In the wake of the Great Financial Crisis, Modern Monetary Theory rose in prominence with the simple message that we had more fiscal capacity than mainstream economists and politicians appreciated. And in an environment of low inflation and slack labor markets, this message was powerful. But now we’re in a very different environment. The labor market is tight and inflation is sky high. And there's a lot of finger pointing at the aggressive fiscal expansion we saw in 2020 and 2021. As such, there's also a lot of finger pointing at the MMT message. On this episode we spoke with Stephanie Kelton, one of the foremost MMT economists and the author of the best-selling book “The Deficit Myth” to get her take on the macro environment, and what MMT can contribute to today's debate. Transcripts have been lightly edited for clarity.
Points of interest in the pod:
Have mainstream economists been vindicated? — 5:22
Why is inflation so hot? — 6:17
What's the MMT fix for hot inflation? — 10:37
How can taxes fight inflation? — 17:06
The MMT approach to budgeting — 35:31
Should stimulus have been designed differently? — 40:52
Joe: (00:10)
Hello, and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy: (00:15)
And I'm Tracy Alloway.
Joe: (00:16)
What are the big topics for you? We're at the Milken Conference out in Beverly Hills? What would you say are the big topics that you've heard?
Tracy: (00:24)
I think it's inflation, right? I mean, I’ve 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.
Joe: (00:34)
Right, 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 worried. He had a lot of criticisms about this administration and policy and all that, but of all the things I was actually a little bit surprised, like he didn't seem that concerned about inflation or as much as 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 and give the Fed some flexibility. So some interesting different views.
Tracy: (01:03)
Well, yeah, I mean, the thing that I've learned from the past year is that people have very strong opinions about inflation. It's a very emotional topic.
Joe: (01:12)
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.
Tracy: (01:30)
Well, so this is the other thing that I think we've learned, which we've talked about before, but it feels like more people care about about inflation than people care about the unemployment rate. 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.”
Joe: (01:57)
Right. So even during periods of high unemployment, most people hold on to their jobs over a given cycle, but everyone feels rising prices. And so there's sort of like this political asymmetry and you think about the Fed and it has to balance the two, but this is the first time we really see this. Like it appears anyway that the high inflation is coming at a cost of consumer sentiment and so forth.
Tracy: (02:21)
Yeah, I think that's right.
Joe: (02:22)
And of course it's highly politicized and people look at different policies and in particularly they look at, you know, the Fed gets some of the blame but a lot of the ire is 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 way too much. There was one line and the other line was a little bit below and that was the output. But then there's they spent trillions and it's too much.”
Tracy: (02:54)
When are you going to say ‘Modern Monetary Theory’?
Joe: (02:58)
Okay fine. Let's just jump right in. Okay. 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. She's known as one of the foremost advocates of this way of thinking — Modern Monetary Theory (MMT). And she's the author of the book, “The Deficit Myth,” she's the co-host of the “Best New Ideas In Money” podcast. And she's a professor at Stony Brook and she's here with us at Milken.
And so we are going to be talking about actually, you know, what we're really gonna be talking about is MMT to blame for this high inflation? Are you to blame for this high inflation, Stephanie?
Tracy (03:42):
Oh, he jumped right into it.
Joe (03:44):
Yeah. I'm just gonna jump right in. Are you to blame for all this this?
Stephanie: (03:43)
I think so.
Joe: (03:45)
Congratulations.
Stephanie: (03:47)
No, look, I think that you two probably more than anyone have done deeper dives into this question over the course of the last 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…
Tracy (04:29):
Thank you. This is gonna be a double edged sword for us. Anyway, go ahead.
Stephanie (04:34):
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?
Joe: (04:47)
I appreciate that by the way. But it feels like there is sort of this revenge, a little bit, of sort of the old school, the New-Keynesian economists. And they're like, look, here's this line — that's potential GDP. Here's this other line — that's actual GDP. There is a gap between them. And Biden spent too much money. That was more than one line subtracted by the other line, our models work, it showed inflation. So what is that a vindication of that style of thinking? Like the sort of vulgar output gap thinking?
Stephanie: (05:22)
No, of course not. I mean, you know, potentially getting the inflation stuff right but for the wrong reasons, it's not vindication. Okay. So we go back to “what is a more sophisticated way to think about why we ended up with the high inflation?” we ended up with. Of course it's not just here in the US, but it's around the world and you look at Europe and they're just right on our heels. It's seven point half percent or so. So we know that countries like China, countries like the UK, also are at 40 year highs when it comes to inflation. So 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.
Tracy: (06:06)
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?
Stephanie: (06:17)
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. 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.
Joe: (07:14)
Right. You know, it feels to me, and again, you're the expert here, but you know, it's hard to me, it's hard to tell a story that say oil prices, which we know are a huge driver of all in headline inflation, have something to do with fiscal.
Stephanie: (07:32)
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 bounceback happened sooner and the strength of demand. So some of that is at play as well.
Tracy: (08:12)
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 in MMT the constraint on spending is inflation. And now we have CPI at 8.5%. And we have people who are also saying, well, the solution to the inflation is more spending. How do you reconcile those two things?
Stephanie: (08:53)
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 childcare and the 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. You know, he's talking about the importance of reassuring 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? You know, if they wanna do all of this infrastructure, and we've heard talk about, you know, 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 gonna have backlogs, you're gonna have to wait to roll that out. So it isn't gonna 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, but maybe childcare helps a bit.
Tracy: (10:13)
So this is sort of the emphasis on the real resource constraint within MMT, which I will, you know, 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?
Stephanie: (10:37)
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 gonna be a long term program. It's gonna be a 10-year or a 15-year or whatever program, but you've got to start thinking about how you're gonna 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, 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 gonna 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 wanna make, you may well have to elbow out some of the private sector's current use of resources to free up for something that's deemed higher priority like climate.
Joe: (12:13)
So the way we're actually in this country attempting to deal with inflation is through rate hikes and the Federal Reserve. And of course the question is how is that supposed to fix supply chain bottlenecks? And everyone knows it can. 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 counter cyclical
When you look at politicians, they're proposing things like gas rebates or cutting the gas tax, which is a kind of arguably putting more, trying to juice, demand even further. I don't find that very encouraging. And so one of the good things I think about the MMT view of thinking is I consider it to be democratic and 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 they 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 do spending or to spend more?
Stephanie: (13:30)
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 10, you know, I don't think this is gonna 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, you know, 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.
Tracy: (14:17)
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 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 gonna 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 DC — to sum it up.
Stephanie: (15:06)
Sure it is. But I don't know that this is a recent years kind of a thing. I mean, 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 recenters the debate . So instead of, you know, approaching something and saying, all right, we wanna 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 gonna 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.
Joe: (16:31)
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 eases some strains on the economy. Maybe not just the rich, maybe the upper middle class as well. What is the role for a taxation in inflation management and how do you think of it? Because I feel like a little bit confused on this topic.
Stephanie: (17:06)
Okay. Well, taxes function to remove purchasing power from somebody's 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, right? 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 was a currency that didn't exist prior to January of 1999. And then because the government said, okay, after this date, we're gonna start spending only in this currency and we're gonna 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.
Joe: (18:24)
But can tax policy be used countercyclically? And is there a role for like, “Hey, inflation is high. Now is a good time to raise taxes.”
Stephanie: (18:33)
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 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 after it happens? And the answer's probably 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 prescription for reducing inflation in MMT
Tracy: (19:41)
Basic question here, what is the right way or the ideal way to reduce ex-post inflation?
Stephanie: (19:48)
Alright. 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 of a pipe burst. And 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 in inflation.
We were talking earlier about energy, right, are higher interest rates, 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.
Joe: (20:43)
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.
Stephanie: (20:54)
You know, the economists at the Center For Economic Policy And Research came out with kind of six things you could do to reduce inflation pressures today. That's one of the six ideas they put forward a shorter work week.
Tracy: (21:07)
Shorter work week. Sounds fine. Yeah. Work from home. Sounds good.
Joe: (21:09)
Tracy's ears always perk up at ‘work from home.’
Tracy: (21:13)
… if MMT says everyone should work from home that’s okay with me.
Stephanie: (21:16)
We've got you.
Tracy: (21:17)
But 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 forbid 20% or something crazy like that, more people would obviously care — 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?
Stephanie: (22:02)
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 unemployment and the, you know, economic fallout.
So suppose we had a federal job guarantee in place. Then there would've 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 gotta 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've been targeted as opposed to this much more, you know, untargeted…
Tracy: (22:53)
The infrastructure already in place.
Stephanie: (22:55)
You would've had it in place and the money would've 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 helped to fuel some of the inflationary pressures that we're dealing with today, people could be persuaded by saying, look, we don't wanna end up there again.
Joe: (23:13)
I liked the bazooka. I thought it was great. It just sprayed all that money around. And we went from what was gonna be one of the worst downturns ever to the fastest recovery in history.
Stephanie: (23:22)
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’ve got to give some credit to the policy response this time, especially as compared to 2008, 2009...
Joe: (23:35)
I've seen Steven Mnuchin around the conference we're 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 seriousness, you know, looking back, setting aside the idea of like, it would've been nice if there was infrastructure in place, looking back at the various rounds there was the Cares Act right? And the American and then Biden's ARP. Right?
Stephanie: (24:01)
Well, there was the Cares Act in March of 2020, and then there was the $900 billion consolidated spending bill in December, 2020, and then $1.9 trillion in March of 2021. So $5 trillion in 12 months.
Joe: (24:15)
So looking back at those three big bills, just from what, 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?
Stephanie: (24:28)
So in a perfect world, yeah. Right. You would run legislation through a sort of rigorous scoring process. If you wanna call it a scoring process, instead of asking CBO, tell us the budgetary impacts of what we're about to do. You wanna have somebody on the outlook for inflation risk and you wanna 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 gonna 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 [of caution]? 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.
Tracy: (25:51)
And this was also the criticism of 2008, 2009 was that we didn't actually do enough, but 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. And 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 US 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, 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.
Stephanie: (26:49)
Well, I mean, I'm looking at the dollar versus the euro versus the history. Hard to make that argument right now, but it's not, I don't think 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 US or Japan or the UK or Australia or Canada does. It's of course not just the US 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 your back. We're not gonna 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 US 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.
Tracy: (28:06)
Right. This was Fadhel Kaboub 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 capacity.
Joe: (28:17)
You know when I think about like the last 10 years, or 2009 to 2020 roughly, obviously MMT was around for long before then, but the conditions were very right for the message that we are under utilizing our fiscal capacity. And we had elevated unemployment. We know ex-post facto that the unemployment rate could drop much further than economists thought. And it's like, oh, this is full employment. Then it just kept going lower. So the conditions were very good post-GFC for MMT to have a big impact.
And for this message that we are under utilizing these policy tools that we have available, I think like, regardless of why we have inflation etc., it feels like now it's gonna be like MMT on hard mode. And it's gonna 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? It feels like these are gonna 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?
Stephanie: (29:37)
Well, at least that's the proper question. So 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. Reassuring and building resilience and all that sort of stuff. So I think MMT can play a role in that, 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 deficit neutral. And that keeping a deficit neutral is tantamount to keeping inflation and 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?
Joe: (30:41)
How do we get there?
Stephanie: (30:42)
Well, we do it. You have to make, you have to spend the money. There's no like secret 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 gonna successfully orchestrate a soft landing. And if they don't, a hard landing means a deeper recession, which automatically means you're gonna free up capacity. 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.
Joe: (31:45)
One thing that just really strikes me. I mean, obviously there are these sort of like big macro factors driving the inflation we're seeing, but we also like have had a lot of droughts. And like in the US corn planting season right now is dismal. And that's a problem. And there's, you know, droughts in Brazil...
Tracy: (32:04)
Or India
Joe: (32:05)
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, it’s pretty grim.
Tracy: (32:30)
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 wanna 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?
Stephanie: (32:57)
I'm not sure I've heard that critique as much, you know,.
Tracy: (33:01)
You must have heard that MMT is complex, right? And hard for a lot of people to grasp, because the goal posts seem to change sometimes.
Stephanie: (33:09)
Well, I've heard people make accusations about goal posts, but I think, I guess I'm used to hearing people say it's almost too obvious and too simple.
Tracy: (33:19)
Yes. I've heard that one too, just to be clear.
Stephanie: (33:20)
So when it comes to the complexity, can you just help me by [explaining]?
Tracy: (33:25)
I guess it's the idea, so for instance, take a real example from, from recent history. So the Sri Lankan central bank governor, I think he came out like one or two years ago — I can't remember exactly when — 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 physical capacity and independence. He's not focused on increasing productive capacity or whatever. That's what, I mean, it seems open to interpretation.
Stephanie: (34:05)
I got you. So it's, I agree with you. If your takeaway, if your thumbnail sketch of MMT is ‘don't borrow in a foreign currency, you can do whatever the hell you want,’ then that's not gonna work.
Tracy: (34:19)
But you could see how that would be attractive to emerging market policymakers.
Stephanie: (34:22)
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 of hurt either way. So there's no way for MMT to rescue you there.
Tracy: (34:54)
Just to bring it back to the US, 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've 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, I think that's the aspect of it that might be difficult for people to sort of grasp.
Stephanie: (35:31)
Yeah. So I did a post that was, I think it was titled something 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, and when everybody's in panic mode yeah. Then it just became, like I said, the whipping out of that money bazooka and trying to, to smatter, you know, the, the economy with enough cash to support income, to pull us out of the, the pandemic and, and the recovery. So it is true though that if you're ‘doing policy’ and you're doing it consistent with MMT principles, then you've transformed the federal budgeting process. You're evaluating legislation. Yeah. Differently. We just didn't have time to do that.
Joe: (36:16)
The Fed raising interest rates seems to have some effect on the real economy. And I don't know like exactly what it is, but it seems to, you know, certainly mortgage rates have shot up. That's gonna 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, just from your perspective, what do we, you know, let's say we're getting — the Fed 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, given your assessment of the inflation, that it's not necessarily about demand and that it's global and it's about energy and food largely, which it's a bit harder to tell the demand story, what do you think's gonna come out of these hikes, what are they gonna do to this kind of economy?
Stephanie: (37:12)
I guess it depends how big they are and how quickly they come. And you know, 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 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, 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, that's true. Okay. So interest rates are rising. So maybe a few of the people who would've 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 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 legs, 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.
Joe: (38:35)
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 the bottle — 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 assign any significant force to this idea of like the expectations channel?
Stephanie: (39:18)
I don't assign a big force. I mean, I won't say that I discount it 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 who I think wrote that paper that got a lot of attention again, was it the Richmond Fed?
Joe: (39:39)
I think it was actually the Fed. I think it was like the main Fed. Yeah. I think at the Fed.
Stephanie: (39:44)
The 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 turned to this other way to explain inflation and said, well, it's mostly expectations channel. This is what's the driver.
Tracy: (40:11)
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, ah, this is way too much. We're gonna get massive inflation. And he's been doing victory lap around that thesis. And, you know, technically he didn't actually say we're gonna have massive inflation. He said there's a one third chance of having lots of inflation.
Joe: (40:37)
But he was certainly one of the louder voices.
Tracy: (40:39)
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?
Stephanie: (40:52)
Hmm, 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.
Tracy: (41:49)
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?
Stephanie: (42:00)
I mean, it has to be climate. I don't see a bigger threat challenge before us than climate change. And it's gonna touch our lives in ways that, you know, 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 so we're gonna have to deal.
Joe: (42:24)
So in a time in which we're already strained by high oil prices and high fossil fuel costs, and also labor constraints it would appear, and other constraints, what does acting on climate look like from your perspective in a way that doesn't exacerbate inflation? Because Isabel Schnabel at the Bundesbank is talking about green inflation.
Tracy: (42:46)
I was gonna ask if inflation is just, you know, what we have to accept and, and live with in exchange for healing the climate or fixing the climate change problem?
Stephanie: (42:55)
I would certainly hope that if it came down to that, and that was the trade off, that the answer would be unequivocally yes. That it is a small price to pay for the sake for the…
Tracy: (43:07)
Survival of humanity?
Stephanie: (43:07)
It seems like a worthwhile trade off.
Joe: (43:10)
But voters are voters. And we know people are really unhappy about the existing inflation. And if you wanna 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 wanna see something done on climate at a time when people are really upset about gasoline prices, what's a policy framework look like?
Stephanie: (43:37)
What's your energy bill gonna look like when we don't deal with climate change? What is it gonna look like when your house is burned down? And what is it gonna look like, you know, you've ever seen people in an airport when their flights are canceled? Climate change is gonna 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 pocketbook 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.
Joe: (44:16)
Stephanie Kelton, thank you so much for coming back on Odd Lots.
Stephanie: (44:19)
Thanks so much.
Tracy: (44:20)
Thanks Stephanie. That was really fun.
Joe: (44:35)
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 theo ngoing 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 gonna find out, 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 is like a pretty pivotal juncture here.
Tracy: (45:22)
The moment of truth.
Joe: (45:24)
Kind of, I think it is.
Tracy: (45:26)
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, right. 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.
Joe: (45:50)
Over by the end of 2020, right?
Tracy: (45:51)
Yeah. 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 gonna look like for the next month?
Joe: (46:36)
Yeah. And I thought your question was really astute on that matter about this sort of like disparate impact of employment versus inflation and everyone experiencing inflation, only some people at any given moment experiencing unemployment. 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 are the constraints. We always, you know, we always knew X or Y, but I really feel like that's a very relevant now. And Stephanie of course mentioned Yellen and the sort of new supply side economics, progressive supply side economics. You have like liberal pundits like Ezra Klein 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 this like core, like MMT idea that now a lot of people are talking about.
Tracy: (47:39)
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. It's a very MMT thing to say, but I think that's something that we've learned over the past couple years.
Joe: (47:59)
Yeah. If you can write a check to solve it..
Tracy: (48:03)
It’s not that big a deal.
Joe: (48:05)
My most real MMT view, actually, I'm not gonna say. I'm gonna wait. It's too hot for air so I’ll tell you after we stop recording.
Tracy: (48:12)
Wait an MMT view, that's too hot for radio?
Joe: (48:15)
Yeah. That I can't say.
Tracy: (48:16)
Wow. Okay. All right. Sorry, Odd Lots listeners. Shall we leave it there?
Joe: (48:21)
Let's leave it there.
You can follow Stephanie Kelton on Twitter at @StephanieKelton.