How worried should Americans be about the federal deficit? In this week’s episode of WITHPod, chrislhayes and economics professor Stephanie Kelton discuss the Trump administration’s financial policies, from tax cuts to increased government spending.
STEPHANIE KELTON: And, that is in a sense, the value.
And then I say,"But does it still exist somewhere? Does the Fed know I did that? We're not going to tell them, right?"CHRIS HAYES: That's illegal.STEPHANIE KELTON: And forever more it will be there, right? Because only the Federal Reserve can subtract that from the outstanding money supply. Well, the government just made a keystroke entry and put $1,300 in your account, and that's what happened.STEPHANIE KELTON: So in other words, the government spends by instructing its bank to change the numbers in someone's account upward. And when we pay taxes, the opposite happens.CHRIS HAYES: Right, right. So the government is the creator of the money and that it's important when in the social security, right, they're not paying them. This is the key sort of insight here.
The one that I think people think about all the time is packs of cigarettes in prison, right? That's an iconic one. The pack of cigarettes has some inherent value, but even if you don't smoke it has value because it becomes a token of exchange and it's essentially the currency form in an arena with no currency, where you can imagine sardines I think have been used in this. There's all sorts of examples.
That is the moral story. It's not really a technical story. The moral story that people talk about government deficits being bad, right? STEPHANIE KELTON: Exactly. And it works so well with audiences because it's simple and it's self-referential. The finances that we all understand best are our own. So when someone gives you an analogy, story-tells about the dangers of borrowing and taking on too much debt and not living within your means, they use the language of getting your fiscal in order. The house, it's a household.
STEPHANIE KELTON: All right. Here it comes. So let's say the government ... I'm going to put numbers to it. Well, the cash doesn't pay any interest and the treasury's due, so sure enough somebody happily swaps their $10 in cash for these treasuries. So now you've got $10 in treasuries instead of $10 in cash. Maybe I did this to build new infrastructure, so now you also have safer, cleaner, more reliable infrastructure and some bonds. That's a pretty good deal.
And then one of my colleagues said,"If you think it's not right, you should write it up because he would want to know. And so write a paper and show where it all goes wrong." So if it sounds too easy, I think it's because, well, we've never heard anybody say anything like this before. Most of us, this is completely turns on its head the way we understand the world of government finance. And as you said, it sounds too easy in a sense, it's too magical. So I get a bridge and a bond.
STEPHANIE KELTON: No, no, no. Emphatically no. It's so funny because I keep going back to a Principles of Economics textbook, chapter one, page one. Students are introduced to this idea that there is a constraint.STEPHANIE KELTON: It's literally the first concept. And you move on to things like opportunity cost and all that. But here's the way that the thing is supposed to work. And they usually give you a graph with two axes, and they put guns on one and butter on the other.
CHRIS HAYES: Okay, so let's try to play this out. We have an economy in which there's two major cities that are very important, and they're across a river from each other. And in this economy, the government builds a bridge and it issues some bonds. So at the end of the day, you have a bridge between these two cities and you have a bond.
CHRIS HAYES: Right, right. I guess at a certain point, the problem, the thing that you don't want is essentially the government not doing things that productively increase the productivity frontier of real capacity. Now, he said to a Fed chair, the Fed will pay, you know what I mean? I think that what happened in that question was that they tied a big ribbon around AOC, Green New Deal, MMT, leaning hard on the Fed, making the Fed do something it doesn't already do. And that's not necessary at all. You don't have to change any current operating procedures in order to take fuller advantage of the fiscal space that we have.
STEPHANIE KELTON: There will not be negative inflationary consequences as a result of that. Yeah, in fact, you might be surprised. I think you're going to be surprised when I tell you this. There's some new research, this just came out this week from a financial analyst who looked at this question of just how much space is there in the economy today.
And I think the critique against you, in a broader sort of political sense, and against MMT, is that this is just the Laffer Curve of the left. Which is that liberals and Democrats and leftists and all these people want all this public investment for a bunch of reasons. They want to fund the Green New Deal because they genuinely believe in it, right, as a project. And there's this sort of ideological vacuum that you're filling that says like,"Go to it.
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