字起こし partly an educational problem partly a language problem not a financial problem and the economics profession is largely to blame so here's what i think the reality is fiscal deficits are perfectly normal not only are they perfectly normal they're normally a good thing we need them almost all of the time especially in the u.s governments don't really borrow their own currencies this is what i mean when i say we have a communications problem a language problem there isn't anything to pay back because the thing that we call the national debt is already the money all right so let me start with mmt and you can decide whether this sounds like what you all talked about yesterday uh or whether it sounds different let me tell you what mmt is i don't know what your uh interpretation or others interpretation might be but here is what mmt tells us it tells us to start by recognizing that the currency itself the canadian dollar the us dollar is a simple public monopoly it is a public currency and it is under the control of the monopoly issuer of that currency i cannot create the us dollar okay if i try to do that it is called counterfeiting it's illegal and i will go to jail all right only the u.s government can issue or its agents fiscal agents namely the federal reserve can issue the currency right nobody else can do it and the same is true in other currency issuing countries the uk canada australia japan and many many others you have a sovereign currency government is the issuer of the currency what happens is that we get the sequencing backwards we think that governments need our money in order to pay the bills and we we hear this all the time right where will the government find the money to carry out this program or that program how will they pay for it and we've been taught to think that the government is dependent upon us the taxpayer right and that governments have essentially two options when it comes to paying their bills they can raise taxes so they have more money to work with or they can borrow which is really a way of saying future taxes right the burden will fall on some future taxpayer but the idea is that the government has to arrange its finances first has to come up with the money either by taxing or by borrowing to cover a shortfall in spending where do they get the money they go to the taxpayer or they go to savers savers have accumulated a surplus of dollars that can be tapped by government who wants to borrow a portion of those dollars to finance expenditures so the mental model that we work with and i talk about this in my book which is called the deficit myth the mental model that we work with i call the tabs model t t-a-b-s cabs taxing and borrowing that's the tab right the idea that you must tax or borrow first and only after you've done that you've arranged to get the money then you can spend the idea the spending comes last and in my book i say that that model has it exactly backwards of course it must be backwards no one could possibly use canadian dollars or us dollars to either pay taxes or buy government bonds until the dollars have first been put into our hands we have to have them before we can pay tax or buy government bonds the sequencing is backwards and i think when you understand the currency is a public monopoly government is the issuer and you get the sequencing right then almost all of the other silly things that we've been taught to believe start to present themselves as just that as silly right as as wrong so let's go through this federal government is the issuer the currency and the rest of us are merely currency users households don't issue the currency we are currency users businesses corporations small and large medium businesses are currency users individual states in the u.s provinces in canada are currency users a federal government is different as the issuer of the currency it can never run out of money this is something president obama told the american people in an interview as the economy was melting down with the financial crisis back in 2008 2009 and the president was asked at what point does the government run out of money and he said on national television the government is out of money now that was wrong it was wrong and it set up the us to have such an inadequate fiscal response to the crisis that we ended up with a very slow recovery an anemic recovery took about seven years to claw back all of the jobs that were lost everyone got too preoccupied with hand-wringing over the budget outcome the right the growing deficit the increases in the debt and there was a total aversion to using fiscal policy to do what needed to be done to restore growth and jobs and and get a sustainable recovery underway so we didn't figure this stuff out we were running around saying these silly things like we're going to run out of money and future generations will be burdened and we got to get our fiscal house in order and all that sort of stuff currency issuing governments don't borrow their currency from anyone it's not what's really happening all right so you all okay i think you heard something interesting there in canada after covet hit you heard prime minister trudeau say something very close to this we took on debt so you wouldn't have to remember he told the canadian people exactly right except i wouldn't use the word debt remember i think it's the wrong word to use but he was exactly right in the way that he was communicating that and what the difference between what the government could do and what everybody else could do the private sector is necessarily cyclical right incomes go up we spend more incomes go down we spend less the federal government because it has the power of the purse can spend counter cyclically it can spend more when it's quote unquote income is falling when tax revenues are collapsing federal government can spend counter cyclically that's a very good thing right it allows the federal government to step up and stabilize the economy when everybody else is trying to spend less budget outcomes obviously the federal government can do things in discretionary right with its budget it can choose to spend more on certain programs introduce new programs it can cut taxes it can take steps to proactively increase the deficit but most of the time the budget outcome is endogenous meaning that it's a reflection of what's happening in the underlying real economy the economy gets weak even if the government just sat on its hands and said we're not passing any fiscal packages we will do nothing at all to respond to the downturn in the economy the deficit will explode i mean not explode depending on how bad the downturn is the deficit will increase right why because as the economy contracts and people begin to lose jobs spending slows growth slows wages uh decline incomes fall people pay lower taxes and government spends more on things like supporting the unemployed through a range of programs that are in place unemployment compensation and all the rest of it we call them the automatic stabilizers so the deficit is going to increase with or without proactive yes may i ask you to speak a bit slower please yes you can i apologize so the deficit will increase with or without government actively doing something that's what i mean when i say the budget outcome is largely endogenous okay in a very strong economy like we had uh in the uh in the late 1990s and early 2000s the federal government's budget was pushed into surplus on the strength of economic activity okay so mostly endogenous because the private sector normally wants to net save in other words it wants to spend less than its income and the only way that one part of the economy one sector of the economy can spend less than its income is if some other part of the economy spends more than its income so what i'm saying is government deficits allow the non-government part of the economy the domestic private sector and the rest of the world to achieve their saving desires all right this comes from the work of a very important british economist by the name of wynn godly godly sort of pioneered the sector balance framework which we use in mmt to explain or put the government deficit into context so that you're not thinking of the government deficit in isolation as just a headline number in a newspaper article or reported by treasury put the deficit in the context of everyone else's balance sheet you have to do that because it doesn't have meaning outside of the way in which the government's budget deficit interacts with the other parts of the economy so godly would tell us to break the economy into three pieces all right you have the domestic public sector government the domestic private sector and then the rest of the world and you can do this for any country in the world break it into those three pieces and what you will find is that at least one of the pieces will be in deficit you don't have balance income equal expenditure in every piece of the economy it doesn't work like that someone's going to be in deficit the question is who do you want taking the deficit position in the u.s we run trade deficits current account deficits with the rest of the world which means the rest of the world has a surplus position against the us okay so think of their bucket is is filling up with dollars now if the rest of the world is in surplus that only leaves two other buckets and one of them must be in deficit it's either going to be the government sector or the u.s private sector you must pick which one you would prefer to see in deficit you do not get to have all three buckets in surplus it's impossible it can't happen someone's surplus is the result of someone else's deficit spending so what i'm trying to do when i set at the outset deficits are normal and normally a good thing particularly in countries like the us which run current account deficits against the rest of the world right it only leaves us with two options either the u.s private sector will be in deficit or the government will be in deficit now ask yourself which is more sustainable the currency user spending more than its income year after year or the currency issuer spending more than it's taking in year after year i think the answer is obvious the currency user is not going to be able to sustain persistent deficits in perpetuity the currency issuer can the limit is inflation that's the relevant constraint it isn't running out of money like president obama said it isn't the us turning into greece it isn't national bankruptcy it isn't any of those things that we hear from our politicians and pundits it's inflation that's the relevant constraint so let's talk about the deficit in another way because i think it's really important that people understand in the simplest terms possible that this thing we call the government deficit is nothing more than the difference between two numbers it's all it is the difference between two numbers one number how many dollars the government spends into the economy each year the other number is how many dollars the government subtracts back out mostly through taxation so if the government is adding more than it is subtracting if it spends 100 into the economy and only taxes 90 back out we label that a government deficit and we write minus 10 on the government ledger what we forget what we forget is the accounting counterpart to the government deficit is a financial surplus in some other part of the economy if they put a hundred in and only take 90 back out someone gets 10. government deficits are matched to the penny you don't have pennies anymore to the right to the penny by a surplus in some other part of the economy their red ink is our collective black ink so once you understand it that way then you can only draw the conclusion that at least in financial terms every deficit every government deficit is good for someone because their deficits are a financial surplus in some other part of the economy the question is for whom and for what right if every deficit is good for someone in purely financial terms what are those deficits being used to accomplish right who is the beneficiary of the financial windfall on the one hand or of the real economic benefit on the other a better funded infrastructure for example okay so it's not a question of whether to have a deficit or not we are almost always going to have deficits especially in countries that have current account deficits like the us the question is the deficit for what and for whom all right so here's an example in 2017 republicans we had president trump we had republicans in control of both the house and the senate without a single democratic vote republicans passed a major piece of legislation in fact it was sort of the singular legislative achievement of the trump administration huge tax cuts passed in december of 2017. so corporate tax rate went from 35 percent to 21 huge corporate uh tax cut personal income tax rates came down okay so the estimated cost of the tax cuts was 1.9 trillion dollars this is the amount that would be added to deficits over the decade right over a 10-year period 1.9 trillion every deficit is good for someone so who did who who benefited from those deficits i'll tell you who the corporations who enjoyed a big corporate tax cut and every individual who saw their tax rate marginal tax rate come down so there was broad improvement right across the income scale but the vast majority of the benefits went to those in the top 1 of the income distribution 83 percent of the benefits for the personal income tax cut 83 percent of the benefits went to the top one percent okay it costs 1.9 trillion to deliver a windfall to the top mostly to the top 1 now think about this in march of last year congress with democrats only not a single republican voted for this democrats with president biden and democrats now in control of the house and senate passed their legislation it was called the american rescue plan act arp arp guess what it cost you ready 1.9 trillion dollars the estimated cost money to state and local governments money to the unemployed checks to most families a child tax credit that gave 300 or 250 dollars per month to most families with children and on and on and on 1.9 trillion deficit who benefited a very different constituency right the top one percent got effectively nothing they didn't receive the checks they didn't get the child tax credit and all the rest of it this was a fiscal package that was very much targeted at the bottom of and middle of the distribution so what i'm saying is here's a way to do 1.9 trillion in deficit spending both benefit someone clearly but very different very different constituencies all right so let's move from the deficit to the debt this thing we call the debt so whenever the government budget is in deficit governments match their deficit spending by selling government bonds so if the deficit is estimated to come in at a trillion dollars treasury will issue a trillion dollars in u.s government bonds so we match the deficit with the bond sales and we think the government is doing this because it needs to finance the spending doesn't spending comes first by the time the bonds are sold the spending has already been committed once congress passes a bill and appropriates right uh fund the money for a new fiscal package that's baked in the rest is all happening behind the scenes coordination with the federal reserve the government's fiscal agent and the financial markets in the form of primary dealers who take up the new bonds at auction with the backstopping of the federal reserve the fed is there to make sure that there's a reserve ad that dollars go in to allow dollars to go out as the government swaps dollars for bonds let me put it this way if the government spends a hundred dollars into the economy and only taxes 90 dollars back out it has deposited 10 into the banking system it's there somewhere right now it matches that deficit with bond sales so what happens 10 green dollars come out and 10 yellow dollars go in the the dollars the cash the reserves call it what you want are subtracted out and replaced with interest-bearing dollars called u.s government securities government bond is nothing more than an interest-bearing dollar that's what it is right it's a risk-free interest-bearing dollar so when the government does this thing we call borrowing it's just replacing one iou the reserves or the currency with another form of government iou which is a security that is an interest-bearing form of the dollar that's all that's happening now ask yourself why it does that does it have to do that no of course it doesn't have to do that the issuer of the currency never has to borrow its own currency from anyone in order to get it why would you right if you were the issuer of anything would you knock on your neighbor's door and ask to borrow that thing silly something else is going on and it made sense hundreds of years ago on a gold standard that governments would want to replace dollars which were convertible on demand into gold which is finite it made sense that governments might want to convert dollars into government bonds because government bonds could not be presented for gold on demand but we don't have that system anymore we have a floating exchange rate the dollar is not tethered to gold or anything else so something else is going on government is continuing to issue bonds to allow people who have dollars to trade them in for a higher form of the currency one that amplifies itself over time an interest-bearing form of dollar so you you know you think of this thing we call the national debt and in our case you know depending on whether you're gross debt or what you're netting out we see you know reports and headlines just a couple of weeks ago u.s national debt hits 30 trillion dollars and it you know people's eyes bug out because it's such a huge number and it's a huge number with the word debt attached to it so people get nervous they shouldn't okay all that is is a historical record that's it it's a historical record it's record keeping it's keeping track of every prior year in which the government added more than it subtracted okay this national debt is just the dollars that were spent by government but not taxed back they are currently being held in the form of interest-bearing currency called a government security that's all it is that's that's all it is it's already the money it's already the money that's why when i said at the start there's nothing to pay back it's already the money it's just two different ways to hold your dollars in an interest bearing form or in a barren form right may i ask you again to slow down a little yes i apologize sorry for that i apologize so the the key point here is that selling government bonds is purely voluntary for a currency issuing government voluntary so hand wringing how will we deal with the debt how will we reckon with the debt on the other side of the pandemic it's already the money paying it back is simply turning the yellow paper back into green paper this is no challenge for a currency issuer you could pay it off tomorrow with a keystroke literally you could retire the entire thing tomorrow if you wanted to and you wouldn't have to ask taxpayers to kick in a dime let me explain japan already has or at least had something like 50 of all of the outstanding well of all jgbs japanese government bonds the central bank has over a period of many years bought them up bought them up and once the central bank buys the government bonds it's as if treasury never issued them in the first place because at that point it becomes a left pocket right pocket thing where treasury is paying interest and principal to the central bank which then returns the money to treasury at the end of each year it's effectively gone you could just cross it off and and not think about it any longer and if you wanted to you could go out and try to gobble up as much of the outstanding government so-called debt that you want so i'm not advising that but you could do it and so the debt is a political problem it's a political issue it's a political challenge because of the way we talk about it as if it's akin to household debt hey when i borrow if i go to a bank and i sit down with the loan officer and i ask i say i am here to borrow money i'm there because i don't have money and i want to borrow from the bank when the government borrows it's not going in empty-handed and saying i need money it is first depositing the dollars into the system spending more than it taxes back it's putting the dollars in and then turning the dollars into treasuries i don't get to walk into the bank put the money down on the desk in front of the loan officer and then ask to borrow the money that's not how it works but that's what the federal government is doing but we don't understand it and nobody explains it to the people and i'm not sure how many people in government understand although most central bankers i think do understand this uh they may just not want everybody else to understand it okay i'm going to say a few more things and then i am wrapping up so here we are in this moment where with with any luck god knows we are coming to a point where this pandemic will start to be in the rear view mirror and already we're hearing and this panel is designed to get us thinking what do we do now what about the deficits what about the debt this is pushing us in the wrong direction and i think it would be very tragic if world leaders and governments started to pivot turn their attention to the deficit and to the debt and find themselves pursuing austerity programs this is what happened after the financial crisis it's exactly what we allowed ourselves to do in the u.s we were looking at what was happening in parts of europe and we saw it on television every single night we saw what was happening in greece in italy portugal spain ireland and we had pundits all over the airways telling the american people we had the president of the united states telling the american people that if we didn't get our fiscal house in order we were going to end up like greece okay so congress gave us one spending package really and it was way too small and it didn't do enough to restore the economy health of the economy to get jobs back and so forth and then we pivoted to austerity and we started cutting spending and we started worrying about the deficit and we had commissions and all of the attention turned away from the things that matter the real economy restoring prosperity jobs incomes to worrying about the number that falls out of the budget box at the end of each year and it was tragic and as i said economists play and played a a very key role in all of this harvard economists reinhardt rogoff and others pointing to what was happening in europe as a harbinger for uh other countries in the world this is your fate if you allow your debt ratio debt to gdp to reach 90 percent you'll tip over and a financial crisis and slow growth and all that kind of stuff it was terrible and it was wrong and many of us well some of us anyway knew that it was wrong then and so what i will say is that some leading economists have shifted their views in very important ways since 2010 beginning with olivier blanchard who's very influential so blanchard decides at some point that maybe the debt is more sustainable than we thought because if interest rates remain low lower than the growth rate then debt won't explode it's actually sustainable and so probably we are fine and we could even afford bigger deficits now he said this before covid so covid just demonstrated that of course if congress writes a bill and the votes are there it can pass and authorize the spending of trillions of dollars between march 2020 and march 2021 one year congress committed more than five trillion dollars to fighting the pandemic governments around the world stepped up with fiscal packages not just once but another right more fiscal support now the us is outperforming the rest of the world in terms of the rate at which we we have recovered our economy the labor market we're growing faster inflation is hot yes because in a pandemic you don't have the benefit of time on your side to be very careful about every spending decision lawmakers sort of you know in a sense there's some panic right about millions of businesses going under millions of people losing their jobs their apartments their homes their livelihoods so they went very big and very fast and to some extent the inflation that we have today is a result of people having had so much income but it's also a result of the way people are trying to spend that income not on services not going out to bars and restaurants and theaters but fine goods durable goods that have to be manufactured shipped supply chains bottlenecks clogged ports trucking freight problems so yes inflation is the limit but inflation is running hot all over the world right in germany 40-year highs in the uk in china near a 40-year high so what mmt has told us from the beginning is a currency issuing government like the us canada japan the uk australia and so on cannot run out of money there is no financial constraint the government can commit to spending any amount it deems necessary if the votes are there the money will go out okay so you're not going to run out of money and you're not going to have a greek-like situation where you have debts that you cannot pay because your debt is denominated in your own currency greece is borrowing in europe and they don't issue the euro that's the problem so mmt had all of that correct indeed predicted the greek uh the european debt crisis and always told us that it was inflation not solvency that you have to worry about and in normal times budgeting with an inflation constraint in mind is the right thing to do in a pandemic you have to decide whether you're willing to you know go big at the risk of doing too little knowing that inflation could be a consequence of that spending and let me just say the final thing i'll say is so here we are having at the moment a debate about whether we need to worry about deficits and debt i don't think that we should be having that debate inflation is the relevant challenge that we face now how do we deal with it the mainstream answer is the central bank will deal with it it's their job they are the inflation fighter how do they fight inflation mostly by raising interest rates so now you have to ask yourself whether you believe that central banks with this tool right one price right that policy interest rate that they have control over whether the central bank nudging rates higher is going to work to bring down headline inflation which is being driven by supply chain bottlenecks other kind of issues going on some large corporations using their pricing power to extract you know higher than normal profits and all the rest of it meanwhile making housing more expensive making it more expensive to buy and finance the purchase of an automobile right making your credit card payments go up student loan payments go up so interest rates are a very um [Music] blunt instrument and i think chairman powell in the u.s has made it clear that the fed believes that their interest rate their inflation fighting tool the interest rate is designed to work on excess demand problem and what powell has said testifying before congress here is that what we face today is still mostly a supply-side challenge which means we need to think about new ways to address inflationary pressures that don't rely simply on the blunt instrument of rate hikes and so with that i will stop
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