Warren Mosler: What Modern Monetary Theory Tells Us About Economic Policy

hello i'm here with warren mosler he is a friend full disclosure he is also president of valence which is a financial services management company he's been a market practitioner economist and also a mini celebrity because he's been written up in the new york times so um i decided to uh bring him in and and interview morn thanks for uh for coming around let's start with um the fundamentals uh you are considered to be one of the so-called fathers of modern monetary theory do you want to just explain what that is for those that haven't followed you on the vlogs in the blogs for him the government is the only legal issuer of the thing that it demands for payment of taxes and i guess what distinguishes it uh in in in at least in practical policy terms is the fact that um we don't operate under a so-called gold standard constraint uh this whole notion of fiscal uh sustainability or uh that's that's not an uh an issue under but we could operate under gold standard and that would be a self-imposed constraint yes the government could say uh anybody works for the government has to stand on one foot i mean there's all kinds of silly things we could do to ourselves like a gold standard but we don't have a gold standard now we effectively liberated ourselves and that in theory gives policy makers a lot more um freedom to uh con construct policies which they generate full employment and and and and yet we don't do those sorts of things i it opens up their options yeah far beyond what are the imagined options today in washington and and and you've discussed that and um you were described as a deficit lover with a following and i think i i've always said it's a little bit unfair because i don't think you're a deficit lover or deficit hater i think it's more fair to say that you actually uh challenge the notion that a deficit per se is a good or a bad thing it's more of a barometer than anything else right well it is what it is there's no morality assigned to the deficit and and we have this atlantic article uh out today um which uh describes it's it they have a picture of uh alan uh simpson and then uh um mr bowles of the simpson bowls commission um there there's this notion that somehow we're getting the deficit under control uh this is a great thing this is why stock markets are are valiant and uh um yeah i think you have a somewhat different view about what yeah that's that's what ends the business cycle yeah this is the real deficit crisis is when they get too small so for example in 2006 the deficit got too small under one percent of gdp wasn't enough to support the credit structure and it all came apart you could say the same thing about the late 1990s when we allowed the deficit to go into surplus the economy was sustained by the private sector doing its own deficit spending at seven percent of gdp which was totally unsustainable and triggered that collapse that we handed to president bush and before that um get my years straight here we had the deficit got too small under bush senior with the bush tax hikes caused a big recession of 1990. and there seems to be this implicit notion that somehow public debt is inherently more destabilized than private sector debt right um that somehow it's okay for us to run up loads of private credit even though arguably that's what created the foundations for the 2008 crisis yeah i remember that in the 90s when they were saying you know the private debt growing at seven percent is sustainable but a public debt of one or two percent is not sustainable of course it's exactly the opposite because of course a government being the monopoly issue of the currency right and in fact if you look uh closely at the accounts as a simple point of logic government has to spend first and then collect taxes it has to spend first and then borrow okay otherwise how are the dollars to pay taxes and talented government going to be out there it's like the football stadium it doesn't collect the tickets first and then sell them okay anybody who issues anything has to get it out there first and then collect it where the users all the other people they have to get the dollars first before they can spend them and you describe this you you actually wrote a book uh um the the seven uh innocent uh deadly sins about uh which economic policymakers follow and and and you've used that scoreboard analogy before and you've talked about you know how the effectively the federal reserve acts as the the scorekeeper right right so if we're all in a card game and i'm the score keeper how many points do i have i don't have any points well then how do i give you a hundred i just write them down and do i have fewer points after i give you 100 no so the federal reserve is an agent of congress the treasury and the fed are both agents of congress and the federal reserve is the scorekeeper for the dollar when they spend they just credit an account they write the number down and the account gets larger which chairman bernanke has told us many times so he was on public television they were asking him where all the hundreds of billions for the banks came from and he said we just use the computer to mark up the numbers in their accounts he's exactly right and so when the when the government spends they add to numbers to accounts and when they tax they subtract they don't give anything up when they spend and they don't get anything when they tackle because it's unlike say when we operate it under a gold center there's not a stock of gold that sort of goes up and down and i mean a lot of the economic terms that we have are are predicated on this this gold standard type thing where we have stocks of gold and flows of money where gold literally flows from one country to another and we don't have that under uh the current system before 1934 when the fed credited an account and you had a number in that account you were entitled to cash it in for a gold at 35 an ounce and that was a risk and so they have to operate under that risk and that constraint now today the only thing you're going to get if you go to the fed with a ten dollar bill the only thing you can get is two fives right they'll make change but you're not gonna get any gold or anything else okay so let's go to the uh the policy considerations um obviously we had a huge crisis in 2008 it was first of all though in in contrast to most economic crisis there was a financial crisis which then spilled over into the real economy right and um you have said to me many times and to others that it could have been arrested quite easily if the right mix of fiscal policies had been introduced at that time what would you have done if you were say treasury secretary or even president well in the second quarter of 08 we had had a flat economy and we had 170 billion dollar stimulus tax cut spending increase we had 170 billion deficit proactively and we grew it two and a half percent and i was talking to kareem basta who's my partner and very good he says you know the third quarter doesn't look so good when this runs out he doesn't see any support anymore you know what's gonna happen what do you think's gonna happen i said we'll just do another one how hard is this i just did one and it worked they did nothing they just watched the whole thing collapse it was nine months later before we got the too little too late not enough to get us out of it obama's stimulus package and i i just couldn't believe this political decision to do nothing you know but it happened and if we had taken say a number like closer to say one and a half two trillion which was we lost about a trillion dollars of economic output and if we had matched that with a an economic stimulus of that magnitude we probably could have arrested the problem what do you say though for example about all the toxic assets that were that were um supposedly like a cancer within the financial system what's your your response to that you know i don't have a particularly strong response in in august of 08 all we have to do is suspend collecting payroll taxes have a full fight attack suspension and then the average family would have taken home an extra 600 a month same people just stopped taking it out of their paycheck and they would have been able to make their mortgage payments right if they wanted to on their houses yeah uh if you looked at the housing market before that delinquencies weren't good but um the house the mortgages were predicated on incomes and what happened was eight million people lost their jobs all once it couldn't make their payments and suddenly all those loans became toxic waste so what's the difference between you know aaa loan and toxic waste with the triple a the guy's making his mortgage payment toxic waste he can't make us more expensive there's no other difference at the bottom of the pile either guy's making his mortgage payment or even and so we created this whole financial crisis by allowing sales to collapse and jobs to be lost and because all the credit cards were taken away okay up until 08 the last couple of years it was private sector credit expansion that was driving the economy once that collapsed because of bear stearns lehman financial crisis whatever the the obvious thing to do is to just stop taking all this money out of paychecks of people working for a living and i don't see any moral hazard in doing that so that they can suspend and make their payments out of income instead of out of debt it's like what's so bad about that nice progressive bottom-up you know populist approach who more than the people working for a living you know deserve to be able to buy the output they're producing right and then that of course spills over into everybody else including all the state tax revenues and all that that was lost so i don't know if i directly answered your question no you did and actually you gave me a very kindly gave me a nice segue into something else that you wanted to talk about i wanted to talk about which was uh your job guarantee idea because obviously as you say uh you we ideally what we want to move towards is an income and employment based uh um economic policy as opposed to a private credit led economy and you've had some proposals um such as the job guarantee program which would achieve that so do you want to elaborate on that and just in the background let's not forget that jobs are a cost of production yeah the benefit is the output right not the jobs if you ask most people not i know you're you and i are different would you rather work today or take the day off at full pay yeah quite a few people would take the day off at full package except unless you got a job like this because you need to buy things right so the job is really the cost to all of us of what we have to do and but it's become we've set it up so it's difficult to get jobs so it's difficult and we've turned it off somehow into a benefit you know somebody created jobs like that okay there's plenty of jobs anyway so um to get to your point right now we need the same thing we needed in 2008 we should just fully suspend these fica taxes of course instead of year end we increased them and now we've seen gdp go down steadily yeah 1.8 instead of 3.1 it's been revised down this quarter i heard as low as point five for q2 interesting that we're still forecasting three months ago and we call it a forecast yeah yeah before it happens that's usually it's more yeah accurate supposed to forecast the future let's see these people forecasting things again to do that all right so uh so let's say we do the full ficus suspension the people working all get extra income and then sales go up now the the general idea is that capitalism runs on sales so the the restaurant that's full of people doesn't lay off the bus point yeah i don't care no matter what the regulations or the taxes are you know yeah confidence variation doesn't really apply in the situation you get a full restaurant people will um yeah they'll hide keep hiring waiters yeah you can hate the government tea party you're not gonna let the busboy go if you're full yeah if you're empty you're not gonna hire an extra bus boy yeah okay even if you got a tax break or something you're just to keep the money okay you've got to get so employment is always a function of sales and the fewer the people you can hire the better for the same output that's called productivity because then we have more and more businesses more and more services more and more good things happening you know everything theater you know you name it arts medical research we can have more and more of that if businesses could only hire fewer people to do the same job it just frees people up for more and more things that's productivity that's what makes us all rich so what we want to do is restore sales output which restores employment right right and so you have a payroll tax suspension payroll tax holiday and suddenly that starts happening now if we want more public sector um goods and services then you wouldn't do that instead you would just hire people directly into the public sector and that's a political decision if you want to build a high speed rail you don't give everybody a tax cut but i think the point about the job guarantee program is it's a permanent institutional feature let me circle back to that okay so here's the problem you got all these people in the private sector go out and and now the private sector does not like to hire people who have been unemployed they just don't like it we can spend hours going into all the studies and why but they don't do it and it was a famous ad not too long ago on one of the internet ads says it was an employment agency that said out of work people you know don't apply this this jobs are available only for people already working it's a it's a what the economists like to call a negative externality yeah right okay and so what we need to be able to do is transition people from unemployment to private sector deployment when you when the demand is there otherwise you get labor bottlenecks and you get a high nero when you're still at seven or eight percent unemployment yeah you've just ratcheted yourself down and you've lost all that you know real out because effectively the long-term unemployed become less employable the longer they are unemployed yeah yeah and even like a couple of months makes a huge difference and so what i proposed is offering a transition job which would be a permanent institutional structure to anybody willing and able to work and i'm just going to toss out a wage like 10 an hour and you could include child care and whatever medical benefits that's fine and that job is available to anybody willing and able to work and it will be considered a transition job so right now the unemployed would be able to take this job to show what they can do they come in on time they take a bath every day they don't get in fights and this makes them attractive to the private sector to hire and then they will transition to private sector work they effectively become shovel ready labor i think is it exactly so if you look at a buffer stock yeah it's a buffer stock policy right now we have unemployed as our buffer stock when the economy gets bad it fills up the unemployment fills up when the economy gets good it's supposed to feed back in but it doesn't it's like if you use butter for buffer stock but you can keep it cold all the butter stock would come in and then it goes rancid and then the economy's drawing it doesn't function as a buffer stock and so as a result the price of butter goes up and they're strong yeah and you're limited in what you can do because all that butter's gone bad so to keep the labor fresh and liquid right you keep it employed and active and that's all you have to do and now the question is how large would this transition job b well it needs to be smaller than it needs to be it's the purpose of it is a um you know an inflation anti-inflation buffer stock yeah right so how how many people do you need unemployed to act as a price anchor it functions as a price anchor and the answer is not that many under clinton we had unemployment down under four percent and inflation was still going down so i would say we could keep fiscal policy loose enough low enough taxes high enough public spending where you'd only have maybe two or three percent of the population at any time in this transition job this is separate from regular public sector service if you want people doing normal public sector work you hire them at full wages benefits whatever you're supposed to do this is just the transition job and an effectively would substitute for a lot of the things that we have today like food stamps unemployment insurance um because there's always this question that people say well you know they're the we we have this question about involuntary versus voluntary employment so a lot of the times you i would leave all those programs in place yeah add this and see what happens yeah my instincts and my experience tells me 90 of the people would take this earn the money and and not be interested in those other programs and i think it's also you mentioned something else which is very important which is that it acts as an inflationary anchor because effectively what this program does is set a floor but you've also pointed out to me in the past that you don't want to outbid the private sector for uh for for workers so that for example some guy from the private sector sees someone working in this program and say ten dollars an hour and out bids at say fifteen dollars an hour the government's not going to come back and say no we want you to stay at 17 an hour because that's precisely the thing that could trigger an inflationary spiral right and look you could walk into this program and say we're going to pay 30 an hour for anybody who wants a job you're just going to empty out everybody in a fast food industry you're going to have 50 million people show you know it's disruptive it doesn't it's not the point you want to be as high as you can make it but you want it to be low enough so it's not disruptive to the private sector at this point in time because right now there's no point in uh disrupting what we have now and it's going to i think at 10 an hour it's non-disruptive it's going to function as an effective buffer stock it's going to be an effective transition job but it needs to be coupled with either a tax cut or a spending increase it's a larger deficit so that there's demand out there so these people will get hired to meet the demand and i've noticed that you've talked a lot about tax cuts and and or uh spending increases in other words you focused on the the role of fiscal policy now the markets these days experienced so are experiencing this sort of um crazy uh schizophrenic behavior uh they hang on the word of everything that the fed chairman says um you i think have taken the view that uh monetary policy uh things like qe quantitative easing or gimmicks and then actually it's fiscal policy that drives uh economic policy or it should do anyway right i did a cartoon once years ago for a brentwood conference where uh i had alan greenspan in the car seat and the kid's car seat in the car with the steering wheel you know wasn't attached to anything and then congress is the congressman is there at the steering wheel with his hands out the window not holding on to it looking over at alan and going nice driving while the car's going over the cliff right so um but that's exactly what it is you know it's uh monetary policy is the kid with a steering wheel that's not attached to anything and if and how do you know that just look at the details of what actually happens when you do quantitative easing you buy treasury securities so what does that mean it means you go into the market and you offer a price where people are indifferent between that treasury security and holding cash and what is a treasury security a treasury security is a dollar balance in an account at the fed it's called a securities account okay it's they give it a fancy name treasury security but it's like a savings account at a normal bank if you buy a treasury security you send the money to fed money you get it back with interest if you go to a commercial bank you buy a cd you send the money you get it back with interest it's the exact same thing so the fed is a bank and they have two types of accounts a normal bank would call them checking and savings the fed calls them reserve accounts federal reserve bank and securities accounts treasury securities okay they're just checking and savings so when you when the fed buys securities they go into the market they offer a price where somebody decides you know instead of the securities account i'd rather have my money in the reserve account and the fed debits their securities account makes it smaller credits their reserve account makes it larger they're both dollars at the fed it's effectively swapping assets on the balance of the balance sheet of the fed it's not actually creating new net aggregate demand yeah so if you had a million dollars here and your securities and you sell to the fed now you have a million dollars in your reserve account both of them were bank deposits at the fed there's functionally no difference and the only reason they call it printing money is because they don't count the securities accounts as money but they do count the reserve accounts so it's in the county why do they do that yeah because back in 1933 the reserve accounts were convertible into gold and the securities accounts were not so again it's another legacy of the gold standard yeah everything always goes up back to that but if you account securities as money which under the broader aggregates of snl they are counted as money then quantitative easing doesn't print money and i might add that you're you're not saying this from the perspective being some sort of you know pinhead ivory tower academic economist you've actually seen this from an operational standpoint because you worked in the in banking departments for many many years in fact your whole the whole base of your theory came from watching observing you know all the operations of banks it's just all simple operational things that all the staffers at the fed understand and none of the appointees you ask the staffers at monetary operations monetary affairs you start talking like this they speak your language immediately yeah of course and then you ask them well how many people in the fomc understand this they go zero they just don't get it so there's this huge disconnect between the senior staffers at the fed and the political appointees and i and and one other point on china that i'd like to get to which is that um given that you have this uh the operations you describe we don't have to worry about china running off and creating a dollar crash or a credit markets crisis because we owe them all this money what i always like to say is it's not the denomination of the debt holder it's a denomination of the debt which is the most important consideration so china has i don't know what two trillion in savings accounts at the fed or something like that it's like okay you know what was they gonna do uh what would happen if they called up to check their balance you know they went online and they saw uh you know some kind of it went blank they called the fed well sorry we've had a computer error we've lost all the accounts records they're just gone it's like what do they have they have nothing all they have is data on the fed's computer what are they going to do call the manager i mean so who's taking the risk here they've traded all these real goods and services in return for just numbers on the fed spreadsheet japan's been doing it since world war ii right and helmut schmidt made the same point recently in an article in the handles blood he he commented about germany he said i'm not sure that germany exporting into all of its output in exchange for financial claims is actually a good trade for uh for germany he must have read my book no this is called real terms of trade right it's been good you know it's not a secret or anything and now in the old days of course instead of numbers here china would have had gold but now they don't know they have these credit balances on some computer at the united states federal reserve and what i always like to say is okay if they decided that they didn't want to hold dollars anymore then they might decide to shift it into another currency so you get this one-off portfolio preference shift so the dollar gets weaker our exports probably would go uh would would increase in that sort of a situation so our balance of companies vision would change so everybody says well what happens if china decides to sell all the dollars so let's say they want to buy euro right so they sell their dollars and buy euro over the bank so we would move the dollars from china's checking account at the fed to that bank's checking account whoever it is we're done now the european central bank does the opposite they move euros from you know the banks counts in china's account and they say well it'll make the dollar go down they say well what's our policy okay we've been sending trade negotiators to china for years telling them they have to have their currency stronger which means a dollar weaker okay so you know so what is what is it you want do you want the dog to go up or down you know you're talking out of both sides of your mouth whenever i say that to the person who's explaining this to me they usually like just back off and have no answer so the same people who are worried about the dollar going down are criticizing china because the dollars uh because they want the dollar to go down because the dollar is too strong yeah so it's like you can't have it both ways yeah before you ask me the question pick a policy yeah you know pick one or the other and then i'll address i'll answer your question but you can't have it both ways how would you actually impart these ideas in an educational sense what should we do we have a bunch of young scholars um you know how how do we get this this kind of these kinds of ideas how to disseminate them a little bit better here we have a situation of unthinkable unemployment right now really unthinkable unemployment and what are we doing we're raising taxes and cutting spending we think the deficit's too large and needs to come down you know we're celebrating a lower deficit yeah we're making unemployment worse okay and in fact we need to go the other way and so the reason this mmt understanding is critical is because we're going the other way we're destroying our civilization and we're we're in real terms robbing our children's future that's the real intergenerational theft as opposed to the usual one where we talk about the deficits getting larger and stealing from our grandchildren actually in fact it's the opposite we're literally robbing from the cradle uh today in order to pay uh today's bond holder so that we and we do that by cutting education and then and training and employment opportunities for tomorrow's um future workers yeah we've done two we've done something fundamentally that's you know just so counterproductive is that we've set it all up so that children are an expense instead of an investment now is there any other what is the most important investment we have well it's the children because without any children there isn't much left in 100 years except a lot of crazy old people who can't take care of themselves yeah okay and so children are the primary real investment and yet we've set up we set up children as an expense you get a young couple just getting jobs and they're thinking of having children when they're biologically supposed to be having children it's like are you going to pay for it how can you do that do you know how much it costs to send us get to school okay maybe we need to wait they're waiting until they're 30. and the world population is going down okay we're destroying our own species because we've got mmt backwards that we've set children up as an expensive set of investment we understood that they were an investment it would be the opposite we'd have all the institutional incentives the opposite to encourage you know having children and taking care of them because you know this is the future right and to educate them as best we can and that would be like a real priority instead of something you know that's an expense in it and you know it's just going the wrong way well hopefully we can uh use this institute and some of your ideas uh to change these ideas around but look i want to thank you i know you've got a busy schedule today in new york but thanks for coming around talking to us uh it's been great and um this will hopefully get widely disseminated so that we can start this process of re-educating people particularly on the deficit so lauren thanks a lot okay

Channel: New Economic Thinking

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Keywords: MMT, Modern Monetary Theory, Economics, Finance, Central Bank, Monetary Policy (Literature Subject), Warren Mosler (Academic), Deficit Owl, Economic Policy (Field Of Study), Fiscal Policy, Fiscal Sustinability, Deficit, Economy, Recession, Unemployment, Basic Income Guarantee, Employment Guarantee, Debt, New Economic Thinking, Institute For New Economic Thinking (Organization), Gold Standard

Id: JGuNpqYBkZk

Length: 26min 5sec (1565 seconds)

Published: Tue Jul 23 2013