Odd Lots - Stephanie Kelton on How MMT Won the Fiscal Policy Debate

Episode Date: March 18, 2021

In a sense, Modern Monetary Theory has won. This is not because policy measures are necessarily in line with what MMT adherents would prescribe. Rather, the debate over economic policy, in particular fiscal policy, is happening on MMT terms. MMTers argue that the constraint on government spending is inflation and real resources -- not credit risk -- and that's exactly how even the critics of the stimulus bill have attacked it, that it will be inflationary. So how has the debate around fiscal policy changed so much over the last several years? Much of the credit goes to Stephanie Kelton, the MMT economist and author of the best-selling book The Deficit Myth. On this episode, we talk about their success.See omnystudio.com/listener for privacy information.

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That's vanguard.com slash audio. All investing is subject to risk vanguard marketing corporation Distributor. Hello and welcome to another episode of the Oddlots podcast. I'm Joe Wisenthal. And I'm Tracy Allaway. Tracy, you know what I was just thinking about? You don't troll me about MMT anymore these days. Do you remember that when you used to do that? Yes. All roads led back to MMT for, well, I mean, to some extent, they still do for the past year or so. We've been talking a lot about the shift from monetary policy to fiscal stimulus. that's a big component of MMT. Yeah, you used to, every episode, you're like, Joe, why I didn't, are you going to

break up MMT? But I guess we haven't really done that explicitly in a long time. And so you stopped, you stopped joking about that with me. But today, we aren't going to have to joke because that's actually literally what we're going to be talking about. It is an MMT episode. Yeah. And, you know, I think one of the things that's really striking to me, and I'll just say this,

is that to some extent, I really think that MMT has completely won the debate. And by that, I mean, we have this big fiscal expansion happening in the U.S. And deficits by historical measures are very high. And there are certainly people who are like upset about it or angry about it. But it really feels like the entire debate is like essentially happening on MMT terms or MMT language. So you're right. We definitely don't hear many mentions of bond vigilantes anymore. We don't hear people talking about, you know, how are we going to fund social programs?

The deficit is so large, that sort of thing. Like, that seems a little bit old fashioned now in many respects. I do wonder how much MMT can take credit for that versus the fact that we've just had such an unusual economic crisis, you know, this big exogenous shock, basically. So people are able to use that as an excuse to override those concerns. And this is something we spoke about on a recent episode of the podcast. But like it seems like this crisis was so unusual. It really opened the door to people thinking about stuff differently. But you're absolutely right. MMT, it's definitely not a fringe movement anymore. No, and I think you're right. There's

a lot of things that have happened both in this crisis and over the last decade, the persistent lack of inflation, despite, you know, Fed's balance sheet expansion, despite deficits. That obviously perhaps changed people's thinking. The nature of this crisis and the sort of unanimous, nothing's unanimous, but widespread belief that the government had a role in underwriting the recovery due to its unusualness. But it really is striking. Like, you know, coming out of the great financial crisis, Greece and 90% and bond vigilantes, and there are critics of the existing stimulus for sure. And they didn't get a single Republican vote. But it's all on different terms now. It's about inflationary pressures, which was always sort of the MMT view of like, well,

there's the limits to spending, not the sort of creditworthiness of the government. And so even though there's a long, you know, there's still huge policy fights and debates happening. They really have changed a lot. And I think it's a pretty legit question. The degree to which MMT thinkers have made that happen, but I do think it's part of what's really changed the whole discussion. Yeah. Now, you mentioned policy there. And I'm really, I really want to get into that particular topic when it comes to MMT, because I think one of the big criticisms of it as a school of thought is that even if you agree that MMT is the best way to describe the economic system, it might not actually lead to specific policy prescriptions or it might not lead to policy prescriptions that are

all that different. So politicians can agree that spending is bound by inflation, but maybe they all have different ideas still about how best to spend money. So I would love to dive into that a little bit more. Great. Well, we are going to be speaking with the preeminent person who without question has done more to advance the MMT message over the last decade than literally anyone else. We spoke to her a couple years ago, a year and a half ago at our Odd Lots live event in New York City. So excited to have her back on. We're going to be talking, of course, with Stephanie, Kelton, Professor of Economics and Public Policy at Stony Brook, and the author of the New York Times bestselling book, The Deficit Myth, which just came out in paperback last week. And so very

excited at us. Stephanie, thank you so much for joining us. Oh, it's really nice to be back with both of you. Thank you. Do you think that's right? I mean, I said, I think that on some level, MMT has won the debate, at least in terms of how the debate is defined. Does it feel that way to you? Yeah. And you know, I'll tell you something that I don't really, I don't think I've ever probably said publicly. But I started to feel like MMT was beginning to win the debate before COVID. And, you know, one of the things that I did early last year was to go to Washington, D.C., at the invitation of House leadership and to sit down. Scott Fulweiler was with me.

And I won't say exactly who was in the room because I think we were probably not supposed to do that. But the point is we were there at their invitation to talk MMT. And the reason that they wanted us is because they were thinking ahead. And they were thinking about what a Biden presidency with potentially Democrats in control of the House, House and Senate would mean for legislatively, right? What could they do? How ambitious and bold could

they be? And how should they begin to think now about, you know, rethink, I should say, the federal budgeting process, how they approached the question of, you know, paying for their priorities and so forth. So that was pretty encouraging to me. And it was meant to be the start of a conversation. And I was told, you know, we want to have you back in front of a bigger audience. And then, of course, coronavirus happened. But I thought that was a pretty good indication of the, you know, impact that we were having, you know, where it matters most in Congress. I want to delve into the policy prescriptions, like I mentioned. But before we do, could you maybe contrast, you know, where we are now to where we were when you first started thinking seriously and writing seriously?

and writing seriously about MMT. Like, how different is the environment back then versus you speaking to prominent politicians about how MMT could actually be enacted in serious ways? Oh, Tracy. I mean, I was just a kid in some respects. When I first got involved, I was in graduate school. I started, you know, in the mid-1990s, I graduated. I finished up my understanding.

undergraduate degree and I was supposed to go off to Cambridge University and start a graduate program. And I had this sort of gap where I graduated in December and Cambridge wasn't going to start until October, I think, of the next year. And I had this void and this time. And my parents said, get a job. And one of my professors, my undergrad professors said, no, no, no, go to Denver and work with Randy Ray and spend some time there before you go off to Cambridge. And I thought, well, that's brilliant idea. You know, I get sort of a dress rehearsal for graduate school. And I went and I worked with Randy Ray, who's, you know, was there on the ground floor. He was just beginning to write a book called Understanding Modern Money. That was, I think, his first real entry into MMT,

and that began to lay it out the scholarship. And so I got a little bit of it there with him. But then I finished up a year at Cambridge and I ended up at the Levy Economics Institute. And Randy was there. And I'm sure we'll talk later about Win Godley and people like that and when was there. And now MMT was really getting going. But I was still a graduate student. So I was writing papers and I ended up finishing my program at the new school. So, you know, the way that we were part of a team of academics, but we were mostly, you know,

presenting our work at academic conferences and doing the usual thing, writing peer review journal articles, take a year or two, sometimes more to get in print. And then 2008 crisis came. And that really changed everything. That's where, you know, I got this idea that I would start a blog and we would try to use social media to become part of a larger conversation and get our ideas in different ways of thinking about things out there. So that was an exciting time because for the first time, We were having dialogue with people, you know, outside academia narrowly, and the media started to pay some attention and things just evolved from there. Can you talk about that a little bit further? I mean, there are a lot of academics in all kinds of fields, I'm sure, economics, sociology, everything, who sort of toil away.

I don't want to say toil, but write in obscure journals that get read by 50 people, speak to classes. but don't really have any sort of like meaning it doesn't really jump the chasm into the mainstream discussion. Can you talk a little bit more about when you started noticing that happening with your work in MMT and just like the role of new media, social media, Twitter, blogs, etc. In turning what, you know, going from those journals into the discussion where policy changes. Sure. I mean, you know, we started committing ourselves. in writing on that blog that I launched called New Economic Perspectives. And you know, you're launching a brand new blog and nobody knows it exists and it's very

hard to start to get people reading it and you're out there dropping links to everything you've written on other people's blogs in the comment section. They don't always like that. But it was a way to try to build a readership. And then there were some people who started to pay attention in the very beginning. some guy named Joe Wisenthall, I think a business insider. Who's he? One of the first, I mean, honestly, he really was.

One of the first, I think, financial journalists who started to take a look at the kinds of things that we were saying and what we were writing and took them seriously enough to wonder, sometimes wonder aloud and to repost things or whatever and say, you know, this sort of curious what these people are saying. And it's such a departure from what we normally hear. And then, you know, a handful of others started to do it. I think even John Carney, who maybe was writing for CNBC at the time, he started to look more closely. And Pedro de Costa, who maybe was at Reuters or I don't know where he was, but there were a handful of you guys who were kind to us. I think that's the right word in the early years and weren't dismissive, didn't, didn't, just, you know, go full on embrace of the ideas, but gave it a shot and gave it a mention. And it really did do a lot for us to help us elevate, you know, the work that we were doing and to give us

a shot to prove ourselves credible and worth maybe, you know, paying a bit of attention to. Why do you think MMT resonated with, I guess, journalists and also a broader audience? Like, what was the attraction or what was the thing that opened the door to people, like, I guess having an open mind towards a fairly radical, like, rethinking of traditional economics. Yeah. I mean, I think maybe, you know, I'm not a journalist, but if I were, I think I would be looking for things that are new and different that spark a bit of controversy. you know, that that would be more fun to write about. I think those sorts of things and pull new ideas in and punch them around and see what happens. So I think to some extent, maybe we were red meat for some and we were an interesting new way of thinking for others. But yeah, I think people probably, you know, used us in different ways over time.

But a good story, you know, there. there's this sort of group of economists who don't come from the Ivy League universities. Nobody's ever heard of before. And they're out here saying some really unusual things. And so it became a story of sorts. If I could just talk first person for one second, one of the attractions for me, for your work and others, very early on 2010 or so, was that there just seemed to be a lot of things happening in the economy that the mainstream writers and thinkers didn't seem to have very compelling answers for. And the biggest one to me was, why is it that government debt is exploding?

And we don't seem to have higher interest rates or hyperinflation or, you know, dramatically weakening currency. And so it's like these were just, this was like a puzzle out there to me. And, you know, I was like looking for answers. And it's not that I was like entirely convinced right away, oh, that you guys have the answer, but at least like you're supplying, I thought like something. But I'm curious like, you know, how much, one of the things that we talked about on a recent episode was this idea that the between the great financial crisis and the coronavirus crisis, there seemed to be a lot of things that actually happened in the real world that were not helpful to mainstream macro. gross. So we didn't have hyper, we didn't have inflation, let alone hyperinflation. The unemployment rate went down a lot further than people would have expected. All kinds of sort of mainstream views didn't seem to work out. QE didn't really have much of an effect. Talk to us about that as well. That's sort of like that period in which it felt like mainstream views became a little bit discredited by facts on the ground. That's exactly right. Everything that the mainstream had been warning about for decades, really, kept not happening. And as the evidence mounted, and you know, I think this is one of the things that really did earn us some cred, some street cred, was that we were writing in real time as the, you know, European debt crisis was unfolding. We were taking positions and had taken. positions early on that, you know, there was this design flaw in the Maastricht Treaty and that a debt,

that a debt crisis was entirely possible due to the fact that these countries in giving up their sovereign currencies and adopting this common currency, which they could no longer issue, would mean eventually the financial markets would figure out that they were lending to currency users and they would begin to price that default risk in and yields could blow out. And, I mean, we had written it all up years before the thing. happened. And when others became surprised and then later confused, because if it can happen to Greece, then it can happen here. Only our deficits got very large, you know, 10% of GDP. And interest rates went down, not up. And then we had the downgrade, you know, U.S. government bonds were downgraded.

And people said, oh, this is the end. You know, yields are going to spike. And we said, no, no, no. And, of course, rates went down the next day. And then you can always look to Japan and, the warnings for years with respect to their debt and persistent deficits and currency holds up and they can't get inflation anywhere close to the 2% target. Some would say in spite of QE, I would say maybe even partly because of. I mean, just the models and the things that we thought we understood about relationships between deficits and interest rates and debt and printing money, so-called and inflation. and so if we're just kept not bearing any fruit.

And at some point, you know, we were writing all along about why we understood things to work differently and why what was happening was consistent with our models. And so I think, you know, as I said, I think it earned us some credibility. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. bond markets are massive, murky, and let's be real. Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a commitment to your clients. We're talking top-grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, Go see the record for yourself at vanguard.com slash audio.

That's vanguard.com slash audio. All investing is subject to risk Vanguard Marketing Corporation distributor. So I want to pivot slightly to specific policy prescriptions from MMT. And as I mentioned in the intro, I think this has been one of the criticisms. But what does an MMT policy actually look like? is it focused on reaching full employment or can it be related to, you know, any sort of government spending? Well, I think, you know, we generally accept the idea that, you know, the dual mandate makes sense, the goals of the dual mandate. You want an economy, high levels of employment and

low levels of inflation. You know, broadly balanced macroeconomic conditions in the economy. From the very beginning, though, we just thought that the central bank was not the proper institution, at least not to bear primary responsibility for delivering on those objectives. That, in fact, fiscal policy was a more durable, reliable, appropriate tool. If not, you know, as a replacement, at least is a very strong front-facing part of the way that you get that outcome, that you achieve, balanced economy. So MMT does not come with a pre-packaged set of policy proposals. You hand someone this set of ideas and say, here, go do this. This is MMT. MNT. I sometimes say it's not a verb. It's an adjective. It's mostly a description of the nature of the monetary system and the mechanics of government finance. And you can apply that lens. You can use that MMT understanding to look at any

country in the world, understand their monetary system and explain the mechanics of how government finance will work in that country, what the constraints would be given different types of monetary systems and other things. And then you can craft policy based on the spending capacity of that country. But, you know, the policy prescriptions themselves don't fall out of an MMT box, they come out of the political process. So if we accept that MMT is more of an adjective or a description of the existing system or like sort of more of a state of mind than a set of policy prescriptions, like, I'm curious, how much does that change things in your opinion?

So if tomorrow every single person in the world woke up and accepted MN. as like, you know, the way the economy actually works, what do you think would change? Like, how different would the world look? Well, I, you know, I've often said that I think the big breakthrough will be that we start having more fruitful debates, that we stop debating and wringing our hands over things that aren't of concern, that aren't legitimate. You know, I will often say that MMT is about replacing an artificial, fake, phony, imaginary budget constraint with a real resource constraint, with an inflation constraint. So when I say the debate would change, I mean that we would not be bogged down in debating all the kinds of things Joe opened the program talking about,

you know, we're going to run out of money, we're going to burden the next generation, the bond vigilantes will come after us, we will, China will turn off the spigot and no more will come out. All of those things that hamstrung us, you know, for so many years when we think about what's possible, we could set those things aside and then start having a very different kind of debate. If we could all come to some kind of agreement about, you know, the low-hanging fruit, how much fiscal space do we think is available? Then we would just be debating, how do we want to use that fiscal space? And that's where the politics are unavoidable. Republicans will want to use up physical space doing tax cuts and, you know, other things. And Democrats will want to use

fiscal space doing health care or education or infrastructure, climate. So you still end up with a healthy debate. I think a healthier debate because you're no longer worrying about things that won't happen. And you start focusing on on the real areas of concern. So the next criticism that comes or the sort of logical sequence of this, and I see it in discussions all the time, okay, you're right, the real constraint is inflation, real resource constraints, but you have no way of measuring actual fiscal capacity. You have no way of really defining where we, knowing where we are in terms of real resources. When you're talking to either in academic circles or you're talking to policymakers that have to make these things, how do you think about gauging resource capacity and avoiding.

unwanted inflation? Well, you know, you do it, I think you take a specific policy proposal. If you want to ramp up, you know, a major infrastructure spending program, then, you know, in the old days, somebody might do some sort of input-output analysis. You say, I want to do $3 trillion of infrastructure. Okay, what does your infrastructure program include? Well, it includes some broadband and high-speed rail. I want to build more community health centers.

I want, you know, you lay it out. This is what I want my infrastructure to do, solar panels and all this kind of stuff. So what are the real resources that you would need to carry out that program? And oh, by the way, how quickly do you want to spend $3 trillion? Is it a five-year program? Is it a two-year program? So you need a lot of information. And then you say, all right, so I know what I want to do.

I know what I want to construct, build, you know, whatever. And now what do I need to do it? How much steel, how much concrete, how many machines, how many workers, I need construction workers, architects, engineers. You can actually get a sense of how readily available these things are because, you know, we have measures like, you know, unemployment by occupation. How many out-of-work construction workers are there in engineers and architects? How much slack is there in manufacturing capacity? We know this stuff by, you know, production and moving equipment and so forth. So it's an imperfect world. you're not going to know precisely what the actual number of people available to you are.

You can get a pretty good sense of whether it is realistic to think of a $3 trillion dollar infrastructure plan rolled out over two or three years given the capacity that you have. You call caterpillar. And you say, if I were to place an order with you folks for X dollars and this much equipment of this type, could you fill that order? They'll tell you. I have a slightly weird question, but I'm just curious. In Washington, are there specific people or like, which politicians would you say have grasped the basics of MMT or are embracing MMT the most?

Well, you're not asking me to name name. Sorry, Tracy. Well, I kind of, I was hoping, but like, or, okay, let me rephrase it. Like, is there a body of politicians that are embracing it more than others? And like, I guess the obvious answer to that is the Democrats. But we're just getting to that policy debate. Like, Republicans could easily embrace MMT as a reason to do tax cuts, as you mentioned, just as easily as Democrats could embrace MMT as a way to do, you know, some sort of social spending or something like that. So I'm curious, is there is there an underlying like feature of politicians who are interested in MMT? probably but look let's let's be very clear tax cutting taxes is in the GOP DNA they do not need MMT to help justify tax cuts they have always done that they've been doing it for decades long before MMT existed and and I mean the existence of MMT doesn't I don't think boost their enthusiasm for tax cuts in any way they're going to do it no matter what if they get a chance yeah you know I After the November election, when President Biden, when Biden became the nominee, the Congressional Progressive Caucus reached out.

And it is chaired by Congresswoman Pramila Jayapal. She asked if I would address the caucus. Now, there are, I think, a little over 100 members of the CPC. And every Tuesday, they do a call. And I was the first Tuesday call after the election. So that's just one example. I think there are some people, you know, I won't out people, but if somebody like Senator Brian Shatt out people as MMT,ers.

I won't talk about private conversations that I have. But, you know, Brian Shats, Senator Shats from Hawaii was out there tweeting about how much he had enjoyed the book and how I think he's done interviews. In fact, I know he has. I read some of them where he talked about being on a Senate. it's either banking or finance committee. And he said, we're talking about it. You know, I'm talking about MMT.

We're thinking about this. I think there was an article in the New York Times two or three weeks ago that, you know, disclosed that I have been working in an advisory capacity with Senator Schumer's office and staff for a number of months. We had regular calls. And I wouldn't have spoken publicly about that, but they did. And it was in the Times. And I do this with lots and lots of House members.

And I'm just, I feel very. very, very lucky to be in a position now where so many people will reach out to me, chairs of powerful committees in the House. I, you know, after the book was published, one of them reached out and said, I've been in deficit hawk my entire time in Congress. And I read your book, and you've completely changed my views. And he said, I want to know if we can start working together. So, you know, Randy Ray worked with Senator Rubio and his staff on something, I think a year and a half or so ago. I worked with very briefly one Republican senator, his staff reached out and wanted some input from me on the legislation they were drafting and wanted to think about it from an

MMT perspective. And I was tried to be helpful there. Well, this brings me to an interesting question. And you mentioned that someone reached out to you. It said, I used to be a deficit hawk. And now I'm not. Which gets to the question. And it kind of speaks to what you were saying earlier about. MMT doesn't end the debate, but maybe it gets us to a healthier debate where we're actually talking about the real things. And there are, of course, going to be politicians who say oppose expansion of government health care. But they don't really want to say, and they say things like, we can't afford it. Or they say, you know, we're going to pass the cost onto our children or we just, the cupboard is bare.

We can't do it. How many, you know, in your experience, deficit hawkery, how much is it actually people care about this gap between federal government tax receipts and outlays, the technical deficit, versus how much the deficit is cited as a pretext for opposing some policy that actually the person opposes for deeper ideological grounds? Yeah. I mean, it's such a convenient. you know, foil. If you can empathize with your constituents when they ask you, why aren't we doing more to, you know, better fund our educational system or health care or whatever is. And you can just say, listen, I completely agree with you. I wish we could do these things too. But, you know, we got this deficits and we've got this, you know, $23 trillion debt or whatever. And it's sort of a get out of jail free card. They don't have to offer much more by way of opposition than to just, you know,

their pockets and say, I wish I could help, but, you know, obviously there's no money for that. I think that is useful to a lot of people or perceived as being useful. Other people, I think, you know, would like to not have to lean into that narrative, but they don't see a clear pathway out. And that's what that visit that I mentioned early on, right before COVID really hit in the U.S. when I was on the Hill. So much of what we talked about in that meeting was about messaging. It was about Democrats feeling like they had backed themselves into a corner for years by coming back with these talking points, always bringing up the deficit, hitting Republicans over the head for adding to the deficit, blowing out the national debt.

They've said these things. And now their views are changing and they don't know how to unsay them. And they've talked about the Clinton's surpluses as this sort of badge of honor and tried to paint themselves as the party that holds themselves to a different, and they think higher standard by being the party that wants to try to pay for their priorities and worry about the deficit and remind people that the last time the budget was balanced and in surplus, it was under Democratic leadership, right, President Clinton. And so they're looking for ways to message their way out of that and into a new place. And that's what we spent a lot of time talking about. That's an interesting point I hadn't thought of. So we're so used to people using the deficit as an excuse not to do something. I hadn't thought of people using it as a sort of badge of honor in that way. I wanted to ask you about something else that's going on at the moment, which is we have seen a rise in bond yields and inflation expectations.

And for some reason, I was looking at one very crude measure of inflation expectations earlier today. But for instance, if you look at Google Trends, the word inflation is being searched for more than ever, or at least in the history of Google Trends. And I know you're on the record saying that MMT's overriding concern is inflation risk. I also know that you get a question about inflation every time you do this. But I would love to hear your take on on what's going on now in the bond market and how much that ties into this embrace of fiscal policy in D.C. Like how much has that actually impacted inflation expectations in your opinion? Yeah. I mean, Joe's written about this in a way that I think is really useful and largely reflective of the way that I think about this. you know, anybody can look at the kind of backup in yields and and create a narrative that fits

whatever it is that they're looking to defend with respect to what's happening. You know, I think that it makes a lot of sense to me to say that, you know, nobody can really tease out inflation expectations. As you said, we can come up with these sort of crude ways of trying to get at what's happening here. But, you know, Tracy, I guess my sense is that mostly, you know, this is a fairly modest move up. And that what is probably telling us is that, you know, people are expecting the economy to do better and that they think that the Fed might have to move sooner. And they think that inflation is going to move higher. And I think that, you know, when Powell comes out and tells us that the Fed fully anticipates that we could see some, you know,

pressures over the summer as the stimulus or as the recovery of money rolls out and so forth, that they're prepared for that. They expect it to be transitory. Maybe there are some people out there who have, you know, different expectations and think that the Fed might fall a little bit behind the curve and have to move sooner. You know, I think by and large, it reflects optimism and enthusiasm for the economic outlook. What do you think about this new Fed? I mean, obviously, MMT emphasizes, of course, fiscal power as the sort of key lever for macro stabilizations we've been talking about. But this does seem to be a Fed that's undergone changes and how it thinks, and how it thinks about measuring full capacity and full employment and whether it needs to preempt

inflation, lest it sort of get away from us. What's your thinking? on this sort of like evolution of the Fed under sort of the Yellen Powell period? Well, I think that, you know, in a lot of ways the Fed has become somewhat more humble in the sense that, you know, there, Jerome Powell made a very clear time and time again. I think he used virtually every opportunity when he spoke publicly to say, we don't have this. Okay, do not expect the central bank to have the ammunition that's going to be necessary to get a sustainable recovery underway, that it is going to take fiscal policy. We need a partner. And that was different, right? Bernanke sort of did that, but in much more subtle ways.

I think that, and it's not just Powell, it's central bankers around the world and now helped by, you know, institutions like the IMF and the OECD, you know, everybody is sort of coming to agreement around this idea that fiscal policy has to play a dominant role in the recovery. So on inflation, you know, Powell had to admit that the Fed might have tightened preemptively, that unemployment, it clearly was possible for unemployment to safely move lower without causing inflation to move higher. And I think they're doing a lot of rethinking, you know, some of their own understanding. You have people like Daniel Tarullo who once served on the Fed Board of Governors,

who after his term expired, went out and started stating publicly that the Fed does not have a reliable model of inflation. Now, that was a really incredible thing to say. And so it's a good sign when you know what you don't know and you're willing to go back to the drawing board and rethink, you know, a lot of your priors and what the Fed can do and Powell keeps reminding us the Fed can lend, but the Fed can't spend. And so I think it's helping to shift us into a sort of new paradigm where we are going to see a more permanent role from, you know, the fiscal partner and much less reliance on central banks. And I think that's to the

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the Consortium National of Formation in Health Souttened by Sante Canada. So, you mentioned like knowing what you don't know there, and I think,

like, it is probably fair to say that MMT is still in sort of testing, Like, this is probably, this is, we're seeing the beginnings of this embrace as we've been discussing, and we're going to see more fiscal programs rolled out in the states, and we're going to get an actual test case of some of these theories being put into action. What would it take to, like, give you pause? Like, what would actually make you think, like, oh, wait, maybe there's something in MMT that we, you know,

got wrong or maybe there's something that we underestimated, something that we need to rethink or tweak or revamp. Is there a specific thing that you're watching out for? Well, I think so much again, so much of MMT is descriptive, Tracy. Like, right, if Congress wants to pass big ambitious spending packages, they can do it. And this is what we said. You know, what's interesting for me, actually, is think back to the, the Republican tax cuts in 2017. The Republicans were getting ready to push through these massive tax cuts

and you had economists, I won't name them, but there were leading names, right? Big name economists who came out in opposition to the tax cuts. And one of them made the argument that if the Republicans are successful in pushing these tax cuts through, that we will be, these were his words, living on a shoe string for decades to come because of the deficit that will be created.

Because of the deficits, he went on to say that it would put us at risk because if the economy were to slow down and go into recession, that we would no longer have the capacity to use fiscal policy to counter the recession because what? We had done these tax cuts that left us unable to do to act with fiscal policy. Another leading time. economist was writing, you know, deficits matter again after Donald Trump took, took office and so forth, warning that if you tried to do anything with fiscal in terms of stimulus, that you would be pushing interest rates higher, that you would get crowding out effects, that the economy would slow down. Now, the Republicans passed their tax cuts, and unemployment went down, not up,

and growth went up a little bit. I mean, it wasn't a massive boon that we were. was promised, but it was stimulative and it did improve things. And interest rates didn't go up. Interest rates have trended down. We had coronavirus. We had a recession. And how did Congress respond? With multi-trillion dollar packages, one after another, the deficits of the past did not impede the ability of Congress to respond effectively in the future. So those folks were just simply wrong. And so, you know, when you ask what would cause me to rethink, you know, my, the strength of my convictions, I guess it would be if Congress had authorized, you know, multi-trillion dollar spending package and somehow the checks bounced. You know, I mean, I'm serious, you know, because we're, we're only explaining that

if the votes are there, the money is there. And this idea that somehow, you know, there are these fiscal constraints or somehow you've got to arrange the financing and you might not be able to something might go haywire and all of a sudden, you know, the checks don't go out. And it just doesn't happen. I think, first of all, I think that last point or the point that you made about the COVID crisis showing the myth of like, oh, we need to like save up our fiscal capacity is really interesting and probably still underappreciated. Because I do think there's still, they're sort of like, oh, it's so unfortunate that we spent so much during the good times. And then in an instant, that talking point seems to have gotten disproven because then we spent a lot more in 2020 without a hiccup.

I'd like to do like a sort of like quick lightning round of like common MMT questions before we end. I, you know, I always see these questions about MMT and I want to like sort of like get the Stephanie Kelton the quick answer. So if we don't need to worry about deficits, why do we have taxes? Why do we need to pay taxes? Well, you know, I'll just point you to a 1946 article written by Beardsley Rummel, which is a great name, who was the chair, then called chairman of the New York Federal Reserve Bank. This is not a short answer, Joe. That's right. Rummel gave us a variety of answers to that question. Why do we have taxes? Taxes are important because taxes are for subtraction. taxes remove dollars from our hands so that we don't have them so that we can't spend them so that the government can spend some of its dollars into the economy without creating an inflation problem.

So taxes help to remove spending power from the rest of us and mitigate inflationary pressures. Taxes are important if you want to start up a currency from scratch. And that's a much longer answer, but I'll just leave it with taxes are, the currency is a tax credit. Taxes are important for redistribution. You might raise or lower an existing tax or introduce a new tax because you care about things like the distribution of wealth and income, and you can use taxes for that purpose. You have taxes because you want to incentivize or disincentivize certain behaviors. So taxes are very useful if you're trying to encourage people to buy energy-efficient appliances or electric vehicles or discourage people from smoking or, you know, polluting the atmosphere.

All right, here's another question. If the government isn't really borrowing, why do we need to have a bond market? Well, we don't technically need to have a bond market, but the government has chosen to allow folks to trade their dollars in for a interest-bearing form of the U.S. dollar, which is a government bond. So it's a very safe way to park an awful lot of money in a default risk-free asset that gives you a yield that gives you a return. So you get a little bit of an interest subsidy from the federal government when you hold U.S. Treasuries. All right. Here's another one. Is it naive if the MMT view is that the way to fight inflation is either through taxes or perhaps spending or cutting spending or at least that's one tool? is it naive to think that politicians would ever actually sort of, quote, do what it takes if inflation did run overly hot? Well, I think the first thing to do is challenge the first part of the question that it is not the solution to any and all inflation is most definitely not to raise taxes. And what MMT is trying to do is to say, if we're talking about the kind of inflation that results from too much spending chasing too few goods, the demand pull kind of inflation, then let's integrate inflation.

risk into the federal budgeting process. So the best way to fight inflation is with a good offense, right? You don't want to create an inflation problem and then try to fight it on the back end once it exists. You want lawmakers to be designing the legislation, writing the legislation with inflation in mind, which by the way, they do not do today. I worked in the Senate. I never heard a staffer or a member of the Senate raise inflation as even an afterthought when writing multi-trillion dollar spending bills. So we want inflation to be integrated into the process so that you're thinking if I were to do this, you know, propose new spending, what is the likelihood that it would create inflationary pressures and how do I mitigate those in the legislation before moving forward

with a vote. And I'll just ask the Tracy Alloway question. Isn't MMT just a thing that only works for the US dollar in the US? Well, no. I mean, one of the running jokes, I think, on Twitter is Japan says hi. And so, you know, so many times people will, you know, say if you run these deficits or you get the debt way up, interest rates are going to go up, inflation is going to go up and somebody will tweet. Japan says hi. So, no. Okay. But what? What about EMs? Okay, Japan, yeah, they're kind of weird. They don't have whatever. What about Egypt? Well, look, economists like Scott Fulweiler and Fadal Kabou and others are working with EMs and working with, you know, and I've worked, I don't know that I should say. I'll just say one developing country president and I've worked with him. And so we're very much involved in working in collaboration with,

with governments around the world, including in emerging markets, MMT is absolutely helpful. And the work of Faddle Kaboob, I will say again, check that out for sure. MMT as- Yeah, we've actually had them on. Yeah, it's a great conversation. And so you know, you know that MMT can be helpful in all of these countries. Now, it is true, and Tracy knows this.

I know she does, that MMT is not suggesting that every country has, you know, the sort of expanded policy space that will allow it to easily orient its macroeconomic policies around, you know, creating a full employment economy. There are challenges for many countries that have debt denominated in foreign currency that are more vulnerable to swings in their exchange rates that don't have energy and food sovereignty and so forth. So, but that's not to say that MMT doesn't have anything to offer by way of policy advice and design and so forth. Stephanie Kelton, thank you so much for coming on Nodlop. It was great to be back with you both. Thanks for having me.

Thanks, Stephanie. That was great, Stephanie. Really appreciate it. Take care of you guys. Tracy, obviously I like that conversation a lot. Hearing that sort of trajectory, yeah, I know, kind of obvious. Hearing, though, like the story of like that trajectory of like going from like blogging to being invited in to talk to some of the most powerful people in the world about ideas is. about is, to me, is about as inspiring a story as it gets.

Yeah. I mean, it's definitely been an upwards trajectory. Like, the arrow has moved in the right direction for MMT economists and journalists, of course, Joe. So one thing that always stands out when we speak to Stephanie, like her point about MMT being a set of descriptive rather than prescriptive policies, like, yeah. I think obviously she's right because she's sort of come up with it. But like, my question. is still how much does that actually change? And if it changes the debate or if it allows us to avoid wasting time on irrelevant discussions, like, can we actually afford it? Like, how much does that actually move the needle? And I guess, like, is there going to be a time five or ten years from now

when instead of politicians going like, oh, but the deficit, we can't afford this? What if they're going like, oh, but, you know, inflation and fiscal space. And it feels like they could use pretty much anything, like, as an excuse or as a justifier for something. Yeah, I mean, I was saying, like, my sense is like two things. And one is it does seem like a little harder. I mean, I don't know. I mean, one thing that we know about fighting about or talking about inflation online is that

people will see it even if it's not there, right? Right. So it's like the inflation measures can come in very mild. but people will convince themselves that we're living in an age of hyperinflation regardless. So I do think like that is a good point. In the other hand,

maybe it's like not quite as like, you know, it's like the bond vigilantes or the kids are going to have to pay for it or we're going to become Greece one day. It's like you can never disprove that, right? Like it's like, well, we have to, you know, something could happen 10 years from now

and it would be really bad so we have to do this. So I think it's a little harder. But I do think also like, you know, there are just people are going to have different policy priorities. And there are, you know, there are a lot of people who believe that the government should have some sort of single payer health care. And there are a lot of people who strongly don't think that. And that that's bad and that's socialism. And I don't think that like, that's never going to go away. Like people that are going to just be, but it does feel like at least if we can sort of like move past some of the deficit stuff, it is a more honest political. conversation that we can have on some level. I feel like the problem is forever politics. I think that's the conclusion to everything that's wrong in the world. Like the problem is politics, always and forever.

Yeah. But man is a political animal. And so, yeah, so that will be for thousands of years. We would be fighting about how different people feel that they should reshape the world. Right. And to be fair, we're probably asking a lot of an economic theory to try to fix that problem. Like, that's probably a little bit too ambitious. But again, and it goes back to what we were saying, like, it does feel like the debate these days, I think it's a little bit more enlightened

than it was in 2009, in 2010. So, like, things do change. And again, it's not, I'm not saying it because, like, okay, we got this, like, fiscal expansion and that's good or bad. But it does feel like the parameters of the debate. So you look at even critics. of the stimulus, they're talking about these things like inflation and inflationary pressures and capacity. And how do you measure fiscal capacity or inflationary capacity, which wasn't really even like part of the discussion in a meaningful way, you know, like 2009, 2010, at anywhere near the same level.

So maybe things can change. No, the language has certainly changed. Absolutely. All right. Shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts podcast. I'm Tracy Allaway. You can follow me on Twitter at Tracy Allaway. And I'm Jill Wisenthall. You can follow me on Twitter at The Stallwart. And be sure to follow our guest, Stephanie Kelton. She's at Stephanie Kelton, the paperback version of her book, The Deficit Myth. It's now out. So you should check that out as well. Follow our producer, Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcast, Francesca Levy, at Francesca Today.

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