Odd Lots - Stephanie Kelton On MMT and the Inflation We're Seeing Today

Episode Date: May 19, 2022

For years, economists of the MMT school have been arguing that the way we think about deficits and government spending is all wrong. Whereas many people warn about the unsustainability of the national debt -- likening it to a household credit card bill -- the MMT view is that real resources are the constraint on government spending, and that inflation is the sign that real resources are being stretched. So what about now? We had substantial fiscal support during the pandemic, and now we have the highest inflation in over four decades. On this episode we speak with Stephanie Kelton, a leading proponent of MMT, a professor at Stony Brook, and the cohost of the Best New Ideas In Money podcast. We discuss the causes of the current inflation, and how to think about it through the MMT lens. This episode was recorded in Beverly Hills at the Milken Institute Global Conference.See omnystudio.com/listener for privacy information.

Thanks for listening to Oddlots. Follow the show on Amazon Music for more future episodes or just ask Alexa play the podcast, OddLots on Amazon Music. 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 very big. It's a firm. It's a few. 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. If Bellfib TV is now streaming, is it still TV? Is it still TV if there's no TV box? If I can stream all my favorite channels and pause and record shows, that's TV, right? A new era of FibTV. It's streaming, but it's still TV. Well, glad that's settled.

Bell, connection is everything. Hello, and welcome to another episode of The OddLod. podcast. I'm Joe Wisenthall. And I'm Tracy Allaway. Tracy, what are the big topics for you at we're at the Milken Conference out in Beverly Hills? What would you say of some of the big topics you've heard? I think it's inflation. Right. I mean, I got to say, I was on a credit markets panel, and it was called credit markets and inflation. So that kind of tells you everything you need to know. No, that's obviously a big thing. I saw Ken Griffin of Citadel. He was talking a lot. He was actually kind of optimistic about it, though. Like, he wasn't that work. He had a lot of. He had a lot of

of criticisms about this administration and policy and all that. But of all the things, I was actually a little bit surprised. He didn't seem that concerned about inflation or as much as all the media is talking about it. He thinks it'll moderate towards the end of the year, or he thinks there's a chance anyway, give the Fed some flexibility. So some interesting different views. Well, yeah, I mean, the thing that I've learned from the past year is that people feel very, people have strong opinions about inflation. Like, it's a very emotional topic. Sure. And it's really striking that we've had this incredible labor market recovery. We have sub-4% unemployment. And yet it appears that because inflation is high, that explains why consumer sentiment is so bad. Although I think there's more to it than just inflation. Well, so this is the other thing that I think we've learned, which we've talked about before. But it feels like people care about more people care about inflation than people care about the unemployment rate.

That's what it feels like to me because inflation affects everyone, whereas the unemployment rate is this kind of abstract thing. You can go up to people and say, oh, unemployment is just 4%. And they'll be like, well, I've been employed for the past 10 years. And all I know is that the cost of living is going up. Yeah, exactly right. So even during periods of high unemployment, most people hold on to their jobs over a given cycle. But everyone kind of feels rising prices. And so there's sort of like this political asymmetry. And you think about the Fed and it has to balance. balance the two, but this is the first time we really see, like, it appears anyway that the high inflation is coming at a cost of consumer sentiment and so forth. Yeah, I think that's right. And of course, it's highly politicized and people look at different policies. And in particular, they look at, you know, the Fed gets some of the blame and transitory shocks. But there's a lot of, I guess, Iyer directed at the fiscal stimulus. And in particular, that last round that Biden did after he was elected and a bunch of people say, oh, look, it's proved, it's too much.

That was way over there. There was one line and the other line was a little bit below and that was the output. Wait, wait, wait, wait. But then they spent trillions and it's too much. When are you going to say modern monetary theory? Okay, so. I'm waiting more.

Okay, fine, fine, but let's just jump right in. So one of the biggest advocates, not of fiscal stimulus or spending per se, But in getting us to rethink what we can do with fiscal policy, of course, is Stephanie Kelton, who's known as one of the foremost advocates of this way of thinking, modern monetary theory. And she is the author of the book The Deficit Myth. She's the co-host of the Best Ideas and Money podcast. And she's a professor at Stony Brook.

And she is here with us at Milken. And so we're going to be talking about, actually, you know what we're really going to be talking about is modern monetary theory to blame for this high inflation? you to blame for this high inflation step oh he jumped right into it now i'm just going to jump right in are you to blame i think so congratulations no look i um i think that you you two probably more than anyone have well no no i'm just going to say have done deeper dives into this question over the course of the last what 18 months two years or whatever you have been chasing this story in a more sophisticated and persistent way than i think anybody out there and you've I think really forced the conversation to shift. I mean, maybe I've helped shift the conversation

on some fronts, but on the inflation front, I really think you've helped to focus attention on issues of pandemic-related supply chain and bottlenecks. Nobody's done more to change the conversation around those things. So. Thank you. This is going to be a double-edged sword for us, I think, if people start, yeah. Anyway, go ahead. Well, look, I mean, so we have that. We've been paying a lot of attention to the drivers of inflation and thinking about inflation in ways that we didn't before. And frankly, we haven't really had to think about inflation for so many decades to the extent that we talked about inflation. It was, how do we get it up? I appreciate that, by the way. But to, you know, the sort of, it feels like there is sort of

this revenge a little bit of the sort of the old school, the New Keynesian economist. And they're like, look, here's this line that's potential GDP. Here's this other line that. that's actual GDP. There was a gap between them. Biden spent too much money that was more than one line subtracted by the other line. Our models work. It showed inflation. So is that a vindication of that style of thinking like this sort of like vulgar output gap thinking? No, of course not. I mean, you know, being potentially getting the inflation stuff right, but for the wrong reasons, it's not vindication. Okay. So I again, we go back to what a what is a more sophisticated way to think about why we ended up with the high inflation we ended up with. And of course, it's not just here in the

U.S., but it's around the world. And you look at Europe and they're just right on our heels at seven and a half percent or so. So we know that that countries like China, countries like the UK also are at 40-year highs when it comes to inflation. So it's it's a bit simplistic and I think wrong, frankly, to look at things like the output gap and say this is all down to pouring too much fire on an economy that didn't need that much fiscal support. Can you break it down for us a little bit more? How much of the current inflation or price increases do you think are due to demand versus supply issues and energy prices and things like that?

Super hard. Super hard to know the answer to that. Tracy, we were talking about that this morning on a panel that I was on with current CBO director, a former CBO director. and Jason Furman. We had exactly these kinds of conversations. I don't think anybody on the panel feels really comfortable dissecting at that level, you know, half, a third, whatever. But we do know, and we have differences of opinion, to be sure, right? Jason thinks that more of the inflation is a result of the excessive fiscal support. And I think I put myself on the other side, which is that

most of what we're still dealing with is, you know, pandemic-related and energy. And so I think that's, you know, exactly where to put the numbers. I don't know. But when it comes to, you know, where to lay the bulk of the blame, I still come down on the side of, you know, pandemic and energy and now food, Ukraine. Yeah. Right. You know, it feels to me, and again, we're the expert here, But, you know, it's hard to, to me, it's hard to tell a story that, say, oil prices, which we know are a huge driver of all-end inflation, headline inflation, have something to do with fiscal spending. Yeah. Right. I mean, you could in reverse, though, right, when the pandemic first hit and largely things were shut down, oil prices did come significantly down. So there was some kind of a relationship between what was happening in the economy and that sort of thing. But yeah, you're right with. respect to stimulus and the fiscal support. Yes, we got a faster recovery. Thank God. We got vaccines faster than a lot of people ever imagined. I remember when early on we were hearing, you know,

Dr. Fauci say maybe four, maybe five years. I mean, thank goodness, that happened much more quickly. And so the bounce back happened sooner and the strength of demand. So some of that is at play as well. So one of the things that we talk about a lot on this podcast is underinvestment in energy production and infrastructure. And this is something that the Biden administration has been very vocal about as well. And in fact, Biden has suggested a number of times that the solution to high prices is more spending, more investment to solve some of these bottleneck issues. And I wonder how that fits into MMT in the sense that my understanding is an MMT, the constraint on spending is inflation. And now we have CPI at 8.5 percent, and we have people who are also saying, well, the solution to the inflation is more spending.

How do you reconcile those two things? Well, yeah, it's a good question. So if you think about it the way I think that President Biden does, which is we need more capacity with respect to the labor force. We need to bring more, especially women back into the labor force. And so he will, in a sense, justify investments in universal pre-K and child care and this sort of thing. so that you can get, especially women, to return to the labor force to maybe ease some of the difficulties that employers have been having hiring workers with computer chips. He's talking about the importance of reshoring some capacity with semiconductor manufacturing

and building resiliency and all of that stuff. Now, you're rightly raising this question about how do you do that in a supply-constrained environment. If they want to do all of this infrastructure and we've heard talk about climate and the rest of it, you want electric school buses. You want to electrify the grid. You want solar panels and EV charging stations all over the country. Well, the question is, you know, who's going to put those up? Who's going to manufacture? Do you have firms that can meet those orders in a timely manner? Do you have the supply capacity? And to the extent that you don't, you're going to have backlogs. You're going to

wait to roll that out. So it isn't going to relieve a lot of inflationary pressure in the short term. And I think he keeps reminding us that these are sort of mostly medium and longer term investments. maybe childcare helps a bit. So this is sort of the emphasis on the real resource constraint within MMT, which I will, credit to MMT, I think that real resource focus has been borne out by the past couple of years. But I guess my question is, does MMT have a solution to that? Like, what is the policy recommendation in this kind of situation? Well, it depends what you want to accomplish, right?

If you're thinking about the kinds of things that worry me the most in some respects, which is the climate crisis that we're facing, then I think what you need to do is sit down and draft a program. And it's going to be a long-term program. It's going to be a 10-year or a 15-year or whatever program. But you've got to start thinking about how you're going to resource the kinds of investments that are needed to reduce CO2 emissions over a longer period of time. And that means investments in energy and investments in housing and transportation and agriculture. It's a big program. And so when you say, you know, how does MMT think about the capacity constraints in part, it's addressing a housing shortage. It's addressing got to build more housing to deal with a housing shortage. You have to deal with the grid.

If you're going to electrify, you've got to make those investments. And, you know, you're not going to get it all perfect. You're going to try to map this out and do it in a way that takes advantage. of capacity where it exists, that build capacity, builds capacity where it doesn't, that frees up capacity in the economy for other uses. If something is deemed a priority and you don't have the capacity to make the investments you want to make, you may well have to elbow out some of the private sector's current use of resources to free them up for something that's deemed to higher priority like climate. 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 in subject to risk Vanguard Marketing

Corporation distributor. Eating well shouldn't be complicated, but somehow it turns into recipes, prep, cleanup, and half your Sunday gone. Factor solves all that. These are fresh, ready-to-eat meals designed by dieticians, delivered to your door, and ready in just minutes. No prep, no cleanup, no excuses. And it's not just about convenience. You're getting real food, balanced nutrition, and zero artificial stuff. Meals that help you stay on track for all of your goals without the grind of doing it all yourself. Grilled chicken, roasted veggies, steak plates, postables. They taste like something you get in a restaurant, but they come out of your microwave in two minutes flat. If time, cost, or effort have been holding you back from eating better, Factor just took the

off the table. Right now, get 11 meals, free shipping, and free sides for life. Hurry, this offer won't last long. Go to factormeels.ca and use code fit. That's 11 meals, free shipping and free sides for life, but only with the code fit at factormeals.ca. Factor, Canada's number one ready-to-eat meal delivery service. So the way we're actually in this country attempting to deal with inflation is through rate hikes and the Federal Reserve. And there's all, you know, people like, well, what is the Federal Reserve? How is that supposed to? a fixed supply chain bottlenecks, and everyone knows it can't, et cetera. And most people seem to also have this view. It's like even the advocates of monetary tightening, it's a blunt tool. It's not

the most amazing thing. But, okay, that's what we're going to do. But at least it is countercyclical. When you look at politicians, they're proposing things like gas rebates or cutting the gas tax, which is kind of arguably putting more trying to juice demand even further. It's not, I don't find like that very encouraging. And so. like one of the good things I think about the MMT view of thinking is I consider it to be democratic and not outsource not outsource demand management to the Fed. But on the other hand, I look at what politicians, their response, and I don't exactly feel encouraged by how they're thinking about dealing with a period of high inflation. And so should that give people pause about

the MMT political economy such that when we hit high inflation, In many cases, the first instinct of politicians is to even juice spending or to spend more or Well, okay. So you raise this, the gas tax thing. And that's a pretty modest. I mean, we're talking about a few pennies, really. It's like, you know, I don't think this is going to lead to a big burst of inflationary pressure. And of course, alongside that, what at least Democrats are also talking about are, you know,

trying to move another package through where President Biden is explicitly. referring to this as a package that would be deficit reducing and therefore helping to bring down inflation. So you are actually hearing, now I may not agree with that, okay, but you are hearing politicians say we ought to pass this legislation because it will actually help us to deal with inflation. So, you know, you can say I don't trust them to do it, but the truth is they are actually trying to do exactly that. But just to broaden it out a bit, this has been one of the classic critiques of MMT, which is that, okay, you can change the narrative and make it so that people don't think that, you know, the budget in and of itself is the constraint on fiscal spending. But then you still

have the problem of politicians having to agree on whatever the policy is that we're going to enact. And to be honest, you know, recent history in Washington has not been conducive to consensus. You still have to build that consensus, even if you say, well, the budget is not unlimited, but bigger than maybe we think. And so, I don't know, if anything, it feels like that issue is still lingering. Consensus is lacking in D.C. to sum it up. Sure, it is. But I don't, I don't know that this is a recent, in recent years kind of a thing. I mean, this is, this is the name of the game. You know, if the votes are there, the legislation passes. And if the votes aren't there, the legislation doesn't pass. And so,

MMT doesn't solve the political gridlock and that sort of a thing. What it does do, though, Tracy, I think is it, as you said, it re-centers the debate. So instead of, you know, approaching something and saying, all right, we want to do a trillion dollars of infrastructure investment. And we know we have to pay for it. We're in the old framework, right? We know we have to pay for it. So we're going to couple the proposed spending with a whole slew of tax increases to generate

revenue so we can go to the Congressional Budget Office and say, look at our legislation, give it a score, tell us if we did a good job, keeping it all deficit neutral. And it turns out, and we've seen this with build back better, right? It's really hard to get the votes when you have to convince your colleagues in the House and the Senate, not just to vote for your spending priorities, but also to vote for the increase in taxes that you think are necessary to keep it all deficit neutral. And what MMT does is say, you know, sometimes you don't have to offset. the spending. Maybe offset half of it. Maybe you don't need to offset any of it, you know? And so you can then maybe have an easier time gathering the votes to make investments because you only have to win one

fight instead of win that other fight as well. I'm a little bit confused still about the role of taxes in inflation management because one thing that you hear is like, well, this would be a really good time to raise taxes on the rich. That's a politically popular thing. Maybe it marginally diminishes their spending power that creates eases some strains on the economy. Maybe not just the rich, maybe the upper middle class as well. Is there a role for taxation in inflation management? And how do you think of it? Because I feel like a little bit confused on this topic. Okay. Well, taxes function to remove purchasing power from somebody. hands, right? Every dollar that's taxed away from you is a dollar you don't have and, excuse me,

can't turn around and chase after some good or service in the economy. So taxes function to diminish one's purchasing power. But there are other ways to do that as well. So the role of taxes in MMT, first, there's an origin story, right? There's an if you wanted to start up a currency from scratch, taxes play an important role. And we saw that with the euro. The euro is a currency that didn't exist prior to January of 1999. And then because the government said, okay, after this date, we're going to start spending only in this currency and we're going to require taxes be paid in this currency. Well, lo and behold, you switch over the monetary system and now you have the euro. So, you know, creating a demand for a currency is one role of taxes. Another role is, you know,

inflation. If you simply spent the currency and never taxed any of it back again, then you would, you know, put too much purchasing power into people's hands, and the result would inevitably be inflation. So one thing that taxes do is allow the government to both spend its currency into the economy, but also recover a portion of it as they tax some of it back. But can tax policy be used countercyclically? And is there a role for it's like, hey, inflation is high? Now is a good time to raise taxes. Well, the Democrats are trying to do that now, actually.

But taxes are already countercyclical, right? Tax revenues increase automatically as the economy grows and they drop off in a recovery. I'm sorry, in a recession. And so I guess you're asking about discretionary, right? The discretionary use in order to battle inflation. It's been proposed in the past. You know, the Federal Reserve building is named after Mariner Eccles.

And if you go back and you listen to the kinds of things Eccles was saying when talking about how to bring down inflation after the war, or during and after the war, Eccles was saying, we should use taxes to do this. So it's not a new idea. It's not an MMT proposal per se. Could it work? Could it function to reduce inflationary pressures? Yes. Is it practical to adjust taxes in real time to try to battle ex post inflation like after it happens? And the answer is probably no. Maybe you can get the votes to raise taxes when inflation is high and it may help to reduce inflationary pressures. But it's certainly not the frontline policy prescript. for reducing inflation in MMT. Basic question here. What is the right way or the ideal way to reduce ex post inflation? All right. So this is the way I always have tried to say this.

There is in my mind anyway, no one size fits all policy response to inflation. You have to look under the hood. If I were to walk down into my basement and find it flooded with water, I know I have a problem on my hands, but I don't know why. I don't know if a kid left a sink running, if a toilet overflowed, if the dishwasher's leaking, if a pipe. First, before I know what to do, I have to figure out where the source of the water is coming from, what's causing the problem. And that's how I think about inflation.

If we were talking earlier about energy, right, is higher or higher interest rates, the right response, the right policy response to an inflation that's being driven largely by oil prices. I think the answer is no. So I really think where we're ultimately headed, I think, I guess I hope, is to a more granular, tailored policy response, more sufficient. sophisticated response to the way that we approach, you know, combating inflation. This is where we need my idea of a Fed that sets the speed limit of cars. And in these days, lower the speed limit. Rather than raising interest rates, lower the speed limit to get better gas mileage. You know, the economists at the Center for Economic and Policy Research just came out with

a kind of six things you could do to reduce inflationary pressures today. That's one of the six ideas they put forward. A shorter work week, right? Shorter work week sounds fine. Work from home sounds good. Tracy's ears always perk up at work from home. She's like a big. If MMT says everyone should work from home, that's...

We've got you. Yeah, we've got you. That's okay with me. But actually, actually, on that point, can we talk about the job guarantee portion of MMT? Because I mentioned this in the intro, but it feels to me that given everything we've experienced now, that inflation seems to be a more salient issue for people than unemployment. And, you know, maybe if unemployment was at 10% or God for people, bid 20% or something crazy like that, more people would obviously care, but a greater proportion of

those not directly affected would care. But it feels like everyone has a stake in inflation. Everyone is impacted by the cost of living. So how does MMT overcome that discrepancy? How do you get people to care about the job guarantee portion of the theory? Well, I guess, you know, one way to think about it is what if we had a federal job guarantee in place? before the pandemic broke. And instead of, you know, 22 million people lost their jobs in the first two months of the pandemic or whatever. And Congress sort of panicked because we didn't have kind of institutions in place to absorb

and deal in a more focused way with the, you know, the unemployment and the, you know, economic fallout. So suppose we had a federal job guarantee in place. Then there would have been, you know, less, I think, panic and pulling out the bazooka, the money bazooka and just spraying it across the economy and saying we got to blow a bunch of money into people's hands because we don't know what else to do you could have employed people directly and it would have been targeted as opposed to this much more you know untargeting you would have had the infrastructure already in place would have had it in place and the money would have gone right to where it was needed you wouldn't necessarily have had to send large checks to almost everybody and maybe to the extent that doing those kinds of things help to fuel some of the inflationary pressures that we're dealing with today, people could be persuaded by saying, look, we don't want to end up there again.

I like the bazooka. I thought it was great. It just sprayed all that money around. And we went from what was going to be one of the worst downturns ever to the fastest recovery in history. Yeah, actually, I mean, there's no question, right? It is true, right, that we did have the fastest economic recovery in recorded history. So you got to give some credit to the policy response this time, especially as compared to 2008, 2009. I've seen Stephen Mnuchin around the, conference were at. And I keep trying to, I haven't gotten close enough to invite him on odd lots. And we can talk about how great that was. But in all, but in all seriousness, you know, looking back, setting aside the idea of like it would have been nice if there was

infrastructure in place, looking back at the various rounds in Israel, there was like the CARES Act, right? And the American and then Biden's ARP, right? Well, there was the CARES Act in March of 2020. And then there was the 900 billion consolidated spending bill. in December of 2020 and then $1.9 trillion in March of 2021, so $5 trillion in 12 months. So looking back at those three big bills, from what we know now and where we are, in your view, are there lessons to be learned about how they might have been structured differently? So in a perfect world, right, you would run legislation through a sort of rigorous scoring process, if you want to call it a scoring process, instead of asking CBO,

tell us the budgetary impacts of what we're about to do. You want to have somebody on the outlook for inflation risk and you want to have somebody taking a look at what it is you're proposing to spend and looking to mitigate inflation risk ahead of time. That's the big advantage I think of MMT is that when it comes to inflation, the goal is to preempt it, not to chase it on the back end after you've caused the problem, but to avoid inflationary problems, partly through a job guarantee, but partly through changing the way that you evaluate legislation prior to voting. Now, having said that, you know, I said we're in a perfect world. And in a perfect world, you'd also have perfect information.

So you would be able to see the delta variant coming. And you would be able to see the Omicron variant coming. So when I think about it, if you had been able to tell lawmakers, say, let's say you take Larry's story to them. And you say, the line goes here and the other line is here. And this is going to be too much. But also you should know a delta wave is coming and an Omicron wave is coming. Would lawmakers have wanted to err on the side? remember everybody originally said it's better to do too much than too little.

So maybe if you had perfect information about what was coming, lawmakers might have still preferred to take the risk of going too big. We just don't know. And this was also the criticism of 2008, 2009, was that we didn't actually do enough. So one other thing that people are talking about quite a lot right now is the idea of the dollar and its place in the global financial system. America's enjoyment of reserve currency status. And this has also been one of the sort of tangential criticisms of MMT, which is that it might only work for a country like the U.S. that enjoys

that reserve currency status. Maybe it's not so well suited to emerging markets. And I know you have strong opinions on this. But I'm just curious, how are you thinking about that aspect of it at the moment? And what's your response to people who say, well, inflation, the inflation that we're experiencing and, you know, it just proves that the dollar is on its way down or that America's reserve currency status is somehow in danger. Well, I mean, I don't know. I'm looking at the dollar versus the euro versus. This is very hard to make that argument right now. But it's not, I don't think, Tracy, that I have strong opinions about EM. I think that for a lot of EM countries, they don't enjoy the kind of capacity, you know, to spend that a country like the U.S. or Japan or the U.K. or Australia or Canada does.

And it's, of course, not just the U.S. because you look at what even countries across Europe this time, as compared to last time, this time European countries, even those that are on the euro, enjoyed basically the full backstopping of the ECB. It was almost as if the ECB restored monetary sovereignty to all of these countries and just basically said, we have. have your back, we're not going to let yields blow out, go and spend what you need to spend, deal with the pandemic and the economic fallout. So it's not just the U.S. that can do these things. Every European country could basically spend whatever was necessary because they enjoyed the backstopping of the ECB. The UK did a lot of fiscal, you know, Australia. But emerging markets are definitely different. You got a lot of dollar-denominated debt. You're dependent on energy and food and other, you know, critical items to import, you're not necessarily going to be able to get those

things, and you're in a different spot. Right. This was Fidel Khaboobb's argument when he came on here, which is that actually MMT, when applied to emerging markets, is about building up that independence, that fiscal independence. Yeah. You know, I think about like the last 10 years, or 2009 to 2020, roughly, obviously incredible ascendant MMT, was around for long before them, but the conditions were very right for the message that we're underutilizing our fiscal capacity. And we had elevated unemployment, elevated unemployment, we know ex post facto, that the unemployment rate could drop for far much further than economists thought. And it's like, this is full employment, then it just kept going lower. So like,

the conditions were very good in the post-grade financial crisis for MMT to have like a big impact. for this message that we are underutilizing these policy tools that we have available. I think, like, regardless of why we have inflation or, et cetera, it feels like now it's going to be like MMT on hard mode. And it's going to be these questions about like, how do you build port capacity? How do you build sustainable energy capacity? How do we build electrical grid capacity? these are like these are, it feels like these are going to be the really tough questions of the next decade. And I'm really curious like from your perspective, how are you aiming to have MMT thinking inform these conversations? Well, at least that's the proper question. So we're now we've shifted the debate onto this new terrain and you hear, you know, Secretary Yellen going and giving speeches before the World Bank just recently and saying, you know, what the administration's, basic macro approach is modern supply-side economics. And the shift that she's talking about there is

exactly what you're talking about, building capacity and dealing with supply side, right? Resuring and building resilience and all that sort of stuff. So I think MMT can play a role in that. And, you know, we're not quite there in the sense that for Janet Yellen and the way she's talking about it, you still have that adherence to the idea that everything needs to be definitely. neutral. And that keeping a deficit neutral is tantamount to keeping it inflation in neutral, which it is not. But at least we're starting to focus on things like how do we make the investments in ports and childcare and all the rest of it, you know, semiconductors and so forth. How do we get there? How do we get there? Well, we do it. You have to make, you have to spend the money. There's no,

there's no like secret, you know, recipe here. You just simply have to spend the money. So how do you continue to make the kinds of investments? that are necessary in an economy that is supply constrained. How long will we be supply constrained? You know, the word recession is everywhere at this conference. Everyone is talking about whether the Fed is going to successfully orchestrate a soft landing. And if they don't, a hard landing means a deeper recession, which automatically means you're going to free up capacity, right? So I'll just come back to climate because for me, that is the number one issue.

It's not going anywhere, which means I don't think that MMT has lost its place. in the debate. I think that, you know, the weather-related tornadoes, hurricanes, fires, floods, all the rest of it, that stuff is only going to intensify in the years ahead. And we have to spend and we have to make the investments. And so MMT gives us, I think, the confidence to know that there is a path to get there. One thing that just really strike me. I mean, obviously there are these sort of like big macro factors driving the inflate. we're saying, but we also have had a lot of droughts. And I like in the U.S. corn planting season right now is dismal.

And that's a problem. And there's, you know, droughts in Brazil that have affected. Or India and its wheat crops. And the heat. And so thinking about like the connection between climate and weather and the inflation and food that we're thinking right now is pretty real. So I mean, just on this note of how MMT sort of recaptures the narrative, again, one of the critiques has been that the theory itself is complex and people tend to kind of see what they

want to see inside of it. What do you say in response to that to people who say that the theory is too complicated and has a tendency to sort of like change goals and aims over time? I'm not sure I've heard that critique as much. You know, I think you must have heard that MMT is complex, right? And hard to, for a lot of people to grasp. because like the goalpost seems to change sometimes. Okay, well, I've heard people make accusations about goalposts and so over. But I think, I guess I'm used to hearing people say it's almost too obvious and too simple. Yes, I've heard that one too, just to be clear.

So when it comes to the complexity, can you just help me by? I guess it's the idea. So for instance, take like a real example from recent history. So the Sri Lankan central bank governor, I think he came out like. like one or two years ago, I can't remember exactly one, and said, like, we're pursuing MMT. And he thinks he's doing MMT because it's more fiscal spending. But then a lot of other people who are more closely aligned with MMT who are more involved with it will come out and say, no, no, no, this isn't MMT because he's not building up

fiscal capacity and independence. He's not focused on increasing productive capacity or whatever. That's what I mean. It seems open to interpretation. I got you. So I agree with you. If your takeaway, if your thumbnail sketch of MMT is don't borrow in a foreign currency and you can do whatever the hell you want, then that's not going to work.

But you could see how that would be attractive to some emerging market politicians. Sure, you could. And I think, you know, I know only a little bit about the Sri Lankan comments and the justification, the invocation of MMT there. And I think his belief was as long as the proportion of domestic debt, is higher than the proportion of external debt, then you're somehow okay, which makes no sense whatsoever. You still have a lot of external debt that has to be serviced. And if you can't, you know, export and earn foreign exchange to service debt, you're in a world or hurt either way.

So there's no way for MMT to rescue you there. But just to bring it back to the U.S., for instance, a lot of people, well, some people, I should be careful, some people will say that, well, we just experimented with MMT, we ramped up our fiscal spending at a time when we really needed it. And some others will say, well, actually, you know, for instance, real MMT would have told you that we should have had the architecture in place before the 2020 pandemic happened in order to provide that kind of support to people or that, you know, the policy should have been slightly different. That's what I mean about the complexity. And I think that's the aspect of it that might be difficult for people to sort of grasp. Yeah. So I did a post that was, I think it was titled something like, like it's too late for an MMT-informed approach to budgeting. Right. And again, it was the pandemic.

It was the panic. You know, when everybody's in panic mode, then it just became, like I said, the whipping out of that money bazooka and trying to smatter, you know, the economy with enough cash to support income to pull us out of the pandemic and the recovery. So it is true, though, that if you're doing, quote unquote, doing policy and you're doing it consistent with MMT principles, then you've transformed the federal budgeting process. You're evaluating legislation differently. We just didn't have time to do that. Eating well shouldn't be complicated, but somehow it turns into recipes, prep, clean up,

and half your Sunday gone. Factors solves all that. These are fresh, ready to eat meals designed by dieticians, delivered to your door and ready in just minutes. No prep, no cleanup, no excuses. And it's not just about convenience. You're getting Real food, balanced nutrition, and zero artificial stuff. Meals that help you stay on track for all of your goals without the grind of doing it all yourself. Grilled chicken, roasted veggies, steak plates, postables. They taste like something you get in a restaurant, but they come out of your microwave in two minutes flat. If time, cost, or effort have been holding you back from eating better, Factor just took those off the table.

Right now, get 11 meals, free shipping, and free sides for life. Hurry, this offer won't last long. Go to FactorMeals.com.C. and use code fit. That's 11 meals, free shipping, and free size for life, but only with the code fit at facturemeals.ca. Factor, Canada's number one ready-to-eat meal delivery service. If Bellfib TV is now streaming, is it still TV? Is it still TV if there's no TV box?

If I can stream all my favorite channels and pause and record shows, that's TV, right? A new era of FibTV. It's streaming, but it's still TV. Well, glad that's settled. Bell, connection is everything. The Fed, raising interest rates seems to have some effect on the economy. And I don't know exactly what it is, but it seems to, you know, certainly mortgage rates have shot up.

That's going to make borrowing or affording a house at current prices, at least more difficult. It seems to already be slowing some things perhaps in the housing. market. What is, in your view, like just from your perspective, what do we, you know, let's say we're getting, the fetus seems to be set on this, like, very aggressive series of hikes. By the time this comes out, actually, we'll have had the May decision, but, you know, more hikes likely on the way. If we, given your assessment of the inflation, that it's not necessarily about demand and that it's global and that's about energy and food largely, which it's a bit harder to tell the demand story, What are you things going to come out of these hikes?

What are they going to do to this kind of economy? I guess it depends how big they are and how quickly they come. And I think that the likelihood of a soft landing, you know, I think I'm on the side of that's really difficult to pull off. And, you know, you can slow things down. Housing is, of course, the probably sector that is the most sensitive to interest rates. But, you know, you've done shows and I've listened to them. where you've talked about the housing market and you say, listen, you put a house on the market and all of a sudden you have 40 bids and half of them are all cash, which makes you go, okay,

so interest rates are rising. So maybe a few of the people who would have borrowed and bid on that home are out, but maybe you still have 20 all cash buyers in the mix because they're not interest sensitive. So to the extent that you do see housing start to cool, then of course, fewer people buying homes and furnishing them, maybe that takes some strain off of durable goods and that's sort of stuff. So I don't discount that interest rates have a channel, you know, but it's just very difficult to figure out. And Powell will remind us long and variable lags, right? So by the time inflation starts to come down, the interest rate increases may not really have taken hold. And yet the fiscal tightening, which is already baked in, we have huge reduction in deficit right now,

that may do enough to, you know, help with the reduction in inflation. One of the reasons it seems that the Fed is, you know, inclined to do an aggressive series of rate hikes is this idea of like, well, yes, a lot of the inflation is still transitory factors. Maybe it's still related to the pandemic. And now, of course, the war or the new lockdowns in China. But it's too late. And we're worried about the inflation expectations genie coming out of the bottle. And that if you just let inflation get too high for too long, regardless of the fact, regardless of why. our expectations become unanchored, and then we have a decade of high inflation just because expectations. And I'm curious, like, do you sign any significant force to this idea of, like, the expectations channel? I'm, I don't assign a big force. I mean, I won't say that I discounted entirely, but the idea that there is this dominant channel through which interest rates work, which is through inflation expectations, you know, I'll put myself on the side of Philip Rudd, I think wrote that paper.

They got a lot of attention. Was it the Richmond Fed? I think it was actually the Fed. I think it was the Fed Fed. Yeah, I think of the Fed Fed Fed. I think a lot of it is economists sort of hand-waving because most of the old theories seem to have stopped working. You know, most people don't put a lot of cred in the idea of a Nairu

or maybe a Phillips curve sort of fell out of favor when the data stopped working. And so people just sort of turn to the, this other way to explain inflation and said, well, it's mostly expectations channel. This is what's the driver? So just on this topic, there are some people who in early 2020 or maybe mid-2020, I'm thinking specifically of Larry Summers. But, you know, Larry Summers came out and said like, oh, this is way too much. We're going to get massive inflation.

And he's been doing victory laps around that thesis. And, you know, technically he didn't actually say we're going to have massive inflation. He said there's one third chance of having lots of inflation. You certainly wanted a louder voices of concern. Absolutely. And so, you know, people are giving him a lot of credit for seeing these price increases. What did he get right in that scenario? Or what did he see that other people maybe didn't?

Well, inflation went up. Right. You know, I mean, it can be a case of right for the right reasons versus right for maybe the wrong reasons. And I'm not sure that I heard Larry articulate back in, you know, January of 2021 or December when the debate was really heating up over this $1.9 trillion COVID package. I'm not sure I heard him talk about, you know, housing and energy and food and, you know, it was the sort of line goes this way and the other line goes that way. And the gap is such that we're pouring too much in. So, you know, I think that I had a piece out in April of 2021 in the New York Times. It was a fairly long op-ed.

And it was all about inflation. And so it wasn't as if inflation wasn't also on my radar and others. But I think we were thinking about it in different ways. So maybe just to sum it all up, you know, if you had a wish list right now, what would be your biggest policy recommendation or what would you like to? see the most happen right now. It has to be climate. I don't see a bigger threat challenge before us than climate change. And it's going to touch our lives in ways that are unimaginable still for many. But I think the scientific community is telling us in the latest intergovernmental panel on climate change report is pretty scary stuff. And I think we're going to we're going to have to

deal. So in a time in which we're already strained by high oil prices, prices and high fossil fuel costs and also labor constrained would appear and other constrained. What does acting on climate look like from your perspective in a way that doesn't exacerbate inflation? Because Isabel Schnabel, the Deutsche Bank is talking about green inflation, etc. I was going to ask if inflation is just what we have to accept and live with in exchange for healing the climate or fixing the climate change problem. I would certainly hope that if it came down to that and that was a very important. the trade-off, that the answer would be unequivocally yes, that it is a small price to pay

for the survival of humanity? It seems like a worthwhile trade-off. But voters are voters, and we know there's people are really unhappy about the existing inflation, and if you want to keep a durable political coalition alive in Washington, you have to win elections every two years. And so how do you think about when you say you want to see something done on climate at a time when people are really upset about it? gasoline prices, how do you think about putting, you know, what's a policy framework look like that's also politically terrible? What's your energy bill going to look like when we don't deal with climate change?

What is it going to look like when your house is burned down? And what is it going to look like? You know, you've ever seen people in an airport when their flights are canceled? Climate change is going to massively disrupt life in so many ways, right? It is going to be an irritant. It is going to be a hardship. people are going to be feeling pain in ways that haven't even imagined in their lives, in their pocketbooks as a result of climate. So, again, I think, you know, the kind of inflation we're dealing with now is mild in comparison to what lies ahead if we don't get our arms around this.

Stephanie. Stephanie, thank you so much for coming back on Adlaught. Thanks so much. Thanks, Stephanie. That was really fun. Yeah. Obviously, I really enjoyed that conversation. You know, something I was thinking about just in general with inflation.

more broadly is things have really started to normalize in the United States from a pandemic perspective. There really are like very few restrictions on anything. Now, of course, there's still, you know, the awful war that's happening in Ukraine and there is the ongoing lockdowns that are happening in China. But to the extent that inflation is sort of pandemic related, I kind of think like now is the period where we're going to find out. Like is it start to cool down as things normalize, whatever that means, or is there some other force that continues to push it extremely high? I think there's like a pretty pivotal juncture here.

The moment of truth. Kind of. I think it is. Well, the other thing, and we've spoken about this before, but in retrospect, maybe transitory wasn't the right word to use to describe what was actually pandemic-related. inflation or narrow inflation versus broad-based inflation, something like that. And it does feel like by using that word, the Federal Reserve basically put an expectation in that this would be something

that lasts three months. Over by the end of 2020. Right. When actually, to your point, it's only recently that a lot of these pandemic-related restrictions are starting to go away. The other thing I would say, and this is sort of a big picture, theoretical, philosophical question is I feel like a lot of this MMT debate boils down to relative versus absolute gains. And this kind of comes to the inflation point, right? It's easier to get people riled up about cost of living than it is about employment. And on the other hand, a lot of it also comes down to short-termism versus long-termism. A lot of these policy recommendations absolutely make sense for big long-term problems like climate change, but sometimes it's hard to get people to think beyond, like, what are my bills going to look like for the next month?

Yeah. And I thought your question was like, was really astute on that matter about the sort of like disparate impact of employment versus inflation and everyone experiencing inflation, only some people at any given moment experiencing unemployment. And, you know, the one other thing, and this is just my personal opinion, but, you know, the one other thing is so much of the MMT message has been co-opted and then claimed that this is always how we thought. It's like, oh, we always knew that real resources were the constraint. We always, you know, we always knew X or Y. But I really feel like that's very relevant now. And Stephanie, of course, mentioned Jenny Elyne and the sort of new supply side economics, progressive supply side economics. You have liberal punts like as our client talking about, you know, the new supply side. But this idea of, well, if the constraint is on the supply side, then let's build out the supply side is like this like core like MMT idea.

Then now a lot of people are talking about. My most MMT leaning opinion or recognition this year is and we've said this. I think we've written this. But the idea that any problem that can be solved with money isn't actually a big or real problem. Like that, it's a very MMT thing to say, but I think that's something that we've learned over the past couple of years. Yeah, if you can write a check to solve it, you're, it's not that big a deal. My most real MMT view, actually I'm not going to say, I'm going to wait. It's too hot for, it's too hot for error, so I'll tell you after we hit record.

Wait, an MMT view that's too hot for air. Yeah, that can't say. Wow, okay. All right. Sorry, Oddlots listeners. Shall we leave it there? Let's leave it there. This has been another episode of the Odd Lots podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Allaway. And I'm Joe Wisenthall. You can follow me on Twitter at The Stallwork. Follow our guest, Stephanie Kelton at Stephanie Kelton. Follow our producer, Carmen Rodriguez, at Carmen Armin. Follow the Bloomberg head of podcasts. Francesca Levy at Francesca Today. And check out all of our podcasts at Bloomberg, onto the handle at podcasts. Thanks for listening.