Warren Mosler: What Modern Monetary Theory Tells Us About Economic Policy

hello I'm here with Warren Mosler he is a friend full disclosure he is also a president of veillance which is a financial services management uh company uh he's been a market practitioner Economist and um also a mini celebrity because he's been written up in the New York Times so um I decided to bring him in and and interview moreen thanks for uh for coming around let's start with um the fundamentals uh you are considered to be one of the so-called fathers of modern monetary Theory you want to just explain what that is for those that

haven't followed you on the blogs in the blog sphere the government is the only legal issuer of the thing that it demands for payment of taxes and and I guess what distinguishes it uh in in in at Le at least in Practical policy terms is the fact that um we don't operate under a so-called gold standard constraint uh this whole notion of fiscal sustainability or uh that's that's not an an issue under your in under your perspective but we could operate on gold standard and that would be a self-imposed constraint yes the government could say

uh anybody works for the government has to stand on one foot I mean there's all kinds of silly things we could do to ourselves like a gold standard but we don't have a gold standard now we effectively liberated ourselves and that in theory gives policy makers a lot more um freedom to uh construct policies which they generate Full Employment and and and and yet we don't do those sorts of things yeah I like to say it opens up their options yeah far beyond what are the imagined options today in in Washington and and and you've

discussed that and um you were described as a deficit lover with a following and I think I I I've always said it's a little bit unfair because I don't think you're a a deficit lover or a deficit hater I think it's more fair to say that you actually uh challenge the notion that a deficit per se is a good or a bad thing it's more of a barometer than anything else right well it is what it is there's no morality assigned to a deficit and and we have this Atlantic article uh out today um which

uh describes it's they have a picture of Allan Simpson and uh um um Mr BS of the Simpson BS commission um there there's this notion that somehow we're getting the deficit under control uh this is a great thing this is why stock markets are are aant and uh um you have a somewhat different view about that well yeah that's that's what ends the business cycle yeah this is the real deficit crisis is when they get too small so for example in 2006 the deficit got too small under 1% of GDP wasn't enough to support the

credit structure and it all came apart you could say the same thing about um uh the late 1990s uh when we allowed the deficit to go on Surplus the uh economy was sustained by the private sector doing its own deficit spending at 7% of GDP which was totally unsustainable and triggered that collapse that we handed uh President Bush and before that um get my year straight here we had the uh deficit got too small under Bush senior with the Bush tax hikes caused a big uh recession of 1990 and there seems to be this implicit

notion that somehow uh public debt is inherently more uh destabilized and then private sector debt right um that somehow it's okay for us to run up loads of private credit even though arguably that's what created the foundations for the 2008 crisis yeah I remember that in the 9s when they were say saying you know the private debt growing at 7% is sustainable but a public debt of 1 or 2% is not sustainable of course it's exactly the opposite because of course a government being the Monopoly issue of the currency right and in fact if you

look uh closely at the accounts and as a simple point of logic government has to spend first and then collect taxes it has to spend first and then borrow okay otherwise how are the dollars to pay taxes and to lent to the government going to be out there it's like the um football stadium it doesn't collect the ticket first and then sell them okay anybody who issues anything has to get it out there first and then collect it where the users all the other people they have to get the dollars first before they can spend

them and you described this you you actually wrote a a book uh um the the seven uh innocent deadly sins about which economic policymakers follow and and and and you've used that scoreboard analogy before and you've talked about you know how the effectively the Federal Reserve acts as the uh the scorekeeper right right so if we're all in a card game and I'm the scorekeeper how many points do I have well I don't have any points well then how do I give you a 100 I just write them down and do I have fewer points

after I give you a 100 no so the Federal Reserve is an agent of Congress the treasury and the FED are both agents of Congress and the Federal Reserve is the scorekeeper for the dollar when they spend they just credit an account they write the number down and the account gets larger which chairman beri has told us many times he was on um public television they were asking him where all the hundreds of billions for the banks came from and he said we just use the computer to mark up the numbers in their accounts he's

exactly right and so when the when the government spends they add to numbers to accounts and when they tax they subtract they don't give anything up when they spend and they don't get anything when they tax because it's unlike say when we operated under a gold standard there's not a stock of gold that sort of goes up and down and I I mean a lot of the economic terms that we have are are are predicated on this this gold standard type thingy where we have stocks of gold and flows of money where gold flows from

one country to another and we don't have that under the current system before 1934 when the FED credited an account and you had a number in that account you were entitled to cash it in for gold at $35 an ounce and that was a risk and so they had to operate under that risk and that constraint now today the only thing you're going to get if you go to the FED with a $10 bill the only thing you're going to get is 25s right they'll make change but you're not going to get any gold or

anything else okay so let's go to the uh the policy considerations um obviously we had a huge crisis in 2008 it was first of all though in in in contrast to most economic crisis it was a financial crisis which then spilled over into the real economy right and um you have said to me many times and to others that you it could have been arrested to quite easily if the right mix of fiscal policies had been introduced at that time what would you have done if you were say treasury secretary or even president well in

the second quarter of 08 we had had a flat economy and we had $170 billion stim tax cut spending increase we add 170 billion to the deficit proactively and we grew at 2 and a half% and I was talking to Kareem Basta who's my partner and very good he says you know the third quarter doesn't look so good when this runs out he he doesn't see any support anymore you know what's going to happen what do you think is going to happen I said well let's just do another one how hard is this I just

did one and it worked they did nothing they just watched the whole thing collapse it was nine months later before we got the too little too late not enough to get us out of an Obama stimulus package and I I just couldn't believe this political decision to do nothing you know but it happened and if we had taken say a number like closer to say one and a half two trillion which was we lost about a trillion dollars of economic output and if we had matched that with a an economic stimulus of that magnitude we

probably could have arrested the problem what what do you say though for example about all the toxic assets that were that were um supposedly like a cancer within the financial system what's your your response to that you know I don't have a particularly strong response in in August of' 08 all we had to do is suspend collecting payroll taxes have a full FICA tax suspension and then the average family would have taken home an extra $600 a month same people just stopped taking it out of their paycheck and they would have been able to make

their mortgage payments right if they wanted to on their houses yeah uh if you looked at the housing market before that delinquencies weren't good but um the house the mortgages were predicated on incomes and what happened was 8 million people lost their jobs all at once and couldn't make their payments and suddenly all those loans became toxic waste so what's the difference between you know triaa loan and a toxic waste with the triaa the guy's making his mortgage payment toxic waste he can't make his mortgage payment there's no other difference at the bottom of the

pile either the guy's making his mortgage payment or either and so we created this whole financial crisis by allowing sales to collapse uh and jobs to be lost and um because all the credit cards were taken away okay up until ' 08 the last couple of years it was private sector credit expansion that was driving the economy once that collapsed because of Bear Sterns Leman financial crisis whatever the the obvious thing to do is to just stop taking all this money out of paychecks of people working for a living and I don't see any moral

hazard in doing that uh so that they can spend and make their payments out of income instead of out of debt it's like what's so bad about that nice Progressive bottom up you know populist approach who who more than the people working for a living you know deserve to be able to buy the output they're producing right and then that of course spills over into everybody else including all the state tax revenues and all that that was lost so I don't know if I directly answered your question no you did and and actually you gave

me a nice very kindly gave me a nice segue into something else you wanted to talk about I wanted to talk about which was uh the your job guarantee idea because obviously as you say uh you we ideally what we want to move towards is an income and employment based U um um Economic Policy as opposed to a private credit Le economy and you've had some proposals um such as a job guarantee program which would achieve that so do you want to elaborate on that and and just in the background let's not forget that jobs

are a cost of production yeah the benefit is the output right not the jobs if you ask most people not I know you're you and I are different would you rather work today or take the day off at full pay yeah quite a few people would take the day off at full pay except unless you got a job like because you need to buy things right and so the job is really the cost to all of us of what we have to do but it's become we've set it up so it's difficult to get jobs

so it's difficult and we've turned it off somehow into a benefit you know somebody created jobs it's like that's okay there plenty of jobs anyway so um to to get to your point right now we need the same thing we needed in 2008 we should just fully suspend these fic taxes of course Instead at year end we increased them and now we've seen GDP go down steadily yeah 1.8 instead of 3.1 it's been revised down this quarter I heard as low as 0.5 for Q2 interesting that we're still forecasting 3 months ago and we called

a forecast we're forecasting past with that's usually it's more accurate in theory even then it's not all that accurate so we're supposed to forecast the Future Let's see these people forecast the past I can't even do that all right so um so let's say we do the full FICO suspension the people working all get extra income and then sales go up now the the the general idea is that capitalism runs on sales so the the restaurant that's full of people doesn't lay off the bus boy I don't care no matter what the regulations or the

taxes are you know the confidence VAR doesn't really apply in the situation you get a full restaurant people will um they'll H keep hiring waiters yeah you can hate the government tea party you're not going to let the bus boy go if you're full yeah if you're empty you're not going to hire an extra bus boy yeah okay even if you get a tax break or something you're just going to keep the money okay you've got to get so employment is always a function of sales and the fewer the people you can hire the better

for the same output that's called productivity because then we can have more and more businesses more and more services more and more good things happening you know everything theater you know you name it Arts medical research we could have more and more of that if businesses could only hire fewer people to do the same job it just frees people up for more and more things that's productivity that's what makes us all rich so what we want to do is restore sales output which restores employment right right and so you have a payroll tax suspension payroll

tax holiday and suddenly that starts happening now if we want more public sector um goods and services then you wouldn't do that instead you would just hire people directly into the public sector and that's a political decision if you want to build a highspeed rail you don't give everybody a tax guut you prog I think the point about the job guarantee program is it's a permanent institutional feature let me Circle back to that okay okay so here's the problem you got all these people in the private sector go out and and now the private sector

does not like to hire people who have been unemployed they just don't like it we can spend hours going into all the studies and why but they don't do it and there was a famous ad not too long ago on one of the Internet ads says it was an employment agency that said um out of work people you know don't apply this this jobs are available only for people already working it's a it's a what the economists like to call a negative externality right okay and so what we need to be able to do is

transition people from unemployment to private sector employment when when the demand is there otherwise you get labor bottlenecks and you get a high nou when you're still at s or 8% unemployment yeah you've just ratcheted yourself down and you've lost all that you know real output because effectively the the long-term unemployed become less employable the longer they are unemployed yeah yeah and even like a couple of months makes a huge difference and so what I proposed is offering a transition job which would be a permanent institutional structure to anybody willing and able to work and

I'm just going to toss out a wage like $10 an hour and you could include child care and whatever medical benefits that's fine um and and that job is available to anybody willing and able to work and and it will be considered a transition job so right now the unemployed would be able to take this job to show what they can do they come in on time they take a bath every day they don't get in fights and this makes them attractive to the private sector to hire and then they will transition to private sector

work they effectively become shovel ready labor I think is it exactly so if you look at a buffer stock yeah it's a buffer stock policy right now we have unemployed as our buffer stock when the economy gets bad it fills up the unemployment fills up when the economy gets good it's supposed to feed back in but it doesn't it's like if you use butter for a buffer stock but he didn't keep it cold far all the butter stock would come in and then it goes rancid and then the econom is strong and it doesn't function

as a buffer stock and so as a result the price of butter goes up of that yeah and you're limited in what you can do cuz all that butter gone bad so to keep the labor fresh and liquid right uh you you keep it employed and active and that's all you have to do and now the question is how large would this transition job be well it needs to be smaller than it needs to be it's the purpose of it is a um you know an inflation anti-inflation buffer stock yeah right and so how how

many people do you need unemployed to act as a price anchor functions as a price anchor and the answer is not that many under Clinton we had unemployment down under 4% and inflation was still going down so I would say we could keep fiscal policy loose enough low enough taxes high enough public spending where you'd only have maybe two or 3% of the population at any time in this transition job this is separate from regular public sector service if you want people doing Normal public sector work you hire them at full wages benefits whatever you're

supposed to do this is just a transition job and in effectively would substitute for a lot of the things that we have today like uh food stamps unemployment insurance U because there's always this question that people say well you know there the we we we have this question about involuntary versus voluntary employment so a lot of the times you I I would leave all those programs in place yeah add this and see what happens yeah my instincts and my experience tells me 90% of the people would take this earn the money and and not be

interested in those other programs and I think it's also you you mentioned something else which is very important which is that it acts as an inflationary anchor because effectively what this uh program does is set a floor but you've also pointed out to me in the past that you don't want to outbid the private sector for uh for for for workers so that for example some guy from the private sector sees someone working in this program at say $10 an hour and out bids at say $15 an hour the government's not going to come back

and say no we want you to stay at $17 an hour because that's precisely the thing that could trigger an inflationary spiral right and look you could walk into this program and say we're going to pay $30 an hour for anybody who wants a job you're just gonna empty out everybody in the fast food industry you're gonna have 50 million people show you know it's disruptive it doesn't it's not the point you want to be as high as you can make it but you want it to be low enough so it's not disruptive to the

private sector at this point in time because right now there's no point in uh disrupting what we have now and it's going to I think at $10 an hour it's non-disruptive it's going to function as an effective buffer stock it's going to you effective transition job but it needs to be coupled with either a tax cut or a spending increase a larger deficit so that there's demand out there so these people will get hired to meet the demand and I've noticed that you you've talked a lot about tax cuts and and and or uh spending

increases in other words you focused on the the role of fiscal policy now the markets these days experience so are experiencing this sort of um crazy schizophrenic Behavior they hang on the word of everything that the FED chairman says um you I think have taken the view that monetary policy uh things like QE quantitative easing gimmicks and then actually it's fiscal policy that drives U economic policy or it should do anyway right I did a cartoon once years ago for a Bret wood conference where uh I had Allen Greenspan in the car seat in the

kids's car seat in the car with a steering wheel you know wasn't attached to anything and then Congress is the congressman is there at the steering wheel with his hands out the window not holding on to it looking over at Allen and going nice driving while the car is going over the cliff right so um but that's exactly what it is you know it's uh mon policy is the kid with a steering wheel that's not attached to anything and if and how do you know that just look at the details of what actually happens when

you do quantitative easy you buy treasury Securities so what does that mean it means you go into the market and you offer a price where people are indifferent between that treasury security and holding cash and what is a treasury security a treasury security is a dollar balance in an account at the FED it's called a Securities account okay it's they give it a fancy name treasury security but it's like a savings account at a normal Bank if you buy a treasury security you send the money the fed money you get it back with interest if

you go to a Commercial Bank you buy a CD you send the money you get them back with interest it's the exact same thing so the FED is a bank and they have two types of accounts a normal bank would call them checking and savings the FED calls them Reserve accounts Federal Reserve Bank and securities accounts treasury Securities okay but they're just checking in savings so when you when the FED buys Securities they go into the market they offer a price where somebody decides you know instead of this security account I'd Rather Have My Money

In The Reserve account and the FED debits their Securities account makes it smaller credits their Reserve account makes it larger they're both dollars at the FED it's effectively swapping assets on the balance of the balance sheet of the FED it's not actually creating new net aggregate demand yeah so if you had a million dollars here in your securities and you sell to the FED now you have a million dollars in your reserve account both of them were Bank deposits at the FED there's functionally no difference and the only reason they call it printing money is

because they don't count the Securities accounts as money but they do count the reserve accounts it's an accounting why do they do that because back in 1933 the reserve accounts were convertible into gold and the Securities accounts were not so again it's another Legacy of the gold standard everything always goes back to that it but if you account Securities as money which under the broader Aggregates of SNL they are counted as money then quantitative easing doesn't print money and I might add that you're you're not saying this from the perspective being some sort of you

know pin head Ivory Tower academic Economist you've actually seen this from an operational standpoint because worked in the in banking departments for many many years in fact your whole the whole base of your theory came from watching observing you know the operations of Banks from this is just all simple operational things that all the staffers at the FED understand and none of the appointees you ask the staffers at Monetary operations monetary Affairs um they start talking like this they speak your language immediately yeah of course then you ask them well how many people on the

fomc understand this they go zero they just don't get it and so there's this huge disconnect between the senior staffers at the fed and the political appointees and I and and one other point on China that I'd like to get to which is that um um given that you have this uh the operations you describe we don't have to worry about um China running off and creating a dollar crash or a credit markets crisis because we owe them all this money what I always like to say is it's not the denomination of the debt holder

it's the denomination of the debt which is the most important consideration so China has I don't know what two trillion in savings accounts at the fed or something like that it's like okay you know what are they going to do uh what would happen if they called up to sit to check their balance you know they went online and they saw uh you know some kind of it went blank they called the fed well I'm sorry we've had a computer error we've lost all the accounts records they're just gone it's like what do they have

they have nothing all they have is data on the fed's computer what are they going to do call the manager I mean so who's taking the risk here they've traded all these real goods and services in return for just numbers on the FED spreadsheet Japan's been doing it since World War II right and helmet Schmidt made the same point recently in an article the handles blat he he commented about Germany he s of said I'm not sure that Germany exporting it all of its output in in exchange for Financial claims is actually a good trade

for uh for Germany he must have read my book no this is called real terms of trade right it's been you know it's not a secret or anything and now in the old days of course instead of numbers Here China would have had gold but now they don't now all they these credit balances on some computer at at the at the United States Federal Reserve and what I always like to say is okay if they decided that they didn't want to hold dollars anymore then they might decide to shift it into another currency so you

get this oneoff um portfolio preference shift so the dollar gets weaker our exports probably would go would would would increase in that sort of a situation so our balance and payments vision would change yeah so everybody says well what happens if China decides to sell all their dollars so they let's say they want to buy euro right so they sell their dollars and buy euro with the bank so we would move the dollars from China's checking account at the FED to that bank's checking account whoever it is we're done now the European Central Bank does

the opposite they move Euros from you know the bank's account to China's account and they say well it'll make the dollar go down they say well what's our policy okay we've been sending trade negotiators to China for years telling them they have to have their currency stronger which means the dollar weaker okay so you know so what is what is it you want do you want the dollar go up or down you know you're talking out of both sides of your mouth whenever I say that to the person who's explaining this to me they usually

like just back off and have no answer so the the same people who are worried about the dollar going down are criticizing China because the Dollar's uh because they want the dollar to go down because the Dollar's too strong yeah so it's like you can't have it both ways pick you before you ask me the question pick a policy yeah you know pick one of the other and then I'll address I'll answer your question but you can't have it both ways how would you actually impart these ideas in an educational sense what should we doing

we have a bunch of young scholars um you know how how do we get this this kind these kinds of ideas out to disseminate them a little bit better here we have a situation of Unthinkable unemployment right now really Unthinkable unemployment and what are we doing we're raising taxes and cutting spending we think the deficit is too large and needs to come down you know we're celebrating a lower deficit yeah we're making unemployment worse okay and in fact we need to go the other way and so that the reason this mm understanding is critical is

because we're going the other way we're destroying our civilization and we're we're in real terms robbing our children's future that's the real intergenerational theft as opposed to the usual one where we talk about the deficits getting larger and stealing from our grandchildren actually in fact it's the opposite we're literally robbing from the cradle uh today in order to pay today's Bond Bond holders so that and we do that by cutting education and and and training and and and employment opportunities for tomorrow's um future workers yeah we've done two we've done something fundamentally that's you know

just so counterproductive is that we've set it all up so that children are an expense instead of an investment now is there any other what is the most important investment we have well it's the children because without any children there isn't much left in 100 years except a lot of crashy old people who can't can't uh take care of themselves okay and so children are the primary real investment and yet we've set up we' set up children as an expense you get a young couple just getting jobs and they're thinking of having children when they're

biologically supposed to be having children it's like how you going to pay for it how can you do that you know how much it cost to send this kid to school okay maybe we need to wait they're waiting till they're 30 and the world population is going down okay we're destroying our own species because we've got mmt backwards and we've set children up as an expensive set of investment we understood that they were an investment it would be the opposite we'd have all the institutional incentives the opposite to to encourage you you know having children

and taking care of them because you know this is the future right and to educate them as best we can and that would be like a real priority instead of something you know that's an expense and it and you know it's just going the wrong way well hopefully we can uh use this institute in some of your ideas uh to to change these ideas around but look I I want to thank you I know you've got a busy schedule today in New York but thanks for coming around talking to us uh it's been great and

um this will hopefully get widely de so that we can start this process of re-educating people particularly on the deficit so waren thanks a lot okay