Planet Money - Modern Monetary Theory (Classic)

Episode Date: January 20, 2021

We rethink everything we know about government spending, taxes, and the nature of money.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

This is Planet Money from NPR. When you scroll down in President Joe Biden's stimulus package and you look at all the bullet points, there is money for so many things. More money for unemployment, more money for state and local governments, money to help schools open, money to bail out state and local governments. There is a lot in there. And the total price tag is $1.9 trillion. And this is at a time when a federal government is already spending trillions more dollars a year than it is taking in in taxes. Federal debt is already more than $20 trillion. So this raises the question, how is the government going to pay for it? But there is a school of thought that says, wrong question, wrong way to think about it. This wing of economics

calls itself modern monetary theory, MMT. We covered it two years ago, back when other presidential candidates were suggesting other expensive programs like Medicare for All, free college, and a jobs guarantee. And those didn't happen. But with spending, shooting up this way of thinking about economics was gaining some traction. So with more spending on the horizon now, here is our episode from 2018 on modern monetary theory. We got a brilliant question on our Planet Money Twitter account recently, a question that spawned this entire episode. I asked my dad about a question and he said he couldn't answer it. So he told me to come and ask you. It came to us from Amy, a 13-year-old listener in Bristol, England.

She listens with her dad. And Amy's question, it's about the government and what it can spend. Here it is. I had this idea that because they print money, instead of giving it to the bank and making inflation go up, they could use it just for the public services and it would be much easier, and it would be, in general, really good, because I know there's lots of problems with, like, there's not enough tax to go around all the schools and hospitals, so I thought maybe this might help. So thank you for listening.

Yeah, thanks. Bye. This question is brilliant. It has so many layers. Like the first part, printing money. What is stopping the government from printing as much money as it wants? Basically nothing. And then the spending part.

If the government prints money, why do they need to take my money in taxes? And Amy even calls out the possible fatal flaw. Inflation. Inflation. But she's like, are we sure that this would cause inflation? And the answer is, nope. Inflation ain't what it used to be. Economists of all ages are rethinking how it works. At the heart of Amy's question is a paradox. The government can create money, but the government also says it doesn't have enough money to pay for stuff. Does that even make sense? Hello and welcome to Planet Money. I'm

Sally Helm. And I'm Alex Goldmark. Today on the show, the whole show is Amy's question. Can we buy everything we want? And if we try, will we be living in a utopia or an inflation nightmare? why will we be living in a utopia or an inflation nightmare? Okay, Alex, we found the perfect person to answer Amy's question. She's an economist, had a similar question about 20 years ago, and has been thinking about it ever since. Her name is Stephanie Kelton. So what do you think? Is Amy on to something?

You know, young people can be so clear-minded. Yeah, that is an incredibly sort of astute way of framing it. You know, the government can fund itself by simply issuing the money. And Amy has hit on something that is well-known to economists, but it's just that most economists like to say, but that's not really a very serious way of going about things. But Stephanie is serious. She's a professor at Stony Brook University. She's one of the leaders of this movement within the left wing of economics. It's called modern monetary theory.

Or the initials MMT for short. And they say the government could create money and spend more without necessarily raising taxes or causing runaway inflation. If you're wondering, before this episode is over, we will all scream the word inflation together. They know about inflation. Wait for it. So, 13-year-old Amy, her question led us straight into this whole huge alternate theory of economics. And at just the right time. MMT is having a moment right now. There's a corner of the economist internet that is, like, obsessed with this idea.

There are more MMT blogs today than, I don't know, McDonald's franchises or something. They're just, like, everywhere. And it's not just the blogs. Politicians have been asking Stephanie and her colleagues to be advisors. Bernie Sanders. Earlier this year, she gave a keynote in Parliament in London at the House of Lords. The Lords couldn't get enough. Most economists used to ignore these ideas as fringe or far out, and a lot of them still do.

But lately, some economists who used to shrug off these ideas, they're starting to write about MMT. And regular people, more and more of them, are becoming converts every week. And when Stephanie is talking to a potential new convert, she often starts with the first basic part of Amy's question. About what is money? Can the government just print as much money as it wants? I don't like the phrase printing money. I'll just lay that out there. Okay, okay. We're going to say create money because most of the money out there is digital, not paper.

No shock here, right? The way we mostly handle money in our lives. Yeah. I mean, in my life, it's basically only numbers ticking up and down in my bank account. I've never touched paper, basically. And most of that digital money out there in the world actually comes from banks making loans. It's worth a second to explain this one. It's different than the way a lot of textbooks talk about it.

Here is the idea. Let's do it. Okay. So say economist Stephanie Kelton needs $100,000 to start a pancake restaurant. I don't know. The bank checks out her credit history and they're like, you're good. They decide to give her the money. The loan officer will type some numbers into his or her computer and my account balance is going to increase by $100,000.

That is it. The bank officer isn't thinking about cash. He's not going down to the vault and counting 20s. People say, what? That's crazy. Where did the bank get the money to make the loan? Well, it got it from the keyboard, right? It was a one followed by a number of zeros.

Call it the power of the keyboard. Banks have it. And Stephanie says, so does the government. The superpower of the keyboard. This is how Stephanie tells the story of government spending. When Congress spends money on aircraft carriers or whatever, they just tell the government's bank, the Federal Reserve, to go and type some money into the accounts of basically whoever's making aircraft carriers. Just type it in. So Stephanie says the question, can the government afford something? The answer to that question is always yes.

So, like, can we afford to build a thousand new bridges? Yes. Could we fill all of the potholes in all of New York City if we wanted to build a thousand new bridges? Yes. Could we fill all of the potholes in all of New York City if we wanted to? Of course. And also buy a hundred new aircraft carriers for the military? You could. And college for everybody. Federal government could pay for it. Affordable.

Sounds like a utopia. There has to be a catch, though, right? We know there's a catch. What's the catch? OK, we're going to get to the catch. But quick asterisk here. These MMT ideas apply only to governments that control their own currency, currency that's backed by nothing but the government's good name. It's not pegged to another currency. And this doesn't work for countries that borrow in another currency. borrow in another currency. So it applies to the U.S. and to the U.K., but not, say, to Greece because they use the euro or Venezuela because they have a bunch of debt in U.S. dollars. Right, because then Greece and Venezuela can't use the power of the keyboard to pay back the debt if they need to in the same way. Asterix is over? Yes, it's over. Okay, let's go. Okay, so from here on out, let's focus on the U.S. and the U.K. Thirteen-year-old Amy, after all, lives in the U.K. This all leads us to the next part of our big question from Amy. The government can create money.

So what's the point of taxes? Why does the government need to take my money in taxes? The story on taxes that I always had in my head, it says that the government spends money because, you know, it has to. It needs to pay for aircraft carriers and first-grade teachers. I always had in my head. It says that the government spends money because, you know, it has to. It needs to pay for aircraft carriers and first grade teachers. And part of the government's job is to balance the amount of money that it spends with the amount of money that it takes in. This is the part where you hear, you know, about Congress fighting over the budget. The government takes in money in taxes. And if it needs a little extra, it borrows some money.

a little extra, it borrows some money. And then across town, the Federal Reserve, the central bank, they look at the health of the overall economy and change interest rates or create some money, maybe remove some money from circulation to keep the economy in balance. Basically, the Fed handles that big picture stuff like fighting inflation. And meanwhile, Congress buys aircraft carriers. But modern monetary theory says it doesn't have to be this way. Forget everything you know. Back when Stephanie was a young grad student, she heard about a different way of looking at things. It was being shopped around by a finance guy named Warren Mosler. He was looking at this whole system, the federal government, the central bank. And it's like when you're looking at

one of those optical illusions. Is it a goblet or is it two faces staring at each other? I always see the faces first. He's looking at the system and it's like he suddenly sees the goblet. If you look at it a little differently, then taxes don't finance spending. Spending comes first and taxes second. This got me, so let's slow it down. Here's the old way. Taxes bring in the money.

Then government spends that money. Mosler's new way? Government just spends. Power the keyboard. Then the government has something to tax. The money's out there. So Stephanie was initially not sold on Warren Mosler's argument. She was like, this sounds fishy. I'm going to vet it. So I spent a number of months reading treasury manuals, Fed manuals, tracing out all of the balance sheet entries, going through the minutiae of how government spending and taxation and financing actually works. I wrote it all down with all the complicating details. And I ended up reaching exactly the same conclusion that Warren had reached. When she looks at all the details, she's like, whoa. Actually, yes.

This is a valid way of looking at the world. Which kind of throws off the whole way she was thinking about economics. And there's this group of other economists talking about these ideas. There are about six or seven of them eventually. And they become these modern monetary theory people. The MMT crowd is born. Do you start talking about that at like the Economist Bar where you guys are like drinking Economist beers? Oh, totally. Totally. We named a cocktail after it. No, I mean, it's... The MM and tonic? Yeah, it's the mind bender, I think, is what we probably would have called it if we'd

actually done it. So in this mind bending world, we still have the question, why does the government tax at all? Stephanie says one reason. It taxes because it wants to remove some of the money that it spent into the economy so that it can guard against the risk of inflation. Inflation! Inflation! We told you we'd yell it. We got there. Okay.

This is one of the big ideas of modern monetary theory. Taxes are not for spending. Taxes are for fighting inflation. And spending, that isn't just to buy stuff the government needs, but the power of the keyboard, the spending from that, can be put to use for doing all kinds of good things, to put money into the economy to give it a boost or to help get to full employment. Okay, so the government is spending money into the economy, spend, spend, spend, and eventually they're going to need to drain some money out. And she says you can think of

taxes as a way to do that. Because, I mean, you got to have a way to get money out of the economy, right? And this is a big question that we had about MMT. If you remind the government that it has the power of the keyboard, is the government going to go crazy? And then will you get like people with wheelbarrows full of cash dumping piles of money on the counter when they want to buy a cup of coffee? I'm going to sort of summarize like common objections that I hear come up to this. And I think I could summarize them succinctly by saying just like Venezuela, Weimar, Germany, Zimbabwe. Deeply thoughtful, right? Objections, yes. I mean, so that's like countries that face hyperinflation. Well, those aren't serious

objections. That's not a serious objection. That's someone who wants to resist what they're hearing. And so they throw out a word, Zimbabwe, Venezuela, Weimar, Germany. And so look, if you think hyperinflation is the necessary result of what I just described, the government sitting down with its budget and deciding how many dollars to write into each of these line items, you could well get inflation. I'm not denying that. The federal government could try to spend too much into an economy that doesn't have the room to absorb that much new spending and you begin to get an inflation problem. I'm not suggesting that that can't happen. But she thinks it wouldn't necessarily happen.

And we were like, wait, but wouldn't it happen? If there's just a ton more money pumped into an economy, then everyone has more money. So then everyone's going to spend more money. And that is what drives up prices and causes inflation. If there's more money out there through the government spending, then it's it's out there and people can do whatever they want with it. So I'm trying to get my head around, wouldn't that cause inflation somehow? If everyone, a bunch of people have more money because the government is spending a bunch more, then won't they spend that money on stuff and couldn't that cause inflation? Well, where is it? Where is it? We've been doing it. We just did it with a $1.5 trillion tax cut.

We did it with $300 billion in additional spending. We've done it and done it and done it. Where is the inflation problem? I don't see it in the UK. I don't see it in Japan. I don't see it in the U.S. It's true. Countries, including the U.S., have had a hard time hitting the inflation targets that they want to hit for years. So Stephanie says we shouldn't be freaking out about inflation right now. But we do need to think about inflation. Here is her answer to the last part of Amy's question. Should the government create as much money as it needs to? Here comes the catch.

Well, the catch is that all of these things are affordable in money terms. But, you know, I like to sometimes I'll say every economy has its own internal speed limit. The speed limit. Every economy has its own internal speed limit. The speed limit. She says what you need to look at is how much money an economy can absorb before inflation takes off. And the speed limit has to do with what economists call real resources. An economy is not just money. Like if you want to build a hospital, you can't build it out of money.

You need concrete and glass and linoleum floor and sofas in the waiting room. And those IV bags that hang on those sort of rolling coat rack things. You need someone to make those rolling coat rack things, let alone doctors and nurses. Of course you need them. Stephanie says those things are what create the speed limit. So say the factory that makes those wheeling coat rack things is running at like half the capacity that it could. that makes those wheeling coat rack things is running at like half the capacity that it could. Then if the government decides to place a big order for those coat rack things, nothing bad really happens.

They just buy them at the normal price, put them in the hospital. Great. Great. But what if the factory is at full capacity? Then the government has to say, hey, sell to our new hospital instead of to your other customers. And to get them to do it, they'll have to pay more. That is inflation. Prices just went up. And if the government spends so much that it drives up prices all over the economy, that's your inflation problem.

Stephanie says that's what the government should think about. Not whether they have enough money, but whether there are enough resources in the economy to soak up that money. That is basically her answer to Amy. The government can create money and spend it up to that internal speed limit. If you start to get inflation, that's a sign you might be spending too much. Maybe you could raise taxes to pull some of that money back in. But if you don't see inflation, just go for it. Now, clearly, not everyone sees it this way.

Their theory, I believe, has holes in it. This is Tom Pally. He's an economist. He's done work for labor unions. And he's on the left of the economics profession, like MMT. But he's been a longtime critic. Trouble in the family. And we might as well say here, the reason we're only hearing from economists on the left in this episode is that the economists who are researching and writing about this theory, they mostly all tend to be on the left. Economists who take a

more traditional or conservative view, they tend to say you have to think about taxes as a way to finance spending. That is the responsible way to run a government. To Tom Pally, modern monetary theory is useful because it points out some flaws in mainstream economics. Like he thinks that mainstream economics is too obsessed with balanced budgets. But he has some doubts about MMT. A big one is the whole taxes thing, the idea of using taxes to fight inflation. Politics doesn't work like that. Taxes are very, very contested. No one wants their taxes raised. It's very hard for politicians to raise taxes. They're very slow to do it because, guess what, they don't get reelected if they do. He says it's just not realistic for the government to react fast enough to respond to inflation. We put that to Stephanie Kelton.

If your concern is that it would be difficult to fight inflation by raising taxes, that is obviously a legitimate concern, that it is difficult to get Congress to act quickly to do the right thing. And so one of the things that MMT economists have advocated for a very long time is finding a way to take the fingerprints of Congress off of the decision making. In other words, to make it happen automatically. She says something like this kind of happens already. Like when the economy is booming, you don't have to spend as much on unemployment insurance. People have jobs. So spending goes down automatically.

She says do more of that. More types of taxing and spending that kick in automatically if inflation starts to tick up. And also she says, and she's not alone in saying this, nobody has a good model of inflation right now. And she thinks the government could spend a lot more money right now and we'd still probably be fine. right now. And she thinks the government could spend a lot more money right now and we'd still probably be fine. Okay, so we went looking for a way to explain to 13-year-old Amy whether the government can print money to spend on schools and hospitals and not have to raise taxes to do it. And we found this branch of economics, this movement even, with a whole new way of looking at how money works. Do you see the faces or the goblet? You can pick which one you want to see.

Yeah, they say you can make this mental shift about taxes and spending. Don't think about them the way you think about your money in your private life. Like, do I have enough to buy this thing I want to buy? The government is not a household. Lots of economists agree there, by the way. Instead, the modern monetary theory folks, they say, start thinking about how taxes and spending affect the big economic stuff like employment and inflation. The way it is now, it's the Federal Reserve's job to think about that. Kind of just because that's how we set things up, like way back when.

But MMT would say government spending and taxing is actually a much more direct way to go about this. If you want more employment, don't fiddle with the interest rate. Just hire people or buy things from businesses who will hire people. There are definitely questions about how this works in practice. And this is far from the mainstream textbook way that most economists talk about this stuff. And if you think government sucks, you probably aren't loving this plan. But there's some logic to the idea that Congress should be thinking about the big stuff. Is the economy good?

Are people employed? And that money isn't just a way to buy aircraft carriers. It's way more than that. That's something the MMT folks want you to keep in mind. Don't just think about money as a scarce resource, something you can run out of. Think about what you want money to do and go from there. It's a different starting point for asking the question, can we afford something like a new hospital? we afford something like a new hospital? Hi.

Amy, is that you? Yeah. Amy, you asked us a question a couple weeks ago. It was a really good question, and we have an answer for you. I'm really excited. I'm, like, super excited. I didn't know that you were going to get back. I didn't think that this was going to happen.

Unfortunately, you have to listen to a whole episode of Planet Money to get it. How does that sound? Okay. Yeah, that's really good. I'm excited. After the break, Amy from Bristol. Amy? Yeah. What do you think? That was amazing. I was literally like trying to stop stop myself from screaming because it was so good. So what do you think? What's your takeaway?

You have this question. It's a really, really good question. We found some stuff out. What do you think now? I think it's really good. Listening to that, it just made me feel like I could be on to something really good. So are you going to tell the other kids at school what you figured out here? Yes, I'm definitely going to tell. I'm going to tell everyone, like, I'm so happy that you made that episode and it just answered so many questions, like, that were in the question that I asked.

There is a lot we didn't get to in this episode. Lots to pick apart here. Go hash it out on the internet. We post every episode on Twitter and Facebook. We also have an Instagram for Pretty Pictures and probably fewer fights about inflation. Though we do sometimes talk about inflation on our Instagram. What do you expect? Today's episode was produced by Nick Fountain and Darian Woods.

Our editor is Brian Erstad. You, Alex Goldmark, are the supervising producer. Thank you for supervising. Thanks also to Brad DeLong and J.W. Mason, who were among the many people who helped me understand MMT. If this podcast didn't give you enough of the metaphysics of money, can I recommend our friends at Radiolab? They have an episode out last Friday called More Money, More Problems featuring Planet Money's own Jacob Goldstein. Go take a listen. I'm Sally Helm.

And I'm Alex Goldmark. Thanks for listening. Yeah, I literally just came out of school today, and my dad was like, oh my gosh, Planet Money emailed me and said that they've used your idea for an episode. And I was like, oh my gosh. and a special thanks to our funder the alfred p sloan foundation for helping to support this podcast