kelton 2021 /02/02

all right we're going to go ahead and get started here with the evening good evening my name is julia campbell and i am a junior in agricultural business and economics i'm also a member of the committee on lectures at iowa state university and it is my pleasure to welcome you all this evening we would like to begin this event with a land acknowledgement iowa state university is located on the ancestral lands and territory of the iowa nation the united states obtained the land from the musquake and sauk nations in the treaty of 1842 we wish to recognize our obligations to this land the people who took care of it as well as the 17 000 native people who live in iowa today tonight's talk is co-sponsored by the department of economics and the committee on lectures which is funded by student government during and after our speaker's talk please use the q a and or chat box to submit your questions i will read them to her speaker at the end of her presentation now to the main event dr stephanie kelton is a leading authority on modern monetary theory a new approach to economics that is taking the world by storm she is one of the most important economists influencing the policy debate today her new book the deficit myth modern monetary theory and the birth of the people's economy shows how to break free of the myths and misunderstandings about money and the role of taxes debt and deficits that have hamstrung policymakers around the world with that i am happy to introduce dr stephanie kelton well thank you so much and thank you to everyone who's logged on i i'm very happy to be able to spend an hour or so with you this evening and i think you know um it's it's basically impossible to have missed what's taking place in terms of the national conversation right now um as lawmakers look to um come to some kind of agreement around another coveted relief package and so of course we're hearing lots of people who talk about 1.9 trillion and you know inevitably when big numbers like that come up uh people will start to raise concerns about price tags about government spending about the implications for government finances how much will it add to the deficit and the national debt and what are the dangers or risks associated with doing that um do we really need to do that so i think it's a really nicely timed uh opportunity to spend some time with you so i'm going to jump in i've got some slides i'm going to keep it aimed at a a very general audience because i assume that there is a broad cross-section of folks out there tuning in joining us tonight not everybody has a background in economics i'm certainly not going to presume that you're all uh familiar with economic jargon you don't need any of that what i'm going to do is talk mostly at the start in ways that i think are going to be fairly familiar to you because i'm going to talk about money and taxes and deficits and the national debt in the most conventional ways right the ways that we're used to hearing people talk about them in the mainstream media maybe in your classrooms right on television in newspapers and it's the dominant discourse okay so a lot of this should be pretty familiar and what i'm going to suggest is uh and the title of my book as you just heard is the deficit myth now i wish that there was just one myth but the truth is there are a lot of myths and misunderstandings surrounding the nature of government finance the way that our monetary system works what taxes and deficits are all about so i want to try to clear through what i think are the myths and misunderstandings and once we get through those i'm going to present you with some alternative ways of thinking about these things okay so i'm going to start with a quote from mark twain because i am a huge fan of mark twain and i uh opened my book actually the introduction to the hardback um opens with this quote from mark twain he says it area he is he's uh it is attributed to him right that he said it ain't what you don't know that gets you into trouble it's what you know for sure that just ain't so so here comes what we know for sure okay what we know for sure when it comes to money now if you are taking courses or have taken courses in economics you might be under the impression that money is not sort of terribly interesting that you can almost sort of gloss past it you don't have to spend a lot of time asking deep questions about the monetary system the nature of money where does money come from how is money created and that sort of stuff mostly in mainstream economics if you get any kind of treatment of money it will go like this say once upon a time uh men and women sort of bumped into each other and they looked to trade things by exchanging one good for another good in other words barter and barter is very clumsy and so people invent money they pick something that they decide to accept and exchange to make exchange easier to conduct and we could talk about transaction costs and all sorts of things but basically it's an efficiency problem right you're solving an efficiency problem and money is convenient so people just decide we should use this thing over time different things serve as that monetary instrument right a medium of exchange eventually people settle on precious metals they have nice properties they're durable they're divisible they're portable the state if it comes in at all comes in after the fact mostly to just sanction what the private sector has already decided to do pick and use some money thing so the state can come in and put a stamp on it and guarantee the fineness and the weight of the metal or something like that but none of that's really terribly important money is just there to lubricate the um the trading process the exchange mechanism so that things work more smoothly okay then when you get to public finance if you get there the idea here is that again the the state does not play a central role the taxpayer is at the center of the monetary universe so i have this quote here from margaret thatcher who of course was the first woman to be prime minister uh in uh in in the uk and she said this you know she said look let us never forget this fundamental truth the state has no source of money other than the money the people themselves earn this state has no source of money okay so remember that all right moving to the next one let's talk about government spending so what do we learn what do we know for sure that just ain't so well we are always asked to think of the government the way we think of our own personal finances so you will hear people say things like the government needs to budget like a household right you and i know what it's like to sit around the kitchen table and balance the checkbook governments ought to work very hard to balance their finances in ways that are akin to a household's finances people talk about let's say this coveted relief package and you will hear sometimes people say well how where's the money coming from how will we pay for it right there must be some where the government gets money and the idea here is okay again go back to thatcher if the state wants to spend more she said it can do so only by borrowing your savings or by taxing you more there is no such thing as public money there is only taxpayer money so we teach students in conventional economics textbooks that governments basically have three choices when it comes to paying the bills okay the government can choose to pay the bills by collecting a tax right collecting money from us we pay a tax they have money they can use that money to pay for expenditures or they could borrow from savers like like thatcher said government can borrow your savings so if they want to spend more than they can collect in tax or then they are currently collecting then go out and borrow some money and then they'll have money and they can turn around and pay for some of their spending the third option is usually discounted because it is considered sort of the last refuge of a banana republic and that is the government could always print money okay but we very quickly dismiss that option in economics because the assumption is that printing money will be inflationary if not hyper inflationary so that leaves us with two options right once you take money printing off the table you're left with taxes and borrowing so i have this little mnemonic here i use it throughout the book because this is the sort of way that we are asked to think of the government's finances think of the government as needing our money before it can spend you see before the spending takes place the government has to come up with the money it does that by taxing and borrowing those are primary operations the spending can only come after the fact if the financing has been secured okay so governments are constrained the main purpose of taxes is to generate revenue for the government so that they can collect money so that they can finance expenditures this is how we're asked to think of the government so when you hear people talk about you know as you see on the right here this is a recent tweet from the staff director of the senate budget committee on the democratic side okay and he tweeted that if we were if congress were to pass this particular kind of tax called a financial transactions tax that it would raise enough revenue to make public colleges and universities tuition free council student debt it would pay for all of these things so in the beltway and i worked for a period of time actually on the senate budget committee with him and for senator sanders um the way that staffers and members of congress think of taxes is mostly for the purpose of generating revenue so that the government can pay its bills okay so we look for these things called pay fors you know you have to find the money if you want to spend something uh additional money normally congress is expected to follow something called pay go to pay for their spending right to show you where the money is coming from so that you're living within your financial means so that you recognize that the goal would be not to have to run a deficit right if you can come up with all the tax revenue you quote unquote need then you can pay the bills without relying on deficits so a deficit happens when the government spends more than its revenue right more than it collects in revenue and other payments to itself mostly taxes so you get a deficit now we're taught to think of deficits as evidence that the government is mismanaging its finances it's done something wrong right it's fiscally irresponsible um you might need to run a deficit in a moment of crisis like a coronavirus pandemic you could sort of make allowances and say well all right now now is the time to kind of suck it up and and you know tolerate some deficit spending it's necessary sometimes wars um you know extreme crises maybe it's sustainable in the current moment but deficits pose a number of risks and so over time what you want is a plan some way to bring down the deficit to move the budget toward balance okay remember we're in the conventional right i'm gonna challenge all of this stuff so when it comes to deficits what is the big deal why do people get anxious about deficits why are they considered a risky sort of thing to do well look the idea is that when the government is running a deficit that it has to come up with the money to cover the shortfall if it's spending more than it collects in taxes then it's short cash so how does it cover the shortfall well it borrows like thatcher said goes to savers and it borrows to cover the shortfall so we are asked to think of government borrowing as the thing the government does to finance the shortfall to finance the deficit so where does it get the money well it goes into this hypothetical market and it borrows from savers so you know if you're an econ person then supply and demand curves you're comfortable with if you're not it doesn't matter just imagine a big pile of money that exists somewhere in the world dollars right us dollars they're out there somebody has put them there they have saved them they've piled up and if you want to borrow from that pile you're welcome to borrow at some price right and the price is determined by the forces of supply and demand right more supply price goes down more demand price goes up so we are taught that there's this limited supply of finance available right there's only so much money and the more the government wants to take from that pile to finance a bigger and bigger death deficit the more it is competing with other borrowers so if you have private businesses that are looking to borrow money to finance investments in new machines new factories research and development then government comes along and gobbles up more of those dollars leaving behind fewer to finance everything else so you get this story about how deficits crowd out private investment and how private investment is generally so much more productive than government spending and so government deficits come at the cost of elbowing out more productive uses of those funds and the economy ends up growing more slowly over time right less productive use of of the financial capital that's available all right so continuing with this theme of why people get nervous about borrowing and deficits and so forth think about interest rates the way that we're taught to think about interest rates is this that basically the federal reserve adjusts the short-term interest rate maybe you hear about this on the news and you hear you know the federal open market committee met today and decided to leave a key interest rate unchanged or to raise it or to lower it well that's monetary policy and that is the fed adjusting one price in the economy okay a very short-term interest rate in the hope that that will help keep the economy on a sort of even keel right at full employment ish with low inflation so the idea is that you have these technocrats they're very wise uh they can respond they're nimble right they can adjust this interest rate and mostly we should leave it to monetary policy to the central bank to deal with managing the economic cycle okay sometimes you get a crisis and then you invite fiscal policy into the room but mostly we think central banks uh are the right institution to manage the economy when it comes to longer term interest rates that's where people get worried right because if the government is borrowing to finance deficits and taking on debt the argument here is that people could get worried at some point markets begin to wonder i wonder if the government is going to be able to pay back that debt start getting concerned about solvency risk maybe the government's going to default i think that i'm very worried and i'm going to demand a higher interest rate on the loans that i make to the government to compensate me for the risk that i feel is involved in this so you hear people say things like you know what if china stops lending to the u.s what if they won't give us dollars anymore what if they decide to dump their treasuries what if the u.s becomes like greece maybe you remember about a decade ago a number of european countries got into trouble with debt there was a full-blown debt crisis in many periphery countries in europe so we looked at what was happening there and drew a number of lessons saying wow that could happen here in the u.s right there could be some sort of a sudden stop where interest rates just go sky high and markets don't want to lend to us anymore so these are the ways that we're taught to think about the debt and to worry about borrowing deficits and debt okay we're almost reaching the end of the conventional stuff okay so on the debt you've heard this i've heard this we've all heard this there are members of the senate and the house standing up in congress every day giving speeches repeating things like this that you know the problem with the national debt is that it represents a financial burden on our future right that somehow yes it's a necessary evil in the current moment with coronavirus we have to run a deficit and that means increasing the national debt but man on the other side of coronavirus there is going to be some kind of a reckoning and we are going to have to figure out how to deal with all of this debt that we've taken on if interest rates were to rise i mean we're lucky now because we can borrow at you know very low rates of interest but that won't always be the case this is what they tell us and as interest rates begin to rise the cost of servicing all of that debt increases and we're all on the hook we're going to have to figure out well what are we going to cut education social security what's going to go to make room for all of the additional spending that's going to be required to pay back or to service the national debt so look we've got tough choices ahead it isn't going to be pretty we're going to have to deal with social security and medicare everything on the table this is what you hear this is austerity okay that that because of the debt that we've um taken on as a nation we're gonna have to make sacrifices in the future okay so all of that should be familiar i think now i'm going to ask you to switch gears i want you to let go of everything you just heard and i'm going to do my best to replace it with something less theoretical and more descriptive of the mechanics of government finance how things actually work because virtually everything i just went through works in theory but not in practice so i want to switch gears okay and i it's almost like trying to reprogram ourselves to think differently and the thing i'm going to ask you to do is to think of the federal government we're talking about the u.s in this context but we can apply this to lots of other countries as a currency issuing government a monetary sovereign what do i mean well i mean i'm i'm showing you here a spectrum okay and so i want you to think of countries that are on the left side of the spectrum countries like the us and japan and the uk canada australia countries that issue what i'm going to call a sovereign currency have more policy space available to them then we usually acknowledge countries at the other end of the spectrum those that join a currency union like greece who gave up the drachma its sovereign currency and began spending and borrowing in a foreign currency called the euro if you fix your exchange rate if you borrow in u.s dollars but you're russia or argentina or venezuela you are not a monetary sovereign so the nature of the monetary system is critical and so let's talk about what the differences are so in my story or in the mmt story we don't start with money is invented because barter is so clumsy we look to the actual work of people who study this stuff numismatists people who study the nature and origin history of writing anthropologists sociologists historians almost anyone but an economist uh legal scholars people who actually look at right the historical record and take seriously the question where did money come from why did societies begin using money and so you know a legal scholar could easily do a semester on that question and i'm just going to do one quick slice and so i have to go very fast but the basic idea is that the state comes in at the very beginning okay it doesn't come in at the end and and sanction what the market has chosen the state chooses the money of account in the u.s the unit of account is the us dollar in japan it's the yen in the uk it's the pound in mexico it's the peso right the state chooses the money of account imposes some kind of tax fee fine obligation on segments of the population and says these obligations are payable in my own unique unit of account the idea is the state wants to provision itself it wants a standing army it wants hospitals it wants infrastructure and so to get those things the state imposes some kind of a tax or other obligation on people the population is then faced with the need to acquire the currency to have to pay this tax how am i supposed to do that oh well the state can come in spend its currency into existence hire and pay people to work and produce to provision the state and so think of the federal government just fundamentally different from all the other players in the system okay the federal government is the issuer of the currency and the rest of them households businesses state and local governments are users of the currency in our context users of the dollar whereas the federal government is the issue of the dollar which might help you understand why governors and mayors across this country have been looking to congress for almost a year now to come through with some aid to help state and local governments weather the shortfalls in their budgets because state and local governments really are revenue constrained federal government is different it's the issuer of the currency so if that currency issuer is issuing a currency that it does not pledge to convert into something that it could run out of right doesn't pledge to convert into gold or silver or another country's currency and it avoids borrowing in a currency that it doesn't issue can't control then that government has added policy space it ha it is what we could think of as a monetary sovereign okay so its budget works differently from a household budget or a business or state or local government so when it comes to government spending a monetary sovereign faces no financial constraint there's no budget constraint as we conventionally understand it monetary sovereign can't run out of its own currency you know when president obama was first elected and he came into office in a moment of crisis right the financial crisis and the ensuing great recession and deficits exploded around him and at one point he was asked very early in the first year of his first term in office at what point does the government run out of money and he said we're out of money now okay that is wrong that was wrong and and it cannot happen right a currency issuing government cannot run out of its own currency when it spends the spending is carried out by a keystrokes it's a modern era folks right we understand this if congress commits 2.2 trillion to the cares act or 1.9 trillion that they're talking about now that spending will happen because the government's bank the federal reserve will carry out on behalf of treasury all of the payments that have been authorized by congress how does the fed carry out the payments well they do it with a digital with a keyboard right and they make credits to bank accounts the appropriate bank accounts are credited the numbers are typed in the balance increases so there isn't another way to do it there isn't this menu of choices where you could pay the bills with tax revenue you could pay the bills there's only one way to pay and all government spending today is carried out with new money creation there's no other way for it to happen in the under the current arrangement so that's the way it works the government spends first taxes and borrows after the fact government can pay any debt it has even the big ones social security medicare interest on the national debt the government's not revenue constrained it can always afford to make the payments the punishment for over committing for overspending isn't national insolvency it's not bankruptcy it's not running out of money the punishment for trying to do too much for overspending is inflation okay so that's the relevant constraint so when we think about taxes when i think about taxes i don't think about taxes as the source of revenue where the government gets the money to pay the bills the currency the us dollar is a tax credit just think of it as a tax credit you can do a lot of things with it but the one thing you can always do one to one is if you have a one dollar tax liability to the government you can always hand over one dollar bill and it will reduce your tax liability by one dollar okay it is a tax credit so when you hand the government's own currency back to them in payment they redeem the currency so paying taxes doesn't increase the government's capacity to spend remember they're the currency issuer but it does reduce your capacity to spend so every dollar that's taxed away from us is a dollar that we don't have that we can't turn around and spend into the economy buying goods and services so taxes are one way to relieve like a pressure valve to relieve pressure on the economy as spending power is removed from the rest of us okay but when you make that payment when you write that check to the irs and you pay your taxes you might think well i'm doing my part for the country my patriotic duty help pay the bills for the government well the reality is you you know your dollars are going to the irs but the irs is the graveyard for the dollar it's where the dollars are redeemed okay they're sort of in this graphic here's down the drain right government isn't recycling them into new spending it's adding when it spends and it's subtracting dollars when it taxes so i'm going to see if i can speed up a little bit so here we go on deficits so this word gets people anxious because the deficit sounds like a inherently a problem right you got a deficit why do you have a deficit well look the deficit's just the difference between two numbers that's all it is one number is how many dollars the government is spending into the economy each year and the other number is how many they are subtracting back out mostly through taxation each year so if you look at the top portion of the graph here where it says fiscal deficit and i have two buckets right the government's bucket and then a big bucket that belongs to everyone not named uncle sam right the non-government bucket if the government spends a hundred and only taxes ninety dollars back out it's making a financial contribution it's dropping ten dollars into our bucket the big bucket that belongs to the non-government sector so look every deficit is good for someone right it has to be because the government deficit is nothing more than a financial contribution to the big bucket the question is for whom right who gets it and what good is it doing so we're talking a lot today about 1.9 trillion well it just so happens that 1.9 trillion is exactly the estimated cost of the republican tax cuts which were passed in december of 2017. so you could compare these sort of and say well for 1.9 trillion we got tax cuts that mostly benefited people who were already doing really well eighty-three percent of the benefits went to the folks in the top one percent of the income distribution had corporate tax cuts alongside that mostly aimed at lifting right the buckets of people who were already doing phenomenally well coveted relief on the other hand the package that's being debated now is 1.9 trillion that would direct cash payments into the hands of low and middle class families increase unemployment compensation put money for vaccination and distribution and a whole range of other things right so you can add to the deficit in ways that you might think are very useful and will do a lot of good you can add to the deficit in ways that you might think are fairly wasteful and benefit only a handful but either way the deficit is benefiting someone right every deficit is good for somebody so surpluses on the other hand a deficit blows dollars into our buckets a surplus government surplus sucks the dollars out of our buckets so when the government's budget moves into surplus it just means they're subtracting more dollars from the economy than they're adding back in now there might be times that you want to do that um but it certainly isn't something that you should strive to achieve just because you think the word surplus sounds better than the word deficit okay so the goal is not to say i want the government's budget in surplus or balanced by the year x or y or z you can't possibly know what the right budget outcome is 3 5 10 20 years from now no one can know now it's going to depend on a lot of variables the state of the economy and the economy itself is going to move the deficit around on its own the goal is to balance the broader economy not to balance some arbitrary you know uh number that falls out of the budget box at the end of each year so we think about government borrowing i don't think of the government as really borrowing what i think of is uh that when the government is engaged in deficit spending here on the left you see the government spends a hundred into the economy taxes 90 out that's down the drain the deficit that is produced leaves ten dollars behind in the economy but when the government runs a deficit by habit custom it matches up its deficit spending by selling u s government bonds so if the deficit is ten dollars it will sell ten dollars of government bonds u.s treasuries so what happens is there's a swapping a recycling right the money is taken back out and replaced with u.s government bonds cash is out bonds are in so look if you're the currency issuer if you're the issuer of the us dollar it should be obvious you never have to borrow the dollar from anyone in order to spend you're the issuer right you have to go to china to get dollars you have to go to some pile of savings somewhere in the world to to tap in order to come up with dollars you're the currency issuer okay you're putting the dollars in and then transforming some of them into a different monetary instrument which you also issue called a us government bond okay so you're doing this we could get really into the weeds i'm not going to do this but it's not about financing the government spending it's done to support interest rates that's really what's happening so the funds to buy the bonds come from the prior act the spending or lending of dollars into existence has to take place before the government can remove them and replace them with bonds all right interest rates people got excited remember what if interest rates go up we use interest rates to manage the economy but that long-term interest rate boy that one could come back and bite you well look in mmt we do not look at the central bank really as the best institution to um manage the business cycle right and so when it comes to like stabilizing the economy rather than believing that this one price the short-term overnight interest rate can be adjusted tweaked here there up a little down a little until you find balance in the economy right that it's more complicated than that that all of these adjustments in the overnight rate um are disruptive in a number of ways and these state can be destabilizing that it's probably better to set that interest rate at some very low near zero rate and just leave it there and forget about it okay there are other ways for the central bank to manage the economy prices um economic conditions that don't involve adjusting the overnight interest rate um but we should recognize that when the central bank does raise rates it does increase debt service costs the government will end up paying more on government bonds if the fed raises rates so is that a problem well it's not a financial problem okay because even if interest rates get very high the government can always afford to make the payments and we could look back to the reagan era when paul volcker was fed chair and interest rates were very high there wasn't a problem financing any of the debt even though it nearly tripled under reagan and interest rates were very high so um there's no magic threshold there's no tipping point or debt to gdp ratio where things unravel and everything becomes unsustainable we could look at japan the largest debt in the world with some 240 250 percent debt to gdp ratio interest rates on the 10-year government bond are zero uh and they can't get inflation durably up to even close to their two percent target so okay very quick i'm gonna move faster now on debt um the national debt this thing we call the debt that we get very very anxious about and told that it's our burden and we have to pay back this number that people will flash right with lots of zeros behind it is nothing more than a record it's in ray we've just written down a written record of all of the cumulative deficits right net of service pluses that government has run from the beginning of time so it's a cumulative record of net spending all of the deficits offset by any surpluses and the outstanding stock of u.s government bonds is what we call the national debt we should just think of it as part of the broader u.s money supply okay there it's nothing more than the dollars the government spent into the economy didn't tax back so they're sitting there in the form of government bonds like interest bearing dollars that's all it is okay is it a problem to pay it back no you can think of it as i did in the book as if the government can make payments in two forms it can make payments in green dollars which is think of that as cash it can make payments in yellow dollars which is interest bearing currency government bonds to pay back the government bonds you just take away the yellow dollars and replace them with green dollars remember you issue both right so paying it back is not a challenge inflation is the thing to watch out for so if i had to tell you what is mmt about in one sentence i guess i would say mmt is about replacing an artificial fake phony imaginary budget constraint with a real resource constraint with an inflation constraint so mmt centers inflation risk that is at the core of the project and recognizes that supply constraints matter right people are debating these twelve hundred dollar checks and some people are saying well twelve hundred dollars is too much what if it risks overheating the economy you send people twelve hundred dollars and now they have all this you know spending power and they go rush in and try to buy things and the economy can't keep up with demand and you get inflation well okay you have to have do some analysis to see whether you think twelve hundred dollar checks actually risk accelerating inflation most economists do not believe that by the way um but some high profile ones at least one in particular has made that argument but you could imagine if the checks became twelve thousand dollars or a hundred and twenty thousand dollars right there beyond some point this is a real risk right inflation uh is going to become a problem as the economy reaches its capacity constraint right so we don't believe there's an inherent trade-off between inflation and unemployment in mmt we think in fact you can achieve true full employment a job for everybody who wants one without accelerating inflation and we would accomplish that through a federal job guarantee which i'm going to talk about right here as i close this out so here we are in this moment right we are debating relief and recovery and we have a new administration uh president biden has said that what he wants right now to deal with coronavirus in the health pandemic is 1.9 trillion he's calling that rescue money right sometimes relief package so that is immediate emergency money on the other side of that he's already told us he wants to come back to congress and work with them to do even more because he wants to lay a foundation for a stable and inclusive recovery recognizing that the crisis isn't over when coronavirus is stamped out that we have a myriad of crises intersecting crises you know we have to want to avert the threat of recession but we have a climate crisis we have a housing crisis we have um health care crises we have an employment you know crisis depending on um how you want to define that i i will define it as a jobs crisis and so you know we're looking at forecasts that say the economy is going to recover and next year we're going to have positive economic growth and so no recession um but unemployment is likely to remain elevated relative to pre-pandemic levels in the absence of doing more so we're going to hear these debates right and so here's the the end here um how do we move to better outcomes how do we achieve better outcomes how do we as you all put in the title of this talk how do we center people over profits how do we get there how do we get the kind of recovery that brings everyone along that everyone feels materially better off on the other side of coronavirus so the mmt recognizes that unemployment is always a policy choice if there is someone who wants to work but feels trapped locked out of the the employment market can't find a job anywhere else in the economy we can create a job for that person um in fact the only way to sustain true full employment where everybody who wants a job can have one right a decent paying job uh is for the government to step in and guarantee employment okay so how would that work well the government would announce a wage and benefit package and it's a standing open-ended offer anybody who wants a job at this wage and benefit package but can't find work anywhere else in the economy come on in right walk into any one of the american job centers used to be known as unemployment offices all over the country you can walk in unemployed you can walk out with a job the idea is the government funds the funding comes from the currency issuer right federal government funds the program but local communities and local governments help administer so it's decentralized the program would act as a very powerful automatic stabilizer taking the guesswork out of a lot of the budgeting so that when the economy moves into a downturn instead of millions of people losing jobs and becoming unemployed they could transition into this public service employment program find new work immediately have their wages their income stabilized and as the economy recovers transition back out and into private sector employment this is perhaps the most pro-business uh public policy that i can think of right because you are maintaining a ready pool of workers their skills are being maintained right employers when they are ready to hire again don't have to go bid workers away from competitors at higher and higher wages they can bid workers out of the public service employment pool at a relatively small markup over whatever that basic wage is maybe it's 5 15 an hour and so you know you avoid a whole range of associated costs unemployment is very expensive right social and economic costs uh of unemployment so anyway we can do a whole many hours just on this proposal but the idea is that we could put millions and millions of people to work building a care economy caring for people caring for our communities caring for our planet we just have to budget our real resources right because that's what it's about if you have the people if you have the technological know-how if you have the raw materials if you have access to the real things you need to carry out whatever the agenda is right to ensure that people have health care and a good education and a secure retirement whatever the people's agenda looks like it's the real resources that matter and those are what you have to respect right because there is an inflation constraint there is a spending constraint but you're not going to bankrupt the country you're not going to run out of money all those myths that we talked about in the beginning um we worry too much about things that won't happen or can't happen and not enough about um spend enough time thinking of ways to build the kind of economy that would work for everybody right so that's it i'm going to let you all jump in with some questions oh i have to stop sharing my screen all right i'm going to stop and take some water thank you professor uh kelton uh the first question um on the on the share is how would you measure inflation in this um in this economy uh and is there a different measure of inflation than what would uh say be with the consumer price index or what we're more familiar with yeah i mean look i think that economists and folks at the bureau of labor statistics and others are always looking for ways to improve the way that we measure inflation but i'm not proposing in this you know what i've laid out here i'm not suggesting that we've done a particularly bad job and that um you know we have to replace what we're doing with some other measure of inflation i think that uh i'm willing to accept the way that we currently go about measuring inflation for the purposes of this kind of analysis what i would say is you know if you are thinking about a large scale project government is thinking about spending two trillion dollars let's say on infrastructure spending what you would want is to do some rigorous analysis of the in potential inflation risk associated with spending two trillion dollars repairing modernizing america's crumbling infrastructure and you're evaluating that proposed spending for inflation risk so what would you look at well if you're going to do a big infrastructure program you need lots of workers who can do infrastructure so you know looking at um unemployment rates by occupation do i have unemployed construction workers do i have architects and engineers do firms that produce do businesses like caterpillar do they have the capacity to meet new orders if i order a whole bunch of cranes and equipment that mixes concrete and does all those things so you see what i'm saying it's not about so much top line inflation when you're thinking about you know making investments in the economy whether it's education or health care or infrastructure you can evaluate inflation risk on a on a sort of more micro basis uh another question what is the thought process be between zero as the correct interest rate and i i would guess behind this is is then who would hold bonds oh so okay so when i say zero i'm talking about the overnight interest rate so you know there if this person is really interested in this stuff you can google uh warren mosler and matt forstatter and you can find a published article by them that's called something like the natural rate of interest is zero and what they're arguing in that piece is that absent some sort of artificial support mechanism absent some sort of intervention the interest rate would normally sit at zero the overnight interest rate so it's natural in the sense that because the government is usually running a deficit spending more into the economy than it's taxing out the banking system normally would sit flush with excess reserves and when all banks are flush with excess reserves banks would like to lend reserves but nobody's really looking to borrow so the bid the interest rate sinks to zero so the argument would be just set it it's the anchor for the yield curve right the the overnight interest rate is the anchor so you just have to anchor it somewhere and it's a better anchor if it's not always moving around so set the interest rate at some low we think near zero is appropriate since that is the natural rate leave it there and other interest rates will be a markup over the base rate which is zero now the government as the um issuer of treasuries can also choose the interest rate that it desires to spend on any bonds it chooses to issue so if you think that there's public purpose in paying bondholders 10 interest to hold risk-free government bonds you can do that okay i personally don't see the public purpose in that but the reality is that it is a risk-free instrument and you're supposed to get reward for taking risk so interest is a sort of you know a subsidy for people who already have money warren mosler calls it sort of like a basic income for people who already have money um it's a subsidy it's what it is so you know you have to i guess decide how much of a subsidy risk-free you want to pay to people who take no risk and i think it should be extremely low dr fulton this question is surrounding the job creation by the government um and that would relate to so question is how do we have a frictionless environment for people to come back into the private sector and make that transition well in a sense nothing's frictionless right they're going to be there's going to be some time you can be in public service employment does not come with strings attached in the sense that you only get six months in the program and then you have to find work elsewhere because it may not exist for you okay may take you 12 months may take you 18 it may only take you three so the idea is that when a job is available for you outside of this public service program then you can transition out right if you're offered a job you say fine when do you want me to start and then you separate from the public service job and you move into some other employment conversely if you're employed by the private sector and your employer hands you a pink slip at the end of the day and you didn't you know never saw it coming you can quickly transition into uh back into employment in public service work where your benefits are maintained you have health care whatever is included in that package and some base you know wage so i think you know there are places i talk about this in the book there are countries that have experimented some with large-scale um programs of this kind so um it isn't as if governments haven't done and aren't currently doing this sort of thing this is a relatively long question so i think i'm going to shorten it just a little bit so the constraint on borrowing appears to be inflationary pressures and so uh or perhaps the the constraint on on using monetary policy as a means of of uh deficit spending uh so if in fact inflation starts uh to uh run hot in in the terminology here how is what is the government going to do to actually uh remove that inflationary pressure and who does it is it the central bank or is it the fiscal authority good question so first let me just be clear um it's not the central bank that's accommodating or making possible there was something there that suggested that somehow the deficit um is due to the central bank doing something with respect to borrowing don't think like that that's not what's happening um suppose in spite of your best efforts to mitigate inflation risk by carefully evaluating new spending and trying your best to avoid inflation suppose inflation pops up remember we talked earlier about these price indices okay these are indices that we build right we build the pce we build the cpi we decide what goes in the basket we decide how to weight each of the components healthcare housing transportation energy food education right so we've constructed this thing and the price of the basket can increase just because one thing gets super expensive all of a sudden like think of the oil price shocks right so we tend to think of inflation as a generalized increase in prices like everything is getting more expensive at once but you know much of the experience around the world with high uh or very high inflation tends to be driven not by just sort of that generalized increase but by increases in specific important heavily weighted uh goods or services that go into the basket so if you get inflation the first thing to do is figure out where it's coming from right you don't just treat all inflation the same way right now how do we fight inflation we say it's a central bank's job how do they fight inflation they raise the interest rate because that's all they that's the tool right so we have a one-size-fits-all policy today when it comes to fighting inflationary pressure the central bank handles it and they do it by raising interest rates mmt says that probably and most of the time inflation is not best uh dealt with by raising interest rates in fact that could even exacerbate the problem so to figure out how to fight the inflationary pressure you look under the hood and you gotta look at the components where is the problem coming from right if i have a flooded basement and i go downstairs after we wrap up here and i discovered that there's standing water in the basement i know i have a problem but i don't know what's causing it i don't know if one of my kids left the faucet running upstairs i don't know if the toilet overflowed i don't know if a pipe burst i don't know if the dishwasher is leaking to fix the problem i have to know what's causing the problem and the same is true of inflation so it might take fiscal policy it could be something that you do on the regulatory side could take the banking policy it could be that you know you do want the fed and commercial banks dealing with uh rising housing prices let's say you have a speculative boom in commercial real estate or the housing market or any number so the bottom line is you need a broad tool kit and government agencies working together um could be commerce could be ag i mean you you need a lot of hands on deck to be prepared to deal with inflation because it could come from a lot of different sources uh if if i could follow up and this is not in the in the question but i'm i'm curious as to what would be in that toolkit so it sounds like uh one of the the possibilities are our price controls for for specific commodities and another would be targeted tax rates for certain sectors of the economy so discretionary taxes is that what you have in mind or what would be the toolkit i wouldn't i wouldn't rule those out of the toolkit and surely historically and sounds like you probably know this um those have been exactly the kinds of things during and immediately after world war ii going into the korean war these are exactly uh the sorts of things that were used to combat inflationary pressures so a wartime economy will tend to push inflation higher and you know a wide array of um industry labor leaders government agencies would deal with inflationary pressures in different ways so those are um some of the kinds of things you know as one example really fast you know the supreme court is um set to take up the affordable care act so-called obamacare and uh there are studies out there that suggest that if the supreme court were to rule the affordable care act unconstitutional and we would lose along with that uh protections for people with pre-existing conditions if that went away then private health insurance companies would be free to price discriminate once again people with pre-existing conditions have to pay more to insure you your premiums go up well you got some hundred million people walking around in this country with one form of a pre-existing condition or another so you can imagine if health insurance companies were now liberated and and free to price discriminate there are studies out there that suggest that premiums could increase 30 40 percent for some people now if that were to happen on a on a broad scale you could easily see how rising health care costs along with uh losing control of some medication prescription drug that's also possible under the aca that health care costs could shoot up and that could feed into top line headline inflation so how would you want to deal with that with the tax increase people can't afford their health care so you raise their taxes that doesn't make sense uh raise interest rates that doesn't make sense i mean it seems to me you go at the source of the problem right and it would be reining in the drug companies and you know dealing with health care in a way that avoids this ability of private health insurance companies for-profit companies to raise prices and and drive that inflationary pressure one of the questions is who would decide what jobs to offer in the public service setting in relation to some of that job creation so that's a good question if you're interested and you're interested on some level because you asked the question so i'm going to send you to kind of a beefy report and i'll also recommend a book by an mmt colleague of mine who's a professor at bard college here upstate in new york her name is pavlina chernova she has a newish book out just last year uh the case for a job guarantee and she and a number of other scholars and i co-authored a report published it two or three years ago a path to full employment public service employment all those words are in the title it's published through the levy economics institute so if you put her name or my name into the google machine and type public service employment you'll find this levy report and in that report we go through uh in detail and she does in her book a lot of examples of where the jobs come from how they're designed the bottom line answer and i suggested it in in my remarks is that the local community and local governments the people living on the ground in the communities where the work will be done they know the community's needs best it's not some bureaucrat in washington dc that can tell you what kind of work needs to be done in some small town in northeastern oklahoma they don't know that community right it's the people living in the community who know what's of value what's of need um and so the idea is that they propose the jobs now they have to meet broad criteria established in order to be approved authorized and put on the shelf so that when you walk in that job center looking for work there are jobs on the shelf ready to be done the community has indicated that they value this kind of work they think it needs to be done as soon as somebody shows up willing to do it you match the worker with the uh available work and and you're often and running thanks this is a a more technical question and it's it's something i'm not familiar with nicholas caldor apparently advocated for the adoption of an international system of buffer stocks so it sounds sort of like the uh oil reserve that we have written broad on on on an international scale on a lot of commodities as a means of buffering against inflationary pressures and and he wanted comments on on that yeah i mean uh i haven't looked at that uh at those proposals and at that work in a very long time i will uh i will be frank with you about that but i recall at some point in my uh time in cambridge uh learning about this and yeah i think that you know there are post keynesian economists and um perhaps some mmt economists probably not as many more in the post-keynesian i think uh broader tradition that um you could find all kinds of stuff but within if you ask the question is um is something like this as sort of thinking internationally about using buffer stocks stabilizing commodity and other prices then yes i think that um that's pretty easy to accommodate in a in an mmt sort of macro international framework and i can see um i see good reasons for thinking along those lines i think we have time for one more question food prices good one maybe one question here would be um what would be the similarities and differences of this system to a central government planning system um in that respect well so what i've tried to do okay is um is just describe for you the nature of the monetary system the way it works today the institutional arrangements the treasury and the fed the coordination that happens and the mechanics of government finance how does government spending really work what are bonds really about so i haven't imposed apart from the job guarantee which is just you know our way of recognizing that we can do better than using trapping some number of people millions of people in unemployment for the purpose of fighting inflation that's what we do today and that is planned and don't don't mistake what we do today as somehow not plan it is planning the federal reserve literally tries to figure out exactly how many people need to remain unemployed right when too many people start finding jobs what does the central bank do raise the interest rate too many people are finding jobs that is planned okay so what mmt is is offering a lens right it's a descriptive framework to better understand the mechanics of government finance how the system works monetary system and so forth and then with that better understanding it opens up added policy space now that policy space could be used right you say well i have this additional policy space available to me i want to use that policy space to deliver single-payer health care okay that might sound like planning but everything is in a sense a form of all decision making is a planned action right so you can use mmt to justify increased tax cuts as a way to try to move the economy closer to full employment you can use mmt to justify increased spending on education or infrastructure or climate of dealing climate and and so forth so um you know it mmg doesn't tell you exactly what to do it shows you what you can do okay thank you so much dr kelton for your talk and for answering our questions you're welcome i i really encourage everyone to get her book the death statement when it comes out in paperback in march i think this is a breath of fresh air into an economic discussion and a lot to be excited about with the bible administration so thank you so much dr pelton well thank you all for having me and thanks to everybody who joined i uh it was nice to be with you thank you everyone have a good night