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Can the government afford to fix climate change? Can it afford to fund fossil fuel company

subsidies, or pay private health insurance rebates, or lift the one in six kids who live under the

poverty line in Australia out of poverty? Governments tell all sorts of stories about what they can

and can't afford, about being fiscally responsible and their economic management of a nation.

At budget time, it's a case of to tax or not to tax, acts or not to acts. But at the heart of it all has

been another story. This persistent idea that a balanced national budget or a surplus is good and

a deficit bad.

Because not very many people want to have an adult conversation about these things. That's the

truth. It's too easy to dumb everything down and communicate with people as if they can't be

trusted with a better, real, honest understanding of where the limits are.

So we pretend as if the government can't afford to do things. We pretend as if the deficit is

dangerous and the debt is a risk to our national security or our well-being or it's a burden on all of

the rest of us. We're just not prepared to have a grown up conversation.

I think that's a real problem. People can be trusted. I believe in democracy.

I think that transparency is a good thing. I think honesty is a good thing. I think people can be

treated as adults and be trusted to have a grown up conversation.

They can understand the monetary system. They can understand that governments have the

power of the purse and that with great power comes great responsibility and we can hold them

accountable when they abuse that power.

That's Stephanie Kelton. She's author of the New York Times bestseller, The Deficit Myth, Modern

Monetary Theory and the Birth of the People's Economy. She's a senior fellow at the Schwartz

Center for Economic Policy Analysis and professor of economics and public policy at Stony Brook

University.

And she served as chief economist on the US Senate Budget Committee for the Democrats in 2015

and as senior economic advisor to Bernie Sanders during his last two presidential campaigns.

Well, Professor Kelton joins me on Big Ideas today. Hello, I'm Natasha Mitchell.

Great to have you with us. And we're at the State Library of Victoria as part of the National

Sustainability Festival.

Great to have you here, thanks for being in Australia.

I'm so happy to be back, this is my fourth trip, so.

Australia's got a big debt at the moment, that's a fact. So what's the myth part of the Deficit Myth?

Oh boy, so I wrote this book, and the title, The Deficit Myth, sort of suggests that there's just one,

like singular, there's one myth. There isn't, there is a web of myths that are intertwined, and so

what I did in the book was try to go through what I think are the maybe six biggest myths

associated with the way that we've been taught to think about public finances and government

deficits and the debt and so forth. And so the big one that I start with in the book, the first

chapter of the book is called Don't Think of a Household.

So how have we been conditioned to think about public finances and government spending?

We've been told by politicians and journalists, everybody who talks about this stuff, they use

terms like balancing the books and fiscal responsibility and living within your means and all of

this sort of stuff that resonates with us because the finances that we understand best are our own

personal finances. So when somebody gets up and starts talking about the federal government's

budget in ways that sound familiar to the way we think about our own budget, we say, well, yes, of

course, it's very sensible.

And what I try to do in the first chapter of the book is to say, actually, no, their budget doesn't

work like a household budget at all. There's a huge difference between what the federal

government can do, what state or provincial governments, what businesses and households can

do. And the biggest difference, that red line that separates the federal government from

everybody else, is that they get to issue the currency.

In fact, they have the sole legal authority. In the case of Australia, the Australian government

reserves for itself the right to create the Australian dollar. If you and I try to do it, well, it's

counterfeiting, right?

It's illegal. They'll lock us up and we'll be in big trouble. So states, local governments, households,

businesses, they're users of currency.

The federal government is the issuer. And the important lesson that comes from that is that they

don't have to operate their budgets like the rest of us. They can never run out of money, but they

can run out of things to buy.

So the thing you have to watch out for isn't that the government is going to go broke or become

insolvent or run out of money. The thing you have to watch out for is inflation.

It's interesting, though, the range of leaders who subscribe to the metaphor of the national

economy as operating like a household economy and needing to be managed as so, from every

side of politics. Obama said it, Bernie Sanders said it, they all say it. So why does it persist this

metaphor?

Is it just simply a lovely simple way of summing up a complex base called a national economy?

First, it's politically convenient. These are people, you know, I had conversations with Senator

Sanders, of course, when I worked for him. And the challenge for a politician is that they speak in

talking points and they sort of practice and they memorize and they know what they want to say.

And most politicians pride themselves on consistency of message. You don't want to be this

politician that says one thing one day and then to something else the next day. So if you're a

Senator Sanders and you've been running around for three or four decades preaching the virtues

of balancing the budget, raising taxes to pay for your priorities and so forth.

And then someone comes along like me and presents a different way of thinking about things.

Well, now you've got a problem. Look, a lot of these politicians like the idea of the deficit or the

debt being a problem because it's like a political football.

When you're running against the other party, you can say, they ran up the deficit, they piled on

trillions in debt. They're fiscally irresponsible, you should vote for me because I'll come in and

clean up the mess. So it's kind of a nice narrative, they think.

And the other thing is that you can appear fiscally responsible. We're used to hearing politicians

talk like that. So when somebody says, I want to do these things, I want to make investments in

education and health care and infrastructure climate, and I can show you exactly how I'm going to

pay for it, so that it's going to be fiscally responsible.

It won't add a dime to the deficit, it won't add to the national debt. And so let me show you how

I'm going to do it. And in the case of somebody like a Senator Sanders, you can say, I'm going to

scratch this itch I have on my left arm, and I'm going to do all of these things for society that make

improvements in people's lives.

That scratches that itch. And I can scratch this itch on my right arm, which is, I'm worried about

inequality, income and wealth inequality that has become so extreme, so that my pay for to

achieve and accomplish all of the spending I want to do is we're going to go get the rich, and we're

going to tax them, we'll have a wealth tax, we'll raise the taxes on those at the very top, and that's

going to provide the money that I can then say is going to be used to pay for all this. So I

sometimes call it the two-itch problem.

I want to do both of these things anyway, so why not tie them together? The problem is that very

often the votes aren't there to push up all the taxes that you think you need in order to carry out

the spending programs, and so what happens is that society gets left without the investments in

education and healthcare and infrastructure and climate.

And that's the argument that you're making in The Deficit Myth. But this idea of surplus equals

good and deficit and big deficit equals bad has been with us for a long time, and it's more than a

narrative. It's an organizing principle for the way economies are run in countries like yours and

mine.

And we are unnecessarily holding ourselves back, that we could be doing so much better than

we're doing, but we don't do those things because we're fearful of doing anything that might

increase the deficit, that might increase this thing we call the national debt. And so, you know,

what I've tried to do is say, we just have to change the way we think because we sort of have been

conditioned to have a certain reaction to the word deficit. You watch a sporting event, you turn on

the TV and you're watching a football game and you hear the announcer say, you know, if this

team is gonna come back and win this thing, they're gonna have to overcome a three-point deficit,

deficit, deficit.

It's always in a negative context. And so what I've tried to do in the book is to say, well, in the case

of the government deficit, what we're talking about is the difference between two numbers. That's

literally all it is, right?

One of the numbers is outlays or how much the government is spending into some part of the

economy. So if the government spends, make it easy, $100 into the economy and they only tax $90

back out. We label that a government deficit.

Somebody writes a minus 10 on the government ledger and we say, oh, shame on you. You've

done this terrible thing, irresponsible. But wait a minute.

If they put 100 in and they only take 90 back out, what have they really done? They've made a

deposit of $10 into some other part of the economy. The government's deficit is the non-

government's financial surplus.

So in that sense, every government deficit is good for someone in purely financial terms, because

their red ink is our black ink. The question is, deficits for whom and for what? Are those deficits

happening because the government cut taxes on people at the very top, and the windfall went to

people who are already doing really well, and you didn't really get anything for it in terms of the

economy.

We didn't get better health care, better education or anything, but the deficit was good for the

people who benefited, right, those at the top. Or did the deficit help you accomplish something

like reducing child poverty, improving standard of living for the vast majority of people? So every

deficit is good for someone.

The question is for whom and for what?

So let's just reach back into time a little bit. Where does the idea that deficit is bad and surplus is

good emerge from in the 20th century?

Well, it goes back even before then. I mean, this really is hundreds of years you can find, you

know, from the founding fathers in the United States worrying about things like this, but you

know, when you have a monetary system that looks very different from the one we have today,

let's say you're on a gold standard and you are the government and you are pledging to convert

your currency, the dollar, into gold at a fixed price. So anybody who's got dollars can come bring

them to the government and say, I want gold.

Okay, you've pledged convertibility. It's called a convertible currency. So now you've got to give up

some of your gold because you've made that promise, right?

But the problem is that gold is finite. You have gold reserves, but you can run out of them. So

there was a reason for running the budget, for trying to operate the budget in ways that you had

to be very careful about how many dollars you put out there because every one of them was

potentially convertible into something you could run out of, which would force you off of your

monetary system.

So it made sense back then to think about trying to balance in some respect, the amount of

money you're spending relative to what you're taxing, so that you could avoid running out of gold

reserves. Today we have a very different problem. We aren't on a gold standard.

The government doesn't promise to convert the Australian dollar into gold or silver or another

country's currency. But it does still have to be careful, right? You can't just spend without regard

to how much you're putting out there because people can use that money to chase after goods

and services in the economy.

And so again, inflation is the thing to watch out for.

Okay, we'll come back to that. So what is modern monetary theory? What are you calling modern

monetary theory?

Well, is this about money? Is this about just printing money for the sake of it?

No.

Endlessly?

Yeah, no, it's not.

Infinitely?

Stop it.

Well, I mean, that's how some people construe what you're arguing that this banks can print

money. Go for it. Why is there ever a problem?

Just print more money. Well, inflation is the problem, and we'll come to that.

It is the problem, and it's at the core of the entire project. That's what MMT is about. So if I had to

take MMT and present it, like, in a sentence, what I would say is MMT is about replacing an

arbitrary, imaginary, fake, phony budget constraint with a real resource constraint, with an

inflation constraint.

The whole project is built around inflation risk. That's the thing to worry about. That's the thing

to watch out for.

So mainstream economists, orthodox economists, the ones that have been advising presidents

and prime ministers around the world for decades, have not recognized that inflation is the thing

to watch out for. They don't talk about inflation risk. They go around talking about the budget

deficit and the debt, and the number that pops out of the budget box and the debt to GDP ratio, as

if that's where you get into trouble.

And what we're saying is, you can have a large deficit without inflation becoming a problem. You

can have a surplus, and inflation can become a problem. So, it's inflation you have to watch out

for.

MMT is a framework. It's a lens. It helps you understand what to worry about, where the limits

are, what you need to do in order to operate your budget in a responsible way, where fiscal

responsibility doesn't mean trying to shrink the deficit, per se.

It means keeping an watchful eye on inflation and achieving policy objectives that serve the

public interest without setting off inflation.

And if you're brushing up on Economics 101 as you're listening, if a government circulates more

money, people have more money to spend, so there's more demand for goods and services, and

with increased demand for those goods and services or the inability to meet that demand, prices

go up. That's the inflation risk. Put simply, too simply, of course, back to Professor Stephanie

Kelton.

Could you imagine if we all went to bed tonight and then woke up tomorrow morning and it was

Modern Monetary Theory Day, and from that point on, everything would be run according to your

principles, what would have to change?

Well, the budgeting process would have to change. I mean, that's the biggest thing. That's what I

want to see.

Once you realize that inflation is the thing you have to watch out for, how would you approach the

budget? If you sat down with a government budget and you saw every line item there, healthcare,

education, infrastructure, social spending, social security, in our case, Medicare, all the rest of it,

and you saw dollar numbers in each of those categories, and then you looked at society, you

looked at the economy, you saw unemployment, you saw poverty, you saw infrastructure

deteriorating, a housing crisis, you saw all these things, you say, okay, so I have the power of the

purse, I can write down different numbers in any part of the budget I choose to try to address

problems, but I can't fix everything all at once because I can't resource it. I don't have the

productive capacity, so I have to prioritize.

What are the national priorities? What do the American people want? What do the Australian

people want?

What are the priorities of the people? It's about serving public good, right? That's the point of the

federal government, is to get in there, use its budget in ways that deliver for the people, and that

means making choices.

It means budgeting with an eye to the real resource constraints, to being able to actually make

good on promises you make. If you tell everybody in America, which we don't have, but if you said

to everybody in America, you have a right to health care. Tomorrow, starting tomorrow when you

wake up, everyone in this country has the right to health care.

Everybody gets it. You wake up tomorrow. That's great.

I have a promise from the federal government, I can't find a doctor, I can't find an

ophthalmologist, I can't get an appointment with a dentist because we haven't resourced it. So

what has to change is the entire focus has to turn toward-

Workforce.

Exactly, real resources, productive capacity, making good on promises, budgeting with an eye to

avoiding inflation risk, to investing in the capacity. If you want education to be free or near-tuition

free, that's great. Announce it tomorrow, but when all of the students show up, where are the

classrooms and the faculty and the dorm rooms?

How do you resource it? How do you make good on those promises? So it's a change, it reorients

our thinking so that we start investing in our economies.

You're less concerned about a government deficit. You're very concerned, though, about a whole

lot of other deficits, social deficits, societal deficits, aren't you?

Yeah, there's a chapter in the book called The Deficits That Matter, calling attention to the acute

problems in our economy, a retirement crisis, a health care crisis, a housing crisis. We used to, at

the time I wrote the book, you know, a jobless crisis when unemployment rates were much higher

and on and on.

But at the heart is the reframing that says actually governments should be in debt. Debt is good.

Debt is not bad.

Is that right?

Well, not necessarily. It does recognize that in order for the rest of us to be able to save the

currency, in order for the rest of us to save the dollar, the government has to spend more of it than

it takes away from us, or we wouldn't have it. We wouldn't have the surplus.

We wouldn't have the savings. So every time the government adds more than it subtracts, in other

words, when it runs a deficit, it is supplying us with a financial surplus. That becomes part of our

savings, part of our wealth.

So does the government need to do that? Well, it does if it wants to allow the rest of us to

accumulate some savings. So I think it would be unsustainable for the government to try to run

surpluses year after year after year, because what does that mean?

It means the government is subtracting more away from us each year than they're spending into

our hands. And so it's whittling away, whittling away at our surplus. Now, we've done this.

You all did this in the 1990s. Your government ran surpluses around the same time. We had Bill

Clinton as president.

The federal government ran budget surpluses from 1998 to 2001. Four years, the only four years of

my lifetime that the government's budget was in surplus. And, you know, Democrats and

Republicans sort of celebrated.

This was seen as a badge of honor. Finally, we've eliminated the deficit, balanced the books and

then some. We've got surpluses and the thinking was from the White House that the government

was going to carry on running surpluses as far as the eye could see and we were going to

eliminate the national debt.

This was actually something the White House said. We are on track to completely eliminate the

national debt.

Well, it's a matter of political pride to run a surplus in this country as well.

Absolutely, and this is what I'm saying. They wear this as a badge of honor, right? They go out and

they say, we are the party that balanced the books and delivered the surplus.

Vote for us because we are fiscally responsible and the other guys are all reckless spendthrifts and

so forth.

We know that story well in Australia, don't we?

Everybody knows it. The problem is that when we were being told that the government was going

to be in surplus as far as the eye could see and we were going to retire the national debt

completely, some of us raised our hand and said, this isn't going to happen. This is crazy.

This is unsustainable. Why? Because when the federal government's budget is in surplus, it

necessarily implies that the non-government is the one running the deficit.

We were running the deficit. The private sector was spending more than its income year after

year. That is unsustainable.

Why? Because the private sector is a currency user and the public sector is the currency issuer. So,

we got four years of surpluses before it drove the economy into recession.

In 2001, the US economy slipped into recession. George W. Bush was president.

He responded with tax cuts in 2001 and another round of tax cuts in 2003. And the economy, it

was a short recession and we got out of it, but we haven't had a budget surplus since then. They're

destructive.

Okay, so you're looking to the story of historical precedent there in relation to a surplus. Let's do

the same with governments that have been in deficit over the years and some of the disaster

stories there. You know, post-war Europe, for example, saw countries in deep debt and the

consequences were massive inflation, if you think of a country like Hungary, for example, and

some of these countries started just printing more money and it exacerbated inflation

enormously.

So how do you read that story? Or if we look more recently at countries like Brazil or Venezuela,

where they're dealing with massive inflation.

Wars are both costly and tend to be inflationary because you massively ramp up spending and

you usually very quickly run up against your physical capacity constraints. You start to run out of

labor, you start to run your economy so hot that you get bottlenecks and prices start going up.

And that tends to happen.

Happened worse in Europe because a lot of the war was actually fought there. The US

experienced high inflation during World War I and again in World War II, the UK experienced

high inflation. But we did a much better job in World War II than we did in World War I because

we prepared, we sort of understood that you have to do things to mitigate inflationary pressure

when you're spending a lot of money.

We could talk about what the US did and Australia and the British to hold inflation down when

the government was engaged in the war effort. Inflation came down after the war. It ramped up

again during the Korean War.

And these sort of things happen in countries like Argentina, Brazil and some of the other

countries that you've mentioned. Look, countries can get high inflation. A lot of the time, it has to

do with commodity prices.

You're Argentina. You export a lot of things. Soybeans, for example.

When commodity prices are very high, you're exporting a lot. You're bringing in a lot of US

dollars. You've borrowed in US dollars.

You have a lot of foreign denominated debt, which is really key here. You can service your debt

and carry on and things can be okay. And when commodity prices come down, if it's Venezuela,

it's oil.

If it's Argentina, it might be soybeans or something else. All of a sudden, commodity prices come

down and your exports aren't generating the cash flow that you need to service your debt. And

you start getting into a situation where you are, in effect, kind of importing inflation.

You're printing money, you could say, in the case of like, you know, Weimar, Germany, we could

talk about war reparations and all the various things that happen there. But there's almost always

a deeper story. It isn't about just printing money.

There's usually something that happens on the supply side. There are wars, there are coups, there

are crop failures. There's something that happens with the physical productive capacity in a

country that gives rise to these high or hyper inflationary scenarios.

But they're important stories to consider, aren't they? Because one of the criticisms of modern

monetary theory is that you don't look at historical precedent in quite the depth that you might to

look at the cases that contest what you say.

Well, that's a peculiar critique. No, I mean, a lot of the economists who've been part of this project

for the better part of 30 years takes history very seriously. Some of them have done their

undergraduate training in history and then only later added the economics.

And so I think if you're actually reading the scholarship, you'll find a great deal of attention paid

to some of the historical examples that you've raised.

So let's drill in a little bit further then. At the heart of this story is you're wanting people to feel

less concerned about debt. You want to remove the politics of what you call the politics of deficit

hysteria.

And it's interesting just on that. It seems that concern about deficits are quite selective. So there

isn't so much concern when a government is funding, say, rebates for private healthcare or

funding fossil fuel industry subsidies.

But there's a whole lot of debate that is unleashed when we're talking about, well, can we afford

raising the single parent payment? Or can we afford to fund public schools more? Or, you know, it

seems to be highly selective, this political hysteria around deficits.

Absolutely. It certainly is in the US context. I mean, this question, how are you going to pay for it,

becomes intrusive when you're trying to propose doing things that some politicians just aren't on

board with.

And so what about the deficit? How are we going to pay for it? What about the debt?

That's a convenient thing to be able to grab hold of, because you can use it as your sort of excuse

for not giving your vote to support those things, because you don't really want to do them anyway.

But every time, you know, every year, the Defense Reauthorization Act comes up. It is by far and

away the most bipartisan vote that members of the Senate take every year.

So, you know, the White House submits a request. They say, we'd like $800 billion for military this

year. The senators get together and say, why only $800 billion?

We feel generous today. And without even being prodded, they say, let's give them $820 billion.

And they raise their hands and you get 80 or 90 or 92 votes and it sails through and nobody ever

pauses to say, how will this impact the deficit?

Where will we find the money for this? How will we pay for it? It's just simply, they know.

When there is something deemed a priority, there's enthusiasm for authorizing the spending.

And the votes are where the money comes from. If the votes are there, the money is there.

Nobody ever goes out for infrastructure, for childcare, for nutrition, for housing, for anything else.

You never find the money first. That isn't how it works.

Well, not necessarily. It does recognize that in order for the rest of us to be able to save the

currency, in order for the rest of us to save the dollar, the government has to spend more of it than

it takes away from us, or we wouldn't have it. We wouldn't have the surplus.

We wouldn't have the savings. So every time the government adds more than it subtracts, in other

words, when it runs a deficit, it is supplying us with a financial surplus. That becomes part of our

savings, part of our wealth.

So does the government need to do that? Well, it does if it wants to allow the rest of us to

accumulate some savings. So I think it would be unsustainable for the government to try to run

surpluses year after year after year, because what does that mean?

It means the government is subtracting more away from us each year than they're spending into

our hands. And so it's whittling away, whittling away at our surplus. Now, we've done this.

You all did this in the 1990s. Your government ran surpluses around the same time. We had Bill

Clinton as president.

The federal government ran budget surpluses from 1998 to 2001. Four years, the only four years of

my lifetime that the government's budget was in surplus. And, you know, Democrats and

Republicans sort of celebrated.

This was seen as a badge of honor. Finally, we've eliminated the deficit, balanced the books and

then some. We've got surpluses and the thinking was from the White House that the government

was going to carry on running surpluses as far as the eye could see and we were going to

eliminate the national debt.

This was actually something the White House said. We are on track to completely eliminate the

national debt.

Well, it's a matter of political pride to run a surplus in this country as well.

Absolutely, and this is what I'm saying. They wear this as a badge of honor, right? They go out and

they say, we are the party that balanced the books and delivered the surplus.

Vote for us because we are fiscally responsible and the other guys are all reckless spendthrifts and

so forth.

We know that story well in Australia, don't we?

Everybody knows it. The problem is that when we were being told that the government was going

to be in surplus as far as the eye could see and we were going to retire the national debt

completely, some of us raised our hand and said, this isn't going to happen. This is crazy.

This is unsustainable. Why? Because when the federal government's budget is in surplus, it

necessarily implies that the non-government is the one running the deficit.

We were running the deficit. The private sector was spending more than its income year after

year. That is unsustainable.

Why? Because the private sector is a currency user and the public sector is the currency issuer. So,

we got four years of surpluses before it drove the economy into recession.

In 2001, the US economy slipped into recession. George W. Bush was president.

He responded with tax cuts in 2001 and another round of tax cuts in 2003. And the economy, it

was a short recession and we got out of it, but we haven't had a budget surplus since then. They're

destructive.

Okay, so you're looking to the story of historical precedent there in relation to a surplus. Let's do

the same with governments that have been in deficit over the years and some of the disaster

stories there. You know, post-war Europe, for example, saw countries in deep debt and the

consequences were massive inflation, if you think of a country like Hungary, for example, and

some of these countries started just printing more money and it exacerbated inflation

enormously.

So how do you read that story? Or if we look more recently at countries like Brazil or Venezuela,

where they're dealing with massive inflation.

Wars are both costly and tend to be inflationary because you massively ramp up spending and

you usually very quickly run up against your physical capacity constraints. You start to run out of

labor, you start to run your economy so hot that you get bottlenecks and prices start going up.

And that tends to happen.

Happened worse in Europe because a lot of the war was actually fought there. The US

experienced high inflation during World War I and again in World War II, the UK experienced

high inflation. But we did a much better job in World War II than we did in World War I because

we prepared, we sort of understood that you have to do things to mitigate inflationary pressure

when you're spending a lot of money.

We could talk about what the US did and Australia and the British to hold inflation down when

the government was engaged in the war effort. Inflation came down after the war. It ramped up

again during the Korean War.

And these sort of things happen in countries like Argentina, Brazil and some of the other

countries that you've mentioned. Look, countries can get high inflation. A lot of the time, it has to

do with commodity prices.

You're Argentina. You export a lot of things. Soybeans, for example.

When commodity prices are very high, you're exporting a lot. You're bringing in a lot of US

dollars. You've borrowed in US dollars.

You have a lot of foreign denominated debt, which is really key here. You can service your debt

and carry on and things can be okay. And when commodity prices come down, if it's Venezuela,

it's oil.

If it's Argentina, it might be soybeans or something else. All of a sudden, commodity prices come

down and your exports aren't generating the cash flow that you need to service your debt. And

you start getting into a situation where you are, in effect, kind of importing inflation.

You're printing money, you could say, in the case of like, you know, Weimar, Germany, we could

talk about war reparations and all the various things that happen there. But there's almost always

a deeper story. It isn't about just printing money.

There's usually something that happens on the supply side. There are wars, there are coups, there

are crop failures. There's something that happens with the physical productive capacity in a

country that gives rise to these high or hyper inflationary scenarios.

But they're important stories to consider, aren't they? Because one of the criticisms of modern

monetary theory is that you don't look at historical precedent in quite the depth that you might to

look at the cases that contest what you say.

Well, that's a peculiar critique. No, I mean, a lot of the economists who've been part of this project

for the better part of 30 years takes history very seriously. Some of them have done their

undergraduate training in history and then only later added the economics.

And so I think if you're actually reading the scholarship, you'll find a great deal of attention paid

to some of the historical examples that you've raised.

So let's drill in a little bit further then. At the heart of this story is you're wanting people to feel

less concerned about debt. You want to remove the politics of what you call the politics of deficit

hysteria.

And it's interesting just on that. It seems that concern about deficits are quite selective. So there

isn't so much concern when a government is funding, say, rebates for private healthcare or

funding fossil fuel industry subsidies.

But there's a whole lot of debate that is unleashed when we're talking about, well, can we afford

raising the single parent payment? Or can we afford to fund public schools more? Or, you know, it

seems to be highly selective, this political hysteria around deficits.

Absolutely. It certainly is in the US context. I mean, this question, how are you going to pay for it,

becomes intrusive when you're trying to propose doing things that some politicians just aren't on

board with.

And so what about the deficit? How are we going to pay for it? What about the debt?

That's a convenient thing to be able to grab hold of, because you can use it as your sort of excuse

for not giving your vote to support those things, because you don't really want to do them anyway.

But every time, you know, every year, the Defense Reauthorization Act comes up. It is by far and

away the most bipartisan vote that members of the Senate take every year.

So, you know, the White House submits a request. They say, we'd like $800 billion for military this

year. The senators get together and say, why only $800 billion?

We feel generous today. And without even being prodded, they say, let's give them $820 billion.

And they raise their hands and you get 80 or 90 or 92 votes and it sails through and nobody ever

pauses to say, how will this impact the deficit?

Where will we find the money for this? How will we pay for it? It's just simply, they know.

When there is something deemed a priority, there's enthusiasm for authorizing the spending.

And the votes are where the money comes from. If the votes are there, the money is there.

Nobody ever goes out for infrastructure, for childcare, for nutrition, for housing, for anything else.

You never find the money first. That isn't how it works.

You write a piece of legislation, you find the votes, and you pass the legislation. The legislation is

literally where the authorization comes from. It's a set of instructions that goes to the

government's bank, the Federal Reserve, and it says, these are the things that we have just

committed to.

You are our fiscal agent. You're going to carry out the payments on behalf of Treasury that have

been authorized by Congress. Go forth.

And the Federal Reserve's job is simply to change the numbers in the bank account. They make

the payments that have been authorized by Congress on behalf of Treasury, so people can call it

printing money, but show me how else it could possibly work. There's only one way for the

government to make its payments, and those payments are made through the Fed using a

computer keyboard to change the numbers in the appropriate bank accounts.

That's how all government spending takes place.

Whereas the assumption is that all government revenue comes from, well, primarily from,

taxpayers, taxes, government bonds. This is the assumption that people make. So in order to

make more money, and so that they can spend money that serves all of our needs, we need to

increase taxes.

Well, it is the assumption, except that the reality, and we've all just lived through it, is that that's

not the way it works. I mean, let me tell you what we did in the US, and you'll know the numbers

for Australia are certainly better than I do. But when COVID came to our shores, it was March of

2020.

That's when it really started to bear down on us. And it became very clear that we were in a lot of

trouble. We didn't have vaccines, and businesses were told you can't open, and the economy, oh,

everybody, there was panic, right?

You're talking to an audience who, we were in the city that was locked down the longest in the

world, as it turns out.

I know.

Wasn't that fun?

So clearly we had an emergency on our hands, and Congress recognized, and we had Democrats

in control of the House, Republicans in control of the Senate, a Republican in the White House.

So we had divided government. And yet, in March of 2020, we got a piece of legislation, it was

known as the CARES Act, $2.2 trillion past just like that to deal with the COVID pandemic.

In December of the same year, we were still in trouble, and Congress came back with an

additional package, $900 billion. And then President Biden won the election, the Democrats won

the Senate, now they have the House, the Senate, the White House. They came back in March of

2021, and they passed a package 1.9 trillion.

If you do the math, those three add to 5 trillion in the span of 12 months. There was no discussion

about whose taxes were gonna go up to pay for any of this, because nobody's did. There was no

discussion about going to China to see if maybe we could work out a loan, because China had its

own problem with COVID, right?

Congress committed the funding. It's how it always works. The conversations about tax increases

or issuing bonds, those are different operationally.

You can raise taxes for sure. You can cut taxes. We do that well.

And we issue treasuries. But there's only one way for the spending to take place. And every single

dollar the government spends is spent via the Federal Reserve, typing numbers into a computer,

and new money is created.

So this idea that governments can pay the bills with tax revenue or with borrowing or by printing

is wrong. There's only one way for it to happen. All government spending is paid for with newly

created money.

Taxes are like the delete key. They just subtract money out of our bank accounts, right? They

reduce the amount of money the rest of us have to run around chasing after goods and services.

So what's the point of taxes?

Well, lots of things.

Why bother? If a government can just print all the money they want, why collect taxes at all? Is

this about some kind of relationship between their citizenry and themselves?

Well, so to maintain the value of the currency through time, taxes are really important. If all the

government ever did was put dollars into our hands and never subtract any away, you can imagine

how quickly you would erode the value of the currency. So it's really important that you, in some

sense, regulate how much you add relative to how much you subtract.

As long as you add a bit more than you subtract, the rest of us get to save some. That's where our

savings come from. So that's a good thing.

But if you get carried away, in the US., they sent us checks. Most Americans got a $1,400 check, a

$600 check, and a $1,200 check.

They did it three times. But the government could easily have made the $1,400 check a $14,000

check, or a $140,000 check. They could send any amount they choose.

But you could imagine the inflationary consequences of choosing $14,000 versus $1,400. So taxes

are important for a variety of reasons. They give governments the ability to impact the

distribution of income or wealth in the economy.

If you think things have gotten so unequal that you're worried about too much going into the

hands of a smaller and smaller group of people over time, then you might put taxes up on people

at the very top, not because you need their money to pay the bills, but because you want to reduce

the inequities in society. You might use taxes to incentivize or disincentivize behaviors. Maybe you

want people driving electric vehicles or putting heat pumps or solar panels on their homes, so

you provide tax breaks to incentivize that.

You want businesses to do certain things. You give them subsidies or tax breaks. Maybe you want

to discourage certain things.

You hear people talk about a carbon tax or something. Taxes do a lot of things. They allow the

government to impact and influence the economy and behaviors in a lot of different ways.

Yeah, yeah. So then there's the question of, and I want to come back to the inflation question, but

at the heart of this, you're then making a case then, I assume, for what you do with the deficit, to

fund what you need to fund to sustain a society. What are your priorities?

Okay, so two things-

And this is a political question, isn't it?

The question, I guess, is if governments can and have the power of the purse and commit to

spending money without raising tax, what should they do?

What should they do? And that's the $6 trillion question.

It is a question for our democracy. It is a question for those who get to cast those votes, who are

supposed to be casting votes as representatives of the people, right? I mean, it's not for me to say.

I certainly, as an individual, have ideas about what I care about and what I would like to see

prioritized, but it isn't part of MMT for me to say, this is the order in which government should

prioritize different projects. So sometimes we say MMT is a lens. It's a framework for analysis.

A framework for analysis doesn't tell you what to do.

Well, within your lens is, for example, the question of employment and full employment, isn't it?

So you have a theory, a job guarantee, an idea of a job guarantee. Tell me about that and why it

matters, because I don't know that everyone fully understands that, in fact, most governments

want to maintain a degree of unemployment in society so as to manage inflation, which is not a

great feeling if you're unemployed right now, that somehow you're a pawn in a bigger economic

game for the government.

That's right.

You say we don't need to have a sort of guaranteed minimum of unemployment, do we? You want

to have a job guarantee instead that could create full employment when there's a need.

And also, it helps you achieve another objective, which is price stability or managing inflationary

pressures. And so we like the idea of a federal job guarantee for both social reasons, economic

reasons related to inflation and efficiency and so forth.

So what is it?

Okay, so the idea is basically we use unemployment as our primary weapon in the fight against

inflation. The belief is that if you allow the labor market to get too tight, if you let too many people

find jobs and the labor market is very tight, well, workers will suddenly have a lot of bargaining

power and they'll be able to go to their employer and say, I want to raise, and if you say no, why all

just go get a different job because jobs are so plentiful, right?

And you're talking to a country where we've had massive wage stagnation.

We did too. For 35 years, we didn't see any increase in real wages for the median worker. So we

maintain a pool of people in unemployment because the belief is, if you allow too many people to

be successful in finding jobs, the labor market will get too tight, workers will have too much

power, they'll be able to bargain for higher wages.

Higher wages mean higher prices because employers will pass those higher wages on to

consumers and so we'll get inflation. So central banks whose primary responsibility it is to fight

inflation, try to keep an amount of unemployment in the system that they think is necessary, the

right amount of unemployment to keep inflation from accelerating. And what we're saying is this

is both cruel and costly and inefficient.

There's a better way to manage inflationary pressures and we don't have to use our fellow citizens

to do it. We don't have to punish them by holding them out, locking them out of work in order to

fight inflation. So the idea with a federal job guarantee is simple.

The federal government announces a wage and benefit package and says anybody who wants to

contribute, wants to work in the program, can't find a job anywhere else in the economy, can have

a job in the federal job guarantee program.

What sort of work?

So that's up to the people who design the program, the way we imagine it. You would have jobs

oriented around caring for people, caring for the planet and caring for communities. So a care

economy, if you like, and those jobs, there is more work to be done than there are people to do it.

But what you want is for a program that's federally funded, but locally administered, so that the

work is of value to the people who are living in the communities where the work will be done. And

that's where the job should really take shape. People should say, you know what, my community

needs a crossing guard at this dangerous intersection where kids have to go to school and there's

always some accident that happens there.

We need a crossing. There's a job in the Job Guarantee Program. I could go on and on.

It's one example.

On Big Ideas, on ABC RN and ABC Listen, it's Natasha Mitchell with you. And I'm joined by

economist, Professor Stephanie Kelton, author of The Deficit Myth, Modern Monetary Theory

and the Birth of the People's Economy. Now, Modern Monetary Theory, MMT, as Stephanie refers

to it as, challenges economic orthodoxy and has its critics.

That's important to point out. We'll pop some links to explainers over on the Big Ideas website, if

you're interested in reading more. What about climate change?

How do you see your thinking, shaping how we respond to climate change? Because at the heart

of your country and my responses to climate change is, well, we can't afford to do that. Well, we

can't afford to do that, that, that or that.

We might be able to afford to do that. It's really constricted the nature of the conversation about

what we can do to keep global warming within 1.5 degrees. That means 50% cut of fossil fuels in

the next, what, 10 years, 100% in the next 30 years.

That's a massive wholesale change to the current modus operandi. And yet we're constrained. So

how do you see climate change being part of this story and our response to it?

Yeah, for the better part of my adult life, to the extent we've had a debate, active debate around

climate change, the big impediment has been obviously the financing, the cost, how are you going

to pay for it? And we got a piece of legislation passed through Congress a little over a year ago. It

was called the Inflation Reduction Act, but what it really is, is a climate bill.

And it was estimated when the bill was passed that the federal government would end up

spending around $370 billion. That's how much the government would kick in. Now, that's not

enough to deal with the problem we're facing, but it's big, it's the biggest climate package we've

ever had.

Only Congress did something really interesting, which was they wrote the bill and they didn't cap

the spending. It's like having a cookie jar with no lid on it, and it replenishes itself automatically,

like you can never reach the bottom of the jar. So uncapped federal assistance for businesses and

for households, if a company wants to invest in R&D for green energy technologies, if they want to

do offshore wind or solar projects or EV charging stations, if homeowners want to put heat

pumps and solar panels or buy electric vehicles for themselves, the federal government has the lid

off the cookie jar.

And so that $370 billion that was originally estimated, we have blown way past it already. And

places like Goldman Sachs, you know, Investment Bank has looked at this and said, you know, the

US could end up catalyzing as much as $3 trillion over the next decade with this piece of

legislation because they didn't limit the amount of money the federal government is willing to put

in. So there are people in the US, you know, there are headlines out there that say, well, here is

MMT showing you what you're capable of doing when you're willing to commit the kind of

resources, financial resources to assist in the mobilization of the real resources.

So do you envisage any limits on how much a deficit can be? Is there any modeling informing the

shape of this, the limits of this?

You know, it's funny because they did call the legislation the Inflation Reduction Act. And I'm

sitting here saying this whole time, we've been having this conversation, I said inflation is the

limit, inflation is the limit. So think about what this bill does.

It invites people to come in and spend a lot of money. And you're thinking, wait a minute, if you

spend a lot of money, isn't that the way, isn't that the path to inflation? Except that so much of the

spending is investment in building capacity, which means that you're doing both.

You're adding to demand, but you're also increasing the productive capacity, the supply capacity

of the economy. So if you can safely absorb that spending, then it doesn't become inflationary.

And so far, what we are seeing is inflation drifting down back toward the Fed's 2% target, even as

we massively increase spending.

The deficit in the US right now is running about 6% of GDP. That's big, and inflation is drifting

back down to 2%. So you can have very large deficits and low inflation, but inflation is the thing to

watch out for.

Are there models that can help with that? Yes, there are.

When you have conversations about this, what are people's responses? Because some say this

sounds fanciful. Some say it's a riddle, that it sounds seductive, but why aren't more people on

board if it's true?

Why aren't more people on board?

Well, we're doing it. We've provided a description. We've laid out the framework.

We've explained what the spending capacities of a currency issuing government are. The

government can afford to buy whatever is available and for sale in its own currency. That's the

trick.

If it's not available, you can't have it, okay? Even if you're the richest country in the world, which

we are in the US., when COVID hit, we couldn't get ventilators.

We couldn't get PPE. Remember those words, masks and protective equipment? We're the richest

country in the world.

We couldn't get those things because they weren't available and for sale in dollars. But that's the

limit. You can afford to buy whatever is available and for sale in your currency.

You can't run out of money. You can run out of things to buy. So why do people say it sounds

fanciful?

I don't know is the answer. I think certain people are kind of concerned that you can't trust

governments to restrain spending when the time comes.

Because this is an argument for big government.

Well it's not.

And in your country, big government isn't in favour.

It isn't. It isn't an argument. Again, it's a lens.

I am an economist. I am offering a framework that I hope will provide lawmakers with a better

sense of where the limits lie, how to budget responsibly. I'm not saying, you know, this is carte

blanche.

It's a free for all. It's a free lunch. Go out and disregard all things and spend freely.

That isn't it at all. In fact, you know, I would argue, and I have many times, that MMT holds

governments to a higher standard because it would force them to put inflation risk at the centre

of their budgeting process.

This calls for political processes though to then use that money responsibly. How do you see that

playing out in a country like your own where you're facing an election? To put it bluntly, I think the

rest of the world is watching on sort of in a state of disbelief that Trump could become your

president again.

What? How do you see this playing out? How do you even have this conversation in the context of

a Trump presidency?

We have to go there.

We've been there.

I know. We all watched.

We've been there. So what happened when Donald Trump was president? You know, this is the

thing.

I'm not giving anyone a new permission slip. MMT doesn't say...

I should just say to the radio audience that Stephanie's eyes just popped out of her head when I

said the word Trump.

I have a glass of water next to me and I was thinking about asking if anybody could replace it with

vodka quickly. You can go back and we could talk about Reagan, we can talk about George W.

Bush, we can talk about Bill Clinton, we can talk about lots of presidents and the policies that they

pursued.

And half the population will be enthusiastic about them and the other half will not be supportive.

But returning to Donald Trump for a moment, when Trump was president, he really

accomplished one thing legislatively and that was the 2017 tax cuts. They passed in December of

2017.

Republicans had control of the House and the Senate. Donald Trump managed to get sweeping

tax cuts through. Corporate tax rate was 35%.

Republicans lowered it to 21%. Personal income taxes changed, rates changed and so forth. So

sweeping tax cuts added about $2 trillion to the deficit under Donald Trump.

83% of the benefits went to folks in the top 1% of the income distribution. So, as I said, every

deficit is good for someone. That particular deficit was really good for people at the very top of

the income distribution.

So what if we get Donald Trump again? Well, I presume we would see additional tax cuts. I would

expect them to try to lower the corporate tax rate even more and who knows what else?

So how do you see our government and it's the same as your government, that we have a reserve

bank that has essentially one lever. It is to reduce interest rates or increase interest rates and all

the complexity of an economy kind of flows on from that. One lever, how do you see that?

That seems like an incredibly blunt instrument and it, as we all know, for people paying

mortgages or trying to get rent, rental properties at the moment, it's creating an absolute

nightmare for people.

Isn't it insane? I'll call it what it is, I won't put you on the spot. It's crazy, it's insane.

Inflation is considered a cost of living crisis. Then the central bank comes in and says, we have to

deal with the cost of living crisis, inflation, by raising interest rates, which exacerbates the cost of

living crisis because now it's more expensive to buy a home, it's more expensive to buy a car, it's

more expensive to put things on your credit card, it's more expensive for businesses to finance

their working capital or make investments and so forth. It's a huge problem.

As you say, it is a blunt instrument. It's all they've got, so by God, they're going to use it. And it

doesn't work well.

And it's a problem that we haven't developed a more sophisticated suite of policy tools to respond

to inflation. It would be like if we all went in and made appointments to see our doctor and each

of us walked in and we all saw the same doc and you walk in and Natasha, you say, I don't feel

right doc. And the doc pulls out his prescription pad or hers and writes a prescription and off you

go.

And then I go in, I said, I don't feel right doc. And the doc writes the same prescription and then

you, and you, and you. One size fits all, we all get the same prescription.

We'd call this person, we'd say it's medical malpractice. This guy's a kook, take away his license.

But with monetary policy, with central banks, they write the same prescription for any and all

inflation.

It doesn't matter where it's coming from, if it's energy because of a war between Ukraine and

Russia, if it's food prices, if it's COVID related supply chains.

And we've had all of that.

One prescription for everything, and it's just supposed to magically heal. It does not do us justice.

It doesn't serve us well.

And somehow we've been doing this for at least 40 years, relying on this single blunt instrument.

And I think the good news is, I believe that in the coming decades, we're going to see things start

to change.

How?

Well, when the Fed was fighting inflation by raising interest rates, and President Biden wrote an

op-ed, ran, I think, in the Wall Street Journal. The title of the op-ed was, My Plan to Fight Inflation.

Now, this is kind of interesting, right?

Because the institution is supposed to fight inflation, it's the central bank. It's literally their job.

And yet we had a president write, My Plan to Fight Inflation.

And it was a three-pronged plan. Part one was, let the Fed do its thing. I mean, God bless them, let

them try.

But part two was, I'm going to try too. My administration is going to try. We're going to work on

the backlogs at the ports.

We're going to run them 24-7. We're going to try to deal with licensing in trucking to get more

people who can drive trucks and get those trucking costs down. We're going to deal with

affordable childcare so that women who've left the labor force can reenter and take some of those

jobs and ease pressure on the labor market by making childcare more affordable and more

accessible.

And he went on and on. And then step three was, to the extent that the deficit is contributing to

inflationary pressures, we're going to work to bring down the deficit. And that's the kind of stuff

that makes a lot of sense, right?

You say, if you have an inflation problem, don't leave it the job of fighting inflation entirely up to a

central bank with one blunt tool. Get in there and find more sophisticated ways to get right at the

source of the inflationary problems. Where is it coming from?

We're going to build semiconductor plants in the US so that we can produce our own chips,

because chip shortages were causing car prices to increase. So one way to fight inflationary

pressure is to reshore some domestic manufacturing capacity. So we're doing all of those things.

So is that at the heart of your approach in Modern Monetary Theory for addressing inflation, the

inflationary risk?

Absolutely. It is absolutely at the core. And I'll just tell this, because-

So it's a whole lot of hands-on government.

It's a lot of tools and it's an expanded toolkit. But yeah, it's government. It's government agencies.

It's both monetary and fiscal policy, regulatory levers, antitrust enforcement, building capacity, all

of those things the Biden administration is doing. I'll just say very quickly when Janet Yellen, who

was the chair of the Federal Reserve for a time, and she's now the secretary of labor, she came

out, she gave a speech, and she was talking about the administration's approach to

macroeconomic policy. And she said, our approach can be described as modern supply side

economics.

This is how she described the Biden administration's macroeconomic policy framework. One of

Trump's former advisors then wrote an op-ed in the Wall Street Journal and said, Janet Yellen is

an MM tier. And he was almost right, right?

Because she had put at the center inflation and capacity, supply constraints. So it was definitely

leaning into MMT. And so I don't think this happens for a lot of economists, where, you know,

you're writing scholarly papers, you're publishing and you're writing books or whatever.

And all of a sudden, people around the world start paying attention and then a movement

develops. That isn't something that usually happens to an economist.

And a New York Times bestseller, no, Liz?

You know, so it did spark a sort of political movement. And I think what really happened is that it

happened around climate, around the urgent need to act. And the numbers are so big.

And people who say, you know, what we need to do to address climate change is going to cost

trillions of dollars. And that became who can help us answer the question, how will you pay for it?

Interesting. Thank you. Big thanks to Stephanie Kelton.

Thank you so much.

Stephanie Kelton, author of The Deficit Myth, Modern Monetary Theory and the Birth of the

People's Economy and professor of economics and public policy at Stony Brook University. She's

also the subject of a new documentary film called Finding the Money. I'm Natasha Mitchell, and

you can find out how to join me at live events like this one, which comes from the National

Sustainability Festival.

Just look for Be In Our Audience on the Big Ideas program homepage over on the ABC Radio

National website, and you can find the Big Ideas podcast on the ABC Listen app, a great way to

share our episodes too with your friends on social media. I'll catch you next time. Bye.

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