewhere in
Speaker 2: the Mediterranean or down in the Caribbean. All right, let's
Speaker 2: jump to our favorite questions while we still have you,
Speaker 2: starting with what have you been doing to stay entertained?
Speaker 2: What are you watching or listening to these days? Yeah?
Speaker 3: I feel like it was a long dry spell where
Speaker 3: we couldn't agree on anything. You're talking about streaming like
Speaker 3: Coflix or whatever. We could not agree. My husband will
Speaker 3: start something, I watch half of it, I hate it.
Speaker 3: We stopped. So we went back and rewatched Miss Masel
Speaker 3: because he loved that at the same time.
Speaker 2: Yeah, and then although it did kind of go off
Speaker 2: the rails in the last couple of seasons.
Speaker 3: Well we enjoyed that was okay. We both loved that.
Speaker 3: And then two nights ago we started streaming nineteen twenty three,
Speaker 3: the second season. Oh really, I love I watched that.
Speaker 2: That's part of the Yellowstone.
Speaker 3: Yeah, I was on an airplane and I'd never heard
Speaker 3: of the thing. And years ago I watched I think
Speaker 3: they had five episodes available and I just ate them up,
Speaker 3: and then I came home and said, you got you
Speaker 3: got to watch this with me. I'll start it all
Speaker 3: over with you. And so a couple days ago, I
Speaker 3: think season two came out.
Speaker 2: So huh, I'm gonna I'm gonna definitely have to check
Speaker 2: that out. Tell us about the mentors who affected your career,
Speaker 2: who helped shape the economists you are today.
Speaker 3: Well, I mentioned John Henry early on. That's an undergrad mentor,
Speaker 3: and then graduate kind of my masters, that's Randy Ray
Speaker 3: I also mentioned, and then when Godly came after, and
Speaker 3: then Warren Mosler. I know, those are the four men
Speaker 3: who I think, more than anyone else, shaped not just
Speaker 3: my professional life, but in a lot of ways just
Speaker 3: my life.
Speaker 2: Huh, really really interesting. Let's talk about books. What are
Speaker 2: some of your favorites? What are you reading right now?
Speaker 2: Although I know when you're wrapping up a book, there's
Speaker 2: no time to read other books other than research.
Speaker 3: It's exactly right. I go back and I consult books now,
Speaker 3: mostly for the purpose of working on this book. But
Speaker 3: I'm an old school you know, like I think people
Speaker 3: should read Veblin. I think they should read The Theory
Speaker 3: of Business Enterprise. I think they should read the Theory
Speaker 3: of the Leisure Class. I think people should read Minski.
Speaker 3: I think, you know, Stabilizing an unstable Economy is really
Speaker 3: hard to plow through. But Can It Happen Again is
Speaker 3: a wonderful little book. People should read anything by John
Speaker 3: Kenneth Galbraith. Right now, I'm reading Galbray's son, James Galbraith
Speaker 3: and his co author Jing Chen have a new book
Speaker 3: just came out last month called Entropy Economics, So I
Speaker 3: just started that.
Speaker 1: Huh.
Speaker 2: You know, that's the worst part about writing a book
Speaker 2: is you just have to put all your reading that's
Speaker 2: not related off to a side. It's no fun. Our
Speaker 2: final two questions, what sort of advice would you give
Speaker 2: to a recent college grad interest in the career and
Speaker 2: either economics or academia.
Speaker 3: I think anybody who wants to study economics should try
Speaker 3: to find a program where they can get exposed to
Speaker 3: a broad array of you know, diversity of views, a
Speaker 3: pluralist program if you like something where you know, every
Speaker 3: class you walk into isn't going to be some version
Speaker 3: of itself general equilibrium theory and that sort of thing.
Speaker 3: Try to find places where to as much as you
Speaker 3: can you get what might have won one day been
Speaker 3: called political economy. You know, where you can actually read
Speaker 3: interesting thinkers and do more than just i'll say sterile
Speaker 3: agent based modeling and all that. You want the real
Speaker 3: world in there. You want finance and banking. You know,
Speaker 3: these people who came out of economic and finance programs
Speaker 3: ahead of the GFC. A lot of people said, I
Speaker 3: couldn't make sense of what was happening because we never
Speaker 3: had any room in our models for finance or banks
Speaker 3: or credit. We didn't talk about any of those things.
Speaker 2: Huh, really interesting. And our final question, what do you
Speaker 2: know about the world of failing the blank? Public policy, economics,
Speaker 2: deficit spending today? You wish you knew twenty five or
Speaker 2: so years ago when you were first getting started.
Speaker 3: So that conversation I had when I was an undergraduate
Speaker 3: about where to go to graduate school, and I can
Speaker 3: remember Randy Ray saying, if you go to Harvard, you
Speaker 3: won't suffer the slings and arrows that you'll suffer if
Speaker 3: you go to a program like Notre Dame at the time,
Speaker 3: or the New School or something like that. I'll never
Speaker 3: forget him saying you can avoid the slings and arrows.
Speaker 3: That was thirty years ago, and I think I didn't
Speaker 3: take the advice. I went to Cambridge, England, and then
Speaker 3: I went to the News School, and I have definitely
Speaker 3: suffered the slings and arrows over many years. I think
Speaker 3: I wish I had known or understood better just how
Speaker 3: petty and aggrieve a lot of academics can be.
Speaker 2: What's the old joke, Why is academic politics so vicious
Speaker 2: because the right there is so little at stake. Yeah,
Speaker 2: it's really true.
Speaker 3: Yeah it is. I didn't understand at the time, but
Speaker 3: I live to learn right.
Speaker 2: But you know, the academic lifestyle is really not a
Speaker 2: bad lifestyle. You get to work with bright young students.
Speaker 2: It's usually college towns or lovely parts of the country.
Speaker 2: It sounds like you enjoy being a professor and your
Speaker 2: husband enjoys being a dean.
Speaker 3: Well, he's a professor, sob.
Speaker 2: Is he still teaching or is he head of the
Speaker 2: department or both?
Speaker 3: He's he's a professor. He's got an endowed chair in
Speaker 3: the history department, but as of a month or so ago,
Speaker 3: he is once again back in the day office. He's
Speaker 3: an associate dean now, so he's doing both well.
Speaker 2: Stephanie, thank you for being so generous with your time.
Speaker 2: We have been speaking with Stephanie Kelton. She is professor
Speaker 2: of economics and public Policy at Stonybrook University and author
Speaker 2: of the best selling book The Deficit Myth. If you
Speaker 2: enjoy these conversations, well, check out any of the five
Speaker 2: hundred and fifty or so we've done over the past
Speaker 2: ten plus years. You can find those at iTunes, Spotify, YouTube, Bloomberg,
Speaker 2: wherever you find your favorite podcasts, And be sure and
Speaker 2: check out my new book, How Not to Invest The
Speaker 2: Bad Ideas, numbers, and behaviors that Destroy Wealth, coming out
Speaker 2: March eighteenth of this year. I would be remiss if
Speaker 2: I did not thank the crack team that helps me
Speaker 2: put these conversations together each week. My audio engineer is
Speaker 2: Andrew Gavin. Anna Luke is my producer, Sean Russo is
Speaker 2: my head of research. Sage Bauman is the head of podcasts.
Speaker 2: Here at Bloomberg, I'm Barry Retorts. You've been listening to
Speaker 2: Masters in Business on Bloomberg Radio,