By L. Randall Wray, Professor of Economics at the University of Missouri-Kansas City, Research Director with the Center for Full Employment and Price Stability and Senior Research Scholar at The Levy Economics Institute. Originally posted at New Economic Perspectives
I’ve seen some pretty bizarre claims about MMTers. They are “tea partiers”, “barely left of center”, who “are not interested in policy”, who “ignore inequality”, who “are only interested in reducing taxes”. “MMTers ignore the fraud of the banksters.” They are at best “one issue” advocates for a particular view on money, taxes, and employment. I have no idea where critics get this stuff. I’m convinced they make it up. Ignorance or dishonesty; probably both.
For anyone who wants to disabuse herself of such nonsense, please go to www.levy.org, click on scholars, click on my name, and find right in front of your face a few hundred pieces on policy that I wrote. Yes, inequality. Yes, the explosion of incarceration. Yes, the War on Poverty’s failure. And so on. Stephanie Kelton just reminded me of an interview I gave in December to Travis Strawn–who happens to be a former student. He was writing for the Seven Pillars Institute (full disclosure: I’m not sure what it is). Judge for yourself if this is garden-variety “liberal”, let alone “tea party”.
Travis Strawn: You and a small band of economists around the country are the vanguard of an economic theory called MMT, or Modern Monetary Theory. Can you give a simple description of this theory that may be understood by our educated, but not necessarily economically trained readers?
L Randall Wray: Well the most important thing, especially from the policy perspective, is the recognition that a sovereign government that issues its own currency is not like a householder or firm. So whenever you hear someone say you need to run the government’s budget the same way you would run a household budget, that cannot apply to a sovereign government like the United States. The analysis is completely flawed, even though that analogy is used all the time. You hear politicians saying, “well if I ran my household budget the way that the federal government is running it’s budget I would go bankrupt”, and of course that is true, the difference is that the household is not a sovereign government and it doesn’t issue its own currency.
TS: Why do you think that idea so pervasive in politics? I mean, I know exactly what you are talking about, I hear about that all the time, and it just seems like it’s common knowledge?
LRW: I think there are at least two, maybe three reasons. I think that some economists were trained a long time ago back when we had a gold standard or the Bretton Woods dollar gold standard and they were taught economics that was sort of appropriate to a gold standard. On a gold standard the government can run out of gold and if you link your currency directly to gold, in a sense you could say you can run out of your currency. It’s actually more complicated than that, but you could understand how someone who thinks along the lines of the gold standard would think there is a financial constraint facing even a sovereign government, but of course we abandoned Bretton Woods in the early 1970s; we are never going back there again. So it’s not applicable to the kind of currency system that we actually have in the real world. So that’s one reason.
The second is, a lot of people are just confused and the analogy of a household intuitively makes sense if you have not studied economics and don’t understand the difference between government and households. It is an analogy politicians use because it works, people understand it, it’s very simple and intuitively obvious although completely false.
Then the third reason is, I think, there is an attempt to use this analogy by people who know it is wrong in order to fool the public into doing things they don’t want to do, such as cutting social spending. I think the reason why this analogy has become so much more commonly used in the past thirty years is because we have had the takeover of all public debate about budgeting by the deficit hawk crowd most of whom I think, realize what they’re saying is pure nonsense. [It’s] politically expedient for them to say, “Uncle Sam has run out of money, therefore we need to cut social spending” – like food stamps, like support for the poor, and support for the aged. That I think, is pure politics.
TS: It does seem like MMT is a bit threatening to the economic establishment. Why do you think it seems like a threatening theory to the economic establishment?
LRW: Economists as a whole do tend to be politically conservative. Probably not as conservative as what people believe when they hear the likes of Pete Peterson, Robert Lucas, [and] Milton Friedman; those individuals are really outliers. Most economists are not that far to the right, but they do tend to be politically conservative and they worry about a government that is getting too big and too powerful and so they want to constrain it. If you say that the federal government actually doesn’t face a financial constraint; that it faces other constraints, but not a financial constraint, most economist are worried the population as a whole might exercise democracy and demand the government provide more. So I think that’s a big part of the reason.
Then you have to understand most economists don’t do macroeconomic theory. Most are focused on pretty narrow areas of economic discipline in microeconomics, applied microeconomics, and just applied economics in general. So they actually don’t know much about the monetary system, about the options available to currency issuers. They of course have had some macroeconomics and it could’ve been many years ago, but it’s not an area they work in. Finally, the younger economists out there may not have actually had any real macroeconomic theory in their courses, because over the past 20 to 30 years what is taught in Ph.D programs became ever more highly mathematical [and] esoteric, bearing no relation to the real world. If I tried to explain what they do, it just sounds impossible. It doesn’t sound like this could be something that people study in economics courses at the PhD level. It’s true that they use models that have one individual in them, who has an infinite lifespan, and whose only goal is to maximize something called utility through time. That is what they are studying, not in their micro-courses, they study that in their macro-course economies, with one person in them with no money, no financial institutions, no government. Those are the kinds of models that economists over the past 20 to 30 years have been trained to use even in macroeconomic courses, so they literally know nothing about macro-economics.
TS: Another related question. What do you think mathematics can contribute to an accurate description of economics? Do you think mathematics cannot really help explain the economy because the variables of human nature are just so complex and grand or do you think there is a place for mathematics that can actually provide a true description of the economy?
LRW: Well I think there are limited places where you can get some insights from mathematics. In fact when I took the calculus series of courses you know, when you learn about the difference between change and rates of change, that is a very important concept and that concept is important in economics. I think it is very useful to know a fair amount of math and even to use it occasionally. The problem is that economists get caught up in these extremely simplistic models. Simplistic in the sense of the kind of hypothetical economy they are modeling. Mathematically the models are very complex, and basically that is all they do. They then try to make policy recommendations based on these completely unreal and far too simplistic models. The Queen of England asked her economic advisers, “Why didn’t any of you [economists] see the financial crisis coming?” The reason is really obvious: [it’s] because they were using these models in which crises cannot happen.
So economists have models of economies that cannot exist.
TS: I think I saw a video with David Harvey kind of explaining that same thing – the Queen of England questioning economists [that were] saying it is systemic failure.
LRW: One common excuse is that it was a tail event; it is an extremely improbable once in a hundred thousand year event. They have this idea of the black swan event. But there were economists who saw it coming and explained in pretty good detail what we know after-the-fact, which actually fit what happened. These economists didn’t use these models, they used heterodox economics and they all saw it coming.
TS: [Who] were some of the economists that saw it coming?
LRW: I think there are two very important names. One is Hyman Minsky [who] saw it coming in the 1950s and that might sound absolutely bizarre, but Minsky started developing theory in the 1950s of the long-term transformation of the financial system from a very robust system, that we had in the early postwar period, to finally a highly fragile unstable financial system that we got in the 80′s, 90′s, and 2000′s. Minsky died in 1996 so he actually didn’t live to see this crisis, but all along he was updating his theories. His explanation of what was going on would allow anybody to see that a big crisis was going to occur.
So Minsky is one of the two names, the other is Wynne Godley. He is one of so-called wise men of the UK who gave advice to the UK treasury, was at Cambridge, and moved on to the Levy Economics Institute, where Hyman Minsky also was and where I spent time. So I would say Godley’s writings from ‘96 to about 2000 really spelled out in detail what was wrong and why the whole thing was going to crash. So he really focused on the processes that actually led directly to the crash. He did live long enough to see the crash so I think that he got the specifics right and Minsky got the general right.
TS: According to MMT, is the economy doomed to move in cycles of boom, bubbles, and bust?
LRW: I would say people who follow MMT would agree with that, but that idea comes from Minsky. He was my dissertation advisor and there are other business cycle theorists, but I think Minsky was the best.
TS: So you think that it is inevitable [that we move in cycles of boom, bubbles, and bust]?
LRW: Yeah, one of [Minsky’s] famous sayings was stability is destabilizing, so if you achieve economic stability, that itself will cause instability. The reason is because people change their behavior if they believe the economy has become more stable, more robust, with less likelihood of a deep crisis. They change their behavior and take on more risk so they create the instability. That’s exactly what happened. Chairman Bernanke in 2004 wrote a paper announcing that we’ve entered the period of the great moderation, central bankers are so clever now that they have managed to stabilize the economy, so that from now on you have a much more stable economy. We would still have some swings, but they wouldn’t be very big and of course, if people believe that, then they might take on more risks because there is less chance things might go bad. That’s exactly what they did and that led to the crisis.
It’s just like when Irving Fisher in 1929, I think in September, wrote that the stock market has entered a new permanent plateau and it would never go down and of course one month later it collapsed. Bernanke wrote this in 2004 [and] three years later we collapsed. Paul Samuelson wrote in, I think, 1968 that economists have figured everything out and government knew how to fine tune the economies so we would never have any more recessions or inflations and immediately of course, we got inflation and then a very deep recession. So whenever economists make statements like this we know we are looking at the beginning of the next crisis.
TS: Do you think if MMT was actually applied and used on a greater scale in economics, we could have a system that is generally more stable? Where people aren’t just unemployed and unemployment wouldn’t skyrocket, or you wouldn’t have recessions? Do you think it’s possible if MMT was more commonplace that recessions could be reversed more quickly I guess is my question, or that we could fine tune it a little bit better so things wouldn’t be so bad when recessions occurred?
LRW: We can’t eliminate the business cycle, but we can make the crisis much less severe. We can move to recovery a lot faster and most important we can prevent job losses. So eliminating instability is going to be impossible and that shouldn’t be our goal, but reducing instability is something we can do. We need to reform the financial system so that is a big area, not easy to do politically and there is uncertainty about the economics of doing that too. So that’s one big issue, harder to do.
Then the other is to change fiscal policy so that it adds to stability instead of adding to instability and that is actually relatively easy to do. What you need is for the government’s spending and taxing to move counter-cyclically. So you want taxes to go down and spending to go up when you are moving into a recession and the most important thing is to prevent unemployment from rising in recession. What we propose to do which handles all of the spending side is to have an employer of last resort, or job guarantee program, in place so that when people start losing their jobs in the private sector they can always go into the government direct job creation program, job guarantee, or employer of last resort, whichever you would want to call it. They don’t become unemployed and continue to earn some of their income which helps put a floor on how bad the recession will get and it helps the recovery begin because government spending automatically goes up as you hire those people. When the economy does recover the private sector will start hiring those people away from the government’s program. Government spending automatically goes down, so you get government spending going in the right direction counter-cyclically. The only other thing you need to do is have a progressive tax system that is based on the performance of the economy, so that when people’s incomes go up, you tax more and then when incomes stop rising or go down you tax less, which is a progressive income tax.
TS: What is MMT’s view on income inequality? Inevitable or avoidable with the right policies and what are these right policies, if they are avoidable?
LRW: Well it’s very easy to reduce the inequality that results from low income, from poverty, from low wages; all you have to do is offer jobs. Minsky did a calculation [in] 1974 and Professor Kelton and I did one around 2000. We showed that if you just give a job to anyone who wants to work you will eliminate two thirds of all poverty, even if you pay only the minimum wage. We would like to see the job pay more than that, but even at a minimum wage you eliminate two-thirds of all poverty. So most poverty is due to joblessness. People who cannot get jobs or maybe they get jobs that last a few months and then they are unemployed again. We need permanent jobs that pay a decent wage and you’ll eliminate most poverty. You’ll still need some kinds of anti-poverty programs but the jobs are the best anti-poverty programs there are, then you need something else to fill the gaps.
Now that still leaves inequality due to extremely high income at the top. This program by itself doesn’t address that kind of inequality. I do think you need to address that, not because a lot of progressives think we need to tax the rich in order to spend on the poor. That’s just wrong, we don’t need to tax the rich more to spend more on the poor, because our sovereign government can’t run out of money, it can always spend more on the poor without taxing the rich. You want to tax the rich because they are rich, you don’t tax them in order to give more to the poor. You tax the rich because they’re filthy rich and so you shouldn’t link the two in policy. In the public’s mind we need to do both, but they are separate policies. You set the tax on the rich not to equal spending on the poor. You set the tax on the rich and make it high enough so that they’re not rich. If that’s your goal – get rid of the excessive riches of the rich -you tax enough so they are not excessively rich. It’s an extremely hard thing to do politically. The final thing is rather than trying to do this with taxes, which is hard because once people have income, especially high income, they have an incentive to protect it, the means to protect it, the means to influence policy, and they are extremely powerful. In practice I think in the US, it is actually impossible to take away income from the rich through taxes because they buy off the politicians, they get special exemptions, they never pay high tax rates, they hide their income, they put it overseas, and so on. The only way that will work in a country like the U.S. is to prevent them from earning the income in the first place. You have to do something like set maximum pay for CEOs. There is no reason why a CEO should be earning 300, 500, or 600 times more than the average worker. Set a maximum and say if a corporation pays more than the maximum, it should not be more than 50 times the average employee. If a corporation pays more than that they lose their papers of incorporation.
TS: Do you think there is a relationship between the ability to have less income inequality and how democratic a government is? Do you think that they align together pretty closely? That is, if the country is more democratically accountable to its citizens income equality naturally occurs like let’s say in Europe, in places like Denmark?
LRW: Scandinavian countries are a good example of not very much income inequality and democratic governance participation by the population in the political process. Now I think there are cultural differences too and we are now talking political science and I am not a political scientist, but I think the relation is not quite as direct as you are implying in your question. I think we could still have a workable democracy with greater inequality then the Scandinavian countries, but what we have now I think is not workable. It is far too unequal and things are made worse by silly rulings that corporations are people. This is crazy. This is completely antidemocratic and allowing corporations to buy up as many politicians as they want obviously completely subverts democracy.
TS: I think that is a pretty popular opinion. On one of your blogs in New Economic Perspectives you described Wall Street as depraved. What do you think should be done to make Wall Street and high finance in general more virtuous?
LRW: Well you have to completely change the culture. The culture right now is that basically it’s anything goes. You can do anything you want to separate people from their money and that is basically what Wall Street does. It separates people from their money as Matt Taibbi said, it’s a giant bloodsucking vampire squid. So you have to change the culture and the first step is you start prosecuting for criminal activity. We haven’t done that at all. No top Wall Street person is being investigated much less charged with criminal activity. What they’re doing is just going after civil cases against their firms and the firms happily pay fines. Often they have insurance to cover the fines, which do not hurt their top management at all, so there is absolutely no reason to change the culture on Wall Street. You have to throw hundreds, maybe thousands of them into prison [and] that will change the culture very significantly. Say that criminal activity will not be permitted on Wall Street and right now that signal is exactly the opposite. Eric Holder has said we won’t do it. He said it would damage the reputation of their firms if we went after their top management for the criminal activity, in which we all know they have engaged. We have got their emails, and we know they have engaged in criminal activity, but Holder says we won’t prosecute them because it damages the reputation of their firms. This is absolutely ridiculous.
So that is the first step, it’s not enough; we need consumer protection laws, new ones, as well as enforcement of the ones we already have. We need to massively downsize Wall Street. The sheer size alone is probably most of the problem. We need to downsize finance sufficiently so that it becomes almost insignificant. That is where finance was in the early postwar period – finance was insignificant. It has become maybe, the most important sector contributing about 40% of corporate profits. There was a time when Wall Street was hiring the top students in every field from all the top colleges in the United States. That is where they all went. Again, that is crazy, you don’t need that much brainpower on Wall Street, except these guys are all trying to find clever new ways to suck economic rents out of the economy.
TS: Do you foresee another financial crisis in the near horizon?
LRW: Yes, very soon.
TS: Very soon? Why do you think that is? Just because of the accountability of fraud?
LRW: All we did was prop them from 2007 until today. All we have done is prop them up and told them to go back to doing what you they were doing. You were doing such a great job before the crisis so go back to doing it. There are some activities they have not been doing only because they can’t find a market for their products. The private labels home mortgage securitization market completely disappeared because we know the whole thing was completely fraudulent before, so no one would buy the securities. The only securities being sold are the ones that are government guaranteed. There are some things they are not doing, because we told them they can’t do them anymore, not because they do not want to do them. No one is to stupid enough to buy those products right now. They’re doing plenty of the other stuff they were doing before the crisis. All of that returned and the economy is not recovered. In fact it is now starting to slip back into recession, the evidence is accumulating things are getting worse fast.
TS: What’s the evidence?
LRW: Real estate markets. People proclaim that we had a recovery in real estate markets. Okay so what was this recovery? It was all based on hedge funds buying up real estate with the idea they would rent the properties for a while. So they would become slumlords, rent it back to the people who lost their houses, illegally by the way — all of those houses were stolen. They rent the houses back and wait for prices to recover and then sell them. So this was the idea. They have already exploited that strategy. That type of demand for housing is gone and it was the source of the real estate demand. This source is already exhausted, so real estate markets are going to start collapsing. Households still have almost as much debt as they had before the crisis. They are still massively over indebted.
TS: Do you think there’s going to be a collapse in commercial real estate? I have heard about commercial real estate as being a serious problem and I don’t know if it really collapsed during the recession. It was mostly just homes that collapsed during the recession. Is there a potential for commercial real estate to collapse and would that be more severe than the housing bubble collapse?
LRW: I have not studied commercial real estate as closely as the home mortgages, but I have always expected we were going to see the shopping malls fail. If you walk around shopping malls you see a lot of boarded up space so that can happen. Since consumers are not spending like they used to and I expect they are going to cut back spending. So we can see problems there.
TS: Do you think the financial crisis that’s near is going to be in housing specifically? That is where it is going to be centered?
LRW: No, I think that is a huge problem. Probably something like 50% of all homeowners are underwater, so there’s a huge problem. People cannot sell their houses, they can’t move. This prevents them from getting jobs, because they can’t move out of areas with no jobs to areas that might have some, and increases the incentive to walk away, to go ahead and default on the mortgages. So that is a huge problem. But student loans are a huge problem, that’s $1 trillion, credit card debt is $1 trillion, consumers are just over indebted and they can’t make the payments. So it probably will be across all of these sectors.
TS: What do you think of a mass debt forgiveness plan that the government could [create]? Do you think it is possible for the government to do something where it stimulate the economy, by forgiving large debts? I have heard that student loans are under the treasury accounting. Steve Keen was talking about it (http://www.youtube.com/watch?v=4IJjlYj4siU) and government does technically have the power to forgive all student loans. I don’t know if it is that way with credit card debt, but do you think that would fix things? Just an across the board debt-forgiveness?
LRW: I think that substituting student loans with college grants is a good idea, as well as forgiving loans that students have, maybe forgiving 50 cents on the dollar or something like that and lowering the interest rate. I went to college on 3% interest rate national defense student loans and 50% would be forgiven if you went into jobs with a public purpose, like teaching in public schools. They would forgive 50% of your student loans. I think those sorts of policies are good. I think we should add an immediate five-year moratorium on home foreclosures, just say zero. There will be no home foreclosures for the next five years. That would stop the home theft. I think most foreclosures are home thefts. The banks are making up the documents. There is no proof that anybody owes anything out there because the banks have destroyed all the documents. We don’t know who owns the property. We don’t know who holds the right to collect mortgage payments and we don’t know who, if anyone, has any actual legal right to foreclose on homes so we just need to stop those actions. It depresses home prices; it destroys communities when they foreclose, and of course it destroys the families too. So just stop it; and then we can work out how we can give debt relief on the mortgages.
TS: If you could be Fed Chairman what would your monetary policy look like right now?
LRW: I would dismiss 99.9% of all people who work at the Fed. I would have a robot that was programmed to keep the overnight rate at 50% of 1%, at 50 basis points, half of a percent interest. I [would] charge on loans of reserves by the Fed and pay 25 basis points on reserves held at the Fed, and that’s it.
That’s all we need. I would move all the supervising and regulating out of the Fed, because the Fed for the past three decades has shown no interest whatsoever in regulating and supervising financial institutions so we need to take regulating from the Fed and put it in the FDC and OCC at the Treasury. That would be the Fed policy. Don’t need anything else.
The Fed can’t do any of the things that most pundits believe that it can do. It cannot fine-tune the economy, it cannot hit money targets, and it cannot hit inflation targets. Some people are proposing that it target nominal GDP, which is ridiculous, it can’t hit a target GDP. There is one thing the Fed can do. It can hit the overnight rate, that’s it, and monkeying around with that rate has been shown, without any question at all, as being not useful at all for influencing the economy in the direction that we want.
TS: So when [Paul] Volker (former chairman of the Federal Reserve) increased the interest-rate to reduce inflation does that goes against what you were saying? The Fed has the ability to…. I have heard Ben Bernanke say that if inflation got out of hand he would just increase the interest rate. Could he possibly do that to reduce inflation?
LRW: They can always increase the overnight rate.
TS: And that is what would reduce the inflation?
LRW: I don’t believe that it does. I don’t believe that there is any evidence that it does. If you are willing to go Volker on the economy and push the overnight rate above 20% you can cause a financial crisis and you can put debtors underwater. Make them insolvent because their interest payments explode upward. They can’t make payments and they start defaulting on loans so that can possibly cause a crisis deep enough to stop people from spending, which eventually can break inflation, but the cure is far worse than the disease.
Volker’s cure was far worse than the disease. The inflation we had when he came into office would have disappeared anyway. Inflation was dissipating already because it was due to food, energy and the shelter components of the CPI prices rising. Oil prices had quadrupled in 1979. It takes awhile for a huge increase of energy prices to run through the whole system. Obviously prices are going to go up if you quadruple oil prices, because oil goes into the production of everything. If you just give it time the inflation automatically comes down, just like it did in 1974. It took awhile, but inflation comes down. So fighting inflation caused by oil and food price shocks by causing a massive financial crisis that morphs into a very deep recession is a crazy way to fight inflation.
TS: I know a lot of Austrian economists are for no central banking. Do you oppose that or what do you think would happen if you got rid of the Fed or a central bank?
LRW: So I said we are going to program this robot, what we need then is the Fed has to be a lender of last resort. So you need a team of people who can provide reserves, which is done through keystrokes. You need people with an index finger so they can keystroke reserves into bank balance sheets. You need a lender of last resort to stop bank runs. This is not nuclear physics. This is simple. We know how to do it, we have known how to do it since the 19th century. The central bank lends without limit at a penalty rate against good assets and you stop a bank run by doing that. We still need to do that, and the other thing the Fed has to do is clear accounts.
The Fed operates the most important clearing mechanism so banks have to clear with each other and with the government. We still need to do that. The combination of these policies insures bank liabilities always clear at par, that is a one-dollar deposit at Bank of America equals a one-dollar deposit at Chase Manhattan. The Fed ensures that by providing reserves, the clearing mechanism and by being a lender of last resort when necessary. What the Austrians either don’t understand or think is not important is that without a central bank to do this, bank liabilities do not clear at par. We tried doing without a central bank in the US. We were the last major country to develop a central bank. We tried operating a banking system without a central bank and it was a disaster. You never knew how much a bank check would be worth. You didn’t have par clearing but you had bank runs. We had the worse banking crises because we didn’t have a central bank. I obviously am very critical of the Fed, but you have to have a central bank. We just don’t need a central bank to do what people think it is supposed to do – fight inflation for example; we don’t need a central bank to do that because they cannot.
TS: I read an article recently that in Canada [unlike] the US, they have never really had a financial crisis?
LRW: I could not comment on Canada’s history. It is true that the country came through the global financial crisis a lot better and it had much stricter regulations [and] much stricter supervision of their banks. Canada did have financial problems in its financial institutions that were not so heavily regulated. So in the FIRE (Financial, Insurance, and Real Estate) sector they did have problems but in the regulated commercial banking sphere they didn’t because their commercial banks were not allowed to do what ours did. We combined commercial banking and investment banking while Canada did not. So its commercial banks never got into the subprime mortgage backed security business at all.
TS: My last question is: there is no room for ethics and values in Modern Finance Theory (MFT) and neoliberal economics. What are the roles of ethics and values in economics and in MMT?
LRW: I can’t see the point in doing economics, or any social science, without values. I think the financial system is there to serve a public purpose. If it was not then there should be absolutely no government assistance and backup to the financial system. But we recognize that the financial system has to serve a public purpose and that is why we have a variety of backstops for the financial system. We have deposit insurance in case the assets are bad. We have lender of last resort in case there are problems of liquidity. We have lots of tax-advantaged schemes so that savers get a tax advantage, which encourages them to save more and run stuff through special tax advantage type savings schemes, retirement accounts, and so on. We do all that because we think there is a public purpose in the financial system. You know, providing retirement savings for example. So I think that you have to be looking at the public purpose.