US Fiscal Policy and the 'Deficit Myth' with Stephanie Kelton

27:49I just thought you almost need a chapter for every one of these different myths. And it's not that deficits don't matter. It's that they matter in ways that we aren't paying attention to. And so the book was really to try to get us to flip our perspective around to see that every deficit is good for someone. I mean - That's right. You know, so a lot of what the book does is to try to make clear why that's the case. Why is every deficit good for someone in purely financial terms? Government deficits are just the mirror image of a financial surplus in the non-government part of the economy. So we should talk about deficits for whom, deficits for what, right?

28:28deficits can be used to accomplish big things like you know repairing crumbling infrastructure improving our health care education systems and and so on and so forth um and they can also get too big and they can also uh exacerbate or cause an inflation problem so we don't diminish or dismiss any of those things but really have a very different conversation about the role of deficits in the economy. All right. So let's have that conversation. When you say deficits can get too big, I think it was Reinhart and Rogoff's paper said 100 % GDP to debt ratio is a problem. 90 % tipping point, that kind of stuff.

29:10Right. I mean, that was, the problem wasn't the Excel spreadsheet error, which changed their math. The problem is Japan is running to 50%. And their economy seems to be doing just fine. Their quality of life is higher than ours. Their life expectancy is higher than ours. Their income is comparable. If Japan can run, what are we running, like 175, 200 in the U.S.? Oh, we just, I mean, publicly held, I think we just hit 99%. So we're about 100%. Japan is two and a half times our size. Does that suggest we have a long ways to go before the deficit is a problem or are there other potential issues?

29:50Well, I just don't think the ratio is a very useful metric in terms of, you know, thinking about when you've quote unquote gone too far. And I think, you know, it's always interesting how Japan tends to get left out of the conversation, right? Because it really is the counterpoint to so many of these arguments. I mean, The Japanese government, pre-COVID, had been running large, persistent fiscal deficits for three decades. Three decades. They had the 10-year interest rate pinned at zero more recently, but interest rates didn't go up. They didn't suffer the crowding out problem of rising interest rates, pushing investment down.

30:33They didn't get an inflation problem. They've been battling deflationary pressures basically the entire time. You never have a failed auction. You don't have a situation where, you know, bond vigilantes show up and say, that's it, 250 percent, we're out of here. All of those things kept not happening. And so we always pointed to Japan and people would say, well, it's demographics. There's some reason that Japan is an exception to the rule. But I think the truth is that it's just we've got so much of it wrong that that's been the reason that all these bad things that were supposed to happen kept not happening.

31:08I just got an email from Washington, D.C. consultant Bruce Melman saying, please explain this chart to me showing all these deficits. And how is the United States up here and how is Japan down here? And I go, the answer is the Japanese central bank has interest rates set at 0.5 percent. You can finance a lot of deficits when the Fed was at least over 5 percent for a while. and now is barely below it, when you're a tenth of that interest rate, hey, it's pretty easy to finance deficits. How do you look at the relationship between a country's central bank and its ability to manage its own debt? Well, the central bank, so if we're talking about a country like Japan or the U.S., what I'll call and what I call in the book, you know, countries that issue their own sovereign currencies.

32:04It's not even an issue at higher rates of interest, right? Remember when Volcker was Fed chair, Reagan was tripling the national debt, right? A massive buildup in military, you know, a couple of huge tax cuts. Deficits were increasing, the debt was increasing very rapidly. Interest rates were quite high, but it still doesn't pose a financing challenge is the central bank is just crediting bank accounts. I mean, that's how the payments are made. And you can do that at very high interest rates. You can do that at very low interest rates. But when you get that combination of high interest rates and high debt, right, you got a lot of treasuries or a lot of JGBs, you got a high debt to GDP ratio and high interest rates, you can very easily get into a situation where the rate hikes themselves are generating enough additional interest income that it itself can become a source of inflationary pressure.

33:04Right. So I would say that's always the relevant risk. It's not that you're going to run out of money. It's not that you're going to turn into Greece. It's not that you're going to bankrupt the nation or burden future generations or any of that. It really is all about inflation as a constraint. And you can find yourself in a situation where you have, quote, too much debt, But in combination with kind of a central bank policy that is pushing interest rates very often, you can get into that sort of. So we had pretty high deficits in the following the financial crisis in the 2010s. We had no inflation.

33:39When there was a huge, and I mean huge, biggest since the Marshall Plan since World War II, 10 % of GDP as a fiscal stimulus, that combined with the shift to products over goods over services and snarled supply lines and a lot of other factors led to a transitory inflation spike from 2020 peaked in June 2022. 9 % came back down. Now we're in a 3 % era as opposed to a 1 % to 2 % era. But it's not the deficit that caused that. It was the fiscal stimulus primarily as the driver. Where do we see, or is that the wrong - Did you mean this? I thought you were setting up a different argument and then you went somewhere I didn't expect you to go.

34:29No, I'm going to say it wasn't the deficit that was the problem. Oh, but you said it was the fiscal stimulus. It was the fiscal stimulus that was inflationary, and that inflation seems to be transitory. We had, following the financial crisis, we had very modest fiscal stimulus and massive monetary stimulus, and we were in mostly a deflationary environment. When we shifted from monetary to fiscal, it seemed that all at once, seemed like that's where we had our transitory inflation spike. Or do you see it, am I framing it in a way that is incorrect. Tell me what you see here. Well, so I think a couple of things I would unpack, rewind a second and go to QE.

35:10And I don't know if you think of that as monetary stimulus. I don't. You don't. You don't think - So the purchasing of bonds in order to lower interest rates, you don't think of as a monetary policy? How do you contextualize that? No, I think of it as monetary policy to be sure the central bank was trying to achieve something by doing that. And in part, what they were trying to achieve was pushing down rates at the long end. I think from everything I've read, the evidence suggests that it didn't do very much at the long end. I mean, I've seen estimates, you know, 20 basis points. We just didn't get a lot out of that.

35:48Now, they hope that, you know, people would reach for yield, you'd have a wealth effect, Maybe there was some of that kind of stuff going on. But in terms of stimulus, what I see in retrospect and what I thought at the moment, right at the time, was that, you know, Bernanke and the Fed were thinking that QE was going to be like stomping on the gas pedal and revving up inflation. and we'd watch the Bank of Japan try and fail at this for at least a decade. I couldn't figure out why we expected a different result here from what they got there, but we went ahead and tried anyway. And three rounds of QE and Operation Twist thrown in in the middle.

36:29And still, we didn't get to 2 % over the course of a decade. So if that's monetary stimulus, I don't know. I'm struggling to see it that way. So let me throw something at you that is not heterodox, and my economist friends disagree with me on this, but I'm pretty convinced I'm right. I find the wealth effect, at the very least, has been greatly exaggerated. And then in the real world, I think it's kind of meaningless because, look, when you look at who— So the wealth effect is defined as a rising stock market leads to greater economic activity, which I think is backwards. I think you have good economic activity.

37:14People get hired. They get raises. They go out and spend money. That ultimately leads to a rising stock market. And the reality is when the stock market, aside from crashes and like 08, 09, when people panic sold things, and I don't mean just stocks but houses, cars, collectibles, art, whatever. When you don't have the stock market rising, that doesn't affect 80 % of the population. You know, the vast majority of equities are held by the top 1%, 10%, 20%. I think top 20 % is something like three quarters of all equities or less than the top quartile. So the wealth effect isn't going to affect people.

37:56Raising wages affects people's spending. And by the way, the wealthy, however you want to describe it, the top 1%, 10%, they tend to spend no matter what the stock market's doing. You know, if they want a new car or a vacation or a new house, they tend to go get it regardless. So the whole concept, if the Fed was engaging in QE because they thought it would awaken the animal spirits via the wealth effect, well, are we, you and I, in agreement that their fundamental premise is just completely wrong? We are. Yeah. I mean, maybe there was some kind of placebo effect associated with QE. If people thought it did a certain thing, they behave in that way and it has real impacts on the economy short term or something like that.

38:42But it sure didn't appear to do what the central bank anticipated and hoped it would do. And one of the things I can remember, people like Janet Yellen and Ben Bernanke, when they would get pressed on this. What are you hoping will happen? They would bring up the wealth effect and the reach for yield and that sort of stuff. But I remember Bernanke testifying before Congress, and Congress was really frustrated in the wake of the financial crisis. It's like, unemployment is still really high. The economy is clearly not getting juiced by whatever it is you're doing. Which, by the way, is a very typical post-financial crisis scenario.

39:18If you look at history, that's what those recoveries tend to look like. Yeah. I mean, you know, you got one fiscal package, the American Rescue Recovery Act, right? It seemed like a big number at the time, $787 billion, but it wasn't nearly enough given what we were up against. And so - A third was a temporary extension of unemployment. A third was a temporary tax cut. And a third was, Remember shovel ready? I do. $200 billion. I mean, the first CARES Act was 10x that. It's a joke. It was way too small. And as you just said, the way that it was put together was not going to provide a big shot in the arm for the economy.

40:00And so here's Bernanke sitting before Congress. And congressmen are really upset. They're saying, what is going on? You're supposed to fix stuff. It's your job. We gave you the dual mandate. Why isn't it being fixed? And Bernanke said, and I mean, I remember this, you know, it's a quote. He said, let me just say that monetary policy is not a panacea. It's not the ideal tool. Whoa, when he said that, I was like, you know what? He's not telling you that fiscal policy is the ideal tool, but he's telling you that fiscal policy is the ideal tool. Was he too nuanced for the geniuses in Congress? You have to think.

40:41You have to think. I mean, it's like, hey, I'm doing your job and I don't have the tools that you have. So don't expect the same results. I'm pressing the buttons at the keyboard. I'm buying mortgage backed securities and treasuries and I'm hoping it does something. But you all have the real firepower and you're not using it. That's what he said. And so when COVID came, I think we really did learn the lesson this time. Maybe a little too much. And, you know, but you had the collision. So, yeah, you have an economy that is largely shut down. As you said, you've got consumers who can't, you know, spend money on services because most of that part of the economy is closed.

41:16So we all try shoving what money we do have into the goods pipeline. And goods have to be manufactured and shipped. And then we all remember what that was like, you know, backups at the ports and all the rest of it. So that collision of constrained supply and some demand, yes, to be sure, the stimulus packages from CARES on through helped people, right, not only replace income, but in some cases, people ended up with more income than they had when they were working. And so all of those things together, and then you have to remember that the pandemic came in waves. It wasn't just a one-time shock.

41:54We thought we were kind of moving beyond it. And then here came Delta. And then here came Omicron. And then different parts of the world closing at different times. So I think, Barry, when you look at the autopsies that people have tried to do, say, where did all this inflation come from? Was it really that last stimulus package? Was it the$1 ,400 checks that some economists warned were going to put us over the edge? People who've gone and I think done the really serious work here, Peter Orszag, Robin Brooks and somebody else, they have a paper. Bernanke and Blanchard, Olivier Blanchard, Ben Bernanke have papers.

42:29The IMF has looked at this. Different Federal Reserve banks have looked. When you cut across all of the research that's been published, I think virtually everyone lands in the direction of it was overwhelmingly the supply side stuff. It wasn't the demand stimulus. That played a role, but it was a modest one. And I'm writing about this now, so I'm really steeped in going back and revisiting what folks have had to say. So when we say supply side, how much of this were the, we remember seeing all the ships off of the port in Long Beach. I have a vivid recollection of interviewing Professor Jeremy Siegel of Wharton after, I don't remember if it was the first CARES Act or the second CARES Act.

43:14I'm pretty sure it was before the third CARES Act. So CARES Act 1 and 2 under Trump 1, CARES Act 3 under Biden. And I recall Siegel saying, we're going to have a massive 70s-like spike in inflation. No one's prepared for it. The only good news is it'll be transitory. And long before anyone was even using the I-word, Siegel was all over this. Based on the fiscal side, are you saying did he get lucky or was it fiscal plus supply shocks? Well, I'm saying it was fiscal plus. I mean, you know, I had a piece in the New York Times in April of 2020. I kind of remember that piece. I mean, that was my sort of warning on inflation.

44:01I submitted it. It was just ready to go in March. But, you know, they like to hold things. And so it was published in April. But I don't think that that last fiscal package is what gave us that burst of inflation. This is what I'm suggesting is you go back and you do a really careful retrospective on this. And yeah, it played a role. But was it the reason that we tipped over? We wouldn't have had the inflation that we had, you know, hitting 9 % by the summer of that year, by 2022, you know, getting that inflation. This was a global phenomenon. Countries that did massively less fiscal than we did.

44:40Still had the same impact. more, in some cases, more inflation. So I think, you know, the truth is it was pandemic, it was pandemic related, it was supply chain, and inflation went up for reasons mostly related to the pandemic and the disruptions. And it came down for reasons mostly related to the working out of the kinks in the supply chains and, you know, resolving some of those issues. So I have I have a vivid recollection of Ed Yardini, another economist who wrote when you have very rapid increases in inflation, they tend not to be structural and they tend to be resolved in almost a symmetrical way.

45:22The chart looks, you know, if you have a fast rise, you tend to have a fast drop off. He was pretty right about that. And when you go and he was basing this on when you looked at the history of previous inflationary shocks, what you don't want is a long, slow graph. gradual increase that suggests structural underpinnings. You want, oh, we have this temporary issue. It'll eventually be resolved. I think the problem was that transitory took longer than everybody expected, but that still doesn't mean it's structural. It was still transitory. Look, you're a brave man. I know using the T word is still the kind of thing that gets your head lopped off in certain circles, but I think that's right.

46:01And the part of the story that we haven't mentioned, of course, is the war and the role of energy and food. And, you know, I spent the last two days working on this new book. And so I went back and I reread every speech that Jerome Powell has given at Jackson Hole from 2020 to 2024. And you can see, you know, his thinking in real time. And when you read them all, you know, one after the other, you really see his thinking initially with the transitory. And then the war starts and he starts emphasizing energy. Was 2022 was the war, Russian invasion of Ukraine? Yeah. And so that becomes a much bigger part.

46:43And you can hear him saying, you know, this is where it's coming from. This is what's driving. We still have problems with supply chains. Now we have this new problem. So it wasn't a supply side shock. It was a series. Yeah. We were just getting hit left and right, shock after shock after shock, and they fed through the system. And then at some point, when you get to energy, then all bets are off because it's transportation, it's fertilizer, which gets food, which gets, and then it's just, we sort of lived that before in the 70s. You know how quickly an energy price increase can bleed through into broader consumer good categories.

47:20I just read an article somewhere online recently about used car prices are still elevated and it's directly related to semiconductors manufacturing were closed for a year or so. It takes a long time to ramp that up. So by 2023, when we finally get back to normal production, you have three, almost four years of new car production down substantially worldwide. Hey, fast forward two or three years. Now you have a shortage of used cars that's still out there. How long are we going to be dealing with the fallout from the supply side shock of the pandemic in 2020? It's half a decade later. We're still feeling effects of that.

48:07Yeah. I mean, we have words for things like this when the labor market experiences a really negative shock and then it doesn't sort itself out. We talk about labor scarring and hysteresis and this sort of stuff. I don't know that there's a term to use for stuff like this, but maybe there needs to be. And you're right. I mean, once we finally got chips again, they weren't the right kinds of chips. And so it does take a very long time. An event like this is not something you flip the switch off. And then, you know, I used to say when the pandemic started, you could park your car in the garage, turn the keys, you know, turn the engine off, toss the keys in the front seat of the car and go on vacation to Europe and come back 18 months later and start the car and drive and everything would be fine.

48:54But you can't shut the economy down that way and just turn it off and then expect to come back a year later. You got a vaccine, let's open everything up, turn it back on, and things work smoothly. It's just not going to happen. And then complicating things are following the financial crisis, at least in the U.S. I can't talk globally. We underbuilt single-family homes here for pretty much a decade. That didn't lack of supply, didn't help pricing for either homes, starter homes, or rentals. But I want to address labor, which you mentioned, and hysteresis and scarring. You have a very interesting line in the book that kind of struck me.

49:34Unemployment is always a policy choice. Explain what that means. Well, it means that if you truly wanted to eradicate, I mean big thinking, right? Involuntary unemployment. What is involuntary unemployment? Anybody who wants a job, is ready, willing, and able to work but can't find a job, you're involuntarily unemployed. Suppose you had a policy whereby you said the federal government will fund a job for anybody who wants to work, wants to contribute, can't find work anywhere else in the economy. At some base wage, maybe benefit package, you have a federally funded, locally administered job, right?

50:19You can contribute. You could eliminate involuntary unemployment. I'll say, quote unquote, overnight, right? Once the policy is announced and you're prepared to provide the jobs for people to have actual things for them to do, then anybody who's still walking around without work is voluntarily unemployed. We tend to worry about people who are involuntarily unemployed. So what does MMT do for us in terms of this unemployment issue? We don't really worry about it these days because unemployment has a forehandle on it. But for most of my adult life, we've had unemployment rates as high as 5, 6, 7 percent outside of crises.

51:03Why haven't we been more aggressive the way, let's say, Germany or Japan or Switzerland act when there is an economic contraction? There really isn't a whole lot of people involuntarily unemployed in those countries. Well, I mean, I think unemployment had a three-handle before the pandemic hit. That would have been an outstanding time, in my opinion, to introduce a program like this, right? Because the take-up rate would have been relatively small. Would have been cheap to do. Yeah. So you put it in place then. And for people who say, sometimes people say, well, there was no unemployment. I say, great, then that's exactly the right time to do it.

51:41Announce whatever you're willing to pay and say that you're willing to hire people. And if no one shows up, that's just fine. Right. But now the policy, you've stood up the policy and the program is there so that when an event like COVID happens, you don't have to throw 20, 30 million people into the ranks of the unemployed. you can transition people from the job that they're about to lose into some new job. It would truncate the downturn. It would replace income or a portion of income, right? You're probably not replacing full income for most people who lose jobs. But it would be a very powerful automatic stabilizer.

52:20Those people could transition into paid work. They'd have a job record. A future employer could call and say, what kind of work is, you know, buried? Does he get there on time? Does he pick fights with his coworkers? Is he a pretty good guy? And then as the income is supported and the economy begins to recover, those people can transition back into private sector jobs. So it works like a very powerful buffer stock, like a cushion for the economy through the business cycle. Sounds a lot like what Claudia Somm, a former Fed researcher and creator of the Somm Rule, has talked about, putting automatic stabilizers in place so that it's not a partisan hot potato when there is a big downturn.

53:01There's a way to cushion the blow and reduce the unemployment rate. So we're talking about modern monetary theory. We're talking about spending. What we haven't really talked about is taxes. What are the role of taxes in deficits and modern monetary theory? Well, taxes are for subtraction. That's how I think of it. I don't think at the federal level, I don't think of taxes for revenue's sake. Really? Yeah. I know it sounds... Well, it sounds Trumpian because some people have argued that he wants to move to a tariff system, which is effectively like a European VAT tax, only at the border instead of at consumption.

53:50I don't know if it's a negotiating stance or what have you, but less focus on federal taxes, more focus on other revenue sources. Right. But he's still thinking of tariffs as a revenue source. So he just wants to change the allocation, where the revenue comes from. I don't think he's thinking that taxes or tariffs don't generate revenue that the federal government, in a sense, needs to pay the bills. So what I'm saying is that for the federal government, I don't think of taxes or the role of taxes as generating revenue that the government needs in order to pay the bills. So what do taxes do? Well, they subtract money from the rest of us.

54:31So every dollar that's taxed away from you is a dollar you don't have and you can't use to chase after goods and services in the economy. So one important function of taxes is to reduce purchasing power in the non-government part of the economy, right? So consumers, businesses have less to spend. That makes room for the government's own spending so that it can spend money into the economy without creating inflationary pressure. So right now, what the federal government this last fiscal year spent, let me just use rough numbers, let's call it$7 trillion, right? And collects$5.2 trillion in taxes and other revenue, mostly from taxes.

55:12So you get a$1.8 trillion fiscal deficit. So what does that mean? It means that they've made a deposit of$1.8 trillion. That's a financial contribution that goes into the broader economy. And we can then talk about where it goes and what good it's doing in the economy. But taxes are important because they pull money out and are one potential way to regulate inflationary pressure. Obviously, they can be used. It makes changes to the tax code if you care about the distribution of income and wealth and you want to make some kind of change because you think things have gotten too concentrated, or you can use it for incentivizing and disincentivizing behaviors.

55:52But the big one is regulating inflationary pressure. So let's talk about the opposite of MMT. Right after the financial crisis, when a lot of economies around the world were precariously balanced at the knife edge, you had the Osterians come out and very puritanical, belief that deficits, excess fiscal spending, really any good time is problematic and we must all pay for our sins. And so we saw that in the UK. We saw it to some degree in Greece, other parts of Europe. How do you look at these folks that are pushing an austerity argument into a weak economy? I mean, it's economically illiterate.

56:41Okay. I mean, it certainly didn't work out well. To say nothing, we'll hold Brexit aside. The UK's recovery was pretty weak. Europe generally was pretty weak. Of all places, Greece seems to be doing really well today. Germany is in and out of recession. Like wherever you look around, France and Poland and just Spain is doing okay. But all these countries have been having ongoing economic contractions. Do they need to raise their deficit? Do they need to do a little more fiscal spending? What's the economic malaise source in Europe? Well, I mean, it's just what Keynes told us in 1936. it's a lack of effective demand.

57:29I don't think it's necessarily the case that it's got to be government fiscal deficit, but somebody has got to spend more. So how do you do that? I mean, there are two ways to generate this thing we call economic growth. Some part of the economy has to spend more than its income. And if the private sector does it, that can work for a period of time, but that generally involves leverage, right? A little bit of credit, borrowing, what have you. And that can be fine. But as the engine of growth, what we've seen is that when you rely disproportionately or sometimes entirely on private sector to generate that growth, it ends very badly.

58:06That's basically what happened, you know, when Bill Clinton was president and you had the budget, federal budget in surplus for four years in a row, 98 through 2001, the government's budget was in surplus. And a lot of folks looked at that and said, oh, my God, we finally did it. You know, let's celebrate the miracle of the federal surpluses. Isn't this a great thing? And there were people, like I mentioned earlier, Wynne Godley, who were writing about this in real time and saying, man, this is going to end badly. Because those government surpluses that everybody is celebrating are being built on the backs of private sector indebtedness, indebtedness, that it was the private sector that was spending more than its income, running deficits year after year after year.

58:49Wynne said it can go on for a while, but it can't go on forever. And when it ends, it's going to be really bad. And of course, we had a recession in 2001, and then the surpluses disappeared. Government's budget moved back into deficit. So yeah, these countries have to figure out some way to generate the demand. And it doesn't have to be from government, but it tends to be the more sustainable way to sort of create enough demand to keep an economy operating in close proximity to full employment. So following those four consecutive years of surplus, we had the dot-com implosion and then the recession.

59:31And then towards the last month or two of the recession, we had September 11th. And then eventually we ended up with not just the creation of Homeland Security and a whole bunch of increase in wartime and defense spending, but you also had a pretty substantial tax cut under President Bush. did that giant tax cut and all that extra deficit spending, did that then shift that private sector deficit over to the government? And did things end up a little better balanced? Because the economy wasn't terrible. It was just over leveraged as we headed into the financial crisis. Exactly. Yeah. I mean, when consumers pull back, right, because the government surpluses are like, they work like a Hoover.

1:00:24They're just vacuuming up net financial assets. They're sucking dollars off of the balance sheets of the private sector. That's what happens. And at some point, the private sector cries uncle, and they want to spend less and save more. That alone will tend to move the government's budget back into deficit. So much of the year-to-year movement in the fiscal balance is driven not by what Congress is doing, but by what the private sector wants to do. Do they want to save more? Are they trying to save more or are they okay spending more and saving less? Government's budget is endogenous in that way.

1:00:58It will automatically move around. As the economy started to slow down, George W. Bush, Republicans realized, uh-oh, we should have a policy response. The economy's slowing. So you got the tax cuts in 2001 and then you got another one in 2003. Right move. I mean, the right impulse was to relax fiscal policy. So I give them credit, maybe I wouldn't have structured the tax cuts the way that they did. And you got a big expansion of Medicare as well. Part D, right? That was really substantial. So last question on the book. You write that Obama was essentially a fiscal conservative when it came to policy.

1:01:38I don't think the average person thinks of Barack Obama as a fiscal conservative, or certainly a fiscal policy conservative. Explain. Well, like we were talking earlier about that fiscal package, you know, that$787 billion. When he was coming in to office the first time, the wheels were coming off. They were off the economy. And he had people around him. You know, Christina Romer was an economic policy advisor, UC Berkeley professor. She went on to become chair of the Council of Economic Advisors. But she told Barack Obama, this is your holy moment. She was trying to say, this is not going to be your garden variety recession.

1:02:19You can't do some little, you know, tinkering and some modest fiscal package. And all of this is going to be in the rearview mirror. This is big, right? And she could see that this had the potential to be the worst economic downturns since the Great Depression. And her memo was to encourage Barack Obama to go really big on fiscal. Now, a lot of people have written about this, and there were others in Barack Obama's circle, the guys. Larry Summers. Yeah, Larry Summers, David Axelrod, I think I put in my book, famously said, you cannot be talking about anything that has the T in it, not trillion.

1:02:58Meaning trillion. Meaning trillion, you're going to give people sticker shock, he said. And so, you know, I think the men basically said, don't listen to Christina Romer. You got to go for something more modest. And then what he did was try to negotiate with Republicans to try to bring some of them on board. Didn't get any, but ended up changing the package so that you had about a third of it in the form of tax cuts, hoping to sweeten the deal and pull some Republicans in. Didn't work. And then when it became clear that the fiscal response was too small and voices came back, and you have people like Paul Krugman and all kinds of people saying, you know, Congress, you got to get back in there.

1:03:37You got to do another package. By that point, you know, Barack Obama and the economists around him had pivoted to austerity. They were talking about, you know, what can we do with a commission to try to get the deficit down by$4 trillion at least and all this sort of stuff. And we're looking over at what's happening to Greece and Spain and some of the periphery countries that had a real— How can we make those same mistakes? Yeah. Right? Yeah. It seems sort of—I have a vivid recollection of having a dinner with about 8, 10 people, and Paul was one of the people at the dinner around this time. And I remember sort of floating the idea, hey, you know, this is the first time I've seen in my lifetime that the party that doesn't hold the White House is actively trying to sabotage the economy to regain.

1:04:28Like we, you mentioned economic illiteracy. I said you can't come out of a financial crisis and say no fiscal stimulus. And that's effectively what Congress said. And it kind of got poo-pooed back in 2011 and 12. Ten years later, people were like, oh, OK, maybe there was some purposeful economic illiteracy that conveniently made the economy less attractive for a president running for re-election. Yeah, so we ran the opposite experiment. It's just too bad that it had to run against the backdrop of globally constrained supply chains. Because we don't still have an opportunity to just road test. What if we really just engage the fiscal lever?

1:05:18And instead of relying so much on monetary policy, which is what we did for the previous three decades, it's just the central banks will take the economic steering wheel and fiscal can mostly worry about just trying to balance the budget or something. Well, certainly since 08, 09 to let's call it 2017, the Tax Cuts and Job Act, pure monetary policy, almost no fiscal policy. And we saw the results. It was a subpar, weak job creation, little wage gains, poor sentiment, poor consumer spending. As soon as the fiscal spigots opened up, things seemed to begin to—by 2017, things had already sort of gotten better.

1:06:03But, you know, that was a trillion in change. Certainly had a positive effect on GDP. Monetary policy works by trying to get people to spend more out of the same income. And fiscal policy works by trying to get people to spend more out of more income. It shouldn't be a huge surprise which one tends to have the more potent response. Especially when you're coming off a decade or two of low interest rates. It's one thing when your mortgage goes from 8 % to 4%. Hey, we could refinance and we have a little extra cash in our budget. But you can't do that from 3 % to 2%. There's no juice left in the lemon.

1:06:41Yep. This is Tom Keen inviting you to join me for the Bloomberg Surveillance Podcast. It's about making you smarter each and every business day. We bring you a recap of what happened overnight in Europe and Asia, the day's economic data and complete coverage of the U.S. market open. We cover stocks, bonds, commodities, currencies, even crypto, all the information you need to excel. Bloomberg Surveillance also brings you the analysis behind the headlines. We do that with lengthy conversations with our expert guests, the smartest names in economics, finance investment, and international relations.

1:07:20We do all this live each and every weekday that bring you the best analysis in our daily podcast. Search for Bloomberg Surveillance on YouTube, Apple, Spotify, or anywhere else you listen. On the East Coast, listen at lunch, and on the West Coast, when you wake up. That's the Bloomberg Surveillance Podcast with me, Tom Keene, along with Paul Sweeney and Lisa Mateo. Subscribe today wherever you get your podcasts. So let's talk a little bit about what we've been seeing over the past couple of decades and what it means for public policy. Today, I have to start by talking about how few recessions we've seen over the past 20 years.

1:08:04We had the financial crisis that the recession began in, I think, October 07 or December 07, something like that. And then we ever so briefly had a pandemic recession. That's pretty much it. It seems we're having fewer recessions and we're responding to them quicker than we used to. How do you see the depth and frequency of recessions these days? Yeah, it's a good question. I definitely agree. We've had longer stretches between them when they've happened, with the exception of, I guess, the global financial crisis. They have been somewhat weaker. That was obviously a big one. COVID is its own unique thing.

1:08:54I don't know, Barry. I mean, sometimes I feel like Larry Summers had it right, you know, years ago when he said, we only know one way to grow the economy. And that's through bubbles. That we get a good run up in, you know, whether it's the SNL period or the dot-com era or the housing bubble. You know, something comes along and provides a nice tailwind and we get what looks like a long, robust expansion, except it's sort of sowing the seeds of its own destruction. And then we end up with a recession. But we've gotten very good at cleanup on aisle four. You know, we respond and then we set the table and we do it again.

1:09:38I'm always happy to push back on anything Larry Summers says because he is so frequently wrong and yet so widely lauded and regarded. hey, the 2010s, a gradual slow recovery from the financial crisis despite the lack of fiscal stimulus and despite the Fed's ZERP policy that wildly stimulated asset prices. We didn't have a bubble. The pandemic, we still don't have a bubble. If you want to say maybe crypto is a bubble or AI as a bubble. I guess you can make that case. But so far, there's a difference between a broad society-wide bubble like led to the financial crisis, where you had really the bubble was in mortgages.

1:10:35We no longer care about your ability to service the debt. We just want to... It's all about our ability to sell the debt to a securitizer. That was clearly a bubble. it's kind of hard to say we're in the midst of a big bubble economy today it's always obvious in hindsight are we in a bubble today can we say that this has been a pretty robust 15 year run with no bubbles look i don't i don't know i think that things have felt awfully bubbly to me for at least a few years. I mean, it was the SPAC craze. Oh, God, that's a decade ago already. I know, but these things come and then they transition and then it's the next thing.

1:11:25We did the meme stock thing. Now we have AI and crypto and it feels tenuous, let us say. I try and draw a distinction between these giant, bubblicious, impacting society things that feels like it's just taken over everything. The dot-coms felt like it just took over everything in the late 90s. And people forget the Greenspan speech was 96, the irrational exuberance speech. You still had another four, almost five years of growth. Well, that was Keynes' point, right? The market can stay irrational longer than you can stay solvent, which is what makes it so tough to find the entry point to come in and say, yeah, we're here.

1:12:10You know, Keynes had – I still don't understand why so many people fight against what have been such self-evident observations by Keynes. of course when you have a contraction, it's the government that should spend. But no one wants to do the flip side of that, which is when you have a robust economy, that's where the government should be. That's where you can think about a deficit, not in a contraction. Why do so many economists ignore the brilliant insights that Lord Keynes had a century ago? Well, I think he got stripped of most of the really interesting stuff when Hicks and Hanson gave us the sort of ISLM interpretation of John Maynard Keynes.

1:13:01It took out a lot of the really interesting, you know, the role of expectations and psychological impulses and all of that sort of stuff. And it became this kind of static, you know, LM curve go up, IS curve go down. We pretend we can analyze the economy as having two separate and distinct spheres, a monetary and a real side of the economy. And I just don't think people go back and read the original text. And so the rich stuff too often gets left out. Meaning, explain the rich stuff from Keynes. The animal spirits? Well, people use the phrase animal spirits, but they use it loosely to just mean that when people start feeling good, optimistic, that it means they're willing to take on some more risk, make more investment.

1:13:49They'd sort of turn it into that, where I would say Chapter 17 is the most important chapter in the general theory. It's also the hardest one for most people to understand. But that's where Keynes deals with things like the own rates of interest and liquidity preference theory. And that's what I'm talking about. That's very hard to tease out and to bring forward in the ISLM framework. You can argue that it's embedded in the LM curve. It's there somewhere. But nobody sort of manipulates the standard Keynesian model in ways that really reflect that deep concern of Keynes's in terms of the role of long-term expectations and liquidity preference and that sort of stuff.

1:14:32So we're recording this towards the first quarter of 2025. We're in full Doge administration mode. The Department of Government Efficiency, how do you look at all these federal layoffs, all these people in D.C. that we don't know if these job losses are going to stick, what the courts are going to say. But hypothetically, we lose 10 or 20 percent of the federal government, 3 million workers. What does that do to the economy? Well, it throws a lot of people out of work. And then through a multiplier effect, now we go back to Keynes. It's not just the person who loses their job and now has no income or has income replaced on unemployment at a lower rate or whatever.

1:15:19It's the jobs that are tied to those jobs. And so when millions of people or hundreds of thousands of people in this case, I guess, start losing their jobs, it means less spending, which means less income for someone else, which means they go on to spend less. I think it was, you'll probably know very better than I will, I think it was Torsten's lock, I think, who put out a note for clients just maybe a week or so ago that said basically 3x, whatever, you know, if you think that 100 ,000 people are going to lose their jobs, it's more like three, it's three to one, right? You're not just losing that money.

1:15:52That's the Keynesian multiplier effect. In terms of the macro effects. So I don't know, this haphazard thing, do you respond to an email? This is no way to go about looking for smart ways to trim and find efficiencies in government. So from a modern monetary theory perspective, what are the smart ways to approach public policy? Do you think about deficits, to think about spending? Well, the big thing that frustrated me when I served on the budget committee was the fact that no one, and I mean not a staffer, not a senator, not anyone on either side of the aisle, ever gave the briefest moment of concern, care, attention to inflation.

1:16:38Really? That is genuinely shocking. Absolutely shocking, frustrating, maddening. And you got people writing bills, you know, a trillion dollar infrastructure bill, a Medicare for all bill, a bill, a budget, a whatever. And the mentality is, if you can just stitch up the numbers such that the amount of money you want to spend is offset by, you know, savings elsewhere in the budget or new revenue, then you've done your job because now you have deficit neutral legislation and you're good to go and you can go vote and you've been fiscally responsible. And Kelton is sitting in the room going, oh, my God, you guys.

1:17:20You're talking about spending, let's say, trillions of dollars into the economy. And let's suppose it was some big, ambitious Green New Deal infrastructure, whatever program, trillions of dollars. And your plan is to completely offset that spending with new revenue, but you're only going to get the new revenue from a handful of people at the very top of the income distribution, a corporate tax increase, a wealth tax, a financial transaction, whatever it is. They throw all this stuff around. you're potentially opening us up to a huge inflation problem because you're going to broadly spend trillions into the hands of people in the economy while only removing, by taxing, money from people at the very top of the income distribution.

1:18:04And I look at that and say, this is not fiscally responsible. If you're doing this in a fiscally responsible way with an MMT lens, you're not asking, how do I ensure that my spending is deficit neutral? You're asking, how do I ensure that my spending will be inflation neutral? And that's an entirely different problem for an agent, you know, Congressional Budget Office, for OMB, for other people who are thinking about and writing federal legislation. You have to approach this in a completely different way. So I'm going to assume you're not a big fan of the Elizabeth Warren wealth tax sort of thing, or even some of what Bernie Sanders has proposed with another tax bracket for the wealthiest people.

1:18:48I don't think that's how people generally perceive MMT. Am I mischaracterizing this or is that accurate? I mean, you're accurate. We talked earlier about what is the purpose of the tax. And I said the big one is it removes income from somebody. And why would you want to do that? Well, one reason is to make sure that they don't have those dollars and they can't spend them because it helps you regulate inflationary pressure. But I also said You could make changes to the tax code if you have, you know, deep concerns about concentrations of wealth and income. If you think things have gotten too extreme, there are things you can do.

1:19:24You can close loopholes. You can think about new ways to raise revenue. You can look at the estate tax. You can look at – and that's a legitimate thing to do or to think about through an MMT lens, independent of how much revenue will it raise. And that's how Senator Warren, Senator Sanders, they tend to think of these as I need to get money to pay for X, Y, and Z. Rich people have a lot of money. Therefore, let's tax rich people so that we can be fiscally responsible and pay for our spending. And I just think from an MMT perspective, that is not the way to go about it. The Willie Sutton theory of taxation.

1:20:01That's right. So I doubt that you're going to get this phone call, but hypothetically, this administration reaches out to Professor Kelton and says, hey, we're really thinking about extending the 2017 Tax Cuts and Job Act. We could do it for 10 years because that's what the rule is. We could do it for five years and not worry about the offset at someone else's problem. What do you tell them about the TCJA, which some people accused of being very—and a lot of the data supports, it was very heavy towards the top. Pick a number, 10 percent, 5 percent, 2 percent of earners. The number that gets quoted a lot is that 83 percent of the benefits went to people in the top 1 percent of the income distribution.

1:20:52That's on the personal tax side. Have you seen the prices of Porsches and Ferraris? They've gone through the roof. These people need some help. So, look, I mean, I always think of inflation, kind of that's my first stop on the train ride. So I heard a lot of people saying if these tax cuts are extended, it's going to exacerbate the inflation problem. And I said, no, it's not. I mean, come on. Right. We're just talking about a continuation of what's been in place already for the better part of the decade. Seven, eight years. There isn't net new stimulus of any kind. So I set that aside. So if TCGA is renewed, non-inflationary.

1:21:32But there's still some inflation out in the economy. And they're talking not just about an extension, but they might have to fiddle with the numbers because they've only given themselves, I'm saying only given themselves$4.5 trillion in headroom on the tax side. So if the president wants things in there like no tax on Social Security, no tax on overtime, no tax on tips, well, you're not going to fit that in that$4.5 trillion. So now what are they going to do? They're going to go and take a look at some of the corporate stuff, some of the personal stuff. Maybe they go for an extension of three or five years so that they can create a little bit of headroom to add some of these other things.

1:22:13There's inflation potential in that. Now you hear talk of a Doge dividend and$5 ,000 checks. I mean, we're getting into some serious money here. If the$1 ,400 CARES Act I was inflationary, what does that mean for—what would a$5 ,000 check do for PETA? OK, so let's remember. The first CARES Act was March of 2020. And that package included$1 ,200 checks. That was President Trump. And then at the end of the year, in December of 2020, you got the$900 billion package. That included a$600 check. That was President Trump. It was after the election, but he's still president. He didn't want to send a$600 check.

1:23:00He was really mad about that. He said he wanted at least$2 ,000,$4 ,000. Yeah. Really? That's a big number. It's a big number. And he said it ought to be$2 ,000. In fact, he said$600 is like an insult. and he said, I want$2 ,000 per the individual and$4 ,000 for family, but he couldn't get it. So he had to settle for the$600 check. And then it was Biden three months later in March of 2021 who came in with the$1 ,400, which when you add it to the$600, gets you to$2 ,000, which is what Trump wanted all along. Ironically, it's a lot of the Republicans who are the loudest at complaining about that$1 ,400 check being the thing that tipped us into the great inflation of the - It's never one thing.

1:23:45It's always a multiplicity of different factors. So all of those things definitely put a lot of money into people's hands, and it definitely helped support consumer spending. And I mean, it modestly increased inflationary pressure. So now I think they're talking about a$5 ,000 check going to households, what, 76 or so million households. Wow. Yeah, but they're saying, no, don't worry, because that money was going to be spent by government anyway, and we're finding all these efficiencies, and so we're just going to let you spend the money instead of letting the federal government spend the money.

1:24:21Problem is the math doesn't work. Well, you know, math. Who really believes numbers should add up anyway? All right, before we get to our favorite question, I just have a curveball to throw at you. When I was an undergraduate at SUNY Stony Brook, the head of the math department was a guy named Jim Simons, who eventually set up Renaissance Technologies. You've been there. Did you ever get a chance to meet Professor Simons? I did not meet him, but I had a couple of encounters with him. One in particular was kind of funny. I was right in the middle of the pandemic, 2020. 20. I don't remember what month it was, but it must have been reasonably nice out because I was sitting in the house drinking coffee one morning and I happened to look over my shoulder into our backyard and I see, we live on the North shore of Long Island, and I see these two kayakers pulling this little dinghy boat up to our dock.

1:25:22And there are two older people in the boat. And I said to my husband, go find out what is going on, who's getting towed up to the dock. And so he leaves, he goes outside and I see the couple climb out of this little boat and they tie it up to the dock and they go walking up and my husband's gone for a while and he finally comes back and he says to me, you'll never guess who that was. And I don't know what made me say it, except I knew he lived in the area. I said, Jim Simons. And he said, how did you know that? I don't know. I just, yeah, there he was, you know, I pictured a yacht, but no, it was a tiny little outboard.

1:25:59I'm sure there's a yacht or two floating somewhere in the Mediterranean or down in the Caribbean. All right, let's jump to our favorite questions while we still have you, starting with, what have you been doing to stay entertained? What are you watching or listening to these days? Yeah, I feel like it was a long, dry spell where we couldn't agree on anything. You're talking about streaming like Netflix or whatever. We could not agree. My husband will start something. I watch half of it. I hate it. We stop. So we went back and rewatched Miss Maisel because he loved that the first time. Yeah. And then.

1:26:33Although it did kind of go off the rails in the last couple of seasons. Well, we enjoyed. That was OK. We both loved that. And then two nights ago, we started streaming 1923, the second season. Oh, really? Which I love. I watched. That's part of the Yellowstone series? I was on an airplane and I'd never heard of the thing. And years ago, I watched. I think they had five episodes available. And I just ate them up. And then I came home and said, you got to watch this with me. I'll start it all over with you. And so a couple days ago, I think season two came out. So I'm going to definitely have to check that out.

1:27:09Tell us about the mentors who affected your career, who helped shape the economist you are today. Well, I mentioned John Henry early on. That's an undergrad mentor. And then graduate kind of master's. That's Randy Ray, I also mentioned. And then Wynne Godley came after, and then Warren Mosler. Those are the four men who I think more than anyone else shaped not just my professional life, but in a lot of ways, just my life. Huh. Really interesting. Let's talk about books. What are some of your favorites? What are you reading right now? Although I know when you're wrapping up a book, there's no time to read other books other than research.

1:27:54It's exactly right. I go back and I consult books now, mostly for the purpose of working on this book. But I'm an old school, you know, like, I think people should read Veblen. I think they should read The Theory of Business Enterprise. I think they should read The Theory of the Leisure Class. I think people should read Minsky. I think, you know, Stabilizing an Unstable Economy is really hard to plow through. But Can It Happen Again is a wonderful little book people should read. anything by John Kenneth Galbraith. Right now, I'm reading Galbraith's son, James Galbraith, and his co-author, Jing Chen, have a new book, just came out last month, called Entropy Economics.

1:28:39So I just started that. You know, that's the worst part about writing a book, is you just have to put all your reading that's not related off to a side. It's no fun. Our final two questions. What sort of advice would you give to a recent college grad interested in the career in either economics or academia? of you? I think anybody who wants to study economics should try to find a program where they can get exposed to a broad array of, you know, diversity of views. A pluralist program, if you like. Something where, you know, every class you walk into isn't going to be some version of itself. General equilibrium theory and that sort of thing.

1:29:22Try to find places where to, as much as you can, you get what might have one day been called political economy, you know, where you can actually read interesting thinkers and do more than just, I'll say, sterile agent-based modeling and all that. You want the real world in there. You want finance and banking. You know, these people who came out of economic and finance programs ahead of the GFC, a lot of people said, I couldn't make sense of what was happening because we never had any room in our models for finance or banks or credit. We didn't talk about any of those things. Really interesting.

1:30:00And our final question, what do you know about the world of, fill in the blank, public policy, economics, deficit spending today, you wish you knew 25 or so years ago when you were first getting started? So that conversation I had when I was an undergraduate about, you know, where to go to graduate school. And I can remember Randy Ray saying, if you go to Harvard, you won't suffer the slings and arrows that you'll suffer if you go to a program like Notre Dame at the time, or the New School or something like that. I'll never forget him saying, you can avoid the slings and arrows. That was 30 years ago.

1:30:40And I think I didn't take the advice. I went to Cambridge, England, and then I went to the news school. And I have definitely suffered the slings and arrows over many years. I think I wish I had known or understood better just how petty and aggrieved a lot of academics can be. What's the old joke? Why is academic politics so vicious? Because there's so little. Right. There's so little at stake. Yeah, it's really true. Yeah, it is. I didn't understand at the time, but I live to learn. Right. But, you know, the academic lifestyle is really not a bad lifestyle. You get to work with bright young students.

1:31:23It's usually college towns or lovely parts of the country. It sounds like you enjoy being a professor and your husband enjoys being a dean. Well, he's a professor. So the job - Is he still teaching or is he head of the department or both? He's a professor. He's got an endowed chair in the history department. But as of a month or so ago, he is once again back in the dean's office. He's an associate dean now. So he's doing both. Well, Stephanie, thank you for being so generous with your time. We have been speaking with Stephanie Kelton. She is professor of economics and public policy at Stony Brook University and author of the bestselling book, The Deficit Myth.

1:32:10If you enjoy these conversations, well, check out any of the 550 or so we've done over the past 10 plus years. You can find those at iTunes, Spotify, YouTube, Bloomberg, wherever you find your favorite podcasts. And be sure and check out my new book, How Not to Invest, The Bad Ideas, Numbers and Behaviors That Destroy Wealth, coming out March 18th of this year. I would be remiss if I did not thank the crack team that helps me put these conversations together each week. My audio engineer is Andrew Gavin. Anna Luke is my producer. Sean Russo is my head of research. Sage Bauman is the head of podcasts here at Bloomberg.

1:32:55I'm Barry Ritholtz. You've been listening to Masters in Business on Bloomberg Radio.

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