Modern Monetary Theory

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S2: Hello and welcome to a very special episode of Sleep Money or Guide to the Business and Finance World that we live in.

S1: I’m Felix Salmon of Axios. I’m here with Emily Peck of Heftiest. Hello. I’m here with Anna SHYMANSKY of Breakingviews. Hello. And most excitingly, because this is something I’ve kind of been dreaming of for a while now, definitely over a year. Professor Stephanie Kelton is with us. And not only issue with us, but she has a new book out. So tell us what your book is and who you are and what you do.

S3: So Stephanie Kelton and I’m a professor of economics and public policy at Stony Brook University, where I teach courses in the economics department and then the master’s of Public Policy Administration program. And I’ve got a book that just came out a little over a week ago, that, much to my astonishment, debuted at number 13 on the New York Times bestseller list. Lucky 13 I. It is apparently for me a very lucky number. So that’s who I am and what I do. That’s the book. And the book is called it’s called The Deficit Myth, Modern Monetary Theory and the Birth of the People’s Economy.

S1: And you the most high profile avatar of modern monetary theory, or M.A., as it’s known. So we are going to spend this whole episode talking about MMT, what it is, what it says, how it flips, the understanding of government finance in particular on its head, and whether we should just give up issuing government bonds at all right now and just drop money from helicopters onto the economy. It’s a fascinating conversation. I can’t wait to get stuck into it. So that is coming up on Sleepout Money. So, Stephanie, we have had probably more requests for this show than for any other topic that I can think of every couple of weeks or so, we get a person or people writing in saying, what is this MMT? Can you explain it? Does it make any sense? So I guess my first question to you is why? What, have you touched a nerve here? Is there like something in the water? Why do people care about this sort of little debate inside the economics profession? Because people really don’t normally care about debates inside the economics profession.

S4: I think you’re right. I mean, it does tend to feel sometimes like, you know, whacked a beehive or something. And all of a sudden there’s all this flurry of buzzing and excitement and, you know, the stingers come out and it gets a little tense sometimes when the economists start kind of in a back and forth. And I don’t know, Felix. I mean, I think that a lot of people just feel like they’ve had some sort of awakening in this moment, maybe especially right now, where we just spent two thousand and nineteen watching a very crowded field of Democratic presidential hopefuls talk about a variety of programs that they would like to implement if they were to become president. And you know that that that conversation was dogged constantly by this question about how you’re going to pay for it. And, you know, we we listen to candidates debate everything from Medicare for all the student debt cancellation and the money, money, money, peace always got in the way. It always intruded. It was always the thing that was going to prevent us from getting there. How are we going to come up with the money? And so, you know, here we are in this moment with the corona virus pandemic. And Congress is passing bill after bill and into the trillions of dollars. We are without anyone pausing to ask, where is the money coming from? Whose taxes have to go up? And so I think what it’s done is just, you know, pull back the curtain and say, wow, Congress really can act when it perceives there to be some sort of a high priority. They can just conjure the money into existence and we’re off and running. So I think people feel a little duped in a sense by, you know, the the kind of time we wasted over the course of the last year when now it all seems so simple.

S1: So this is the key message of your book is that the first thing that happens is that Congress spends the money and everything else happens after that, the issuance of Treasury bonds, the raising of taxes. All of that comes later. The first thing that happens is Congress spends money. And you. And this is the crazy thing that you write is that. You don’t even need to borrow. You don’t need to raise taxes and you don’t even need to borrow. They can just spend it. And that’s just the kind of convention that if you have if you’re running a budget deficit, then you cover that deficit with with Treasury bills.

S4: That’s exactly right. I mean, we I think that, you know, all of us and myself included, before I came to see things differently, we have this understanding of the federal government and its budget that we think it works like our own right. And so we think that the government has to find the money. And that’s because we’ve been trained to think in those terms. So when policy makers, you know, talk about Medicare for all or whatever it is, you know, how are you gonna pay for it? Where’s the money going to come from? We think they have to get the money first. So they have to arrange their financing after go out and increase somebodies taxes and or borrow some money from savers. And that once they have the money, then they’re in a position to go out and spend. But they have to arrange the financing first, just like I would if I want a new car. You know, I don’t just get to drive off the lot with a car. I have to put the money up first. Right. I have to find the money. So you’re right that in this book, MMT flips that around and recognizes that, in fact, the money to pay taxes and buy bonds has to first be made available. Right. You can’t use tax. You can’t use dollars to pay taxes or use dollars to buy bonds until those dollars have first been put into the economy. They’ve got to be somewhere before anybody can have them. And so, yeah, that flips everything around and recognizes then we have to ask, well, well, if the taxes and the bonds aren’t financing the government spending, what are they doing?

S5: Well, one thing just to start with, you know, in terms of how the current financial system works now, the government is certainly plays a large role in the financial system. However, almost all of the money in our financial system is created in the private banking system. You know, that’s why we have a fit. You know, if we didn’t have a private banking system, there’d be absolutely no reason to have a reserve system. It’s simply a interbank clearing mechanism. So I agree with a lot of the things MMT is saying in terms of critiquing a lot of these kind of standard narratives about how we have to understand deficits and debts. However, it does seem like your theory sometimes doesn’t really kind of. Except that that there’s a distinction there between a private banking system and the public financial system.

S4: OK. So it’s a fair point, especially because I don’t take that up in the in the book and in the same way that Kanes didn’t in the general theory after he’d already written the treatise on money. So, you know, once you kind of plow that field, you don’t have to continue to repeat when you want to make different points in a different type of book. So what I would say is that, you know, the MMT economists have long understood and written about endogenous money creation, private banking. I mean, that’s stuff that we did before really starting to build out the literature for MMT. We’ve been there and done that, but now we’re having trying to have a different conversation. And that conversation is about the working of the monetary system and public money. So it is about the focus is different at different points in time. And in my book, I don’t have a chapter that deals with private credit creation and so forth. I have some references, but it doesn’t mean that we don’t understand that most of the stuff that we call money is in fact created by private banks that banks create. By making a loan, a bank creates a deposit, and that’s new money creation. Of course, we understand all of that as well.

S5: Just saying, as you were just saying, kind of this idea that, you know, the government isn’t spending money, it can’t be created. But, you know, if if I go into the bank and get a loan. The banking system is creating money and. Well, I mean, I understand you can kind of look back and say, well, we have a reserve system. But it does seem to me like, you know, this is all just credit creation. And credit creation happens in different parts of the economy, not simply as a mechanism of the government.

S4: Sure. Yeah. I mean, no question about that. Right. I can I can walk into a bank and a bank can credit my account and I will walk out with one hundred thousand dollars that I didn’t have before I walked in. Right. I also walk out with a hundred thousand dollar new liability if I borrowed that money. So yes, it is true and understood well in MMT. But again, the point that Felix was raising earlier is that MMT is trying to help give people a better understanding of public finances. So when we have these political debates about finding the money and so forth, we’re trying to help people see that the money comes from the votes. That when Congress authorizes, let’s say, the Keres Act and two point two trillion dollars, they are committing to spending money they do not have. And the reason that they can do that is because they know that when they pass a bill like that, they’re effectively ordering up new dollars from the Fed and that the Fed is going to fill that order by marking up or changing the size of the appropriate bank account. And and so we’re trying to explain the monetary operations, the mechanics that take place, coordination between the Treasury and the Fed. How do the dollars come into existence? And so the focus is just on the public budget and the creation of public money through that those channels.

S1: So you said something very interesting that you said that the members of Congress know this, although I’m a little bit unclear whether they did say that, Felix.

S4: We know that. I say we know or did I say you, the members of Congress.

S1: Do you think you said that when they when they passed the bill, they know that they can do that because they’re ordering the Fed to just create money out of thin air? I think they don’t know that. I think one of the messages, if your book is that they the lawmakers don’t actually have that understanding that you that you write.

S4: OK. I think I agree with that. I didn’t mean to imply or suggest that Congress, most members or maybe any, have a sort of deep understanding of the mechanics and the monetary operations and why it is the case that the votes themselves fund the spending. You know, that they can take for granted that all of the things that need to happen behind the scenes will happen so that those payments are always carried out. There’s no chance the federal government’s ever going to bounce a check and that sort of thing, because the Treasury and the Fed coordinate to ensure smooth payment clearing and all that sort of stuff. I don’t think they understand why it’s the case. But there must be something in them that understood that they didn’t have to have a big debate about pay force when they passed the Kahrizak that they could just get up and do that.

S1: You have a wonderful little exchange in your book between Rand Paul and Alan Greenspan where like Alan Greenspan actually was at the Fed, obviously. And so he knew how the Fed works. And he kind of blurts out at one point. Yeah, of course, we can just create as much money as we want. And I guess I’m interested in the sort of epistemic status of Washington here. Like, if you had to split what? Into people who kind of have this understanding of federal money creation and people who don’t. Who would you put on each side?

S4: Oh, I mean, look. Chairman Powell knows just as his predecessor knew. Just as, you know, go all the way back. You mentioned Greenspan. Fast forward through Fed officials. No, I think Treasury officials know what they say publicly doesn’t always match up with what they will say, let’s say privately in conversations. I don’t think there are very many people in Congress. I probably couldn’t even come up with a name to give you for somebody who understands. I think the monetary system and the mechanics that we’ve just been talking about. So I don’t have I can’t put anybody. I don’t think I can put anybody in the house.

S6: I mean, what’s so great about your book, just to rewind a little. Is it’s like, what’s that Kanta Reeves movie where the conservatives like to use the analogy about the red pill, the the and you take the pill and then you see what the world is actually really like. And it’s like reading Stefanie’s book as you read it and you’re like. Oh, of course, the deficit is just this bullshit thing that’s been created so they don’t spend money on poor people ever like really. And I was watching a Senate hearing yesterday about paid sick leave in the time of Corona virus. And we can all agree that we need to have paid sick leave in the time of Corona virus, obviously. And then, you know, there’s the Republican lawmakers up there, Senator, saying like, well, of course, we need to do this, but we need to do it responsibly and we can’t spend any money. It shouldn’t cost anything. And, you know, we shouldn’t run up deficits doing this. And I’m just like now that I’ve read the book and I’ve taken the pill or whatever. I’m just exploding with anger because you know that not only can you spend the money that if you spend the money, you’re creating more money, you’re making people more productive by allowing them to keep their jobs and whatnot. It’s just I feel like you’ve been red pilled bike killed. It’s frustrating to read. Yeah. I mean, I always knew that the deficit thing was it didn’t make any sense. Like, we can’t spend this money on poor people because the deficit. But we can spend this money on a war. No one mentions the deficit like it’s always been ridiculous. And I feel like. It made me sad to read like Stephanie, how, you know, you kind of convince Bernie Sanders about it. But in the end, like, he wasn’t talking about the deficit mess. Or there’s that one scene where you’re talking to that congressman and you convince him you give him the pill or whatever, and he is convinced and you sold him. But like, when he goes out in public, he won’t say it. Like, how are what is the plan to get everyone to just admit the truth about the deficit myth? I am bought in so I can help you. How are you going to do it?

S3: So I hear it. Here’s what I think. You know, you’re right. In that last chapter, the book, I do tell a story about meeting up with Congressman Emanuel Cleaver and him having that moment where he suddenly recognized that he’d been thinking about the government’s budget and its fiscal capacities as if the government was a household. And and he had he had it wrong. And his his response to that was to say to us, I can’t say that. Right. I can’t say that. And so you’re like, how do we get them to say that? And I say in the book that, you know, you mentioned Senator Sanders and you know as well as I do, we’ve all heard him say it a thousand times that, you know, the change never comes from the bottom up, from the top down change always comes from the bottom up. And I feel like that’s a lot of what I hope that this book will do is to help bring about that kind of change in our in our public discourse and the way that we debate public policy. The framing that we use, the you know, the whole thing, that it will kind of come from the bottom up, that it will become increasingly difficult for a member of Congress to go back to their home district and stand in front of their constituents and have their constituents haranguing them about why we are providing enough funding for education or doing infrastructure or whatever it is. And the and the congressman or congresswoman says, you know, oh, man, I really sympathize with you. I’d love to be able to do more. But, you know, that’s twenty three trillion dollar debt or this, you know, trip multitrillion dollar debts. We just can’t do it. And that there will be enough people in the room who’ve been empowered through, you know, a better understanding of what the real limitations are, that they can go, no, no, no, you’re going to you’re not going to give me that line. Right? I don’t buy that anymore. I understand that. Provided the real resources are there. I know you guys can always afford to do it. What you’re really saying is you don’t want to do it because you don’t think it’s a priority and just really be in a position to push back. Because right now, when a member of Congress says, Yabo, we’ve got these deficits and debt, we say, well, that’s right. We do, don’t we? You know, and and old I don’t want to do that to my children and grandchildren. So I’ll stop pressing, you know, for them to do more on the fiscal stuff, because I know we can’t afford it. We just accept that excuse. It’s like their get out of jail free card. They just trot out the debt and the deficit. And then we tuck our tail between our legs and we stop asking for nice things.

S5: I think that, you know, I think that makes a lot of sense, and I think we probably are all in agreement that the U.S. has a tremendous capacity to spend. It has a tremendous capacity to run deficits and debt and not probably have a significant negative impact. However, you know, there is there might not be a nominal constraint, but there’s certainly a real constraint, which I think, you know, you’ve and most MMT people at all, MMT people, I think will acknowledge that, you know, the restrain, of course, is inflation. And although, you know, nowadays everyone kind of thinks, oh, inflation doesn’t exist. But obviously, like, if you kind of shifted the system and were continually spending trillions and trillions trilogy, you probably would start to generate inflation. So kind of what what is the MMT solution then to deal with that?

S3: Perfect. I love that question. So this is so that’s what we do, right? We really do center inflation risk. So if MMT is about anything, it’s about replacing artificial and imaginary constraints with a real resource constraint, with an inflation constraint. And I can tell you from my time in the Senate, working on the Budget Committee as the chief economist for the Democrats, I never once heard a single staffer or a member of the Senate, not one on either side of the aisle use the I word inflation. I never heard it. It’s not it’s not that it’s not that they don’t think about it. It’s not even an afterthought. It’s not a thought. No one thinks of inflation. So what that means to me. You know, if we were back in 2019 and we’re looking at an economy with an unemployment rate of, say, three and a half percent, and you say, well, it doesn’t look like there’s a lot of fiscal space here. I don’t know how much is left there, some to be sure. But we probably couldn’t do multitrillion dollar infrastructure bill right now without offsetting that spending or much of it. Right. Without creating some inflation problem. But here’s the thing. The way the federal budgeting process is set up today is to respect PAYGO. Right. We try to pay for everything so we don’t add to the deficit. And so what I’m saying is imagine that you’re back in 2019 and some member of Congress write the bill and they say, let’s do some big infrastructure spending. So several trillion dollars because we have this infrastructure deficit and let’s pay for it with a wealth tax. Because we don’t want to add to the deficit. So we want to make sure that we bring in three trillion in new revenue so that we offset all three trillion in infrastructure spending. You write the bill, you send it over to CBO. CBO scores it based on what its impact on the budget outlook. Does it add to the deficit? Does it increase the long term debt to GDP ratio? And they go, oh, no, this is a great bill. It’s fully paid for. Doesn’t add to the deficit. They give it a green, a green light gold star, send it back to Congress. Now, Congress can move forward and vote on that legislation. So I’m saying suppose they vote to pass this bill doesn’t add to the deficit. Looks like a great bill. Now, you’ve committed to spending several trillion dollars into an economy that may not be able to safely absorb that three trillion dollars, even though it’s all offset because you’ve chosen and offset a wealth tax that’s going to remove three trillion over time from people who were largely not going to spend that money on new newly produce goods and services in the first place. I know that you know what I’m saying, right. Which is that under an MMT budgeting framework, you would have much more protection against inflation risk than we do under the current budgeting system, where nobody is evaluating new spending based on the potential inflation risk. All we care about is does it add to the debt? Does it add to the deficit? So my answer to the inflation question is, in part, the best way to fight inflation is before it happens. You know, you want to do it preemptively.

S1: So I want to drill down on this a little bit. Can you explain a little bit about what caused previous bouts of inflation in the United States? Oh, possibly elsewhere. If you want. And how foreseeable that was and how you would anticipate Congress being able to sort of head that off before it happens.

S3: Yes. So, you know, Felix, in not just in the U.S., but across in the U.K. and across other parts of Europe. We used to be pretty damn good at this during and after immediately after World War Two. There were you know, we had something called a National Resources Planning Board. We actually thought about managing our nation’s real resources. How do you manage inflationary pressures during World War Two? And after World War two? And there were conveniences of not just academic economists, but industry leaders, labor leaders. People got together and they tried to figure out where are the pressure points in the economy where bottlenecks can begin to build up, where if we do more spending in this area, we’re likely to trigger some inflationary pressure. But there’s space over here for other kinds of investments. We used to be pretty good at this. Then, Fatmata, fast forward to the 1970s, because everybody always wants to talk about stagflation. Clearly, inflation can become a problem even in an economy that is nowhere near its full employment constraint. And that’s what happened in the 1970s, right. That stagflation we had simultaneously very high levels of unemployment alongside very high inflation rates. You know, we can get inflation not as a consequence of trying to run the economy too hot. But in fact, in a depressed economy. Because what? Because things happen on the supply side. You can have oil price shocks. You had the Vietnam War. You had a war in 1973 and the Middle East, you had stronger unions. And so when prices increase, workers were more successful at getting wages to increase. So you can get that wage price spiral kind of dynamic. We don’t have those sort of conditions at play today. I mean, energy prices have been falling. The union movement has been significantly weakened over time. So, yes, things can happen. And in our end, we could look at other examples like, you know, Zimbabwe or the Weimar Republic or something like that again. You know, inflation is a dynamic process. It’s a complicated phenomenon. It doesn’t happen for the same reasons in all times, in places. But if you want to just pick one example and say what happened in Zimbabwe. Mugabe comes to power and he wants to reward the freedom fighters. He takes land away from the whites who’ve been farming it and redistributes it to blacks who just did not have, at least initially, any experience farming the land. And you have massive food shortages. And they had to rely on imports of food to feed the population. And you’re printing money to import food and you got a hyperinflationary episode there. But, you know, when you think of inflation is too much money, chasing too few goods has normally been the case historically that the problem is on the too few goods side, something happens to the productive capacity. Something happens as a supply side shock. Oil prices or something. And you get an inflation problem.

S1: And your view in MMT is that the best way to fight inflation is not through the Fed, is not through monetary policy. It is through Congress and through fiscal policy. So going back to the 70s and 80s and we were you know, there’s this legendary pot of American economics, which is Paul Volcker comes in and raises interest rates and whips inflation because he is the ubermensch. You can do that. What would be the year? What would have been your way of bringing inflation down? Not by relying on the Fed, but instead on the fiscal side?

S3: Well, I think Jimmy Carter did a pretty good job of breaking the back of inflation in that period. I see the eyebrows raised.

S4: I’ve never heard anyone. Presumably you’ve never heard anybody say that. Right. Because Volcker gets all the credit.

S3: And, you know, MMT has pointed out that it is possible that what Volcker was doing in that period was actually helping to, if not accelerate inflation, at least continue to fuel the inflation of that period. What? So we think that the way to fight inflation is to raise interest rates because we think that if interest rates go up, that increases the price at credit, people will borrow less and spend less. MMT recognizes and by the way, so do some folks at various Federal Reserve banks. There’s been some research into this. L.A. recognizes that, yes, increasing interest rates raises the borrowing costs. But some other things also happen, like, for example, when interest rates are increasing and government bonds are maturing, the government is rolling over those bonds now at higher interest rates. So guess what? Bondholders are making more money because interest income is increasing. And if you believe that bondholders spend at least some of their interest income at the marginal propensity to consume out of interest, income is greater than zero. Then when the Fed hikes interest rates, it works like fiscal expansion. Right. Because interest payments increase. So somebody whose income goes up. So somebody will support higher spending. The other thing is, if firms have borrowed to finance a lot of their, you know, wage bill or long term capital investments, if firms have borrowed and interest rates are going up and they’re rolling over, they’re borrowing at higher rates. They may, in fact, pass on to the end consumer in order to protect profit margins. The cost of rising interest rates. So couple of things are happening, right? Raising interest rates makes credit more expensive. It might reduce borrowing and spending, but it also increases interest income, which might increase spending. It also increases the costs to firms who have borrowed and have to pay interest. And they may try to pass those costs onto consumers and that might raise prices. What Jimmy Carter did in the midst of all of this, while Volcker was trying to fight inflation by hiking interest rates, was to deregulate the natural gas industry and all of a sudden natural gas prices came crashing way down. And that eventually broke the the oil cartel. Right. Brought oil prices down.

S7: And so you’re Jimmy Carter.

S5: Yeah. Once they go, it’s kind of just things I don’t like functional finance, the kind of ideas that monetary policy essentially keeps interest rates quite low. And then you manage inflation using fiscal policy. I know that’s a crude explanation, but I guess one of the things, though, is that, you know, when you have extremely low interest rates, you do tend to get excessive credit creation in the private sector. You tend to get a lot of asset price inflation. And this is something we’ve seen frequently. This is something we’ve seen historically. And private debt accumulation is far more dangerous than public debt accumulation. And I guess I I’m kind of wondering, you know, in this system, how how do you protect against that?

S3: Yeah. So this is it, because this is a great question. So you’re right. If we’re not using interest rates to try to manage the economy, then what other tools would be available to policymakers to attenuate buildups in risk, excessive risk taking and that sort of thing? So I think the Fed talks a lot about macro prudential. Right. And you can do a lot of things on the regulatory side. You can do a lot of things in terms of credit controls. If you want to let a housing bubble just continue unabated, then, you know, sit back and let lenders continue making loans with no money down or very little money down. If you want to try to clamp down on that, then increase the requirements for, you know, a federal guaranteed housing loan or something like that. Right. You there are things that you can do, right? I see. I think I’m making sense. So anyway, there’s a whole toolkit that can be enhanced to give the Fed, in fact, more power to influence lending and manage credit conditions in the economy. I just we just don’t believe that interest rates are all that powerful a tool. Right. People believe that that interest rates are they give the Fed one price or give central banks one price. The overnight interest rate and somehow 25 basis points here, 25 basis points there. And you’re going to balance conditions in the whole of the economy. Manage inflation and so forth. I just don’t think it works. And I think that sometimes they confuse the brake pedal for the gas pedal. You’re looking at countries, you know, you’ve got central banks all over the world with negative interest rates. You got Japan struggling for about three decades to hit its own two percent inflation target. If it worked that well as a policy tool, surely somebody would have figured out how to hit their inflation target by now.

S6: Can we talk a little bit about taxing rich people, because one of the interesting things about your book and about MMT seems to me is that and that may be why Wall Street kind of is into MMT. I think people say is because it kind of obviates the need to raise taxes on rich people. But I know that to fight inequality and sort of, you know, decrease the divide between rich and poor that I think you would say would be harmful. You have to touch really tax rich people. So can you talk a little bit about sort of like why you still want to tax people in an empty world?

S3: Sure. I did this actually for the Patriotic Millionaires, which was really fun. They had sort of an inaugural conference in Washington, D.C., like a year and a half or something. I go back when we were traveling and they had me come. Now, this is an organization that formed itself for the purpose of saying we are super rich. Please take more of our money. Right. That’s the patriotic millionaires. We want to help. We want to help the country have nice things. Please tax us more. And and it works beautifully if state governments tax them more because they really can use that revenue to provide, you know, enhanced public services and so forth. The federal government doesn’t need their money in order to finance expenditures. That doesn’t mean that MMT or that I am providing cover and saying, well, we don’t need their money, so let’s just leave them alone, OK? Not at all. And in the book, I say that we should absolutely be doing more to address income and wealth inequality in this country. And that means using the tax code, making it more progressive, getting at these concentrations of wealth that are so extreme now that they don’t just cause our economy to function more poorly when you have this degree of income and wealth inequality. But they’re corrosive to our democracy. Right. It undermines the democratic process, the polluted it’s compromised with this with this kind of extreme wealth. So I don’t want to look at these guys and say, Jeff Bezos, the Coke brother, and the Waltons are my piggy bank and I can’t carry out a progressive agenda without their help. I really need to take their money in order to feed a hungry kid or fix a crumbling bridge. I don’t want to be dependent on them in that way. I think that’s a bad narrative because it really does leave us in a position where we feel like we can’t care for our communities and our economy without them. Right. Unless and until we can get legislation passed to tax them. We have to hold the rest of our agenda hostage. No. And I don’t like the idea of peeling off a few bucks, using them delicately to peel back just enough to cover whatever it is we’re trying to do. That’s the way which is why. I’ll be honest, the idea of a two percent wealth tax for me is using the rich as a pay for me. And on top of that, you’re telling them I’m not. But they were told, don’t worry, you’re not even going to feel it because your wealth is going to grow by more than two percent per annum. And so you’re going to end up richer and richer every year anyway. So you really shouldn’t complain. I think that they should feel it right. I think that if we’re going to really seriously address wealth inequality, that you don’t approach the wealth tax the way that people currently talk about it. We just need a little bit. Right. You won’t even notice it. I think you have to really go after it aggressively.

S6: Until rich people like you’re going to feel less rich after I’m done, I think.

S4: I think that’s that’s the goal, right. You know, there’s a guy if I could quickly say there was a guy.

S3: And I think he was a Republican and he was probably wealthy. He was a businessman. His name was Beardslee Rumball and fiercely Remmel. Is it so fun to say bids? They really work at Condé Nast. He was the then they called it president. He was the president of the New York Federal Reserve Bank. So in nineteen forty six, this guy who’s the head of the New York Fed goes out and gives a speech and publishes this. I think the remarks in an article and this speech was called Taxes for Revenue are obsolete. Now, think about it. Nineteen forty six. He’s the head of the Federal Reserve Bank and he makes the argument that the government doesn’t tax in order to get revenue. Wow. Right. That that was his argument, so what is the purpose of the tax then? If the federal government doesn’t need your money in order to fund expenditures, why do we tax? And he goes through all of these arguments. One is that, you know, when the government spends, it gives birth to a new dollar. Every every time Congress commits in legislation to some new spending, a dollar is born because the Federal Reserve types it into the keyboard at account is credited and new money is created. So there is a new dollar. That dollar will travel around the economy until the government takes it back out. Either the Fed or Treasury has to take it back out. So if I write a check to the IRS, that’s the graveyard for the dollar, right? It has been put to put to death. Once I give it back to the government. And so Rummell said, well, look, one of the reasons we have a tax is because we can’t possibly let the government just spend all the dollars in without subtracting any away or we’re gonna have inflation. So the tax is there to recover, to recoup or to subtract away some of those dollars so we can mitigate inflation risk. Another is that it allows us to impact the distribution of wealth and income. So taxes are important for that. And the final one was actually there were two more I’m only going to mention. One, incentives and disincentives. We can use the tax system to try to get people to do or not do certain things, polluting, right. Drinking, sugary drinks, whatever it is. Right. So lots of reasons for having taxes and raising taxes. But none of them, he argued all the way back in 1946, had to do with paying the bills.

S5: It is very clear that obviously the government does not need to tax in this moment to spend the dollar. I’ll agree on that. But the reason that the government has the capacity to spend is because there is this underlying productive economy that if you didn’t have this underlying large, diverse, productive economy that was generating value, the government wouldn’t have capacity to spend as people wouldn’t be willing to hold the dollars, they wouldn’t be willing to hold the debt. I mean, people are financing the government by choosing to use those dollars, by choosing to hold those dollars if they decide that’s something that was fifty dollars. Now you have to pay one hundred dollars for essentially they’re charging the government more. You know, in a sense, we are all financing the government spending through the underlying productive capacity of the economy. So I guess just in terms of when you’re saying that, you know, we don’t need these people. I mean, you’re still kind of do you still do need the economy to generate wealth. You need there to be value being created or otherwise people won’t be willing to hold dollars?

S3: No, I don’t think I agree with that. I think that, you know, what we’re pointing out, the MMT, is that it’s the rest of us who need the government’s money, not the government who needs our money. Look, in in a economy that was not productive at all in the depths of the Great Depression, when people didn’t have any money and the productive capacity had been badly destroyed. FDR was able to come in and do the New Deal. And then World War two, it isn’t the case that the people were financing the government because the economy was so productive and they bought into this and they were willing to pay their taxes. And that’s how the government was able to do that was exactly the opposite, right?

S5: No, because, I mean, if the government spending had been completely unproductive, I mean, if the government spending had been on things that didn’t increase the underlying productive capacity of the economy, you almost certainly would have just had inflation. But that was good government spending. And that and I think that’s the thing. It’s whether it’s productive or unproductive, if whether the government or private investment is being spent productively, then that helps that underlying economy, which then supports the government’s ability to spend. I mean, when you have hyper inflation, it’s often because for some reason that productive capacity has been eliminated or really, really damaged for some reason.

S3: OK, I mean, I accept that. I mean, I don’t think that’s a challenge in any way to MMT because there’s nothing in MMT that says let’s expand the deficit in unproductive ways. So I accept that. I would also argue that the Republican tax cuts were pretty unproductive that we ever had. And so we could do that and we could do more of that. We can build things and blow them up. And every time we pay somebody to build the thing that adds to GDP and, you know, we have additional productive capacity, but then we blow it up. And that also adds to GDP. Right. Because you pay somebody to go out and drop bombs or whatever and blow up bridges, well, that that destroys productive capacity. And if you did a lot of that over time, like what happened to Germany after World War One, you had the destruction of massive productive capacity. And by the way, that helped set the stage for the hyperinflation that followed. Because you had the reparations and you had an economy that couldn’t keep up with the productive, they didn’t have the productive capacity. So I totally I totally take the point that you cannot continue to provide income support or spend into an economy that lacks sufficient productive capacity to meet that demand with higher supply or you’re going to get an inflation problem. I accept that.

S1: Let me ask about the situation we’re in right now where I think certainly all four of us would agree that there’s just enormous potential for the government to come in and spend money where it’s sorely needed in any way from the state and local government sector to the restaurant sector, the small businesses, you name it, education. There’s no end of places that need a bunch of money right now. We’re running Ivano, four trillion dollar deficit this year, something like that. It’s completely off the charts compared to anything we’ve ever done in the past. So my question for you is, would you still. Fund that deficit by. Issuing Treasury bonds, given how you know what that ends up doing in terms of rhetoric around the national debt, or is there a case to just spend the money without issuing bonds and without increasing any kind of national debt or debt to GDP ratio? And just like drop money from helicopters straight into where it’s needed in the economy.

S3: Yeah, you know that in the book, I, I don’t take a strong position one way or the other, but I will here because you put it in a different context in the in the moment of the Corona virus and with trillions of dollars of spending. And my I guess great fear is that we’ll see a repeat of something like what we saw in the early years of the Obama administration, where the run up in the deficit, in the additions to the debt gave people cold feet and led Congress to withhold fiscal support, to withdraw fiscal support too soon and to leave us with an economy that really languished for a long period of time. Right. That we could have had a much more robust recovery, but we got anxious about the deficit and we didn’t stick with the fiscal support. So I I think that I’m very open to the idea of having the deficits without the debt. We can do that. We can run fiscal deficits without increasing the debt. We don’t issue the treasuries. In fact, I’ll go one step further and and I’ll make the case that selling bonds is almost surely more inflationary than not selling bonds. And I think that the reason is fairly obvious to me anyway. It’s because if you just run the deficit, then you’re just spending more dollars into the economy than you’re subtracting out. Leave those dollars in the system where they will earn zero right there, their non-interest bearing. That’s non-interest-bearing currency. If you replace those dollars with Treasuries, you’re replacing them with interest bearing currency. And that’s got to impart a higher inflationary bias than just leaving the non-interest bearing dollars in the system. So for both reasons, one is the political which you raised, Felix, and I’m I think that’s right. We would have a much harder time falling into panic mode if the CBO wasn’t producing that graph that shows the debt to GDP ratio increasing. Right. Very sharply. Because of the deficits, we would just have a commitment to provide the fiscal support to the economy without the so-called national debt rising and that, you know, shivers down the spines.

S1: So why do you think that no one in contemporary planet Earth does this? Why is it that governments around the world feel the need to cover every single dollar of government spending with a dollar of government borrowing?

S3: Because I think it’s your opening to this whole conversation, the idea that we’re going to tell people that the government doesn’t need to tax or borrow in order to fund itself. Is it upsets the apple cart. I mean, it it really does let everybody know that, though the whole thing works differently from what they’ve been taught to believe. Why aren’t governments doing it? You know, I could kind of make the case that they are doing it in the sense that the Bank of Japan or the Bank of England, once the central bank starts buying all new issues, basically the whole right matched with the amount of deficit spending. Once the central bank buys the bonds, it’s as if Treasury never issued them in the first place. They are, for all intents and purposes, retired at that point. The problem is that for reasons that behoove me, we we count the treasuries that sit on the Fed’s balance sheet as part of the publicly held debt. And that’s crazy, right? I mean. It’s got at that point, it’s it’s gone. It has been disappeared.

S1: OK. Let’s have a numbers round. Anna, what’s your number?

S5: My number is seven quadrillion. That’s awesome. I love that number. It’s the big number, right. So, yes, seven quadrillion. OK. So this is kind of an honor of the fact that we are taping this on June 18th. So I was working on a piece this week on reparations and I was talking with this professor at University of Connecticut, and he did some math about kind of figuring out like the unpaid wages just from eighty nine years between 76 and 1865. And you kind of figure out about like what those wages would be. And then you compound them. And if you compound them at three percent, you get to about 20 trillion about the size of U.S. GDP. She compounded it six percent, which is probably actually more accurate based on kind of different both inflation and interest rates. You get to seven quadrillion dollars would be what those unpaid wages would kind of be worth in a sense, if they had been invested in today’s dollars. That’s a lot of money, right.

S1: Which is more than the amount of wealth on planet Earth.

S5: Oh, it’s like 50 times global GDP. I mean, it’s just it’s it’s I mean, it’s clearly like, you know, no one’s necessarily gonna say and you would have this money right now. But it’s just this idea of like the amount of wealth and also the amount of wealth that was stolen at the time. Then also just how important compound interest is, like the large power of compound interest.

S1: Yeah, I feel I, I, I see these calculations a lot about what if you could just compound for centuries, but kind of there’s very, very few individuals or institutions or families who’ve ever been able to do that. It’s kind of amazing. I think I think the Hapsburgs did it for longer than most.

S5: It’s it’s probably show. Yeah. It’s true. You know, it’s very true. Although it is interesting to think about, like, you know, just I guess in terms of, like, wealth that was given in, like the Homestead Act or something. And how many people still have wealth that was generated from that money that land was given to white people in the Homestead Act. And you kind of, you know, figure out over time how much money that’s worth. It’s just, I think these conceptions of wealth and you’ve to think about kind of like over time, how much wealth has been generated. And just also thinking about, unfortunately, how slavery and that unpaid labor was like our economy would never have existed without it. And so all that wealth that was generated was basically made. All the wealth that has existed has basically been kind of off of that.

S1: So next month, we’re going to have a special episode of Slate Money with my cousin Thomas Harding and talking about family wealth. And I’ve been thinking about that a lot today on Juneteenth because the original source is the Simon family wealth was when we sold Salminen Gluckstein cigarettes to basically an American tobacco company in the 19th century. And that American tobacco company money was obviously made off the backs of slaves in Virginia. And that wealth we invested on this sort of multigenerational basis and some of it has made its way to me. Definitely something I’m thinking about today. But, Emily, what’s your number six?

S7: My number is six. That is the number of Supreme Court justices that were on the right side of history this week when they voted to uphold LGBTQ rights in the workplace. And you can no longer be fired for being gay or lesbian or transgender at work because of this decision. And that was a rare piece of good news, which was honestly, it felt weird to receive good news right now.

S1: So we had we had Gorsuch and Roberts coming out on the side of the Angels.

S7: Yeah, the opinion was written by Gorsuch and he just looked at Title seven of the Civil Rights Act and was like, you can’t discriminate on the basis of sex. And if you fire someone for being married to a man and you don’t fire another person for being married to a man, and the only differences, one person, you know, the only difference is their sex. That’s discrimination. And yeah, we don’t we don’t do that. So it was it was really gratifying to see it. And I wasn’t at all confident that that’s how the court was going to go. So it’s really surprising and a rare piece of good news.

S1: My number is three, which was the financed with his favorite hate read this week was this wonderful column by a freelance journalist called Shruti Advani in the Financial Times, where she was talking about how she managed to cope with the lockdown in Kensington. And she might be a freelance journalist, but she also inherited a bunch of money. And she’s married to a venture capitalist who works for Veazey company, eight Reds. And so the first thing she did, which I love so much, is the first thing she did was she forced a nanny to move, move in with her. She gave up her spare room so that nanny could move in with her, which was like, you know, selfless, obviously. And then she said, Conscious of my responsibility towards the additional souls on board. I took stock of what resources I could call on. Trebling our usual order from the 3D Flowers delivery service was the obvious place to start. So I think that is how you cope with the pandemic people is to multiply by three your normal spending on flower delivery, which is actually what I did. I trebled my normal flower flower delivery as well. It went from zero to zero.

S5: Yes, I went from zero to 100. I’ve been getting flowers every week because I’ve been in my apartment for a very long time and I need it to look like it’s OK.

S1: It’s it’s good. There’s no judgment. This is a judgment freeze on this. Stephanie Kelson. I’ve been saving the best of last. What is your number?

S3: I think my number is going to be twelve. OK, so twelve is the number of points that Biden currently leads Donald Trump in the latest Fox News poll. So you said in a world where there’s not much good news, I’m gonna say from my perspective, that’s pretty good news.

S5: Yeah, for the world’s perspective. Yeah. Goodness. Yeah, it’s great news.

S1: I’m still worried and I have to say. But now. Me too. I think that’s it for us this week. And we’re gonna have a Slate plus segment about a question, which I have a psychological question I have, which is why do I feel reassured by the stock market being strong, even though I know the stock market has nothing to do with the economy? Other than that, many thanks for listening to us this week.

S2: Professor Gelvin, thank you so much for being here. It’s amazing. Many, many thanks to just me, Molly, for producing. And we will talk to you next week on sleep.

S1: OK, so who wants to hazard a guess? I don’t understand this. I don’t understand why I was. I light on a very deep psychological level. I felt much more scared in March when the stock market was plunging and lo than I do now that it has recovered, even though the corona virus is in many more states and hitting highs across the country and we’re not doing anything about it. And the country is up in flames, in protest, and the stock market is not the economy. How on earth is it that this like random number of the S&P 500 can sort of provide psychological reassurance to me? Is it just this, like, wealth effect? Do I have so many stolen books that somehow I feel richer?

S5: I don’t think it’s that, you know, the wealth effect is, I think sometimes an over played thing. But I mean, I do think that part of it is just how we’re condition, you know, which what do we focus on? You know, GDP is completely arbitrary in many, many ways. A lot of it kind of going into what we focus out idea of debts, deficits, inflation, like what you choose to focus on and what society tells you to focus on over and over again matters. And it means everyone else around you focuses on it. So whether or not it is necessarily the right thing to focus, it’s just I feel like it’s part of human nature. Like, of course, you’re going to be influenced by that. And it’s terrifying when you see scary numbers of everything falling down. And it seems like there’s, you know, everything’s bad. And when all of a sudden it seems like, OK, the financial system is working, you feel better.

S7: Yeah, it’s like if you have to be inside all day, but if it’s sunny out, it’s nicer than if it’s like really bad weather, even though it doesn’t actually matter to you at all. It’s psychologically nice when it’s a nice day. And like when the stock market’s doing well, it’s like kind of like a nice day. Good news. And it has, like, that effect.

S1: Is it just me or do you guys feel it, too?

S7: Oh, yeah. Oh yeah. But I also think because when the stock market goes down, my companies start doing terrible things like they freak out and start laying more and more people off. And it actually is bad. Like even though it’s not the economy, it’s still has that those kind of bad effects like Huff Post is on by horizon. And like I check for Isaan stock not because I don’t even hold any rise in stock, but I know, like, if it goes down a lot, like there goes my job, like, you know, companies just freak out and do bad stuff.

S5: No impact.

S3: But a lot of workers do have, you know, four or one K plans. I mean, we replace the traditional pensions overtime with the defined contribution. And people look at that, especially people who are, you know, five, maybe 10, even 10 years away from retirement. And, you know, I know people who are who got very anxious, you know, the start of the corona virus pandemic when the market was way down and people started thinking, I’m not going to be able to retire.

S1: Yeah, yeah, yeah, my, my, my, my weird theory about this is that I’m just completely obsessed with capital stacks and I have this feeling that if the stock market is high, then that’s a cushion against bankruptcy. That leg does somehow it means that there’s a whole bunch of equity that people are placing value on, and that means that all of those companies in the stock market are not going to declare bankruptcy. And that reassures me.

S5: That’s actually correct, because actually, like when you hear people often talk about Netflix and let’s say like I want people buying Netflix bonds like, you know, company, it’s because there’s an equity cushion. You know, it’s that understanding of as long as, you know, people are continuing to value this, they will still be able to raise money. So then you will be able to give them money, whether that is reasonable or not. There are a lot of logical problems and that if you walk through it, that that is actually a story you hear all the time, especially with a lot of Silicon Valley companies.

S1: OK. So I won’t feel like I’m being completely irrational.