Ben Walsh interviews Stephanie Kelton for Barron’s
Stephanie Kelton, an economics professor at Stony Brook University on Long Island in New York, has a radical new way for thinking about the economy: Governments that print and borrow their own currency can’t go bankrupt, she says, and the current U.S. budget deficit is, if anything, too small.
That kind of thinking is part of a school of economic thought known as modern monetary theory, or MMT, which Kelton has helped develop. But she also wants to tell me a story from 2012, years before she became better known as an advisor to Sen. Bernie Sanders’ presidential campaign.
At that time, Kelton was invited to an all-male breakfast club of the Kansas City rich and powerful. Despite her left-leaning views—and being the only woman—she won the room over.
How she did it is a testimony to her rhetorical and intellectual skills and to just how much her thinking confounds a political graph that is defined solely by tax and spending axes.
Kelton, 48, explained to the room in Kansas City that the government budget is not like a household budget because the government prints its own money. But the problem is that Washington always wants to know how to pay for new programs.
That’s a problem for you, she says she told her listeners, because the conventional wisdom in the capital is that money “grows on rich people” and you pay for nice things by taking it from them.
“Don’t look at me,” she instructed her audience to tell lawmakers. “That’s where the money comes from. And you point at the Treasury. You point at Congress.” And she won the room over.
Insisting that government spending comes from taxes, she says, puts the rich at the center of American policy-making in an unhealthy way. And the very rich, Kelton’s experience shows, are pleased to hear that you don’t have to tax to spend.
Here’s what else she had to say.
Barron’s: Let’s start from the top. The way the federal government works is it takes in money from taxes, and then it spends it. Right?
Stephanie Kelton: Well, that’s the usual belief. How it really works is that there’s a constant overlap of things happening. That when Congress sits down, in an ideal scenario, the House and the Senate would come up with budgets. And in all likelihood, they won’t match exactly. And so there will be reconciliation. The budget will either pass or not. It gets signed by the president or not. Congress is writing down numbers and saying, “This is our intention, to spend in these amounts.” And the budget authorization is given that allows the heads of these agencies to go out and start hiring, engaging in contracts. It’s the authorization from Congress that provides the funding. That triggers the spending.
The conventional wisdom about deficits is that we should always be worried about them. When do you worry about deficits?
I worry not just about the magnitude, but about the purpose. We could add $1.5 trillion to the deficit over 10 years, as we just did with tax cuts that go disproportionately to people in the top-income distribution, and we could have done, for instance, student debt cancellation at virtually the same price tag. We could have done massive infrastructure investment, or R&D investment.
You can have the same budgetary outcome, but very different economic outcomes, in terms of the potential to boost long-term growth and productivity, impacts on the distribution of income, and so forth. Every economy has its own internal speed limit. You can only absorb so much additional spending at any point in time, given the slack that the economy has at that moment. So can the deficit be too big? Of course! But can it be too small? Yes. And that’s something you rarely hear people say. Or complain about it.
It seems like people forget balance sheets have two sides.
Government debt is just the money the government spent into the economy and didn’t tax back. That’s all the national debt is. It’s a historical record of all of the times that they made a net deposit, spent more than they taxed out, and the bonds are the difference between those. One of the greatest cons ever perpetrated on the American people is this notion that the national debt belongs to us, that we are responsible in our individual capacity for a share of it.
The national debt clock that counts up exactly how much is owed by every man, woman and child in America!
When I worked on the Hill, one of my favorite exercises was to find elected officials, staffers, and ask them if you had a magic wand, and you could wave it, and eliminate the national debt tomorrow, would you do it? Of course. Who wouldn’t do that? Yes, I mean, the quickest “yes” you ever got in your life.
OK, what if I gave you a different wand, and I told you, you can wave the magic wand, and you can eradicate the world of U.S. Treasuries. There won’t be Treasury notes anymore. They’ll just all be gone. How many members of Congress, would do that?
They looked at me with a total blank stare.
Why do you think that people generally, and politicians in particular, are stuck on this notion of the government spending being like a household or an individual?
In some ways, it’s rhetorically convenient. No politician wants to stand, I think, in a town hall meeting and try to explain the intricacies of government finance to constituents. So it’s a convenient narrative to just reinforce the conventional wisdom, the norms of understanding. And I think it also provides political cover.
You advised Sen. Bernie Sanders, and you’re a major proponent of a jobs guarantee, support Medicare for all, free college tuition, and on—all things the left wants. Do you think that modern monetary theory has an inherent set of politics?
No. When we started undertaking the research for this body of scholarship that’s now dubbed MMT, it was an exercise in trying to understand the monetary system, the way things work. We just wanted to get a better understanding of how the economy works, how fiscal and monetary operations work. At least 90% of MMT is descriptive in nature. But if you believe that the economy chronically operates under its full potential, then it makes sense to look for policy recommendations to make things more efficient, to maximize potential output. And MMT’s not the only school of thought that does that. You see that with classical supply-siders as well. They think the way to squeeze out the last bit of potential is largely through tax cuts and deregulation.
What about Greece, Portugal, Spain, Italy, Argentina, and their debt crises? They exist. Why don’t those things worry you?
Well, the debt crises in those countries are worrying to me. But it’s not a lesson for America. You know, back in 2010, at the height of the European debt crisis, I can remember standing in my kitchen with the TV on, and turning on the news, cooking dinner, and seeing the opening to the nightly news. And it goes, dah, dah, dah, the debt crisis in America. And I go, what debt crisis in America? But that is really what the narrative started to become: This is a warning for America. We need to get our fiscal house in order.
What’s different? Look, Italy in 1995 had a debt-to-GDP ratio of around 120%. Spain in 1995 had a debt ratio of 62%. Greek debt-to-GDP over 100% before joining the euro. These countries were borrowing and spending in a currency that they created. Who remembers the debt crisis in Europe in ’95? There was no debt crisis in ’95, because Italy could always meet every obligation that came due, on time, in full, because it was paying in lira. Where and how else is the lira going to come from but the Italian government?
Do you think openness to MMT and view of deficits and government debt is generational? Do old people just not get it?
I think so. For a certain demographic, the ’70s are still kind of a fresh memory, and you know, waiting in long lines to put gas in the car, high inflation. And so that’s a live memory for some demographic. But young people—I mean, Obama’s slogan was “Yes we can.” And then all hell breaks loose, and he’s on TV right after the inauguration saying, we ran out of money, so no, we can’t. And then you get Hillary Clinton’s message, which was pretty much, “Yes, we can a little bit.” And millennials see their future, they see climate change, and they take it seriously. They see the cost of college education. They see problems with health care. They can’t get out of the home and start a life. They’re open to a big, ambitious agenda. The threats are real for them.