Oct. 27, 2020

Does the U.S. deficit matter?

Who pays for it? It’s a question you hear all the time, especially when we’re talking about trillions of dollars in government spending.

And with the U.S. government operating at a $3.1 trillion deficit in 2020, it’s an especially relevant question. But more and more, economists are beginning to wonder if it’s worth asking. Since the U.S. issues its own currency, does it need to bother thinking about who foots the bill?

That’s what we’re exploring today on the show with Stephanie Kelton, professor, economist, author of The Deficit Myth, and face of the modern monetary theory movement.

You might not agree with what Stephanie has to say...but she’ll certainly give you some food for thought. Listen now.


Kinsey Grant, Morning Brew business editor and podcast host [00:00:08] Hi,
everyone, and welcome to Business Casual. It is me, Kinsey Grant, and if you're a deficit
hawk, close your ears. I gave you a fair warning. Now, let's get into it. [sound of a ding]
Kinsey [00:00:19] Congress recently passed the biggest stimulus bill in history to offer a
crutch to our limping, COVID-ravaged economy. And even more stimulus money could be
on the way. Throughout the summer and into this fall, we've been asking the same
question over and over again. How do we pay for it? I've asked it on this show time and
again myself. Who foots the bill for massive social safety net programs or synthetic
economic horsepower? And I've got a new question today that's going to flip that one on
its head. What if all of that doesn't matter?
Kinsey [00:00:49] Maybe my persistent chirping of guests with the "who pays" line of
questioning is useless. Maybe the U.S. deficit simply doesn't matter. Or at least doesn't
matter in the ways we traditionally think it does. Maybe we can spend more than we bring
in and not go up in flames. That idea is gaining traction within the ranks of our nation's top
economists and politicians alike. It's one of the cornerstone ideas of a newish school of
economic thought called modern monetary theory. I will let my guest today explain exactly
what modern monetary theory, or MMT, is.
Kinsey [00:01:18] But the main gist is that the government doesn't need to run its budget
like a household runs its budget. That could open the door to paradigm-shifting programs
from both sides of the aisle. For one side, say, expanded social safety nets and a green
new deal, maybe. For the other, maybe renewed efforts to lower taxes or permission to
explode military spending. And for both, the ability to do so, seemingly without
consequence, in the form of budget constraints.
Kinsey [00:01:43] Now, I'm no expert, just a podcast host who took some econ classes in
college. So I am bringing in the expert, Professor Stephanie Kelton, New York Times
bestselling author of "The Deficit Myth," professor of economics and public policy at Stony
Brook University, and former chief economist for the U.S. Senate Budget Committee.
Stephanie, welcome to Business Casual.
Stephanie Kelton, professor at Stony Brook University and author of "The Deficit
Myth" [00:02:02] Thank you for having me. It's gonna be fun.
Kinsey [00:02:04] It sure is going to be fun. And I have been reading "The Deficit Myth." I
have heard about it from tons of people. I have to be honest, the first time I heard about it
was on a first date. This person said, after two hours of conversation, that I just had to
read it; it would change my life. [laughs] And it certainly has been an eye-opening read,
and I've enjoyed understanding the deficit myth a little bit more. And that's what I wanted
to make this episode about in the first place.
Kinsey [00:02:26] I think that one of the best episodes we can make of Business Casual is
when we take a long-held belief and totally just flip the script. And I think that's what this
might be doing. So, before we get into all of those questions to answer [laughs] [indistinct]
I just posed to you, we are talking about the deficit today, which means MMT is going to
come up. And MMT has been highly polarizing, I will say, at times, and very confusing
[laughs] at times as well.

Kinsey [00:02:50] Anyone who's listened to this show knows that I love nerding out on the
econ stuff with my guests, have a lot of fun with it. But with that in mind, I'm gonna ask
some basic questions, Stephanie. A lot of questions, but I think it's important to lay the
right groundwork so we can all understand this. And, you know, if you say a word that
doesn't make any sense to me, I'll stop you. [laughs]
Stephanie [00:03:07] OK.
Kinsey [00:03:08] Perfect. So let's start here. Before we determine whether it's totally
obsolete or not, let's understand why the deficit matters, or at least why it has mattered for
so long. What is the U.S. budget deficit and how come we have come to care about it so
much as a matter of economic health?
Stephanie [00:03:25] OK. So the first question you asked, what is the budget deficit, is so
interesting because you've paired it with a question, why have we come to care about it so
much. And there are polls that are done, like Pew does a poll. Gallup does a poll. They
track this kind of stuff. Do the American people really care about the deficit? And they poll
people every year, and they say, what do you think is the biggest challenge facing
America? And they give them some choices. And then where does the deficit rank?
Stephanie [00:03:53] And you can actually track, over time, how people's feelings about
the deficit or this national debt have changed. So it turns out that concern about the deficit
ranks fairly high. But if you were to ask someone, what is the deficit, I'll bet you most
people could not give you a good working definition of what it is. So we seem to care about
this thing, but we don't exactly know why or what it is. So where does that concern come
from? Well, we've been trained. They present it as one of the choices of things we're
supposed to worry about. So it's already kind of given to us as something that's
Stephanie [00:04:31] And then we're supposed to rank the order of all of these problems.
Where does the deficit lie? So what is the deficit? It is nothing more than the difference
between two numbers. This a difference between two numbers. One number is how many
dollars the government spends into the economy each year. And the other number is how
many dollars does the government subtract out of the economy each year, mostly through
Stephanie [00:04:57] So we use this word, which is such a loaded word, which I think gets
to your question, why do we care about it, because the word itself is loaded. It's a
pejorative. A deficit sounds like inherently problematic. Nobody wants to have a deficit. If
you're rooting for your favorite sports team and halftime comes around and you hear the
announcer say, oh, boy, the Chiefs are going to have to have a real strong second half if
they're going to overcome this 12-point deficit.
Stephanie [00:05:26] Well, that's how we're used to hearing the word deficit. It's a
shortfall. It's something that you've try to fix, right? But, if you look at it the way I do, you
don't see it that way. So I look at it in a dispassionate way. It doesn't get my temperature
up to hear the word deficit. I say, well, OK, it's the difference between two numbers. So if
the government spends $100 into the economy, but it only taxes $90 back out, we label
that a government deficit, and it gets recorded on the government's books minus 10 deficit.
Stephanie [00:06:01] What we forget is that if they put 100 in and they only take 90 back
out, somebody gets 10. So on the other side of the government's deficit lies a financial

surplus in some other part of the economy. And once you realize that, then you can see
these headlines that scream trillion dollar deficit or $3 trillion deficit. And understand that
what that headline is really telling you is the government is making a $3 trillion deposit to
some part of the economy. It is creating a surplus somewhere in the economy. And then
you can start to have a whole different conversation about what's going on.
Kinsey [00:06:40] The interesting thing to me about this, Stephanie, is that this is what
should be a very scientific and calculated number. It's just the difference between two
numbers. How come we've attached this emotional value to a deficit? And can we
overcome that? Is it realistic to expect that we could?
Stephanie [00:06:54] Well, it's such a long history. I have a book somewhere behind me
[Kinsey laughs] on the shelf that actually sort of tracks this back to the 1700s. I mean, this
is an issue, you know, this idea that there is sound money, there is a sound budgeting
philosophy and that governments ought to be good stewards of the public person. They
should. They should be good stewards of the public's finances.
Stephanie [00:07:22] The problem, I think, started, and maybe is rooted back in the day,
with this idea that the government's budget is supposed to operate like a household
budget. And so public officials like to talk to us in ways that are very simplified so that the
communication is easy. So you're gonna go out before voters. Your gonna have a very
short period of time to make your case. And so what do you look for? You look for ways to
talk to people that will resonate with them, that are already tapping into things that are
familiar with them.
Stephanie [00:07:54] So if you're a public official and you say something like, we've got to
get this fiscal house in order—the government's been running in the budget, spending
more than it takes in, piling on debt. That resonates with people because they
automatically revert to a narrative, to something that they're most familiar with, which is
their own personal finances. So all that stuff works. You do what works and what seems
familiar and comfortable.
Kinsey [00:08:24] Right. So if we think about—and I know that we are about to think about
the opposite [laughs]—but if we consider the elements of a household budget—you make
money from your job, or however you make money, and you have to pay taxes and you
have expenditures to keep the lights on, to keep food in the fridge. What are the
equivalents in the government? What is the biggest source of revenue and of spending for
the government that contributes to this deficit?
Stephanie [00:08:49] Well, the government gets what you're saying—revenue. See, I tend
not to use that —
Kinsey [00:08:55] [laughs] Taking money out of the economy.
Stephanie [00:08:57] Yeah. And so the government collects taxes from the rest of us.
There are personal income taxes. There's a corporate income tax. There are other fees
and penalties. There are monies paid to government. If you are subject to the individual
mandate, when it was in place, for healthcare and you didn't have health insurance, you
had to pay a penalty. So there's a payment made to government there.
Stephanie [00:09:22] But before coronavirus, government revenue was coming in at about
$3.5 trillion a year. And then the government was spending about $4.5 trillion a year. A

major part of the budget is wrapped up in what some people call entitlement programs,
programs like Medicare, Medicaid, Social Security. You have defense spending, which is a
huge slice of total government spending, about $730-some billion annually. You've got
spending on education and infrastructure and R&D and these other sort of things.
Stephanie [00:09:54] So the difference being about a $1 trillion before coronavirus
between what the government was spending into the economy and what it was taxing
back out.
Kinsey [00:10:05] OK. But what about after coronavirus? [laughs]
Stephanie [00:10:08] Well, so now the Congress has committed about $3 trillion in the
form of four different fiscal packages, relief packages. The biggest was the Cares Act at
$2.2 trillion, roughly. So the estimate now is that the fiscal deficit for this year is going to
clock in at somewhere between 3 and $4 trillion, closer to 4.
Kinsey [00:10:32] So is there a perfect level for the deficit to sit at—to kind of hang out at?
We speak about this as just a number. Is there a perfect number at which the economy is
humming along, people are taken care of in the ways that they need to be, etc.?
Stephanie [00:10:46] See, what you just said right there at the end is, I think, everything.
That's the critical point. If you have a healthy, balanced economy and you've solved all the
problems—you've addressed the real deficits in the economy and people are housed and
they're fed and they're healthy and they have good opportunity in the economy and they're
well-educated. And the number that falls out of the budget box at the end of the year
happens to be 5% of GDP. Who cares?
Stephanie [00:11:12] If it takes 7% of GDP to get that healthy, balanced economy, who
cares? And you don't have inflation, right? You have all of the good conditions. Then I'm
not interested in the number. Now, that number will need to change over time. You can't
just say that 5% will get you a healthy, balanced economy through time because
economies go through business cycles. Sometimes the private sector is going to be very
healthy and strong.
Stephanie [00:11:38] Balance sheets will be strong. Household consumption will be
strong. Business investment will be strong. And the private sector will do a lot of the heavy
lifting in terms of maintaining good employment opportunities and so forth. But, the time
will come when something happens and households pull back, and they want to spend
less and save more. And when they do, businesses are deprived of customers. And when
that happens, they see their inventories building up and then they retrench and they don't
need to hire as many people and spend on capital investment.
Stephanie [00:12:09] And at that point, the government's deficit needs to increase to fill
the void or the output doesn't get sold and unemployment rises. So the right size deficit is
the one that maintains a healthy, balanced economy through time.
Kinsey [00:12:24] And it has to be a flexible number—one that we are willing to adapt
constantly. All right. Let's think on that for a moment. And while we do, we're going to take
a short break to hear from our partner. —
Kinsey [00:12:36] And now back to the conversation with Stephanie Kelton. So,
Stephanie, for so long, we have been told that deficits can't be good. But to your earlier

point, sometimes, like in a recession, we need deficits. But still, those deficits can at times
be a threat to growth, to economic growth on the whole, because of this concept of
crowding out investment in the private sector. Can you explain what crowding out means?
Stephanie [00:13:00] So this is the idea that you start off by thinking of the deficit as a
shortfall—that if the government wants to spend a hundred into the economy, but it's only
taxing 90 back out, then it's, quote unquote, short 10. Now it's not short 10, but that's the
way we think of it. So we say, well, if the government is running a deficit, it's got to go find
the 10 somewhere to cover the shortfall. Where does it find the 10?
Stephanie [00:13:27] We're told that it borrows the 10 to cover the shortfall. OK, from
whom? From savers. OK. Where do savers keep the money? They keep it in a pile of cash
that we call a loanable funds. It's in the loanable funds market. Just think of a big pile of
dollars sitting out there somewhere. So the government's deficit spending, running a
deficit—the story is it's got to go find the money. So it goes to savers and it asks for some
of those dollars.
Stephanie [00:13:57] Savers will lend those dollars to the government, but only at a price.
The price is the interest rate. The problem is that the government is thought to be in
competition with every other borrower in the economy. So the government's not the only
one who wants some of the dollars in that pile. Businesses want some too, to finance their
investment. So deficits put government in competition with the private sector, especially
Stephanie [00:14:25] So what happens? The intensifying competition for that scarce pile
of cash forces the price higher. So the interest rate goes up. As the interest rate goes up,
businesses get crowded out. They say, oh, I was willing to borrow at 3.5% for this project. I
was going to expand my facility. I was going to hire more workers. But the government
came in and took away some of those savings and drove up their price. And now, at 4 or
4.5%, I'm not willing to borrow. And so the idea is that the government has elbowed the
private sector out of the way by pushing up the cost of funds to the private sector.
Kinsey [00:15:06] So if we considered the deficit in the way that you mentioned at the very
top this conversation—that a government deficit is somebody else's surplus—would that
erase the need to think about crowding out?
Stephanie [00:15:17] Yeah, it turns it on its head. It completely turns it on its head.
Because if you if you get the mechanics correct, then you understand that the government
is not borrowing in the way that you and I would borrow. If I walk into a bank tomorrow and
I sit down with the loan officer, I'm there because I don't have money. I go borrow because
I don't have the money and I want money. So I sit down with the loan officer. I say, listen,
I've got this idea. I have a business. It's been doing really great. I'd like to expand. I want a
Stephanie [00:15:47] So I have this conversation with the loan officer. And if he looks at
my business plan and it looks OK, I can get a $100,000 loan from the loan officer. Now,
notice the difference. When the government borrows or does this thing we call borrowing,
so the government spends a hundred into the economy, taxes, 90 back out. It has placed
$10 in the economy. There's $10 there now. Now it comes along and says, well, whenever
I run a deficit, I sell Treasury bonds. So I have to sell 10 Treasury bonds.

Stephanie [00:16:20] So what happens? The government subtracts the $10 back out and
replaces them with 10 Treasury bonds. In other words, the money to buy the bonds comes
from the deficit spending itself. When I borrow, I don't walk into the bank and plop down a
huge pile of cash on the loan officer's desk and then ask for a loan, right?
Kinsey [00:16:41] Yeah.
Stephanie [00:16:41] I'm there because I don't have the money. The government is
spending first and then converting some of the dollars it spends into U.S. Treasuries. The
problem is we call that borrowing. We think the government does it because it needs the
money. And then we refer to the Treasuries themselves as the debt. And this is why we
have such a broken political discourse.
Kinsey [00:17:04] OK. One potential fix for that broken political discourse is MMT. But I do
think that there is still a lot of questions swirling around here that I want to get answered.
So with that, can you explain MMT to me like I'm 5 or maybe like I took macroeconomics in
2014 and pulled off an A-minus?
Stephanie [00:17:23] Well, you started the program with an awfully good kind of thumbnail
sketch of what the core tenets of MMT are about. You said that we want to think of the
federal government's budget not like that of a household. That there are limits, but they're
not the limits that we've been taught to think about. That deficits matter, but not the way
we've been taught to think about them. And so really, at core, where you want to begin to
understand MMT is in thinking about something that we call monetary sovereignty.
Stephanie [00:17:55] What does it mean for a country to be a monetary sovereign or to
have monetary sovereignty? It means that the government has a particular relationship to
the currency itself. In the U.S., the U.S. dollar is issued by the United States government.
The government is the issuer of the currency, and it can't legally come from anywhere
else. I can't create it. You can't create it. Businesses can't create it. State and local
governments can't create it.
Stephanie [00:18:26] And so once you get that kind of fundamental difference to that line
in the sand, what makes them different? Then a lot of MMT follows from that because you
immediately recognize that if you're the issuer of this token thing we call the dollar, the
dollar's just an abstract unit of account. If you're the issuer of the dollar, can you ever run
out? The answer has to be no. Can you ever have bills coming due? Social Security.
Medicare. Treasuries. Interest on the debt. Whatever it is. Can you have bills coming due
that you can't afford to pay? The answer has to be no.
Stephanie [00:19:03] Can you end up like Greece with debt that you can't service? The
answer has to be no. So it immediately takes you far afield from so much of the
mainstream discourse. A lot of things that you thought were true can't be true. And so
that's just like the beginning place. And then you talk about, well, if that's true, you start
thinking about why does the government collect tax? And we're used to thinking the
government taxes us because it needs the money. But MMT shows that can't be right.
Stephanie [00:19:36] If you're the currency issuer, you aren't taxing because you need the
money. There must be some other reason for the tax. So then you investigate that. Why
do governments borrow? Well, they borrow because they have to finance the deficit. No,
they don't. If you're the currency issuer, the borrowing must be about something else. The
Treasuries must be doing something else. They're not financing the government.

Stephanie [00:19:57] So in a sense, MMT changes everything that we think about the
government's budget, how it operates, the role of taxes and borrowing and all the rest of it.
Kinsey [00:20:10] So we know what MMT is, at least in theory. But I wonder whose
responsibility it is to enact it in practice. So who is responsible here? What institutions
should we be looking to?
Stephanie [00:20:21] Well, right now, Congress has delegated responsibility to the
Federal Reserve. And most governments have delegated responsibility to their central
banks. So you know this. The Federal Reserve has a dual mandate, and this is Congress'
way basically of absolving itself of responsibility because they can wash their hands of
conditions in the real economy and just kind of be like, look, it's the Fed's job to give us full
employment and price stability.
Stephanie [00:20:50] They manage inflationary pressure. They get us to full employment.
And that's not our concern. What I'm saying is, and what Jerome Powell, the Fed chair, is
saying is, don't do that. Don't leave it all to us to lay the foundation for a sustainable
recovery because we can't do it. We need you. We need a fiscal partner. We can
lend—Jerome Powell says this all the time—the Fed can lend. But the Fed can't spend.
Stephanie [00:21:20] And so what he's saying is, we can give loans. But unless you see
something I don't see, which is an economy with households and businesses that are
confident and optimistic enough about the future to want to borrow and invest, there's not
much I can do with my lending capacity. What you can do, Congress, is you can spend
dollars into the economy that people will own free and clear. They don't have to pay them
back. And what people need is a cash infusion.
Stephanie [00:21:52] This economy needs grants and spending, not loans and debt right
now. And so it requires basically a fundamental shift, which we have. We have made that
shift to a more fiscal-dominated response to the coronavirus pandemic. It's just that the
politics have gotten in the way right now.
Kinsey [00:22:12] Right.
Stephanie [00:22:13] So we're not getting the additional fiscal support that we need.
Kinsey [00:22:17] So you're saying that Congress should take up the Fed's dual mandate
of managing inflation and employment?
Stephanie [00:22:23] Effectively, yes. I'm saying that it doesn't do a lot of good to give
responsibility for those things to an agency that doesn't have the tools to make good to
carry out.
Kinsey [00:22:35] Right. One that can lend and not spend. [laughs]
Stephanie [00:22:37] Yeah. I mean, you can direct me to make three-point shots all
afternoon. And you can tell me it's my responsibility to do that or, you know, block and
tackle, but it's not going to go very well, [Kinsey laughs] I'm just not built for that. And so,
you know, I think increasingly, I think central banks around the world are beginning to
recognize and more openly say that it's just you've asked us to do too much.

Kinsey [00:23:05] Right.
Stephanie [00:23:05] You've put too much burden on central banks to lay conditions for
recoveries, to sustain recoveries, to fight downturns. And so we're moving into a more
fiscal-dominated world.
Kinsey [00:23:18] My concern with this possible [laughs] outline of what the future might
look like with all this coming to fruition is the Fed is supposed to be independent. It is
supposed to operate, meet this dual mandate independently of the politics that that plague
D.C. If we hand over those responsibilities to Congress, which we talked about earlier, is
consistently dragged down by the politics part of [laughs] politics, do we lose that
independence and that nimbleness that maybe a more independent body would have
compared to Congress?
Stephanie [00:23:52] So here's what I would say. You can be independent but ineffective.
And so what good does that get you? And I think that a lot of the reason that Congress
behaves the way it does in terms of just turning its back on us and saying we're not going
to do anything is because we don't have the expectation that it's their job to be responsive
to changing economic conditions. We've allowed them to put the burden on someone else.
Stephanie [00:24:21] And if there was accountability, if it were Congress that were held
responsible, if it was Congress that we all looked to when the economy remains sluggish,
as [indistinct] why aren't you doing more instead of always looking at the Fed and saying,
why aren't you doing more, then my strong suspicion is that you would get different
behavior from lawmakers because of the accountability. We would be looking to them and
saying, this is your job. Why are you not doing your job?
Kinsey [00:24:46] Right. And we see time and again, when politicians don't do their job,
they're not politicians [laughs] anymore.
Stephanie [00:24:52] That's right.
Kinsey [00:24:52] So what is then left for the Fed to do if this happens, if Congress takes
up this responsibility and we hold them accountable?
Stephanie [00:24:58] Well, the Fed should do what it can do. We shouldn't ask the Fed to
do what the Fed can't do. We should ask the Fed to do what the Fed can do. And so, you
know, why was the Federal Reserve created? To be a lender of last resort, especially in
times of financial crisis. They do that very, very well. You know, the Fed's liquidity facilities,
the Fed stepped in brilliantly. That's an important role for the Federal Reserve.
Stephanie [00:25:22] The Fed can also have an expanded toolkit. For so long, we just
thought the Fed carries out monetary policy. How does it do that? It changes the interest
rate. So the Federal Reserve Open Market Committee meets eight times a year, and they
sit and for two days, they deliberate. And they have a chat. And then they decide at the
end of the second meeting whether to raise their hand and vote to push interest rates
higher, lower, or leave them alone. And so that's kind of the way we think of monetary
Stephanie [00:25:51] But there's so much more. The Fed has a supervisory and
regulatory role when it comes to the financial system. So behaving as an engaged
regulator and supervisor of the financial system is important. The Fed sees inflationary

pressures mounting in housing or because of other types of credit that banks are offering.
The Fed can come in and say, hey, wait a minute, we're beginning to get concerned. We
want to see, you know, credit controls can be put in place. The Fed can have a lot of
influence—swap lines lending to other central banks around the world, it can help other
countries with their development strategies. There's a lot the Fed can do.
Kinsey [00:26:35] OK. So a lot of what we have been talking about is centered around
putting money into the economy and of changing the toolkit of both Fed and the Congress
to do so. But I want to talk next about how we take money out of the economy. We're
gonna do that. But first, a short break to hear from our sponsor. —
Kinsey [00:26:53] And now back to the conversation with Stephanie Kelton. So,
Stephanie, what about the ways that the government should be taking money out of the
economic system? Do you believe in taxes?
Stephanie [00:27:03] Oh, sure. [laughs] So, yeah.
Kinsey [00:27:06] Gave you an easy one there. [laughs]
Stephanie [00:27:09] All right. Look, the MMT thinks about taxes like this: There's sort of a
how to start a currency from scratch role for taxes or other kinds of tax-like obligations,
fees, or fines, or something. And then there's a how to manage the economy and the
currency once the currency is up and running—once you've started it.
Stephanie [00:27:33] So, in my book, I don't do the sort of origin story, the history. In
Randy Wray's book, called "Understanding Modern Money," he has a chapter where he
gets really into the history of how governments have started up currencies from scratch.
Somebody like David Graeber, in his book "Debt: The First 5,000 Years," has a lot in
Stephanie [00:27:55] But basically, the story goes something like this. You just look at the
British colonial history and you say, OK, here's what Britain did to introduce the British
currency, the pound, into a previously non-monetized society. So they weren't using
money in parts of Africa. And the British—I'm making this very simple—the British sail over
and they land and they have a look around. They see resources that they would like to
have. They say, we sure like what we see here. We'd like to buy some of these things from
you. And we will pay you with British pounds.
Stephanie [00:28:34] And the African people said, but these are worthless. So why would
we give up our resources for your nice little colorful sheet of paper? No, thank you. So the
British government says, OK, here's how this is gonna go down. And you colonized, and
you say you're going to have to pay a tax to the crown. And so you'd imagine a hut tax and
you say, you know, you don't want your hut burned down. You're going to have to pay the
crown X number of pounds when the tax man comes around to collect them. I don't have
any pounds. How am I supposed to keep my hut from burning down?
Stephanie [00:29:09] Oh, well, we'll supply you with the pounds that you need to settle
your tax obligation. You just sell us some of these resources we've been eyeing. And so
you see how this can work. You can get people to work and produce for the state by
placing them in a position where they need your currency. And the tax can help drive that
need for the currency. Give it value. Make people willing to work and produce in order to
get this otherwise worthless token. So the currency is a tax receipt.

Stephanie [00:29:42] That's how MMT thinks of the currency. It's a tax receipt. Now, once
you have this in place and the monetary system develops around that unit of account, then
you think, OK, well, what do you use taxes for? At that point, you started up the currency.
Now, why are they important? Well, if the government wants to spend into the economy
without creating too much inflationary pressure, then it can kind of coordinate how much
it's putting in with how much it's subtracting back out.
Stephanie [00:30:12] So the tax is important because it reduces somebody else's
purchasing power. Every dollar that's taxed away from me is a dollar I don't have and I
can't spend chasing after goods and services in the economy. So the government may
want to raise taxes to make room. To make sure that there's not inflation as a result of its
own spending.
Kinsey [00:30:33] Right.
Stephanie [00:30:33] The government might decide, hey, I think the distribution of wealth
and income has gotten completely out of whack. The degree of inequality is so extreme
now that it's not just bad for the way our economy functions, it's bad for the way our
democracy works. And so we're going to use the tax system to subtract some of that
power—dollars—away from people, not because we need the revenue. We're a currency-
issuing government, after all. We don't need their money, but we need them to have less
money. That could be a reason for changing a tax.
Stephanie [00:31:07] Or you could just say, look, we're going to use taxes because we
want to create incentives or disincentives somewhere in the economy. Want to encourage
people to buy electric cars or stop smoking or whatever the case. So lots of reasons for
tax, but none of them have to do with generating revenue for the government to spend.
Kinsey [00:31:27] And this is certainly a very different story from what we typically hear
about the role of taxes in terms of the deficit. It's often we can't pass the something like the
Green New Deal without taxing the middle class. And politicians use that as a point of
contention against one another. This would definitely flip all of that upside down and
backwards. [laughs]
Stephanie [00:31:47] Yeah. I have taught macroeconomic theory for 20-something years.
I taught undergraduate principles, intermediate, master's, Ph.D.-level macro. Not once as
a student did I ever encounter anywhere in my training, in any textbook, something that
treated taxes the way I just described it. That is not the way taxes are thought about by
economists by and large. Taxes are just for revenue. That's why you do it.
Stephanie [00:32:18] I mean, you can also use taxes for incentives and dealing with
inequality. But the way we tend to think about taxes is, you know, the purpose is revenue.
And you want to set the tax rate at the level that will generate the maximum revenue. So
where should you set it? How should you play around taxes? Well, I gotta get enough
Kinsey [00:32:39] If we think about taxes as a tool to blunt inflation, is it useful? I mean,
can it get the job done?
Stephanie [00:32:46] Well, maybe. But MMT's anti-inflation mechanism is not the tax. I
mean, it's not reliance on taxes to manage inflationary pressure. So let me put it this way. I

have a basement in my house. And I might go downstairs, God willing, I won't, but I can go
downstairs later today and find the basement flooded. And so I clearly have a problem.
Stephanie [00:33:11] Why do I have a problem? I don't just run to one part of the house to
go fix the thing that's causing the basement to flood. I don't know if some kid overflowed a
toilet, left a sink running. I don't know if a pipe burst. I don't know if the dishwasher is
leaking. To fix the problem, or to mitigate the problem, you have to know what's causing it.
And that's true of inflation.
Stephanie [00:33:35] So inflation doesn't just have a single source. There's not one thing
that triggers inflation. And therefore, there can't just be one way to mitigate or fight
inflationary pressure. The problem is that today, we really have one way to fight inflation.
And how do we do that? It's the central bank's job. And how did they do that? They raise
the interest rate.
Stephanie [00:33:56] So we have a one-size-fits-all approach to battling any inflationary
pressure that might arise. It really doesn't matter what causes it. So think about that. You
can't see inflation. We construct indices, price indices. So we say, well, we want to track
prices to get a sense of what's happening in the economy if there's inflation. So the prices
of what? Well, pick some important things that we can follow over time. OK. What are
important things?
Stephanie [00:34:26] Well, how do people spend their money? Well, they buy housing and
healthcare, education. They spend on energy and transportation, food, clothing,
entertainment. So we come up with a category of things that people spend money on. And
then we weight the items in the basket differently. We say, well, people spend a lot of their
budget on housing, healthcare, energy. And so those are going to get weighted more
heavily. And then we'll follow the behavior of all these different prices over time.
Stephanie [00:35:00] OK, so what happens if a few weeks from now for whatever it's
going to be, the Supreme Court takes up the Affordable Care Act? Yeah. Because that's
on the docket. And the Supreme Court rules that the Affordable Care Act is
unconstitutional and strikes it down. So preexisting conditions go away. And a lot of the
things that are in the ACA that have mitigated healthcare cost inflation—those are gone.
Stephanie [00:35:31] So now health insurance companies are free to price discriminate.
So they say, you have a preexisting condition. You have to pay more for your private
health insurance. Pharmaceutical drug companies can raise drug prices and that can all
be passed on. So imagine that healthcare prices start to accelerate. And that feeds into
headline inflation.
Stephanie [00:35:53] So now you get some CPI prints that tell you inflation is accelerating.
So what do you want to do to fight it? Do you want a tax increase? Is that going to be the
right policy response to it? I don't think so. Do you want the Fed raising interest rates? I
don't think so.
Stephanie [00:36:08] So this is the basement flooding problem. To deal with inflationary
pressure, have to know where it's coming from. And so MMT has, I think, a very rich array
of tools to deal with inflationary pressures should they arise, and they don't involve raising
taxes. That's not the, like, go-to tool. But it's complicated and you have to go to the source
of the problem.

Kinsey [00:36:33] How do you think that responses to previous recessions or, you know,
economic downturns, even, let's say, 2008, 2009? How do you think the response would
have looked differently or played out differently had this school of thought been more
prominent at that time?
Stephanie [00:36:48] I think that you would have gotten a full-throated, unabashed use of
fiscal policy to support the recovery for as long as it needed. Do you remember when the
wheels were coming off in the eurozone and the debt crisis was sort of in full force 2010.
Mario Draghi was the head of the ECB at the time. And I mean, absolutely, the wheels
were coming off.
Stephanie [00:37:14] And Draghi uttered those three little words: whatever it takes. Now,
that's coming from the monetary authority. But he was really effectively saying we're going
to backstop the whole of the eurozone project. And that meant bringing interest rates down
and helping governments get their finances, make them sustainable. So what I would think
would have happened is that you would have gotten the fiscal equivalent of what Draghi
Stephanie [00:37:41] You would have gotten that "whatever it takes" commitment from
Congress to continue to step up in response to the changing economic conditions with
whatever fiscal support appeared to be necessary. Instead, we got that one-off. We got the
American Recovery and Reinvestment Act, that one big bill, what seemed big at the
time—$787 billion doesn't seem so big now—but Congress passed that and then went
AWOL. And the deficit scared them. The increase in the debt scared them.
Stephanie [00:38:12] And they pivoted to austerity. And they looked at the Fed and they
said, I guess it's yours. You fix it. And at that point, poor Ben Bernanke just kind of shoved
the chips all in. And he said, OK, we're gonna do—I don't know what else to do—so we'll
just do this open-ended quantitative easing and we'll just keep buying government bonds,
buying mortgage backed securities.
Stephanie [00:38:36] The goal will just be to keep the long-term interest rate down, push
as much liquidity into the system as possible, and hope for a wealth effect. Hope that asset
prices go up enough that people feel wealthier and begin to spend and that supports some
kind of recovery. And I think all of that could have been avoided if we'd had an MMT-
informed kind of congressional staff.
Kinsey [00:39:05] And you think about the recovery from that recession. Eventually
became robust. We had a 10-year bull market in stocks and the economy was good in
terms of fundamentals. But it took a while to get there. It was a very long and protracted
recovery compared to maybe what it could have been. What exactly is the impact that you
want to have? What is the end goal or the problem that you're trying to solve with MMT?
Stephanie [00:39:30] I think that the answer for me is that it's just gut-wrenching to me as
a citizen, a mother, a person who cares about other people in the community and in this
country and beyond. Just reckon that once you realize that the suffering is gratuitous,
that's when it becomes impossible to accept.
Stephanie [00:39:57] If there really were no alternative, as Margaret Thatcher told us, you
know, there is no alternative—TINA, she famously gave us—if the money just couldn't be
there, if we didn't have the capacity to do better and to improve lives for so many people
without the need to really tear anyone else down. I mean, we have the capacity to do this.

Stephanie [00:40:19] So why would you tolerate so many deficiencies and so much
suffering across the economy? Why not have, if it's within reach, why not deal with
climate? Why not have the best educational system in the world that everybody can get
access to? Why not have everybody covered by healthcare and the best in the world. Why
not have 21st century infrastructure, housing that's available, affordable for everybody?
Why not strive to do those things? It can't be for lack of money.
Kinsey [00:40:55] That's a fantastic way of putting it. And certainly, I think an example
people can understand. We recognize that for so long, people have wanted to say that the
United States is the best country in the world, or whatever country you're living in. And we
have the capacity at our fingertips to make that true and accurate.
Kinsey [00:41:12] So with that, thank you so, so much, Stephanie, for coming on Business
Casual. I'm really, really grateful for your number one, time, number two, willingness to put
all of this in terms that were very understandable, using some fantastic analogies. I think
that basement one is going to stick with me for a while. So apt. And I just really, really love
this conversation. Thank you.
Stephanie [00:41:32] Well, thank you very much. And I hope there was a second date
because that sounded [laughs] they sounded like a winner to me.
Kinsey [00:41:39] I will most certainly pass along the message. Thank you so much,
Kinsey [00:41:50] Thank you so much for listening to this episode of Business Casual,
trying to unpack an entire school of economic thought in one episode is maybe impossible.
There was a lot I wanted to ask Stephanie that we didn't get to. So, I am bringing in one of
your favorite economists to talk it out. In our next episode, we have Marketplace's Kai
Ryssdal. Subscribe to Business Casual so you don't miss it. And I'll see you next time.
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