How MMT Can Help Us Understand the Economy

I think unless you've been living under a rock over the last year or so you've probably heard in the news a lot of debate and discussion about modern monetary theory prior a lot of it he's been caricature as like other people would just say print the money they kind of do but also so it's also kind of cured caricatured anyway tonight we have with us the person who I think has done more than anyone else these these days to be a proponent and an advocate and a voice for mmt and that is a stephanie kelton she is a professor at Stony Brook she's also an economic adviser to the Bernie Sanders campaign and in addition to talking a little bit about what mmt is we're going to get her perspective on the state the economy and economics right now because we live in interesting times large deficits by historical standards very low interest rates by historical standards and yet things aren't working we're not having inflation like people would have expected wage growth has been poor GDP growth across the developed world very mediocre since the crisis so I won't know you know economists are scratching their head so looking forward to hearing how a mmt economist examines some of these puzzles of modern economic life so I'm Stephanie Kelly [Applause] whoops I'm great I'm breaking stuff what are you saying when people say that about mmt like oh yeah just print the money well you just said it I'm out of here what do I say I don't know what else to say except you know what we've been saying for now two decades and I thought it just started in the last couple years you guys have been at it for a while we've been at it for a little while and as far as I can tell none of us has ever said mmm tea is about you know printing the money but it gets short-handed that way and it's like nails on a chalkboard every time I do an interview now I sit down and I say okay we're gonna do this on the understanding that you're not gonna run a story that says mm T's about printing money until we do the interview and the headline reads economists says print more money you know okay I'm nothing I can do I'm gonna take the bait in that case what is mm tea about and why has it suddenly sort of exploded into maybe not entirely the public consciousness but certainly this demographic well it's like the impossible question to say you know what is mm tea about because it's it's a group project that started more than two decades ago with maybe a half a dozen economists in the early years producing scholarship on questions from you know the eurozone to trade to Social Security to government financed it deficits to the you know I mean it's this enormous project so there's no way to just say this is what mmm tea is and like a you know a soundbite but I think most people when they think of mm tea they think of it as an analytic framework so it's a Mac where macro economist so it's an analytic framework that tries to update the lens through which we understand the monetary system and the policy options that are available I guess in the post Bretton Woods post gold standard era and so we're basically saying look there's policy space that has opened up around us since we have gone off of the gold standard or fixed exchange rates and we're not taking full advantage of that space we could be doing better and so we're trying to you know shine a light on some of those things so what was the impetus when when this first started was it that something has changed about either the financial system or the economy and we want to understand the existing world better or was it the policy prescription that you were after because I think nowadays lots of people here mmt they think full employment they think universal health care that sort of thing which was the inspiration behind I don't think it was either actually I mean I think back to you know when I started training as an economist from undergrad to graduate school it was the mid-90s and you know there were already different schools of thought out there the post-keynesian were saying very different things from more mainstream types of economists and especially when it came to the financial system to banking and finance and those sort of questions so we were always kind of agitated by the way that mainstream economists describe how finance works in particular so we had a different narrative set up from the very beginning but then you know with mmt I think it started evolving as we started to think differently about the role of taxes and the relationship between money and taxes and state finance and it kind of opened up around the question of launching the Euro I think really because we were looking at countries that were making a decision to abandon their currencies and adopt a common currency and that's sort of I think sparked the broader interest so you mentioned that essentially it's an analytical framework and as I mentioned in the intro I think where people would agree we're at a moment where a lot of people feel unsatisfied with the existing answers that economists have given or that mainstream economists have given on things like the recovery why hasn't growth been faster why hasn't inflation picked up just despite cutting rates and these trillion dollar deficits what's your answer to that what is the let's start with that why hasn't inflation picked up despite all these things that economists would have said oh yeah they cause inflation well I think the models are too mechanistic and they lead us to too simple and understanding of really complex phenomenon like inflation and so if you're trained like I was maybe in the early years to think that you know money is inflation is something that happens when you print too much money or you know the Milton Friedman inflation is always in everywhere a monetary phenomenon so if you seek central bank's doing things like QE and people say quantitative easing is printing money and printing money leads to inflation then we all come to expect that if you believe that inflation automatically picks up because the labor market gets tight and your market your model tells you that tight labor markets working through a phillips curve sort of relationship lead to pressure on wages that then lead to increased price it's basically that the models are too simple and we have too much faith in them well actually on that point because I get the logic of this idea that ok unemployment Falls and then workers have more borrowing bargaining power and then that leads to higher wages and then they have more you know more purchasing power and so on what is the conceptual flow because we haven't even really seen robust wage growth by any stretch even though the unemployment rate is below 4% so just like breaking it down like why does even the most simple seemingly logical idea that low unemployment would have all these positive effects on prices why does that not even seem to be work well I think most of it has to do with one key phrase that you just use which is bargaining power and how is bargaining power exercised the reunions and what's happened to unions over the course of the last 30 years I mean they've mostly been decimated so it's pretty hard to tell a rational story about how even as the labor market tightens workers are supposed to exercise the power in the negotiating process if they don't have union representation what are they supposed to do walk in and just sit down with the boss kick their feet up on the table and say I'm here for the raise you know labor markets tight let's go it's just not there the the the mechanisms aren't in place for that to happen for for huge swaths of the American workforce so here's one thing I sometimes but if everyone in the u.s. at least woke up tomorrow and accepted mmt as the analytical framework for the economy what would change like what would that world look like and what would that change from the current scenario actually tell us about what's wrong with the way we think about economics I mean honestly I think the biggest thing that changes is the conversation that we have I mean if if we had a better set of lenses and we were able to see more clearly you know the nature of the space around us the monetary system the way it works I just think that a lot of the questions we asked today and a lot of the things that we presume stand in the way of you know Congress passing legislation that would do something more ambitious like what we can't because trillion-dollar deficits or we can't because China has all this debt or we can't because look what happened to Greece or we can't get right at least that would go away and then we would have a very different conversation even the tax cuts right if we were looking through an mmt lens and we said the Republicans are looking to do between a trillion and a half or two trillion depending on how you want to cost it out in tax cuts instead of saying we can't afford it it'll blow a hole in the budget and all this kind of stuff we would have a different conversation it would be about you know the presumed effectiveness in terms of job creation and the potential inflation risk in an economy that may or may not be closer to full employment so I just think you know Social Security are we really gonna have a conversation about the government's ability to keep its promise to future retirees their dependents and the disabled if we're not afraid of running out of money then the conversation changes that it becomes about demographics and inflation risk and I just think we have a richer more substantive national debate than this you know arbitrary frivolous conversation about you know entitlements driving us into a death crisis which is know as I mentioned ensure you are on one of the teams in the primary and you met speaking of like the sound of like screeching chalkboards how much does it hurt you when you hear Democratic candidates blast the tax cuts on the grounds that it blew out the deficit it would it does but I haven't heard that much of it and I'm encouraged you know way it's funny joke because what I hear Democrat saying is that they would like to repeal all or much of the Republican tax cuts not because they blew a hole in the deficit we got to repair that damage but because they want to use those tax cuts to quote pay for something else in other words it's the same as saying I want to use the deficit to build infrastructure it's no different it's tantamount to saying I want to keep the deficit but I want to direct it toward some other aim right I mean so even though we have some Democrats complaining about Republicans expanding the deficit for very specific purposes there are quite a few high profile Democrats who seem to be embracing mmt whereas Republicans who actually have a de facto history of loads of embracing mmt haven't done that why do you think that is you mean openly invoking No so they'll expand the deficit for their pet projects in a sort of mmt way but they don't seem to embrace the theory in the way that some Democrats well it's better to embrace it actively than to embrace it rhetorically so I guess it's some sense you know it's more encouraging to see someone pushing through an agenda that doesn't hew to the hysteria around debt and deficits is this my preferred set of policies no but you know it's not as if it's encouraging just because a few Democrats have invoked mmt because at the same time you know the Speaker of the House has reinstated pay-go and that's not terribly encouraging if you're looking at the potential to take the House and the Senate and then move ambitious progressive legislation you're not going to do it in an environment in which Pago is in place which is a rule that exists in the House of Representatives today that says you can't add to the deficit so everything has to be deficit-neutral so I mean it's it's good and bad it's there's progress for sure being made now one of the policy agendas that's likely to be on the plate of a theoretical Democratic administration particularly if it's of the more progressive weighing or of it if it is Bernie would be a green new deal and something that you hear people say is some people how can we afford it and the response is often well you know we didn't ask that question we didn't we didn't choose to fight the world war is based on whether we could afford to we figured out a way to do it so what are the lessons from the wars and I mean I think Keynes wrote a pamphlet how to pay for the war that applied today towards something as ambitious as a green new deal yeah I I mean I think that Keynes is little book which was called how to pay for the war that's literally the title of the little pamphlet and you would think just based on a name of it that this must be a book about where to get all the money to finance world war two and this is Keynes was British economist of course so this was you know advice for the British government and it turns out you read this thing and has nothing to do with where the British government is going to get all the money to finance the war effort it's about understanding that this is going to be a massive endeavor that it's going to involve transforming the economy away from one that's oriented around producing for the consumer to one that's oriented around winning the war right transforming the entire economy and Keynes was mindful of the inflation risks because the government was gonna have to ramp spending way up and in order to do that it was going to have to take resources away from other uses and so you're elbowing out the private sector in order to bring people and industries into public service and to orient you know for the war effort so the whole book is about how to do that in a way that avoids to the extent possible creating an inflation problem it turns out it was really effective it was a very careful analysis of how to allow the government to spend into the economy while removing enough purchasing power strategically right it was really important to Keynes that removed the purchasing power from the right hands because if you remove purchasing power from the wrong hands you might not do much to mitigate the inflation risk in other words if all you do is tax the very richest people who weren't gonna spend much of that money in the first place then you run the risk of a real inflation problem so he understood that this had to be done really strategically so with a green new deal same thing right the same principle applies if you're gonna do something that is truly transformative that you're not just talking about transforming the way we deliver energy but the way we build housing and transportation and the way we deal with food production agriculture you're gonna touch nearly every piece of the US economy and so the lesson is to look back at what Keynes told us and to figure out if you're gonna go that big and you're gonna make that kind of investment in the US economy over a short period of time 10 years or so right that there are important lessons to learn from what Keynes was doing in that little pamphlet and inflation is the major risk not bankruptcy or financing so this sort of connects with one of the criticisms that you often hear about mmt which is it's actually not that different to Keynesianism in various ways how would you respond to that how would you lay out the differences explicitly well I think there are a lot of them and you're right I mean there are examples like the one I just gave where I'm saying basically when it comes to the green New Deal listen to Keynes okay that was about inflation risk but there are very substantive differences between the way that we analyze some big questions and the way that some headline Keynesian I mean I don't know how much I want to pick on certain people and give specific examples I was a contributor at Bloomberg for a period of time I got into a little back-and-forth with Paul Krugman we traded some columns him in the New York Times me writing for Bloomberg and there we teased out I think some of the important differences I mean you know the conventional Keynesian models tell you that deficits are supposed to drive interest rates up that's the way it works in normal times and that when the government increases its deficit asked increased borrowing and as it borrows more that gobbles up private savings that are no longer available to finance private investment leaving companies with fewer resources to invest and so investment goes down and his investment goes down you get a slower growing more lethargic economy mmt this is just one example but mmt says no no no hang on deficits don't gobble up savings they augment savings if the government spent a hundred dollars into the economy and only taxes $90 back out we label that a government deficit but what we forget is that I just deposited $10 into some part of the economy my deficit if I'm government I'm Uncle Sam my deficit becomes a surplus in some other part of the economy so from the very beginning of this crowding out story we're deficits become the villains of progress in the economy mmt says no no hang on you're getting it wrong from that very first step right deficits add to savings and then we could go on about the relationship between interest rates and investment they think that they are obviously inversely related we say interest rates are policy variable not something determined by market forces or at least they always can be so they're just we go on and on another thing that people say about mmt is that like well yeah sure because the u.s. is the world's reserve currency so the US has a lot of policy flexibility other countries don't have it but I don't know how much you were paying attention we were talking about Argentina what is the sort of mmt if you were you know if ma pre had brought in you instead of the IMF and said what should I do to make my economy more stable what if what would have been the mmm tears advice well I mean I think the last discussion was was really good and very much on point in many ways in the sense that to the extent that you're able to avoid doing so you should avoid borrowing in a foreign currency and not every country has the capacity to unilaterally just say I am NOT going to the international markets at all I'm only borrowing in my own currency some countries can't do that but Argentina could do less of that and that would be advisable for first start yeah I mean obviously the the reserve currency status gives us an additional degree of freedom there is you know an extra benefit to being the world's reserve currency but you know I was just in Japan not too long ago and yeah there was a controversy about that okay I don't know if that's not okay that's Matt right now I'm not the oxygen it's on the Internet but but there's a country that is not the world's reserve currency that has a debt to GDP ratio if you go grouse terms of like two hundred and forty percent right and I go over there and the biggest question I got from all of Japanese press everyone I talked to how do we get inflation what can we do to cause inflation like they're desperate to create inflation their debt ratio is the you know highest in the world interest rates are right where the Bank of Japan puts them at very low inflation slow it's just you know wait before you go I'm not gonna say I know we're not gonna get into the controversy but for those curious there I discovered through learning about this there is a libertarian caucus within the Democratic Socialist of America I didn't know that either but if you google some of those key words together you'll figure out what's going on I had no idea Tracy well now I've completely forgotten what I was about to ask now I just want to know about the caucus on the topic well actually I was going to ask about some of the chaos that we've seen in money markets this week and part of that was said to have been caused by this ramp up in T bill issuance by the government which sort of bled through into money markets I guess I'm curious how much does MMT sort of reflect on the existing banking system and regulations when it comes to gauging its own impact oh I mean I mean I think that the if you ask me what's the greatest strength of mmt you know I'll be a little bit brazen here I think we've gotten all the big stuff right there's nothing that has been major that we've gotten wrong nothing III think it's an a pretty impeccable record and I think the strength is that we have a superior understanding of monetary operations and that is we dig deep into the weeds on some of this stuff monetary operations that other people kind of superficially understand but mmm tears are really in the wheat so you're both very on Twitter very online and you probably saw some of the conversation from the folks in the MMT community nathan is sitting over there scott full Weiler Rowen gray these guys were tweeting out you know I was trying to write a book and so trying as much as possible not to get too involved in what was happening with you know financial markets in the last couple of days and fed interventions and so forth but these guys were all over it in a deep way and yeah we have a DM group that we were all going back and forth and trying in real time to you know make full sense of it because it's very much in the weeds well more generally so we don't you know get to in the weeds on the operations and money markets and the repo markets which I don't even understand myself just generally speaking what is it what do you make of like sort of mainstream Fed policy do rate cuts stimulate the economy it depends it depends where you are and and in which cycle I think I mean right now we've embarked on yet another cutting cycle we don't know how long it's gonna be but since the summer the Fed for the first time since before the crisis is cut again twice now is that the kind of action that you think could have a positive impact on the economy no I mean not much it it's unlikely to do a lot of harm if war and Mosler we're sitting here he'd say they've got the brake and the gas pedals mixed up in other words Warren has for a long time this is a sort of founding father of mmt so for those that aren't familiar with the name Warren actually makes the argument and I think Randy Ray does as well it's a pretty compelling argument if you actually do I wrote a paper on this when I was a lot younger and published it and there's some empirical support for the idea that central banks when they raise interest rates they think they're tightening when they cut interest rates they think they're easing they think it stimulates the economy to lower rates but in some countries where the debt is very large interest is somebody's income right bondholders receive interest as income and raising rates as bonds are rolled over and interest rates are going up is tantamount to fiscal expansion in other words it's an increase in income right interest income so there is the possibility that raising interest rates has a stimulative effect now against that obviously credit becomes more expensive so interest-sensitive sectors like home buying and durable goods like automobiles and stuff maybe people borrow less to buy a home or a car in an environment in which interest rates are rising but to think that this one price in the entire US economy the overnight interest rate the feds policy tool one price that if they just move it 25 basis points here in 25 basis points there that they can steer this enormous economic ship called the United States economy is pretty much a stretch for me so but that's it that's what we believe that's what he Congress believe right the Fed the dual mandate song it will go through your head tonight right the doom and the feds got into a mandate and they're supposed to use this one price and make these modest adjustments to bring about you know a broad equilibrium in the economy where we get low inflation and high levels of employment and growth so one thing we're hearing a lot about now to the point where it's becoming cliche is that fiscal policy is the new monetary and Joe and I heard this several times today alone it is that the right direction or do you worry that we're just going to assume that any form of fiscal stimulus is going to be the the panacea that we've been seeking well I think that you know this is textbook stuff right there are two levers if you're doing macroeconomic policy you you either pull the monetary policy lever which is conventional policy it's tweaking the interest rate or you pull the fiscal policy lever and that's taxes and government spending and for the last 30 years we have leaned extremely heavily on central bank's not just here in the US but around the world right the central banks were the only game in town fiscal policy is that thing that sits behind the glass with the break in case of emergency cover on it and central banks are supposed to to steer economies right and that hasn't worked all that well for 30 years you know Larry Summers says the last three expansions in the US were bubble driven I mean all three right the left from the savings alone to the subprime to the.com in the 1990 so that's kind of how we do it and now everybody's sort of waking up to this idea that there's another lever that we we have to become more reliant upon but does that mean that any fiscal policy is good fiscal policy and it all has good effects no you know it's got to be targeted and just have a few moments left but I think this is one of the main things they say yeah it makes sense that fiscal policy makers should run the show more often in terms of demand management but then they look at what that means and no one actually looks at DC right now and think oh this is a Congress that is capable of working with the president that could deliver anything meaningful in any period of time or timely manner that seems like a real problem just from a practical standpoint that it's all nice to say that fiscal policy is the lever that should be pulled but that applies politics for better or worse is there how do you address that concern that it's like okay maybe monetary policy is not that effective but at least they could do something well so I know how I I would address it by putting it on automatic pilot to a large extent in other words take the responsibility away from Congress to act in real time to make smart decisions with tax policy and spending and to do that through a federal job guarantee which is to say that in the last downturn you know we were losing 800,000 jobs a month at the height of the Great Recession and if we had had something in place a program in place to absorb workers into employment instead of allowing them to fall into unemployment it would have provided a cushion for the economy to recover more quickly so you know Janet Yellen several years ago at Jackson Hole the big meeting that takes place between fed officials and invited academics and others she said we need to strengthen the automatic stabilizers we need better automatic stabilizers and a federal job guarantee is like turbocharging the automatic stabilizers we have today and that's what I would do stephanie kelton thank you very much so long we've tried a bunch of time sex should get you to come on the podcast itself something glad we finally I made it happen I'm glad to thank you for having me [Applause]

Channel: Bloomberg Markets and Finance

Views: 39,980

Rating: 4.5164833 out of 5

Keywords: finance, news, Bloomberg, MMT, Economics, Markets, Stephanie Kelton, Recession, Keynes, Friedman, Chicago School, Odd Lots Live, Odd Lots Variety Show

Id: QwbDETx3zo0

Length: 28min 11sec (1691 seconds)

Published: Mon Oct 07 2019