W2 academic lecture - Stephanie Kelton: Rethinking fiscal policy

good afternoon everybody how are you good there they are allowed to talk because this is going to be interactive I hope I have a big task in that I have 45 minutes and I want to try to cover a lot of ground with you in 45 minutes so very quickly thank you to Mariana thank you to the organizers the invitation to come and be part of this incredible course offering that Mariana has designed I love that I get to come and talk a little bit about a chapter that I contributed to the book that I guess is serving as the core textbook in this course so but I don't want to stand up here and repeat what's in the chapter because that would be boring for you and you were supposed to already be familiar with the chapter so I am going to give you that broad brushstroke sort of the arc of what the chapter does but then I want to take you where the chapter doesn't go which is a little bit beyond but building on the arguments that I laid out in the chapter okay so in this chapter how many of you will confess to having read the chapter I won't ask you questions about it I won't okay so in the chapter I refer to and I think I have a subheading called deficits save the world right you're nodding so you remember that this is the title of a blog post that Paul Krugman wrote in the aftermath of the financial crisis and the Great Recession that followed and you know the world was sort of teetering on this what are we going to do now that deficits have exploded because the economy's crashed and when economies crash deficits automatically increase governments don't have to actively do things to push deficits up when the economy gets weak when the economy gets weak and people are losing their jobs their incomes go to zero when your incomes go to zero your federal income taxes go they're gonna don't have any income you don't pay income taxes so taxes automatically fall off a cliff in a weak economy and spending to support the unemployed right and a weak economy automatically go up people qualify for programs like food assistance and unemployment compensation and housing assistance you lose your home right so spending goes up automatically tax receipts go down automatically the difference between what the government spends and what it collects in taxes is the deficit and so deficits automatically increase in fact explode because the downturn was so severe and so people looked at what was happening including many professional economists and they said it's time to panic because deficits have widened and this is a bad thing right we must begin to rein in the deficit so actively taking steps to try to balance the budget how cutting government spending raising taxes what's the word that got used all the time austerity I heard someone say it right so attempting to force your economy to balance your budget you see what I did forcing the economy to balance the budget instead of allowing the ax-cut to rebalance the broken economy okay and allowing those deficits to not only emerge but may be actively driving them up and maybe that would have been a good thing and most professional economists today in the u.s. I think agree that deficits that were run during the Great Recession were too small that in fact they should have been larger that had they been larger the economy would have recovered more quickly and that because we didn't do the right things using the government's fiscal capacity to help stabilize and recover the economy we ended up with years of slow growth forgone output lost income lost wealth lost savings jobs that didn't recover and ultimately President Trump that happens in part because of the angst and the insecurities that built up in the dissatisfaction with the current state of affairs for millions and millions of people ok I'm gonna use the US context here but obviously this happens elsewhere around the world then across Europe and you've lived it so you know this okay so deficit saved the world mostly because they automatically happened and that put a floor under how bad things were allowed to get but then we turned against them and we started actively trying to fight against the deficits instead of recognizing that those deficits were doing good things right there was a positive role that those deficits played in the broader economy and we should have allowed them to increase and expand even further all right but we didn't do that and why didn't we do that because of fears about government deficits about the national debt beliefs that are deeply entrenched that deficits are evidence of bad behavior irresponsible right that in fact the right thing to do is to try to push the budget toward balance and so the debate became here and around the world one that largely took place between two views right you had the deficit hawks do you use that term here if you're hawkish on the deficit you are hardcore anti deficit spending you want the budget balanced now and always never spend a penny more than you collect in revenue I'm a deficit Hawk right I want budgets balanced immediately and to stay balanced then there's this other camp that says well that's a little extreme I mean sometimes the economy gets weak and the government needs to do something pull the fiscal lever cut some taxes increase some spending and that actually is a good thing to do yes we agree that you know over the business cycle we would like the budget to be balanced but we're willing to tolerate some deficits when the economy is weak okay this is the deficit dove position so austerity later versus austerity now those are largely that's how the conversation played out between these two dominant positions so what I'm going to suggest is that there's a third voice that needs to be elevated and in the past I coined the phrase that the deficit al and it's sort of you know made some headlines front page of the Washington Post and that sort of stuff people picked it up and said what the heck is a deficit owl and I said well you need a new bird in this aviary because these other Dodos right are getting us bad policy so what is the deficit owl see that the Hawks and the doves are missing and that's what I want to try to build on in the conversation that will follow so my argument what owls are supposed to be wise right they can see things that the other birds are missing because their little heads go all the way around they can see in the dark right so there are advantages there are things that the others are missing that I think needs to be part of the conversation so I want to move forward with that because my position is that fiscal policy is not something that you reach for you know break glass in case of emergency then we use fiscal policy but in in normal times we rely on central bank's to steer the economy my view is that that's not the right way to do policy that fiscal policy should be a permanent tool in the toolkit and that we ought to calibrate the government's budget to deliver mission-oriented spending goals right so figure out what it is you want to do in your economy set goals make them transparent have mission oriented budgeting and then draft a budget that will allow you to achieve those goals so you're using the budget to balance broader conditions in the economy instead of trying to force your economy to balance your budget yes okay let's do it so here's where the conversation breaks down somebody comes in and says we should be doing X Y Z in order to promote a good economy but how are you gonna pay for it how are you gonna pay for it and then the record scratches or you don't know record players because they're sold by the needle on the record player and that's it the conversation stops and this is what happens here and elsewhere around the world we want to do all of these things their mission oriented goals how are you going to pay for right what's behind the question behind the question is a belief that the government needs to find the money that it must somehow come up with money in order to fund programs okay so we have to talk about this is this the right way to begin with this question about money and how governments finance things I argue no and so I want to move us beyond starting with this question which is the question we always begin with okay here is the problem this is a short video the sound works we checked it but for the next couple of minutes you're going to listen to this and then we'll talk about it taking money from our children and borrowing from China take out a credit card from the Bank of China in the name of our children driving up our national debt that we are gonna have to pay back that's irresponsible it's unpatriotic the government's irresponsible spending is turning us into slaves you might well literally lock us into chains at least our children we've got to deal with this big long-term debt problem or it will deal with us and it is a I think it's a I think it is innocent I'm asking you join us to stop this fiscal train room join us to protect our children from an inferior standard of living form a crushing burden of debt and taxes okay I don't believe in any of the tax cuts I didn't want axes words I mean we middle class okay because it you know why and as we discuss deficit reduction which is clearly a major issue for decades we a pile deficit upon deficit mortgaging our future and our children's future the deficit thing is real and the debt thing is real we are really in trouble wanted it something's there need for comprehensive deficit reduction the answer is not only yes but hell yes hangs over our head a government that spends more money than it takes you in that's not sustainable no you cannot cut taxes or increase spending unless you can pay for it the math of federal spending does not add up and we are spending money we do not have a debt burden that that's crushing us to me this is more of a moral issue you can't steal from your kids in grandkids we think the deficit and the national debt all right Amaro what national debt is America's biggest problem does it sound familiar does doesn't it so if you notice this video what you saw is a bipartisan chorus they literally finish each other's sentences right and the way the video is put together it goes Democrat Republican Democrat Republican Democrat Republican which is to say they're all singing from the same hymn book right they're preaching the same gospel about the dangers the risks of government spending more than they take in running deficits piling debt upon debt upon debt the morality play right burdening future generations it's not fair to our kids and grandkids the bit you missed where references from President Obama about borrowing from China so we have discussions about this being a national security threat a threat to future generations a threat to our standard of living I mean my god right this is a disaster fee that's a word I made up but here's the problem all right so this is what we're up against but this this is so old right at some point if this was right don't you think there would have been a disaster by now okay this is a cartoon from 1937 as far back as I can find but I'm sure you would find similar cartoons if I could get back a little earlier but 1937 and what are they complaining about ha ha ha 36 billion look at all those zeros right at the top if we stack them on end they would be as high as you know a skyscraper or whatever right meaning to scare people about the national debt this is 1937 go through to the 1940s now we enter World War 2 and the debt begins to increase okay so here we are look Oh billions and deficit billions of dead no problem here we are forty-nine billion and out here is 65 billion they're saying don't worry the water's fine come on in as if it's a joke right this all of this debt it's a disaster now move to the 1980s Ronald Reagan Reagan massive tax cuts massive buildup of military defense spending deficits increase the national debt almost triples and at the end of Reagan's tenure as president the cartoons say let's build a monument to the Reagan presidency 1.5 trillion is where the national debt is because of Reagan alright again here are more cartoons up to three trillion by the time Clinton leaves office it's five point seven trillion then it goes to seven and a half oh please give to the poor United States we are in debt help us ten trillion and Counting thirteen trillion again with all the zeroes the poor child right watching the TV finding their share of the national debt is $45,000 as it climbs to 14 trillion 15 trillion a monster eating through the US of A right 16 trillion 17 trillion kicking the can down the curb both parties rolling this massive debt over future generations now we are interstellar in the size of the national debt at 18 trillion it even fit on the planet anymore it has grown so large 19 trillion it's a cancer right a cancer 20 trillion the Titanic it's the iceberg ahead it's inevitable it's gonna end in disaster 21 trillion and where we are in the u.s. any minute now literally we're gonna hit 22 trillion okay what am I saying I'm saying for a hundred years and actually it's longer someone has been crying about the national debt and how the end is near and how it's a crisis it is always a crisis no matter what size it is the end is always near the sky is always falling it's always an imminent threat an imminent threat so what I try to do is to provide some perspective to get us to contextualize things to open the other eye right because it's like we go through this analysis with one eye open and the other eye closed we got to see the other side of the balance sheet we have to put this deficit in this national debt in some meaningful context instead of just reacting to numbers right it's just a number maybe it's a negative number and we all suffer from mega mega numa phobia that's the fear of very large negative numbers right we got to get beyond that okay so I want to get us to a point where we can pick up the newspaper read a headline that says the government debt is at an all-time high and be like okay that seems fine okay so how do we get there how do we have a different conversation it requires a paradigm shift it does we have to change the way we're talking about and thinking about some things the biggest mistake is the tendency to think of the government's finances as similar to our own right to liken the government's budget to our individual household budget that's where all the problems begin because we all know at a personal level that we couldn't go on spending more than we take in year after year borrowing increasing our debt and expect things to turn out well for us as people okay that won't end well it wouldn't end well for a business it wouldn't end well for us but we then say therefore it must be the case that it can't work for the federal government either right because their budget is like our budget it is not like our budget and the biggest difference between them and us is that they are the issuer of the currency and the rest of us are merely users of the currency you all are using the British pound but the British government issues the British pound where else could it come from in the US I used the dollar but the federal government in the United States issues the US dollar doesn't come from China right it can only come in fact the government gives itself the exclusive right to create the currency if I try to make it in my basement or my garage it's called counterfeiting and they go to jail right it is not legal for me to create the US dollar only the US government has that right okay call it a super patent so because they issue the currency they can't go broke like a household or private business there's a fundamental difference here so in the time that remains which is how much time okay in the time that remains I'm I'm gonna tackle five questions I'm going to try to do it in about five minutes each but I'll speed up in the interest of time okay so these are the five questions that I want to tackle first most people who have a visceral reaction to the idea of government's running budget deficits can I tell you what the deficit is they don't even understand the deficit they just don't like the word the the word itself has a connotation that's negative right deficit I'm out of something I'm short something it's there's a negative connotation let's talk about what the deficit really is and the same thing with the debt there's a negative connotation people don't believe that debt could be good debt can only be one thing risky bad right dangerous so I've talked about that the idea that we're dependent upon foreign interests right that makes us feel nervous and anxious and vulnerable the idea that what if you know China refuses to lend US dollars and they close the dollar window and then we can't spend any more because they won't let us have dollars we got to talk about that do we eventually have to pay it back though I mean surely we can't just have debt forever eventually you have to pay it off right that's what people say talk about that and then the last question is the one that opens up all of those possibilities all the space where we can have I think a much better much more useful debate about government policy when we talk about in real terms what it is we can afford we get away from all the obsession with money and deficits okay so first what is a government deficit let's say for example the government spends 10 into the economy so let's let that happen here's the government spending 10 into the economy now since we're here in the UK and we're not using these little dollars we're using pounds okay so I'm going to play the role of government and did I do this right so if I make 10 minis 1 2 3 4 5 6 7 8 9 10 ok these are pounds I'm playing the role of the British government they asked me not to do that so I'm not walking in front of that screen I'm going around the screen I'm spending 10 into the British economy that's you guys you're all the households you're all the private businesses you're the British economy now I've spent 10 into the economy as government all right you have 10 but now I'm going to tax you you see so suppose i erase taxes and i collect four of those back so now i've collected taxes so what have I done I spent more into the economy than I taxed back out I ran a deficit you're also you're whispering it I ran a deficit I did this very horrible thing called deficit spending what do you have Oh where'd you get those my deficit is your what say it with me surplus my deficit is your surplus how about that right what would have happened if I balanced my budget what would have happened if I spent ten in and then I taxed 10 back out you would have nothing nothing but because I ran a budget deficit you get the mirror image of that you get those six okay so I'm gonna record minus six on my books cuz I'm government but you get to record a plus six on your books not bad huh pretty good deal now you might say hang on what was that spending for that's a good question was it aimed at improving material well-being for people in the British economy or did it go to the fat cats and though you know did it widen an exacerbate income and wealth inequality did it do something useful to promote longer term growth by greening of the economy whatever it is that your missions are those are important questions but one thing is for sure somebody got made better off in financial terms because of my deficit who gets it and what the spending was about that matters okay but the bottom line is somebody ended up with a financial surplus they wouldn't have had but for my deficit so you all use the term what did we say not red ink in the red right government's in the red government's in the red government's in the red we got to stop that well but when they're in the red you're in the black because they're deficits are your surpluses so in the US we use a phrase red ink so they're red ink is our black ink this is actual data for the u.s. the government's budget balance is here in red the private sector is in black and you can see how they move opposite to one another okay so this is an important point that gets missed because we go through with one eye closed only looking at what's happening to the government's balance sheet without paying attention to what's happening to the non government's balance sheet and that's where we are right we're in the non-government part of the economy so those deficits that exploded when the economy got weak during the Great Recession 10 percent 11 percent of u.s. GDP massive deficits this caused hysteria because people saw these massive deficits right diving down into negative but they didn't pay attention to the huge surpluses they were producing in the rest of the economy and that's what allowed the economy to recover people accumulated financial balances that helped them recover their incomes pay down debt right restore their balance sheets so there were good deficits they were useful they were necessary so here we are in the u.s. today the Republicans just passed some of the biggest tax cuts in US history people are beginning to panic because those tax cuts are projected to increase budget deficits so now we're looking at the possibility of trillion-dollar deficits annual budget deficits in the future years right and so headlines like this in The Wall Street Journal y trillion dollar deficits could be the new normal now people read a headline like that and they get nervous trillion dollar deficits but what if we just rewrite that headline and we report the same information but we give it to you from your balance sheet position instead of from the government so what am I going to do watch that word deficit you see that I'm reporting the same information so now the headline reads why trillion dollar surplus is could be the new normal now you read that headline and say all right let's have some trillion dollar surplus is right that sounds fine to me and it could be fine okay but it's just about perspective so depending on where you stand a thing can look like one thing or it can look like another thing if you're standing looking at it from the perspective of the government it looks like a deficit you turn around and look at it from another angle looks like a surplus right it's about perspective all right so let's talk about the national debt what is the national debt the deficit is the annual difference between what the government spends into the economy and what it taxes back out that's the deficit the national debt is something different people often conflate them so what is the national debt let's start by remembering where those six came from all right whenever I run a deficit as government I borrow all right there is something called a borrowing operation that accompanies deficit spending so I put a hundred in well in this case ten I taxed for back out I left six behind my deficit was six so now I say okay I ran a deficit of six so I have to auction off bonds Treasury's fine so I got a see if anybody wants six of these right here so I'm gonna hold them up now the cool thing about these is that they are government promissory notes but they pay interest you see and those don't okay so I say would anyone like to swap some of their non-interest bearing currency for some of this cool stuff by these Treasury notes and sure enough there are always people scrambling in fact there are never enough of these to go around the auctions are always oversubscribed there are more people bidding for these than I have available so you're gonna give me these six and I'm gonna give you no this is voluntary I don't have to do this right but when I run a deficit by practice I make a swap and I offer Treasury securities and that's what the national debt is so now you're holding six big pink papers instead of six little pink papers that's all the borrowing is that's all the national debt is so a way to describe the national debt is to say the national debt is the money that was spent into the economy and not taxed back that is currently being saved in the form of Treasuries that's all the national debt is it saved your savings it's an investment vehicle that gives you a way to save for US dollars in the form of a financial asset that pays you a little bit of interest over time yeah that's all the national debt is the dollars or the pounds spent into the economy not taxed back currently being saved in the form of Treasuries okay so we have this thing I don't know if you have one but many years ago I think a billionaire paid to put this debt clock up in Times Square in New York City so this huge clock that ran in real time tick tick tick tick the numbers would change and it kept track of the national debt I right there in Times Square prime real estate to remind everyone so that when you're walking around trying to be happy and see a Broadway show you have to walk by this daunting clock that's reminding you of the monster right that's growing and will eat your children at one point so we had this debt clock and it's meant to scare people right big numbers so now that we know what the national debt is we can take that debt clock and just rename it so watch the name here it just becomes a savings clock doesn't that sound better if we don't call it the national debt clock and we just call it the US dollar saving clock or the British Pound saving clock then you can watch the numbers grow and say oh people are increasing their you know safe holding of British pounds I'm okay with that right that's all it is so then we have the China question well what about all the bonds that are held by the Chinese and other foreign countries okay surely that's a problem so let's address that in the case of the US China holds lots of US bonds yeah where did they get them why do they have them they have them because China has oriented its economy for many years around export-led growth they want to make things manufacture things in China put their people in factories working and producing stuff yeah using their time resources energy talents so forth making stuff if they don't keep and consume and enjoy for themselves they put it in a container and loaded on a ship and ship it to America in other countries yes and in exchange they receive what US dollars a so the real goods and services come in to the countries they export to and then they receive payment in the form of somebody's currency yeah so what China gets in exchange for their real goods and services that they manufactured for us is effectively a checking account at the Federal Reserve at our central bank so they get numbers in a bank account owned by China right these are your dollars China then does what you just did they say well I don't care as much for the pink paper the light pink I would prefer some of the dark pink paper so we debit their checking account and we credit their securities account which is a savings account which is US Treasuries so China like others can swap non-interest bearing cash currency for the interest bearing Treasuries is that a problem no the only thing we owed China is a bank statement could it become a problem yes if you are allowing domestic unemployment to increase because jobs and factories are moving abroad and Americans aren't buying the goods and services being produced domestically but instead buying goods produced by foreign countries then if you don't do something about it it could cost you in terms of employment domestically so it's not that you don't have to worry at all about trade imbalances or any of that kind of stuff but my point is it doesn't matter that China has these Treasuries it doesn't mean that we can't service the debt that somehow this makes us vulnerable that you know it's a it's a problem for the US that China owns some of our securities okay so sometimes people will say what if China decides to stop buying Treasuries what if they decide the idea being that if China won't buy US Treasuries then we can't have dollars and then we can't afford to spend this is complete nonsense okay remember if China decided that they don't want to buy any more US Treasuries what would that mean well it would probably mean that China has decided that they don't want to manufacture and net export to the US okay so let's say they decide to keep everything they're making or they don't want to export to the US what does that mean that means they're not going to end up with dollars because if they don't sell us their stuff they're not going to get dollars and if they don't get dollars they're not going to want to convert them into Treasuries so if China decides they don't want any more Treasuries what it's really saying is China's deciding they don't want to net export to the US is that a problem maybe because having access to cheap imports is a benefit to US consumers because your dollar goes further if you can pay less for some of the things that you're buying right so if China doesn't want to continue to make things and sell them inexpensively to American consumers we either have to find another country who will step in and do what China has been doing for us for many years and make the cheap goods and send them to us or make them ourselves likely at a higher price and so it could be inflationary see so there's the risk there which is the potential for inflation which is real a legitimate thing to worry about but not debt service right it's not the debt itself that's the risk so Steve minuchin is our treasury secretary currently and he was asked about this are you worried do you worry that at some point China could either start dumping Treasuries or refuse you know lose interest in buying them and he said I'm not losing any sleep over it that was his response and I think that's the correct one so we've dealt with that all right mostly what they is about is politics it's not about economics these debates that we have about the national debt and deficits that you saw two sides right beating each other up over this issue it's a political crud jewel it's a it's a useful rhetorical weapon when you're running against someone to say your party drove up the deficit and added to the national debt and so vote for us and will not do that and we'll fix it and then that party gets elected and then inevitably they run deficits and the debt goes up and then the other party goes you were fiscally irresponsible vote for us it will fix it and it just goes back and forth right it's political it's politically convenient so one of my favorite things to do when I was working on the hill in the Senate was to ask members of Congress and staffers if you had a magic wand and you could wave that magic wand and eliminate the entire national debt would be gone tomorrow 22 trillion now remember make it all go away just with the wave of a wand would you do it what do you think they said what do you think they said heck yeah wave that wand make it go away say okay so you're enthusiastic about it paying off or eliminating the death what if I give you different wand and I say if you want to wave this wand you can eradicate the world of US Treasuries no more Treasury securities anywhere in the world they're not in pensions portfolios you know they're just gone would you wave the wand what do you think they said so you say no and some said no and some set home like I don't understand the question and then I would say that's okay you already answered it you see the problem you do because you found the humor in this right what's the problem with the answer if they say yes to the first question and no to the second what's the problem it's the same question how is it the same question because the entire outstanding national debt is nothing more than all of those safe assets that are being held in the form of US Treasuries so you can eliminate the debt without eliminating the most important financial instrument in the global financial system the most important US Treasuries they wouldn't exist so ya got a problem if your aim is to pay off the debt or eliminate the debt and also keep the Treasuries okay so let's talk about historically what has happened because we've actually tried this before paying down or paying off the debt there have been seven periods in the entire history of the United States of America seven periods where the government's budget moved into surplus and when the government is in surplus it means it's taking more money out of the economy collecting more than its spending back in right so now I take out ten but I only put four back in so I have a surplus of six you have a deficit of six so once I begin running surpluses then I begin retiring the debt so we start paying down the debt so from eighteen seventeen to eighteen twenty-one the government's budget moved into surplus and we began to pay down the national debt what happened a depression started in 1819 not a recession a full-on depression then we did it again and this time under Andrew Jackson the only time the US ever paid off the national debt was under President Andrew Jackson in 1835 we've zeroed it out and what happened a Depression started in 1837 we had surpluses again began paying down the debt you see the pattern depression depression depression depression and then we did it under Bill Clinton okay 1998 99 2000 2001 four consecutive years the US budget moved into surplus for the first time in generations we had budget surpluses and they were celebrated because fiscal responsibility has been restored to Washington the government's budget was in surplus and we started to pay down the national debt and what happened the Great Recession followed hey so why why is something that sounds so good collecting not spending more than you take in running a surplus paying down your debt if we were doing that that would be judicious right it would be a good thing to do why does it end so badly every single time the federal government does it and the answer is here this is actual data for the u.s. going back to the 1950s what you notice about this image is that it is a perfect mirror image if you fold the graph from the bottom to the top it will collapse entirely to the zero o axis right to the horizontal axis it does it all collapses into one why because it is showing the financial balances of each of the different parts of the economy and so let me explain this is the government in red this is the private sector I had all of you guys in blue and green is everything outside the domestic economy so the whole rest of the world okay so what it means is again if I'm government and I spend more than I collect I put one in I put two in the economy but I only take one back out then you guys have one yeah so my deficit shows up as your surplus and that's what happens here okay so for a period of time in the early period in the 50s 60s and into the 70s the US was a net exporter we manufactured and sold more to the rest of the world in dollar terms then they sold to us so we were running trade surpluses the rest of the world was running trade deficits against us so the green below zero there is a deficit being supplied by the rest of the world if you add their deficits the rest of the world to the deficits I'm running as government together our deficits produce your surplus right so add the red and green and the mirror is the blue move forward in time what happens our trade surpluses disappear now the u.s. runs trade deficits okay so the rest of the world has the surplus they're above zero if the government's budget is not in deficit and if those deficits aren't big enough it is going to leave the US private sector below zero so that is what happens let's say here well no here that's what happens here the rest of the world is running these huge trade surpluses the government's deficit is too small it's too small and it leaves the private sector still in negative territory okay but as the government's deficits get big enough they more than compensate for the rest of the world taking more dollars out of the economy than they're putting in and that pushes the private sector into its proper state of surplus so look quickly here the little red bit right here those are the Clinton surpluses so Clinton the government's budget goes into surplus so the government is going like this more than it's going like this at the same time as the rest of the world is taking more dollars out of the u.s. than they're putting in so the government's surplus together with the rest of the world's surpluses produce massive deficits for the US private sector so it's the private sector for the first time you can see in generations the US private sector largely the household sector begins spending more than its income how long can households users of currency survive in deficit position not a long time right because it's done largely through taking on more debt that's what happened here okay but the government mostly lives in deficit and survives just fine that way because again it's issuer of the currency so the rules are different right one of us can is sustainable it's sustainable when one of us spends more than we take in but not for the other one okay so now the last bit what can we afford here's the way we think about it we think that government budgeting works like this the government goes out collects taxes borrows has money and then spends money the order of operations that we believe is that first they collect all the money then they spent yes so the question is always who is going to pick up the tab how are you gonna pay for it where will the money come from right tabs that's our mental frame this is not the way to think about it right because then we all get obsessed with who's going to pay for it where you're gonna get the money whose taxes are going up how are you gonna finance how are you gonna pay for who's gonna pick up the tab and so somebody comes along with a big ambitious agenda make public colleges and universities tuition-free healthcare for all infrastructure all this kind of stuff and they said we should be doing all these things right which is what he said and this is from her memoir her book after the presidential race and there's this little bit in there where she says you know running against Bernie Sanders was like we would say let's do this and he would say let's do this you know she always went she said he was always going bigger and it was really frustrating and we were like you know how are you gonna pay for your pony Bernie so the pony is a metaphor for what big ambitious spending programs that's the metaphor how are you gonna pay for your pony and he said well we can make public colleges and universities tuition-free with a tax on Wall Street speculation I mean the economics we call it a financial transactions tax or a Tobin tax so we'll raise the money through a tax and then we'll be able to spend the money okay so he's playing in that tabs framework he said infrastructure let's say how are you gonna pay for it or healthcare well well the infrastructure works better the billionaire's will pay for it right we'll have a tax on wealth or something else right we'll go where the money is and we'll raise the money there look this is what happens when you believe that the government is like a household and it has to find the money in order to fund itself that it first has to go find money so your Prime Minister said famously there is no magic money tree right it's not like the money can just come from nowhere you have to find it has to come from somewhere so in a case of Donald Trump of course we had this wall issue and he promised that we were gonna get a wall paid for by Mexico I look how much problem this has created for him if he had just started off saying we're gonna have a wall and the government's gonna pay for the wall it would have been a different conversation right for him but he stuck with this Mexico was supposed to pay for it kind of thing and so anyway the debate that we should be having is completely different and if we had more time I would play this little video clip where Alan Greenspan who was the chairman of the Federal Reserve a few times ago laid this out beautifully and he explained in his words that there's nothing to prevent the federal government from creating as much money as it wants and paying it to someone that is a direct quote from Alan Greenspan under oath giving testimony in Congress okay what he's saying is is there's this fight over Social Security and there's belief that governments can't keep their promises to future retirees their dependents the disabled because where are we going to come up with the money and Greenspan said no that's not the right question we're gonna always come up with the money issue or the currency I here's Fed chair he knows this stuff the question is he says how do you make sure that if you send those checks out to future retirees that when they get the money they're going to be able to spend it in an economy that's productive enough that even with fewer people working and more people retired and therefore not contributing to the production of stuff you'll be able to spend that money into an economy that's producing enough that you don't get what problem inflation it's all about inflation that's what he says it's not about the financing it's not about affordability it's always about real resource constraints and the inflation constraints this is what Greenspan argued this is the debate we should be having but we aren't having last couple of points we will sometimes refer to the u.s. as are you an Arsenal fan I thought so so I had to a search for a scoreboard where they were in the lead but I found one so so look we will sometimes say the US government is the scorekeeper for the US dollar this is all digital payments so when Congress authorizes a budget that provides the spending it's just the votes if they vote for it they pass a budget and the president signs it the spending has been authorized and the money is there the feds job as the fiscal agent of the government is to clear all the payments is to make the payments on behalf of government the Federal Reserve does not bounce government checks its job is not to bounce the government's checks but to clear them okay so the Fed will clear any payment that is authorized by Congress how they use the keyboard at the New York Fed and they change numbers in people's accounts if you sell to government if you're Lockheed Martin or Boeing and you get a big contract and government makes a purchase from you you get a payment they don't send you cash in like pallets of cash they make a digital entry and your bank account increases right by the size of whatever it is the government has agreed to purchase government is the scorekeeper for the dollar here the government is a scorekeeper for the british pound right you don't go to a sporting event and see your favorite teams competing scoring point after point after point and you're sitting there in the stands going oh my god I hope they don't score again where are they gonna come up with the points they're gonna run out of points no one ever would worry that the score keeper is gonna run out of points the score keeper can't run out of points the government can't run out of dollars or pounds right they issue them so how it really works and this is the end is that the government spends first like I did I pass a budget the authorization has given I begin spending into the economy spending comes first you can't pay your taxes to me or buy Treasuries for me until you first get what the money might I have to spend it in before you can have it so the spending comes first the taxing and the borrowing are secondary operations and so this pushes us now to space where we can have a completely different debate because we don't have to ask the money question where will the money come from it comes from the budgetary authorization in your case Parliament authorizes the spending so that's where the money comes from if we understood that we would have far more productive and interesting and important debate about how to muster the resources in the British economy like what do we want to do what problems do we want to address and solve what are our missions what are the goals how should we use the budget to carry those out and so that's the last slide it's all about you know can can you do you have enough real resources available that you can hire them right it's a money tree it's a real resource tree how do you employ the resources you have and direct them in a mission oriented way to solving real problems so that's in your web [Applause]

Channel: UCL Institute for Innovation and Public Purpose

Views: 36,541

Keywords: economics, stephanie kelton, education, policy, fiscal policy, budgets, government budgets, lecture, capitalism, institute for innovation and public purpose, iipp, politics, economic theory, finance, higher education, ucl, university college london, economy

Id: c6ss3p4jjI4

Length: 53min 0sec (3180 seconds)

Published: Mon Jan 21 2019