FS transcripts - WELCOME AND INTRODUCTION
Professor William Halal, Department of Management at George Washington University, Washington DC

WELCOME AND INTRODUCTION

Bill Halal:

[00:00:00] I'm Bill Halal, professor in the school of business. It is my honor to get things going here. I think this is a very provocative topic. It's pretty obvious to most people that the most obvious, the most immediate thing that could be done to solve the national fiscal crisis is to raise revenue by raising taxes or cutting costs but, and that may be necessary to some degree, but any business person knows that you can't get out of a crisis with sheer austerity alone. There's always a need for new vision, new ideas, new opportunities for growth and that's what I think this topic is about.

[00:00:45] I think you're going to find it a really interesting topic and I want to, I've also been asked to acknowledge the special help of Howie Klein and the whole Blue America team for their support. So you have a very interesting program here. Now I'm happy now to turn things over to Joe Firestone who will introduce the first speaker. Thank you for your attention.

Joe Firestone:

[00:01:20] Well this has been a quick one. I guess three weeks ago I read an article by Kuttner, actually, concerning the Peterson Foundation conference, The National Commission on Fiscal Responsibility and Reform. And I got really angry, really, really angry. And I said to myself this is all wrong, we really need to have an answer to this. So, I published a blog post at FDL (at Fire Dog Lake), some people read it, and also a Corrente blog post on that day, and on my own blog as well. I didn't get any comments on my own blog but I got some pretty favorable ones on the other two and people were volunteering to do things. Now I had never intended to do any of this, I mean, I had the idea and I called for the Huffington Post, FDL, and other people to run with this idea. They weren't running. They didn't want to do anything. So I said, well... And then we started working and we started with a small team of people who were working and we contacted the speakers that you see here today and everybody felt that something had to be done, there had to be an answer to this.

[00:03:14] And we wanted an answer which was not just an ad hoc answer. We wanted an answer that was coherent in terms of the conceptual ideas and we wanted an answer that was fact based. And so the economists we asked to speak here are all economists who come from the Modern Monetary Theory school, or the MMT school, of economics. And that school has a very coherent position with respect to deficits and debts and debts to GDP ratio and basically what it says is that for certain kinds of countries, you do not manage the economy based on those particular statistics, that that's not what is important, that public purpose is important and that those statistics will basically take care of themselves if you fulfill the public purpose.

[00:04:42] So we assembled this group to talk to us about that and our first speaker will be Bill Mitchell who is Professor of Economics from the University of New Castle. He has traveled, he took a twenty-four hour plane flight, or a twenty-six hour plane flight to come here and stay for a couple of days to talk to us. He's been working on full employment problems npw for -- how long Bill, thirty or forty years? He's really dedicated himself to that and he doesn't see any reason why we can't have a full employment situation by which he means roughly two percent unemployment and he thinks that that is one of the elements of fiscal sustainability. So now I'm going to turn things over to him to talk about fiscal sustainability and what it really means. Bill, would you like to...

[00:00:00] Good morning to all of you, and a good late evening to me. It's just gone 10 o'clock in the evening. I run a research Center at an Australian university called CofFEE and we collaborate closely with the assembled panel here, over many years now. Before I start, I'll just say thanks for you coming and some have traveled not quite as far as I but some distance; others have traveled locally. And I also want to thank Joe and his group, who seems to be a relatively amorphous group to me, but I think they're all very hard-working to put this together in such a short period of time.

[00:00:57] I think the relevant thing for me is that I run a conference every year, and others of us run conferences every year, and they're academic conferences, and they are discussions among ourselves to some extent, and they to some extent extend the discussions we have among ourselves in the professional literature, the journals that we publish in. But the differentiating feature of this exercise, for me, is that it's the first real grassroots endeavor that has come from the community. I'm just old enough to go back and identify the lineage of this event, the Vietnam protest teach-ins, that were the starting point, as I know, of the community resistance to something that they didn't feel they had a voice in opposing the government policy of the day, and my country had a foreign policy in that period which was summarized by "All the way with LBJ." And it took our boys, in those days mostly boys, into Vietnam with great loss as well. And it was the teach-ins here and the mass street marches in Australia that stopped our governments being involved in that endeavor.

[00:02:34] And what I learned from that historically was that it's community action that ultimately will stop things like... that the people will see they had no voice in, they eventually get a voice by banding together. Because the top end of town have got their voice: it's called the money. And I 'm sure if we go over to Peter Peterson's session, we would see it as a fairly sumptuous event. They've got the money, they've got the contacts, that's the nature of political lobbying. Alternative views, that we represent, don't have any of that, never have had, and they rely ultimately on groundswell of public opinion. And I see this event as a starting in that sense. So I was asked to give a general overview into the idea of what fiscal sustainability is, and I'll do that.

[00:03:42] If I think back a couple of years ago, we'd had, maybe, in different countries, different lengths of this, but say in Australia we'd had 25 years of growing neoliberal - what's now known as neoliberal - thinking, which I characterize by the abandonment of full employment by our governments. The introduction of a diminished social goal which I call "full employability," that is the supply-side... the OECD agenda of making people ready for jobs, just in case there was a job, but not actually providing jobs, whereas under the "full employment" agenda, governments provided the jobs, or made sure they were provided by using aggregate demand management in the post-war period up until about the mid-1970s.

[00:04:41] And we'd had 25-odd years of this sort of privatizations, deregulations, and what have you, and then this crisis comes along, and I thought at that stage that this was the sort of event that might generate a paradigm change in our thinking, a return of fiscal policy, because within a very short period of time, massive outlays relative to what had gone before - in fiscal outlays - were occurring all around the world without anybody saying "Boo!" It was very quiet, it was very sort of surreal, $80 billion dollars was announced as being injected into the economy, nobody said a word. And I thought this was interesting, because this may demonstrate that fiscal policy really is the main game in town, and this excessive reliance on monetary policy, that had been sort of refined into this inflation-targeting regime that central banks pursued, with fiscal policy being a passive partner, and what that meant was running budget surpluses, if you get away with it, in defiance of the ultimate automatic stabilizer, reaction against that, which I'll talk about, and I thought "Well, this is a chance..."

[00:05:57] Now, two years later, fiscal policy has saved the world from a Great Depression, no doubt about that. It's, in my view, demolished everything you'll read in modern mainstream macroeconomic textbooks about the efficacy of different types of macropolicy, monetary, fiscal policy. Yet, two years later, after the handouts have been gratefully received by the top end of town, after we've put some sort of floor into the downward spiral, not enough of a floor, because the fiscal reaction hasn't been sufficient. But two years later, we've now seen this mass hysteria, which almost defies logic, to me, this daily barrage of financial data, I call it "ratio fever." We've completely lost track of what's happened, and we're basically setting ourselves up again for the next crash.

[00:07:08] I don't need to remind you all, this sort of alarmist rhetoric that comes out everyday, and it's getting noted... Luckily in Australia we don't have Fox TV. The owner is an Australian, but he's rejected his Australian citizenship because he wanted to penetrate Corporate World here. But we don't have it, and it's sort of like a curiosity when I see it on TV here, and last night I observed... I was trying to find BBC actually, because that's about the most civilized thing you can find in America, with all due respect. But I stumbled on Fox News and they're running this theme, "Drowning in Debt" is their current news theme, and so I did a search on Google Earth and I realized the hotel was slightly downhill from the US Treasury, and I was really worried overnight that there might have been a tsunami of debt hitting me. And then I realized I was on the sixth floor, and I can swim, so I'm not too bad.

[00:08:12] We've become.. it's reached the level of irrationality. We're getting quotes from our economic leaders, whether you like it or not, Ben Bernanke is one of the world's economic leaders, and we get quotes that only talk about these ratios. And I could go into quotes every day from our political leaders about this, all just talking about financial ratios divorced from any context or what else is happening or what other goals you might have. And when you think about it, the whole discussion of fiscal sustainability in the mainstream media and in our governments, in our parliaments, are all applying the logic - and what’s taught students in our universities out of textbooks - are all applying the logic that related moralists to a monetary system that ended in 1971. And people say to me, "Well, economists know that." And I say, "Yeah I know they know that." And so the agenda... They know the constraints that apply to governments now are not the same constraints that applied - and I’ll talk about what they are - to governments under the Bretton Woods system of convertible currencies with the US effectively running a gold parity. They know that. And so then you dig further and realize that the whole rhetoric is ideological - that they run a conservative approach to government. They hate government intervention in the economy unless it’s helping themselves, through handouts to the corporate sector, and so they’ve blurred the history and they just blithely go on teaching economics as if it’s the gold standard economics.

[00:10:27] The other thing that’s becoming really central in the research literature - so if you read European Central Bank, Bank of International Settlements, if you read the IMF, if you read their research reports and I’ve spent far too much of my life reading that sort of stuff, I'm afraid, but I can’t help myself. If you read the economic literature from the academic institutions and the research think tanks, as they like to call themselves - I think it’s very generous of themselves to actually assert that they’re thinking [some laughter] - you see the way in which the so-called respectable literature - and I’m not... differentiating that from the popular media - are talking about fiscal sustainability is increasingly in terms of these fiscal rules and so fiscal sustainability is defined in the EMU as exemplified by the stability and growth pact: deficits under 3% of GDP, public debt under 60% of GDP.

[00:11:34] If you go back - and I’ve read that literature in absolute detail - here’s no rationale presented for why those particular ratios are. Someone did a back of the envelope calculation at the time and decided that was it. And you read the legislation relating to the fiscal responsibility act in UK, which was brought into law earlier this year, it’s absolute madness. You’ve got my government in Australia talking about as fast as possible getting back to 2% real growth in government spending and 2007 ratio of tax to GDP. That’s got to be their fiscal rule. Makes no sense. And in the textbooks and even in the progressive side of the debate - and those who read my blog know that I have a theme: with enemies like these, who needs friends - and that’s a regular theme. And the progressives even buy into this fiscal rule that you’ve got to balance budgets over the business cycle. And that’s meant to be a more reasonable version than the German constitutional fiscal rule that’s going to ban deficits in 2015. And this "balance the budget": well, that’s reasonable because we recognize you’ve got to have some deficits sometimes, but then you’ve got to pay them back by running surpluses at other times, and if you balance it out you have a neutral impact upon the economy, independent of the context of what’s happening in the economy, what the other sectors in the economy are doing, how they’re behaving. You just impose these fiscal rules out of context and with no comprehension of what it means. So you get statements from conservative commentators, and I read them almost every day, that are, "We’ve had too much leverage in the private sector, so they’ve got to de-lever," and "The public sector is about to explode, they’ve got to de-lever," and meanwhile you’re running a current account deficit. Well if you understood macroeconomics even at the most elemental level you’d know you couldn’t achieve all of that. And it’s this mindless sort of application of sector-by-sector rules that just don’t add up. And of course, meanwhile, the real game out there, the thing that relates people to the economy, is on the back burner again.

[00:14:14] And these [referring to slide] are just unemployment rates and you can see that they’ve been trending upwards over this neoliberal period but also very high now. This is how people are affected by the interaction of the economy. This is the real thing that’s going on out there.

[00:14:35] I could go on and I’ve got other slides but I’ll show you this one [Slide 10]. This is my country and this is not unrepresentative of what happened everywhere over this historical period, 1861 to now. This red period was the post-war period up to the mid-70’s, where the governments, through their white papers after the second World War ended, they realized they’d solved the Great Depression by the military spending, and they wanted to have full employment without prosecuting wars any longer, so they had to work out how to maintain full employment in peace times. And all the countries brought out major macroeconomic statements where they committed to full employment, and they realized that required fiscal policy to behave in certain ways to offset the saving intentions of the non-government sector.

[00:15:33] And that red period was when fiscal policy was very active and in Australia we had unemployment below 2%. Governments would lose electoral office if unemployment went above 2% in that time. There was zero underemployment and zero hidden unemployment. Once we abandoned that in the mid-70’s... we got the confused signals from the OPEC oil crisis, and that allowed some very opportunistic territory seizure by the mainstream economists, the monetarists, at that time that’s what they were called... we abandoned that concept of full employment, we started to worry about deficits for the first time. Australian government ran continuous deficits of different orders through that period, which bounced up and down depending upon the private savings intentions and what was going on with the external sector, and always maintained full employment. It was harder for them to do it in that period, because they were running a convertible currency and a fixed exchange rate. It’s much easier now to actually do that, but they still managed to do it.

[00:16:49] I also like people to see this graph [referring to slide 11], this is US. It puts today’s fiscal parameters in some perspective, I think, relative to where they’ve been in the past. Most people… I get a lot of emails, maybe I get about 1000 emails per day at the moment, but I get probably 20 a day that are incredibly hostile, and they’re all sourced to IP addresses in the US, with all due respect [laughter]. And they tell me that I haven’t got the slightest idea of US history, that the US government always ran surpluses until recently [laughter]. Well you always ran deficits until recently, with some notable periods where you didn’t - they were very short and they terminated because they put so much fiscal drag into the economy. And you can see a couple of periods where that happened.

[00:17:54] What’s fiscal sustainability? What isn’t it? You won’t find a definition of fiscal sustainability by making analogies between households and sovereign governments. If you go to mainstream economics textbooks, one of the myths that appears in those textbooks whether it's explicit, and in some textbooks it is explicit, in some textbooks it’s implicit and it becomes explicit by the delivery in the lectures, you will see there is always a parallel drawn between the household budget and the government budget.

And we had a prime minister in the mid-70’s, just after the OPEC crisis, who came out on national TV to give an address and he said, "What the Australian public has to understand is that the federal government budget," and by now Brettons Wood had been abandoned and we were running a floating exchange rate with non-convertible currency, he said, "What the Australian public has to understand is that just like your budgets, our budget has to- we have to have budget discipline just like you."

Totally outrageous and wrong statement, but it’s that intuition that makes the deficit terrorists, their message so powerful, because people, the public, don’t know how to argue against that and it feels intuitive. But you won’t find a definition of fiscal sustainability in that analogy, it’s flawed at the most elemental level. The household uses the currency and always has to finance their spending whether it’s through earning income, whether it’s through borrowing, whether it’s through using up past savings or running down/selling assets. A national government who issues its own currency and floats it never has to do that. My colleagues later in the day will expand on that theme.

[00:20:08] You won’t find a definition of fiscal sustainability by referring to these ratios that are now in everybody’s lounge rooms each night. These ratios are largely irrelevant. Largely. And you won’t find a definition of fiscal sustainability in the statement of a fiscal rule, a rigid fiscal rule whether it’s accepted by regulation or legislation or, in the German case, constitution. You won’t find a definition of fiscal sustainability in any invariant fiscal rule.

[00:20:54] So where should we start in trying to come up with a concept of fiscal sustainability? And I add that what I’m doing really is just introducing ideas which will be elaborated on in great detail by my colleagues here. So I’m not explaining everything in detail for that reason. But where I think that you should start, and I think we all agree on this up here, is ask yourself the question "Why do we bother to have a government in the first place?" They take our freedom away from us. They force me to wear a helmet on my push-bike. They force me to drive slowly. They force me to do certain things down the beach that I might not want to do. They take away my purchasing power by taxing me. Why would we want them? They’re a nuisance.

[00:21:48] The reason we want them is because they can advance the well-being of all of us, acting as our agents, in a way that we can’t do it individually. That’s why we’d want them. And we might call that the public purpose of government. And that might be a good place to start because fiscal policy is about governments, a government policy tool. So once we think about what we want governments to do for us, then that’s a good place to work out, Well, what does that mean in terms of the way they conduct fiscal policy?"

[00:22:28] So what are the dimensions of that? Well, the way I think about it, and my colleagues have different emphases here, I think about the state. The basic role of the state is to maximize the potential of all of us who live under its sovereignty. And I have this thing that the sustainable goal of the economy should be the zero waste of the people in the economy. That’s what my view of economic behavior is, that nobody should be wasted as a consequence of the way we structure our economy and the way that policy intervenes to manipulate the economy.

[00:23:08] And then from my point of view, that means, we - the state - should be responsible for maximizing employment: making sure everybody who wants to work can work, with decent working conditions and wage levels that provide them with a sustainable life in the cultural and social setting that we live in.

[00:23:32] Now, what that means in a macroeconomic sense is that once the private sector has made its spending decisions - and I’m talking about households and firms, and they make their spending decisions based upon different motivations, firms invest for different reasons and households consume for different reasons, - once they’ve made their spending decisions - which also mean they’ve effectively determined through the income generation process what their saving desires are - once they’ve done that, then the role of government advancing public purpose in this way is to ensure that its policy intervention is consistent with those private decisions such that you get full employment.

[00:24:22] That seems to me to be a basic element of what we mean by fiscal sustainability. Now non-governments, the non-government sector, typically in historical terms as long as we’ve had data, wants to save over the business cycle. This current period where we’ve had debt binges are atypical in history - private debt binges are atypical - and the accompanying budget surpluses that went with the private debt binges are also historically atypical in all of our countries.

And so if it’s typical that the non-government sector will want to save, then there will spending gaps. And what I mean by spending gap is that spending won’t be sufficient, the private spending won’t be sufficient, to generate output and employment, based upon current productivity levels, to fully employ all of the available workforce. All that to me means that the government then has a choice. It can either fill that spending gap with fiscal policy and ensure that advanced public purpose via full employment, or it can decline to do that and either run smaller deficits than are required or even try to run surpluses, which governments have been doing prior to the crisis, and accept the fact that in taking that decision you will have persistent and chronic underutilization of labor and ultimately that strategy will be self-defeating.

[00:25:57] And this is where I introduce this concept of bad and good deficits. You’ll end up with deficits anyway, under those circumstances, but a bad deficit is one that’s driven by the automatic stabilizers. So if you’ve got an external sector that’s in deficit and you’ve got a private sector, a domestic sector, that’s intent on saving - and that means not spending, by design, as much as they earn - then if the government doesn’t use their spending to maintain aggregate demand at sufficient levels, then you’ll get declining income, declining output, declining employment, declining tax revenue, rising welfare spending. They’re the automatic stabilizers that are built into fiscal policy and you’ll end up with a deficit anyway, but that’s a bad deficit, because at the end of it, you’ve just got a recessed economy with high unemployment, increased poverty levels and nobody’s happy about that at all. And then if you apply fiscal rule on top of that, you’re in the position we’re currently in now, moving into a worse outcome than we had a year ago.

[00:27:14] The alternative of course, if the government adopts what I think is a fiscally sustainable strategy, then it will run good deficits. And note I've got - IF the circumstances require, IF - and I’ll say what I meant by that. But it will create, it will still run deficits but with high employment, high income growth, falling poverty rates, and smiling faces. Now what do I mean by "if?" Well, with the private sector wanting to save a bit, budget deficits aren’t always appropriate. Take the Norwegian case. They’ve got such strong external sector that the government can oversee near full employment continuously, high levels of public service provision, first-class education, first-class health, very low inequality in income, great welfare benefits, and they still run surpluses. So it’s not always the case that fiscal sustainability requires the government to run a deficit. But mostly it will be the case, because by definition not every country can run external surpluses.

[00:28:35] And so what I want to come out of that brief message is that you can’t define fiscal sustainability independently of the real economy and what the other sectors in the economy are doing.

[00:28:51] The other important point is that you have to understand the monetary environment, that any notion of fiscal sustainability has to be related to the intrinsic nature of the monetary system that the government is operating. And so it makes no sense to apply logic that applies to say, a gold standard or a fixed exchange rate regime, to a fiat monetary system, which doesn’t have those constraints.

One of the most influential books in the current debate has been Reinhart & Rogoff, and everybody-- you read these commentators, "Ahhh the public debt ratios above 80%, we’re heading south quick." And then you read the table with Greece and America and Portugal and Germany and Japan all in the same table, and the logic is very confused. And most commentators haven’t quite read the book anyway, because it only applies to debt - public debt - that is denominated in foreign currencies anyway. And even Rogoff blurs that when he goes into the public arena and gives media broadcasts. And so it holds out that it’s all public debt, whether it’s in domestic currency or not, and it’s a fraud.

[00:30:26] The other point I would make is that a lot of people say to me, “Oh yeah, but you know these public debt ratios are rising, and the government is issuing debt.” And what’s happened is that governments have imposed, under political pressure, a series of voluntary constraints on their behavior that really mimic the actual constraints that they faced under the convertible currency system.

So my government in the mid-80’s, the Australian government, explicitly changed policy such that the Australian government has to place debt into the private markets, dollar for dollar, to match its net spending. And at the time, if you read the historical documents, you’ll see it’s all about the need for fiscal discipline, that we’re unhappy with the option that the central bank might buy some of the debt that the government issued, more than it needs for, at that time, for liquidity management purposes.

And what really needs to be exposed in this discussion are that all those constraints are voluntary. And in a fiat monetary system, the national government doesn’t have to issue any debt at all. And so fiscal sustainability can’t be caught - a pure concept of it - can’t be caught up and tied in with any of these voluntary constraints.

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[00:32:17] And most people don’t understand the notion of a sovereign government. I don’t know how many times - I do quite a lot of media interviews in Australia on national TV and radio - and the question always comes out, "Do the taxes have to increase? Where’s the government going to get the money from? The government’s going to run out of money. There’s no more money to spend. We’ve had such a fiscal intervention we’ve run out of options." All of this sort of rhetoric.

And that just tells me that we need to work harder in this debate to really educate the debate as to what we’re dealing with here. We’re dealing with governments, in the main, that issue their own currency, that issue it under monopoly conditions, and so the microeconomic rules of monopoly apply to that sort of government in terms of setting price or quantity, and that they can never be revenue-constrained even though it looks as though they are because of these voluntary constraints that they erect as edifices to hide the fact that they are actually sovereign. And we need to get the message across more vehemently that what that means is that our national governments can spend whatever they want. And it has no imperative, like a household, to facilitate funding of that spending. And what looks like to be funding operations, this debt issuance, nothing of the sort.

[00:34:09] And what then emerges in a discussion of fiscal sustainability should be to really articulate what the limits of government spending are. And we’re led to believe it’s all, "Well, once debt ratios go above 80%, that’s it." Or in Europe, "Once the deficits go above 3%, that’s it." They’re not limits at all. All of these financial ratios are not limits at all, for a sovereign government. The limits are clear that a sovereign government can only buy what’s available for sale. Their real limits, if there’s something out there available for sale, the government can always afford to buy it. And that’s a sovereign government.

And when I look around and see high unemployment, persistently high unemployment, everywhere, then I know that there’s at least one productive real resource that’s available to be purchased, and that’s the labor that has no bid for it in the private market. So that would be a good place to start.

And so when I see any unemployment, I know that the government has no real resource constraint here.

[00:35:28] And this then leads to another component of the journey to understand what fiscal sustainability is, and that’s understanding the nature of costs. When a government prints their budget statistics for the month or whatever the frequency is, and everyone goes, “Ooh-ahh, look at that big figure in the piece of paper, it’s getting bigger, it’s gone above Rogoff’s ratio,” that’s not a statement about costs at all.

Numbers on bits of paper aren’t costs. When governments... My government next month is going to announce its budget austerity plan - and it’ll be media attention about what the deficit ratio is and blah-blah - they’re not costs. When government spends a billion dollars, a million dollars, that’s not the costs of the government program. The costs of the government program are the extra real resources that are required to implement and sustain it. So if you’ve got a jobs program what’s the real costs of that? It’s not whether it’s a half million dollars or 10 billion dollars, whatever. It’s the extra food and the extra materials that the unemployed that you’re going to bring into productive use utilize and consume. That’s the cost. When we’re thinking about…when we juxtapose the concept of fiscal sustainability in the public arena to what I think it is, then the public arena debate’s all about financial costs - alleged financial costs - whereas I only think about it in terms of real costs.

[00:37:08] And then we have to understand the role of taxation, and my colleagues will talk about this in much more detail later. And you know, part of the hysteria is that very soon taxes are going to have to rise to pay the deficit down, and if they don’t rise in the next two years, our poor children and their grandchildren, the poor little bastards, [laughter] are going to be so burdened by our prolificacy that we should hang our heads in shame. That’s the debate.

Now it’s possible that taxes will rise in the future. It’s possible they’ll rise in the next 2 or 3 years. But if they do, it’s also possible they could fall. But if they rise, it will have nothing to do with the funding requirements of our sovereign governments. The role of taxation, in a counter-stabilizing macroeconomic policy framework, is to regulate aggregate demand growth. And so if aggregate demand, nominal demand, is growing too quickly for the real economy to absorb it, then there’s a case to be made, if the political settlement is such that you want to have that much public access command of real resources, then there’s a case to be made, that you want to increase taxes and reduce the purchasing power, and therefore aggregate demand, of your private sector. And so that’s to regulate demand to avoid inflation. It’s got nothing to do with funding.

[00:39:02] The other point, I think, that the public debate misses out on - and I play tricks when I give talks to business forums, because business forums in Australia, as they are here, are principal antagonists to any fiscal intervention - and I say to them, “Well how many people like the deficit at the moment?” And you know I can guarantee that almost all - and they’re all not shy to put their hands up - I can guarantee that the vast majority in the audience will say, “Yeah, we hate it.” And I say, “Well, you can do something about it.” And they sort of look at me stupid, and I say, “If you don’t like the size of the budget deficit to GDP, then if you go and invest some more, and create some more productive infrastructure, and employ a few more workers, then the deficit will go down as a percentage of GDP and you’ll have solved your problem.” And what it brings out is that in general, the fiscal outcome - which is just an ex-post statement anyway of what’s been going on - is really what economists call endogenous: that means it’s determined largely by the spending decisions of the non-government sector. And we don’t understand that in this debate. And we go on as if we’ll have these fiscal rules, as I said, which really undermine themselves if they’re creating compatible scenarios with respect to what the private sector actually wants to do.

[00:40:52] I won’t go into this, you can read this. I’ve spoken a lot about this on my blog and in my academic work, this sort of, the fraudulent, concept of structural budget balances. They always - in the way in which all our international agencies, the IMF, the OECD, our treasuries around the world construct them - they’re always biased toward being too expansionary. In other words, the summary of the structural balance is always more expansionary, as estimated, than it actually is in reality. And so it leads to an inbuilt bias towards contraction and therefore working against public purpose.

[00:41:33] So moving quickly, the intergenerational debate is the sort of long-term attack on fiscal policy. So even though we were quiet for a little while, while the governments were bailing the economy out and putting a floor into the collapse of spending, what’s emerging out of that - and this is sort of the way in which the mainstream work - they were so discredited by this crisis.

It’s absolutely amazing that for the first few months, right-wing colleagues that I know just wouldn’t talk, they just went and hid in their rooms, so discredited and embarrassed by it. But the reasonable ones come out now and say, “Oh yeah, we really did have to have a bit of fiscal intervention, we understand that now, but the problem’s worse than you think, because we’ve got these long-term structural pressures that are going to blow the budget out of the water and make it unsustainable.”

What are they talking about? Providing pensions to our elderly, providing a bit of health care to people who might need a few hip replacements. And what I tell them is, “Look, the only issue is whether there’s enough titanium available to put in our hips and our knees. And if there is, the government’s going to be able to buy it no matter what. And if the government wants people to have a pension, then all they need to do is type a few numbers into a computer and that’ll send some money to the bank. And the only issue is whether the pension check that the pensioners get will be able to buy anything.”

[00:43:08] And the irony of this whole debate about the - we call it the intergenerational debate in Australia, it’s more generally known as demographic debate - the irony of it is that everything that the mainstream wants us to do now about it will actually undermine our capacity to deal with it in the future. So the absolute irony is that the way in which fiscal austerity plans are implemented is - in our country and elsewhere - is to attack higher education and secondary schooling, and not realizing that investing in education is the way you get productivity growth and the way you deal with rising dependency ratios in real terms. It’s moronic. Others will talk about the - particularly you people in America - have been living on China’s goodwill. Last time I realized, it was the US government that issued the US dollar and I didn’t think that had been subcontracted out to China. [laughter]

[00:44:12] The other element, and I’m just giving headings now because the others will elaborate in more detail, the other side of it is the debt side, the sovereign debt crisis we’re all in now and - "Drowning in Debt," that Fox News theme of the week, I don’t know how long it’s been going on, I’m glad I’m leaving because I’m going to drown [laughter] - the other idea is this notion of public solvency.

For sovereign governments, unless they are totally perverse, they are totally solvent in their own currency. And the big governments - Australia (big to me), Japan, UK, US, these are the big governments - they don’t issue debt in foreign currency. So there is a sovereign debt problem in Greece. That’s because they voluntarily agreed to give up their sovereignty. There’s no sovereign debt problem in the other countries that I mentioned.

[00:45:14] So to bring that out, to finish up, the way forward, I think, to allow these ideas to expand and broaden in the community, is that what I think is required is a new macroeconomics narrative to emerge. And the challenge for us - I spend all my days in a little darkened room in front of a computer, I go surfing in the morning or riding my bike and then I spend 12 hours or something in front of, in a darkened little room and I hardly talk to anybody - the challenge for people like me is to interact with people like Joe, and others who I don’t know in the audience, to get this narrative out there in a way that’s packaged and understandable, comprehensible.

And we need some marketing people as well, to be able to have pithy ways to express these ideas, because I’m never going to be pithy. And I haven’t got a marketing bone in my body. And we need to get these operational features of the monetary system out to people. We need to teach people what the opportunities that a fiat currency system offers a sovereign government, to actually create full employment and make the lives of those who don’t have jobs eminently better than we’ve been offering in the past 30-odd years.

And we need to really emphasize that it is possible. I mean, I get emails from Americans, "Sorry, [laughter] you can’t possibly have 2% unemployment." Well, yes you can. Sorry, you can, it’s very easy, you all could do it. Take me down to the capitol building, I’ll get it organized. [laughter] It’s this idea that what the neoliberals have managed to do is to...

An example is I’ve been doing work in South Africa on the public works program. In the first 5 years a million people were employed. Their second-year plan we’ve just implemented is going to add three million people. Poverty rates fall for those people who are employed. Yet, I’m told by the treasury, which has the IMF regularly going in there, that this problem of unemployment and poverty in South Africa is manifestly complex. That’s the words they use. Manifestly complex. And I said, "What’s complex about giving them a bloody job?"

We’ve just given a million people a job under this program and they’ve been building water systems, roads, better housing for themselves, community infrastructure. Their children have got a chance to go to school because the families that are getting these jobs have, for the first time ever, some personal risk management capacity. What’s manifestly complex about that? There’s not a shortage of work, there’s just a shortage of funds to provide the work. But there’s no shortage if the national government realizes it’s sovereign.

[00:48:12] We have to get those messages out, that these things are not manifestly complex. There’s this capacity for people to eschew the simple solution, because it can’t be right, can it? Well, in this case, it is right. And we have to really abandon this focus on financial matters and re-orient the debate to the real economy. And I remember Milton Friedman said, and it was about the only thing that I think he ever said that was right - except probably that he loved his wife - but what he said was that we’ve got to get out of this balance of payments obsession and the best way to do it is not publish the data, because if you didn’t publish the data, nobody would know and you’d soon work out that the sky didn’t fall in.

What we’ve got to stop is news broadcasts having a barrage of these financial ratios in our face everyday. They're largely irrelevant and they abstract and re-orient the debate away from what really matters and that’s the real side of the economy and the capacity of our national governments to work on the real side to improve our lives and advance public purpose.

[00:49:40] Thanks very much.

[Applause]

-----------------------------------

audio available here

SESSION 1 - PANEL DISCUSSION

[Randy Wray] [00:49:54] I want to deal with one issue that always comes up when we talk about "the government can always afford to buy or hire any resources that are not being used," and so one response will be "yeah, but the government is always less efficient than the private sector" so I want to deal with that issue. Bill mentioned that we can look around and we can tell that there are... probably the most important resource that any society has is chronically underutilized: that's labor. So there are plenty of people out there who want to work and the private sector does not want to hire them. Until you get to full employment, the efficiency issue is completely irrelevant. Because if you put them to work, and you get any production whatsoever, it's an improvement. You only need to raise the efficiency issue once you're at full employment, and now the government is actually taking resources that the private sector is already using. And then you could raise the question: Is the government putting these people to a more efficient use than the private sector was doing? In that case, it's perfectly legitimate to question whether the government ought to be hiring people away from the private sector, and other resources too. Of course, then you have to ask the question about the private use versus the public use, the private purpose versus the public purpose, and we can ask those questions once we get to full employment. But outside of World War II, true full employment really never occurs, so the efficiency question is completely beside the point. Let's get to full employment and them we can talk about efficiency. We can talk about maybe we want to release some resources from the public sphere so that the private sphere can use those. But until that point, there's never a question of efficiency.

[00:52:00] [crosstalk]

[Marshall Auerback] [00:52:08] Just as a general point, because I approach this more from the point of view of being a market practitioner rather than an academic economist, as a number of the people I saw in the Huffington Post responded, we're just all "a bunch of pointy-headed academics." I actually approach this like Warren Mosler does, as someone who has been in the markets for almost thirty years, and the reason why the theory interested, intrigued, and finally convinced me was not because it was a theory at all, but because it was an operational reality, because debiting and crediting bank accounts electronically is what I see on the screen every single day. That's basically the way it works, in that you don't actually see capital flowing from one country to another in the way you did under a gold standard system, in that some guy pushes a button in Brazil and another guy pushes a button in the US and numbers change on both sides of the ledger, but there's no actually capital that moves. And as for the argument that you would see that reflected in the exchange rates, I sort of say, "well no, not really." The exchange rates move up and down for a number of reasons. People can decide one day, I might decide one day that I don't like the Japanese yen and I might decide to short it and it might have nothing to do with any particular reason that I've seen out there because of capital flowing in or out. There's any number of decisions that go into a currency movement and a private portfolio preference is not something that can be encapsulated into some sort of basically economic theory. So I think that's one of the main points that I think is key to understand, that people say always that we don't really understand realities and markets, but actually many of us spend time, a lot of time, working in the markets, and seeing this on a day-to-day basis. And that's I suppose why we're not intimidated by a lot of the junk that you hear coming out of the media every day, because our own experience is very, very different. And some of us have actually made money off the lack of understanding of public reserve accounting as well, so I'll leave it at that.

[00:554:32] [inaudible]

[Warren Mosler] [00:54:48] I'd just like to add something to what Bill was saying, and it's probably because he hasn't watched Fox News quite long enough. One of the other things that's being said on TV is that it's wrong for the government to be out there spending and hiring people when the private sector is pulling back, saying. "everybody's hurting except the government, so it's time the government needs to cut back also," so Bill, I just want to add that to one of your lists of absurdities. You probably ran out of patience watching before you heard them say that one. And look, there's a reason why nobody on this panel is a household word in the United States, or anywhere in the world, and that's because if we were, we wouldn't be having this crisis. The idea that there is such a thing as fiscal, I like to call it, what Bill was talking about, I like to call it fiscal responsibility, but it's the same thing. The idea that there is a solvency issue, that the government has run out of money, there is nobody out there that's got it right. I don't know, does anybody here see anyone, anywhere? If there was, it wouldn't exist, the problem would go away immediately. We don't have a whole lot of work to do, we only need to get one person who has the national media attention to understand this, and I think the whole thing changes very, very quickly. Because government checks don't bounce, and we'll get into some of our other things, so, thank you, go ahead.

[Stephanie Kelton] [00:56:36] For someone who does have a national reputation, and is out there in the mainstream media, who does understand it, I would say Jamie Galbraith, and we were hoping to have him here with us today, but unfortunately his schedule wouldn't permit that. But we need more voices like that, with better penetration, obviously.

[00:57:00] One of the things I wanted to raise, Bill, related to your discussion, that you posed to your students: "What do you think of the of the government deficit? where do you want the government to be?" I do exactly the same thing with my students in Kansas City. I say "Do you want the government to balance its budget, or do you want it to run a surpl---, a deficit?" And they have this in their mind, they think the responsible thing to do is to have the government run a federal budget surplus. And I say "OK, you realize what this means for you?" And they don't. I think this is one of the most effective ways that we can push back against this call for fiscal responsibility and governments to live within their means and balance their budgets is to say that there are two sides to the ledger, and if the government takes the surplus position, guess which side you take. You take the deficit position. You are the non-government sector. And so, by accounting logic, if the federal government is running a surplus, the non-government sector will be in deficit.

[00:58:00] It is no surprise today, that, while the federal government's deficit continues to rise and rise and rise, people are scratching their heads and looking at private saving rise and rise and rise. Right? It's the other side of the ledger. So, ask someone the next time they talk to you about fiscal responsibility, if you want the government to be in a surplus position, that's going to push you in the deficit position.

[00:58:24] [Pavlina Tcherneva] Just to elaborate on this very same point, it's the same thing with the debt. If you're going to look at the debt as the government liability, this is somebody else's asset. So, all of this argument about the government being responsible and paying down its debt just like households need to pay down their debts, just means that every single private sector portfolio is going to lose a very valuable default-risk-free asset.

[00:58:52] And so, once again, you have to look at both sides of the story. Now there are other reasons we can get into: should the government be injecting all of these bonds in the market, for what purpose are they injected, etc, but to the extent that they reside in your portfolios, if you want the government to reduce the debt, you will be losing that asset. Now, what you will be getting is another asset. You'll be getting cash. That is also a government liability. So, you just take your pick. How would you like to save? In the form of reserves - dollar reserves - or in the form of bonds? With or without interest?

[00:59:33] [crosstalk]

[00:59:40] [Kelton] Randy wrote a blog for the blog that we run out of the University of Missouri-Kansas City. Randy did a blog on this point that Pavlina is talking about, and I like this one very much because I hadn't seen it done by anybody else. He said, when you talk we are seeing the national debt clock, and we are hearing, "your share of the national debt, this is the amount that each of you owes." And he said, "Owes? It's not o-w-e, it's o-w-n." It is the assets that each of us, if we were to divide it equally, right, by population, it is the amount that we own. We don't owe. It's not our liability. We aren't responsible for paying back the national debt. It is our asset. It is what we own.

[01:00:27] [Mosler] Let me just relay a quick story. I had to __??__ Citibank for a private client meeting with Bob Rubin back in I think it was the late 90s, maybe 2000, and he, rightly so, indicated, there were about 20 of us, and he said, "this economy could be in trouble because of the low savings rate." And I thought he was correct, because we had just been running a surplus, so I said to him, "Bob," and I was the last question, I said, "does anybody in Washington understand that when the government runs a surplus like we just did, it reduces savings for the rest of us, non-government sectors, by exactly that amount, to the penny?" And he said, "No, when we run a surplus, we buy Treasury securities, and that adds savings and investment to the economy." I said, "No, when you run a surplus, we have to sell our Treasury securities to get the money to pay the tax, and it takes away that much from the economy." He goes, "Well, I think you're wrong." So I said "Ok, what do I care if you think I'm wrong." But the point was no one in Washington understood how that worked. And so there was zero understanding, and I'll submit that there's still zero understanding of that today. There's no understanding now that the large deficits, as we just said, are responsible for the increase in savings. And you can read that savings are too high, people aren't spending enough, it's the highest it's been since 1993. What was 1993? That was the last time we had a deficit that large.

SESSION 1 - Q&A

[01:01:55] [Mitchell] Ok, our chair seems to have disappeared, so as formal speaker for this session I'm now the chair, so I think it's time to have questions, and there's microphones going around, and because you've forced us to name ourselves, you should name yourselves, and identify yourself before you ask the question, please.

[inaudible]

Q: [01:02:31] [___??___] I just recently learned about Modern Monetary Theory and the question that keeps coming back to me - I'm sure you have answers for it, I just haven't seen the answers - What about inflation, is that an issue, and how do you handle it? Bill mentioned taxation as a tool for helping to manage inflation. And the other question, having mentioned that Norway, because of its external account doesn't have any constraints, what about the constraints that are imposed on other countries, the donation of reserve currency by the external account?

[01:03:17] [inaudible; crosstalk]

A: [01:03:29] [___??___] I guess I'll go to Bill's point first, that you don't get inflation until you've used up the resources. And the other thing is, there's a whole question of what is actually inflation and what are just price increases, and in this country we look at CPI.

[01:03:47] What happened in the 70s was we had an external monopolist in OPEC that was raising prices of oil, and it went from $2 to $40 dollars, and those costs were passed through, had nothing to do with monetary or fiscal policy. And in fact, the inflation broke after the cartel broke, which was largely based on, I think, the deregulation of natural gas in 1978. Where it had been capped at below market levels and so no one was producing any natural gas. We lifted the cap, the price went up to two-fifty or -sixty or something, and suddenly natural gas was everywhere, the electric utilities converted, and OPEC tried to sustain prices. They cut production by, I think, over 15 million barrels a day in the early 80s. Finally they couldn't handle it, the price collapsed, and the inflation went away. I don't attribute any of the success in the war against inflation, whatever, to monetary policy at the time, I see it as an underlying thing.

[01:04:47] The other kind of inflation, the kind of inflation that you can get from the monetary system is the demand pull, rather than the cost push, and that, I've frankly never seen that in my 40 years. I'm sure it's possible, and you see it in some countries, occasionally, but you have to get to full employment, run out of resources, and then the government has to continue to be pushing it past that point, and you use the price signals. Right now, we have an enormous output gap by any measures, some might say it's smaller than others, but it's certainly large enough where that's clearly not the problem. I'll let somebody else continue, just to fill in.

A: [01:05:24] [Bill Mitchell] The question about the OPEC is very interesting, because I think Australian experience was similar to elsewhere, but with slight nuance. You've got to understand what inflation is, first of all. A continuous price... a price bubble within a specific asset class, which is... that's not inflation. That's an issue, so a real estate bubble is an issue, but it's not inflation, and the public debate tends to conflate housing booms with inflation. It's a wrong conflation.

[01:06:05] And you've also got a different __??__ as Warren did, the "cost push from the demand pull" type inflation. In the mid 70s, all of our oil-dependent economies had very major cost shocks to the system. The question then was, if you think about what that means, what that means is that there's a real income loss to the domestic economy. That real income loss has to be shared in some way, and then the cost shock just dissipates very quickly. What governments did at that time was to, for political reasons, was to delay the dissipation of that cost shock. And that's where you do, you can get demand-side factors interacting with the supply-side factors.

[Mosler] Through indexation.

[01:07:00] [Mitchell] Yeah, because you don't want to take the crunch, you don't have a distributional consensus in your country, whereby the workers will take a bit of the real wage cut, the bosses will take a bit of the margin cut, and it'll go out of the system fairly quickly.

[Mosler] Your decline in the real terms of trade.

[01:07:27] [Mitchell] That's what I'm saying. So you can get an inflation then feeding on itself if the workers and the bosses have a slug-out fest in a distributional struggle where each of the _____??____ has price-setting power and they can defend their own margin, the real wage and the profit margin, and the government ratifies that through indexation. But that's got nothing to do with using budget deficits to achieve full employment, nothing at all. All that means is that occasionally if you import a raw material, for example, you'll be subject to price shock and you have to work out how to distribute that real income loss, that terms of trade shock, you have to work out how to do that. It's got nothing to do with the fears that are out there in the public domain now about these deficits generating runaway inflation.

[01:08:23] [Mosler] The other thing is, the mainstream model has an assumption that you need low and stable inflation or a conclusion for optimal long-term growth in employment, and if you can't get the inflation right then market forces will work in that direction. But the model's a relative value model. It doesn't include the currency as a public monopoly because it doesn't include taxation as a coercive force. So, they're right, or they may be right, within the context of the model but the assumptions of the model are not the real world conditions, which is that we do have a state currency, we do have the coercion of taxation, which leads to the unemployment and the counter-cyclical policies we're talking about.

[01:09:10] [___??___] I want to add something, and then the second question wasn't answered yet. When we're talking about, so far, whether the government can afford to hire underutilized resources or to buy them, we're not saying that the government should spend without limit. Those are two completely different things. We're saying the affordability is not a question, the government can always afford to buy anything for sale in terms of dollars in the United States. That doesn't mean that how much the government spends, or what it spends on, doesn't matter for prices. That's a completely different question, and we will be addressing that question as we go along: what form should the government spending take, and can that make a difference to help hold down price pressures? So we will deal with that.

[01:10:00] But we didn't address your question about the reserve currency. Well, it probably is true that when pension funds around the world decide to add your currency to their portfolio, as they did with the Australian dollar, that it increases the ability of your country to run current account deficits, trade deficits. You probably will run trade deficits if the rest of the world is trying to net save in your currency. They're trying to accumulate dollar assets, they're going to try to sell you output so that they can get the dollar assets. So it probably enhances your ability to run current account deficits, but it makes no difference to affordability within your country. Your government can always afford to buy anything for sale in terms of your own currency whether you're a reserve currency or not. It doesn't impact your ability to spend domestically, even if the rest of the world has no desire to add your assets to their portfolios.

[01:11:11] [Lynn Parramore, Roosevelt Institute] I have a question that has to do with both substance and messaging. I feel like we're talking about the Copernican revolution in a sense here, because it's so counter-intuitive, many of the things that we're describing, to what ordinary people walk around are thinking about. For example, on the 15th, when people pay their taxes, I would guarantee if you ask the first 10 people on the street "What did you pay your taxes for? Where did the money go?" they would say, "Well, it went to pay for things, the government needed my money to pay for things, to build things, etc." So, as unpleasant as the fact was that they were paying their taxes, they felt some consolation in knowing that it was funding government expenditures. And I feel like I'm not 100% sure what the narrative is that we're trying to get across here. The taxation affecting aggregate demand, I'm not sure that that's something the average person on the street can hang their hat on, and I wonder, from a messaging point of view, if there's something more you can say about that. And another thing is, what is the psychological impact on that kind of thinking about taxation? Is there, I wonder, a fear, that if people really knew what their taxes were being paid for, they wouldn't want to pay them? So I don't know, if you could comment on some of those issues, it would be great.

[01:12:47] [Mosler] OK, we'll take turns. The way I say it is that the government takes away our money to make room for them to spend without creating inflation. It has to take away some of our spending power to make room for them to spend, because if they didn't, it would just be inflation. I think of it as we're all shopping in the same department store, think of the economy as one big department store, and if we all spent all the money we earned and the government spent all the money they wanted to spend, it would be way too much spending for what's for sale in the store. It would just blow the roof on prices, we'd just be competing, it just be a mess. So the government has to take away some of our spending power, so that we have the right amount of spending power between the two of us to go into that store and shop so that everything gets sold, but not too much so we drive up prices fighting over the goods with each other, and things don't go unsold and we have unemployment. So the idea is to balance the economy correctly so that when we all go shopping, we have the right amount of spending power in the store. As Bill said, that's going to change from year to year as personal spending decisions change.

[01:13:54] [Mitchell] The narrative that I use is I ask people, "Look, do you want to get into your car in the morning and drive down to the corner and negotiate a contract with the private owner of that road; and then turn the corner into the next road and negotiate another contract to access their road; and then on and on until you get to work? Or do you want to take those road resources off the private provider and have the government providing the roads, where you just drive, except for toll roads, you mostly just drive?" It's very easy, I think, to understand the difference between public use of resources for public benefit and private use of that, which could be the same resources and same infrastructure provision in the private hands.

[01:14:43] People in Australia are so pissed off now about the private tollways in our capital cities that the successive neoliberal governments have implemented. What's happening in Sydney, for example, is the government's buying back all the toll roads, because people have become so hateful toward the private ownership of roads. Its a very easy story to tell, that public provision has its place. And as Warren said, you're competing for those resources, so you're got to take those resources off the private sector.

[01:15:25] [___??___, ___??___] I want to thank you all, everybody, for being here. very much. I want to raise the issue, if I could, of voluntary constraints. We talk about voluntary constraints as if they're things that all we have to do is just involuntarize them. And I don't think that there's enough of an explanation as to how voluntary constraints manifest themselves in real economies. I guess I would say, "Are we a monopoly issuer of currency in our country, when Goldman Sachs is creating things that serve as money?" And why can't we have a list of the voluntary that exist, and that need to be undone, in order for us to move into a place where Modern Monetary Theory becomes Modern Monetary Reality?

[01:16:20] [__??__] Let me just start with the first one, which is the President of the United States has said more than once we've run out of money; now there's a voluntary constraint. That's not true. Number two, we see our Administration, Secretary of State, Treasury, flying over to China to negotiate with out bankers to make sure we can fund Afghanistan and health care; those are voluntary constraints. That's completely not necessary either; that's a mistake. They know it, and they play us for complete fools, of course, so those are the top two, I think. Any body else have anything?

[01:16:54] [Kelton] The debt ceiling is a voluntary constraint, and when you want to get through that constraint, you put a bunch of guys and gals in a room, and they raise their hand, and they vote to raise the debt ceiling, and you avoid that constraint as well. I do have some discussion of this in my presentation coming up, and a list of the voluntary constraints, and what we can do.

[01:17:17] [___??___] Let me add one that is really important, because sometimes, when you finally get through to somebody, and they understand what we're saying, "The government can always afford to buy anything for sale," they say, "Uh oh, we gotta constrain those guys!" Well, yes, you do, but the way you constrain the government is by budgeting. They've got to go through the process. They say, "OK, we need this program, we're going to budget for it." Not because we couldn't afford to spend more, but because we want to hold them accountable. We want to make sure that the funds aren't just disappearing into the pockets of somebody. So yes, budgets, budgets are absolutely necessary and that is how you constrain spending. First we have the approval process, make sure it goes through Congress, Congress decides, "This is a program we want, " and then we're going to hold people accountable, to make sure the program gets done without wasting a lot of real resources, which would be a problem.

[01:18:15] [____??____] Also, inflation is a big constraint, because even now, with unemployment 22% if you measure it the old way, you see no uproar over the idea that the Fed might have to raise interest rates soon. That's just common discussion, it's understood, and why? Why isn't there any? Because people are against inflation, rightly or wrongly, the American population would rather see unemployment than inflation. So we've got that built-in constraint in our psychology.

[01:18:48] [Mitchell] To put a finer point on that, Australia now boasts that we've got thirteen and a half percent labor under-utilization, either i unemployment or underemployment. Thirteen and a half percent. Under-24s: twenty-six percent of them are unemployed or underemployed. And we boasted that we were the first to put up interest rates in the current crisis. Our central bank's now put them up three times, next month it'll put them up for the fourth time. We're boasting about that, yet inflation's at the bottom of their so-called "target range."

[01:19:25] [Roger Erickson (sp??)] I want to make a response, and a comment, and a suggestion to the idea things are not intuitive. I want to make issue with that. I'm an operations person, and what I see here is an operational problem. To make a state change in a complex system like a national policy, you always only need to get the key information to the key people in the key institutions, and two great examples of that are World War II and Reagan's big run-up in the budget deficits. [unintelligible] when there is a compelling reason, people change their minds very quickly. The other point about what's plausible is, if we had people in the audience here that were cultural anthropologists, for example, studying tribes, nations, and history of cultures, or biologists that studied ant nests and termite nests, or cellular biologists, just to name a few, my point is, there are wide ranges of people that understand this intuitively, and would say, "Duh! What are we talking about here?" The point is, I've looked into that, and I've made it a habit, the last six months, of contacting people outside economics and asking these questions., and the almost-universal response is, "We thought people in economics knew what they were doing, so we cede the territory to them." The next response is, "Alright, if they don't, we have to start firing people, heads have to roll." The outcome of that is very antagonistic, so my point is, operationally, one of the things we have to plan for is you can't win by pushing this upstream as a fight totally within the economics profession. If you go outside, to other areas, I think you'll find much faster responses, and if you get the information to the right people, even if it does have to be grassroots, that will cause a state change faster than carrying this argument within economics.

[01:21:34] [Mitchell] Just as a comment on that, that's why I think... I know the others here have probably gone through a similar process. I made the decision a few years ago that I would commit myself to writing this blog I wrote. It was an explicit decision, it's not easy to do every day, and something had to give. For example: two years ago I think I put out fourteen refereed journal articles; last year I put out eight. And the six that I didn't put out are my blog, and that's an explicit way that I engage with people that I would never have engaged with before. About thirteen and a half thousand are currently reading my blog, and I don't believe that many have ever read my academic work in the last 30 years.

[01:22:28] [Edward Harrison] I'm a finance blogger at Credit Writedowns. I'm going to make the statement that I do think a lot of this is ideological. I come from a different ideological perspective than probably most of you here. I have a ideological predisposition against government intervention, against government, big government, if you would call it that, so I think a lot of people are probably like that. So when you start making arguments of the government doing X or the government doing Y, I think that you should understand that that's something that's not going to go over with a large population within the United States. I think that's just a given, and I can tell you from my perspective how I feel about that. Now, with regard to the economics of the idea, there are two compelling arguments that you are making, that I think could get your points across that has to do with the accounting. Number one, my deficit is your surplus, if you look at the government, the government having a net deficit is the equivalent of the private sector having a net surplus. If you hammer that point home, over and over again, I think people will understand, in times like these, what is necessary. Second point is, with regard to the government deficit, in terms of how much debt is out there, that the fact that we owe or that we own the debt is a key selling point, I think, to people who want to logically understand we're not passing this on to our children, this debt we actually own, because the debt is the government's debt, if you look at it again from an accounting perspective: my debt is your asset. I think those two pieces of information are very important.

[01:24:31] [____??____] I'd just like to say one thing about big government, and what the government should do. The main point we're trying to make is affordability is not the question. So now we have to have a public discussion, free of the deficit hysteria, about what we want the government to do. And so, what we are arguing is consistent with a small government, it's consistent with a big government. And I think that that is a political question, for the most part. I agree with you, it's an ideological, political question: Do we want the government to do more, or to do less?

[01:25:08] [inaudible]

[01:25:29] [____??_____] I'll be doing that in my presentation. The difference between a federal government and a state and local government, and the mistake we've been making, is that we tend to look at the revenues to decide what government can afford to do. For a state, or a local [government], or a business, that's actually correct. But for the federal government, it doesn't get the revenues, it's just changing numbers down in an account, so it gives you no information. Once you understand that, now you have to drive the model the other way around. Now you say, "Alright, what's the size government we want and then what's the appropriate level of taxation?" Once we know what the government we want is, that's a political decision, then the level of taxation, more often than not, as Bill was saying, is going to be lower than that to provide for the savings so that the private sector will fully employ the resources that the government is not employing. So at the moment, if you look at my proposals, they've been a full payroll tax holiday, for example, to restore the private sector to employing the resources it had been employing in the last few years. Someone else might disagree and want an enormous public sector, or expansion, but those are political decisions.

[01:26:37] [Mitchell] I'll just add to that, and it comes back to the point I made about the ___??___ budget deficits, that in a sense, the private sector determines the size of government, not the other way around. The discretionary impact of government policy is relatively smaller than the cyclical impacts. And so, if you don't like the size of government, then do something about it, or accept the fact the government will do something about it, and limit its own size, and you'll get chronic unemployment and wasted resources. If the private sector thinks the government's too big, then they just have to invest more

[01:27:24] [inaudible]

[01:27:47] [Tcherneva] To carry forward this point, the budget is endogenous in one particular sense. You do have exogenous decisions made in Congress. We sit together, we pass a budget, we decide how much we are going to appropriate for different programs. That is an exogenous decision. But you don't know how many people are going to retire today, or how many people will need to tap into Medicare, so those are endogenous expenditures. You don't know how much you might need today to dedicate to unemployment insurance, because that depends on the cycle. Taxation, however, it's very easy to make the argument that you can set the tax rate exogenously, but the revenue that you get depends on the underlying economy, and how well it is doing. So, it's pretty much misguided for us to be fidgeting with this accounting difference. You need to be looking at the size of the deficit with respect to what is happening to underlying conditions. Trying to hit a particular numerical target is probably not going to be possible anyhow.

[01:28:47] [_____??____] The way I frame that is: the way we do things now is endogenous, because we don't take proactive fiscal policy for the most part. We could. In August of 2008 we could have had a major tax cut so that car sales didn't have to drop from seventeen million to nine million, and we could have sustained demand in the private sector, but we didn't. So, in the absence of policy, the budget deficit was going up, endogenously.

[01:29:23] [___??___] Just an MMT enthusiast (I wrote my question because for me it's easier to place questions in written... I have some difficulties with spoken English). Do you really believe that nobody among the mainstream economists and politicians in the world, both in opposition and in the governments, understand how a monetary system based on fiat money and flexible exchange rate works? And what about the Japanese government, do they do this by accident, or some of you guys gave them some advice, or ...?

[01:30:10] [Kelton] What I think Japan has learned from some of their mistakes of the past, so that when their budget became very expansionary following the bursting of their housing bubble more than a decade ago, they began to recover, and then they made a political decision to try to rein in the deficits. And they began another downward spiral. And so they began another attempt at recovery: they allowed things to expand, and in many ways they expanded endogenously, yet the deficit increased n response to the worsening domestic conditions, and there was another political decision to try to rein in the deficits, and they went down again. So they... I think they're getting it right this time, so far, and I think, to some extent, it's probably that they've learned from some of the mistakes of their own past.

[01:30:57] On the question of whether people out there have any real understanding, Marshall said, "Tell the Eisner story," because I told him this story the other day. Years ago, some of us who are here to day were at a conference in Knoxville, Tennessee, and economics conference, and one of the presenters there was Robert Eisner. Eisner was a professor of economics for decades at Northwestern University, and he was, for a time, Bill Clinton's professor. So, Eisner stood up at this conference and - Eisner wrote a lot about Social Security near the end of his life - and he stood up at the conference and he told us this story. When Bill Clinton was elected President, he invited Bob to the White House, and so Eisner makes the trip to DC, and visits his former student, and President Clinton says, "Well, Bob, what do you think of my economic policies?" And Eisner told him, "On the whole, pretty good, but you've got to know: you're dead wrong on Social Security." And Clinton's response to him was, and I quote, "I know, Bob, but you've got to understand, this is politics." And that was really discouraging for those of us trying to do what we're here today trying to do, which is to help people understand the issues, and the accounting, and the arguments. And because we believe if we could just get people to understand, they'd make the right choices. But, perhaps that not always the case.

[01:32:27] [Auerback] Can I just add to that that sometimes the truth does slip out. I don't know if any of you saw the 60 Minutes interview with Ben Bernanke, last year, when he was interviewed by Scott Pelley and the question arose, "Where did all this money come from? Isn't this money that's going to be taken away from the people that you have to tax later?" And Bernanke basically spilled the beans, "No, this is just electronic debiting and crediting on bank accounts." He actually, literally, did say that. Warren's quoted this many times, I've quoted this many times, and so when it suits them, they do convey the truth. But I see now that he's gone back to the Dark Side, and he's talking about fiscal sustainability again, I think he said that again yesterday.

[01:33:08] It's amusing to me because we were at the Levy Conference last week, and Dick Fisher from the Dallas Fed made a speech, and the first part of the speech was very much restricted to levels of their competencies. He says, "I don't really want to speak about political matters. I just want to speak about monetary policy." And then Social Security came up, and of course then he started going ___??___ about wasteful government spending, and his grandchildren, what they're going to have to pay for. So I thought, "Here we go, spreading into his non-competence in fiscal policy."

[01:33:35] On Japan specifically, because I lived there for five years, and I lived there at the end of the bubble era, and the beginning of the deflation that followed, and even to this day, I don't think many of them really get it. Richard Koo's account of this period is very good. He's not a Modern Monetary Theorist, as Bill has pointed out many times in his blog, but he does, on the factual points, get it right. I've met a number of people at the Bank of Japan and in the Ministry of Finance and about three months ago, someone from the monetary policy... the governing committee of the Bank of Japan actually said, "You know, If we're not careful, we're going to end up like Greece as well." So clearly there are people within the Japanese government, or policy makers, that don't really understand the difference between various currency systems. And I can tell you that the Ministry of Finance itself is full of these deficit hawks, they just hate the notion of government spending. It's still a very large minority view there. [01:34:34]

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audio available here

1st Fiscal Sustainability Teach-In and Counter-Conference

Session 2

George Washington University, Washington, DC

April 28, 2010

Stephanie Kelton: Are There Spending Constraints on Governments Sovereign in Their Currency?

Stephanie Kelton, Associate Professor of Macroeconomics, Finance, and Money and Banking, Senior Scholar at The Center for Full Employment and Price Stability (CFEPS), University of Missouri – Kansas City, Research Associate at The Levy Economics Institute of Bard College, and blogger at New Economics Perspectives

Stephanie Kelton: [00:00:00] Well, I think we have the same crowd we had before, which is very nice to see. We haven’t put anyone off too terribly yet. My name is Stephanie Kelton and I’m very happy to have an opportunity to come and elaborate on some of the things that we’ve started talking about this morning. The title of the talk that I was asked to give is ‘Are there spending constraints on governments sovereign in their own currency’, and Professor Mitchell answered that question in the previous session and everyone was here for that. So, if you’d like to break for lunch… [laughter] Just kidding! [00:00:39]

I’m going to go ahead and say something anyway about this, and what I’m going to say is based on what was described this morning as something called Modern Money Theory. This is not a term that we came up with. I think that others who began to follow our work branded us with this title and started referring to us as the Modern Money School and to our ideas as Modern Money Theory and in many ways I think it’s kind of unfortunate, but this is the brand that we now, or the cross that we now bear, because it is something of a misnomer. What we’re doing is actually not modern at all. The ideas are not theoretical, and they aren’t particularly modern. What we’re doing is simply describing, operationally, the way government finance works. It’s not a theory; we do not make assumptions, although we are economists. What we’ve been describing to you today is not dependent upon any ceteris parabis condition or any set of assumptions about perfect competition or rational agents or anything else that you get exposed to when you study economics, but rather an attempt to simply describe the way in which the institutional arrangements are set up, and the accounting identities and what happens in a balance sheet framework; when one side of the equation moves, what happens on the other side of the equation? That’s really all we’re up to, so don’t be afraid. [00:02:09]

As I said, the ideas aren’t particularly modern. I could have filled the page with names of folks who’ve come before us, espousing exactly the same kinds of things that we’re talking about here today. One of the earliest was a German economist by the name of Georg Friedrich Knapp, who wrote a book called ‘The State Theory of Money’. Many of the same ideas that you’re hearing from us today can be found in the work of Knapp. They can be found in Keynes, most specifically in his ‘Treatise on Money’ published in 1930, and they can most surely be found in the work of Abba Lerner, who wrote extensively on this kind of thing, publishing papers with titles like ‘Money as a Creature of the State’. So, they are neither modern nor are they theoretical, but we like them. [00:02:58]

What we didn’t do, I guess, a lot of this morning is really to talk about money, and what is money. And, while there were some references to accounting, and blips on a screen and button pushing and so forth, we didn’t really distinguish what we’re talking about in Modern Money Theory from what most of the textbooks describe and what our students end up getting taught in most economics programs across the globe. [00:03:27]

When you open up an economics textbook, and you turn to the page that begins to talk about money, inevitably you find a story that begins with something about barter; and ‘once upon a time’ man trucked his wares to the local trading venue because he’s preprogrammed to truck barter in exchange, as Adam Smith told us, and there was no currency around. So you had to lug your clay pots and your shoes and your fish and whatever else you may have specialized in the production of, down to some local trading venue, where the only way the exchange could take place is if you happen to come upon the person who not only had what you wanted, but wanted what you had. [00:04:10]

Economists refer to that as the double coincidence of wants. And so, barter is this clumsy system for conducting exchange and, so the story goes, man suddenly decided – hey there must be a better way to organize – we should really think about finding some Thing that would be universally accepted. And, lo and behold, they hit on money, primitive forms of money first. The textbooks tell stories of things like pebbles and shells and feathers and beads and all of that, and later discovering money things like precious metals, which had nice properties that fish and other commodity monies didn’t have, in that they would serve as a good store of value, they were easily divisible, they were portable – you put your coins in your pocket and go conduct your exchange. [00:04:58]

But, the story is always told that this somehow happened spontaneously. The private sector figures out that there’s a more efficient way to conduct exchange. They choose to use money. They decide what money is. And this all happens without imposition from any authority, no state, nothing like that. So the money is stateless. And, then of course, over time, money evolves (I’m still in the textbook story) from things like primitive money to gold and then to paper with gold backing. People take paper in exchange for real goods and services and the argument is – well, but at the end of the day, it’s as good as gold. So they continue to accept the paper. [00:05:42]

Then the story gets more difficult to explain, for this group. Sometimes we call them the Metalists because, when you have a pure fiat money system, why do people accept currency, that is intrinsically worthless, backed by nothing of value, and yet people will beg, borrow, steal, toil away the day, in order to get these otherwise worthless pieces of paper? [00:06:05]

And so, what we like, what we prefer, is the story that’s been dubbed, or the approach that’s been dubbed Modern Money Theory, which traces the nature and origin of money to the early authorities. Randy has written a lot about this in his, ‘Understanding Modern Money’ book, from the early temples and later to the nation states and we could go on and on about this, but that’s not what I want to do. But, it does trace the origin and nature of money to some power authority; that is, the money does not emerge spontaneously by the will of the people, but it is imposed on them. [00:06:43]

How is it imposed on them? It is dictated by the authority. It is chosen. The authority establishes that you all must pay something to me. I define the unit of account. In the United States, the unit of account is the dollar. So I say in what unit you must pay obligations to me and then I tell you what you have to do to eliminate those debts. And so, I impose a tax liability on you. I make you indebted to me. Now you need to do something to eliminate your obligation to me. And I tell you how you can do that. In the United States, you can earn dollars. You pay your tax obligation to the state in U.S. dollars. That gives value to the government’s otherwise worthless pieces of paper, and allows them to move real resources from the private to the public domain. [00:07:34]

So we have a very clear way to answer the question ‘Why is fiat money accepted?’, whereas our textbook counterparts have some difficulty with that. If you push them too hard, they say, ‘Well, Pavlina accepts dollars from me when I go into her shop because she knows that she can pay Warren her rent with those dollars’. And then you say, ’Well, why does Warren take them?’ ‘Well, Warren knows that he can pay Marshall when he rents a car from him’. ‘Well, why does Marshall take them?’ ‘Well, Marshall knows that Randy will take them.’ And you get into this infinite regress problem. They really have no answer, is the problem in that theory. [00:08:08]

So the Modern Money approach accepts that the currency derives its value from the state’s willingness to accept it in payment to the state, to eliminate obligations to the state. Now there are lots of things that obviously circulate as money things. The government’s money is not the only thing out there. And there is some ordering, or hierarchy of money things. Some are more generally accepted than others. [00:08:39]

And so here I have a quote from James Tobin just to give this some credibility because we pull out the Nobel Prize winner when we want to convince you that these ideas are not crazy and fringe, and James Tobin said in a book in 1998, “In advanced societies the central government is in a strong position to make certain assets generally acceptable media by its willingness to accept a designated asset in settlement of taxes and other obligations. The government makes that asset acceptable to any who have such obligations and in turn to them and to others and so on.” [00:09:14]

So Pavlina takes it because she has obligations to the state. If she herself doesn’t, she knows she can find someone who does. That’s why this thing is special and that’s why the government’s IOU is special and those of us that have done some work in this area, in talking about a hierarchy of money would argue that the reason that the state’s IOU, the state’s money sits at the top of the hierarchy is because it is the most generally accepted and it gains its acceptability by virtue of the state’s proclamation that we all need it in order to eliminate our tax liability. [00:09:48]

So, Modern Money Theory stresses the relationship between the government’s ability to make and enforce tax laws on the one hand, and its power to create or destroy money by fiat on the other. I would define as a sovereign government, a government that retains these powers, that they are sovereign in their own currencies. Among others, examples of governments with sovereign currency, the United States, Canada, UK, Japan and Australia, all sovereign in this regard, by this definition. [00:10:21]

So the question then becomes, for a sovereign government, how much can it spend? Can it afford Social Security? Medicare? Tax cuts? Is the current path sustainable? Isn’t inflation going to be a problem? Will we bankrupt our children and grandchildren? What if the foreigners decide they don’t want to hold our bonds? I am only going to answer a couple of those questions in this talk because many of those are designed to be answered by other panelists later today. [00:10:51]

So, here we have the analogy. This is what most students who study economics are taught, and Ross Perot, I think, deserves a lot of credit for the fact that people think in these terms today, or blame, as the case may be. Ross Perot told us early on, just like the government, every American has to live within his means, and President Obama has told us that the government is out of money. So, what is the basis for this household government analogy? The household clearly has a budget constraint. And we also teach that in our economics classes. Micro economics teaches students how to maximize utilities subject to some constraint, face a budget constraint. How much money can you spend? You can spend everything you receive, either working or unearned in some capacity – gifts, interest earnings, whatever it is - after taxes, plus everything you can borrow. That’s what you can spend. And when it comes to buying things in the United States there’s really only one way to make final payment. When you purchase something, at the end of the day, the only way to pay for it is with the government’s money. There is no other way. [00:12:05]

How does that work? And so here’s an example. Suppose that you go out to dinner and you purchase your meal with your Visa card. Is that the final payment? No. You get a bill in the mail from Visa, and what do you do? You write them a check. Is that the final payment? Well, maybe the last time you see anything happen, but it’s not the final payment. At the end of the day, Visa doesn’t want your check. It doesn’t want what you’ve written down. What it wants is a credit to its bank account and that happens as that check goes through a clearing process and Visa’s bank account is credited with reserves. What are bank reserves? Government IOUs. Federal Reserve money. government money. Only the government’s money can discharge a payment as final means of payment. We are the users of the government’s currency. [00:12:59]

In contrast, the government is the issuer of its currency. It is not like a household. It doesn’t have to raise money by borrowing or collecting taxes in order to spend. Those of us in the private sector have to earn or borrow dollars before we can spend. The government must spend first. And we say this, and sometimes people have a hard time understanding that. How can the government spend first? How can it not spend first? How could the government collect taxes, in dollars, first? It first had to have spent those dollars into existence. The spending has to come before the payment or the collection of taxes. The government must spend first. Government spending is not (we use this term a lot) operationally constrained by revenues. It doesn’t need tax payments and bond sales in order to fund itself. It is not operationally constrained. The only relevant constraints are self-imposed constraints. We talked a little bit about this earlier, things like debt ceilings. That’s a self-imposed constraint. Rules that prevent the Treasury from running an overdraft in its account at the Fed. That’s a self-imposed constraint. It is a constraint that is imposed by Congress. Rules that prevent the Fed from buying Treasury bonds directly from the Treasury, so-called monetizing the debt, is a self-imposed constraint. [00:14.36]

How does the government actually spend? It spends by writing checks on its account at the Federal Reserve Bank. What we see, and what we hear all the time is that the government is spending a hundred, taxes are ninety and it sells bonds equal to ten. So, what we see is an attempt to coordinate the government’s spending with taxes and bond sales and it creates the illusion that what’s happening is that the government is taking money from us and using it to pay for the things that it purchases. But that’s not really what’s going on. As Warren likes to say, the government neither has nor does not have any money at any point in time. It is simply the scorekeeper. So what happens when the government spends? [00:15:24]

Let’s suppose that the U.S. Treasury issues a check for a hundred million dollars to Halliburton. What happens? The Fed marks down the Treasury’s balance. It subtracts one hundred million from the Treasury’s account at the Fed. Halliburton takes the check and deposits it wherever Halliburton happens to bank. I chose Bank of America. So Bank of America marks up Halliburton’s balance by a hundred million dollars. The Fed marks up the size of Bank of America’s reserve account (this is some reserve accounting, hang in there; it’s a little dry). The Fed, in the clearing process, credits Bank of America with a hundred million dollars in its reserve account. [00:16:08]

So what’s happened at the end of the day? What are the effects of government spending? The monetary base increases. We call that ‘high powered money’. Those are the bank reserves. The monetary base increases by a hundred million. The money supply increases by a hundred million. The money supply is all the checking accounts and traveler’s checks and a couple other things, but by and large, those are the deposits, ordinary everyday checking accounts. So the money supply increases. So what is the lesson from this? The lesson is that government spending creates new money, both high-powered money, bank reserves, and the more narrow definition of money, M1. They both increase as a consequence of government spending. [00:16:50]

How about when the government collects taxes? What happens there? Say you write a check for five thousand dollars to the IRS on your personal checking account, and you bank at Wells Fargo. Wells Fargo marks down the balance in your account, minus five thousand. The check gets sent from the IRS to the Treasury’s bank. The Treasury banks at the Fed. The Fed marks up the Treasury’s balance by five thousand, and the Fed marks down Wells Fargo’s balance by five thousand. What happens at the end of the day? The effects of paying taxes (See, when you pay taxes, there’s nothing there. Everything just disappears.) The monetary base decreases. Bank reserves go down by five thousand, so the base goes down. The money supply also goes down because you drew on your checking account. So, the money supply goes down by five thousand, the narrow measure, M1, and the monetary base goes down as well. Paying taxes destroys money. It doesn’t give the government anything. It doesn’t get anything. It eliminates those liabilities. They are, for all intents and purposes, destroyed. [00:18:06]

That’s if you pay with a check. What would happen if you actually sent the government your cash? Every once it awhile it seems like you hear about some crazy person who does this in protest. They get a huge sack, usually of coins just to make it really offensive and difficult on some poor bean counter. Let’s say you have a tax liability and it’s a hundred dollars and you just mail in a one hundred dollar bill. Apart from the shock of opening the envelope, what are they going to do with this? What do we do with this? Send it to the Fed. That’s where the Treasury banks. Goes to the Fed, and what do they do with it? They shred it. They shred it. Why would they shred it, I mean literally shred it, if they needed it to buy things, if they could use it to spend? Because they don’t use it to spend and they don’t need it to buy things. [00:19:06]

So why bother collecting taxes at all, if the government doesn’t need our money, and this came up earlier. Lynn raised this question. Why bother collecting taxes? When we pay our taxes, whether by cash or by check, all we’re doing at the end of the day, is returning to the government its own liabilities. That’s all we’re doing. And they say, ‘Thank you very much’, and the transaction is done. They don’t get anything that they can turn around and spend. They get their own IOU back from us. That’s the end of the transaction. [00:19:40]

So, why do it? Two reasons. One is, and this goes back to the Modern Money Theory that I began with, one is that taxes give value to the government’s money. If they were just to say, ‘We don’t need taxes in order to spend, so let’s suspend all collection of taxes’, that would undermine the value of the currency. It would take away the need that we have to acquire the government’s money. Why would we work and produce things for the government? Why would the government be able to move resources from the private sector to the public domain if it can’t get us to do that by virtue of the fact that we are willing to work and provide things to get the government’s liabilities? So, taxes maintain a demand for the government’s currency – that’s important – and the other thing they do, is they allow the government to regulate aggregate demand. Too much spending power can be inflationary, too little causes unemployment and recessions. [00:20:42]

All right, well then, why does it sell bonds? What are bond sales all about? It’s not selling bonds to cover a shortfall because it needs to borrow money from us. A lot of people have argued, and Bill talked about this a little bit earlier with the Rogoff-Reinhart piece, that there’s a tipping point out there. Won’t we sell too many bonds? Won’t the debt get too large? Isn’t there some point of no return beyond which the whole system collapses? What if the interest payments become too large? What if the rest of the world decides they don’t want to buy the bonds? [00:21:21]

Bonds are nothing more than a savings account at the Fed. We give up dollars today and we receive dollars plus interest at a future date. So if the government sells bonds today, funds get moved from checking accounts. People who have money buy the bonds. Funds move from the checking account into what’s effectively a savings account. It’s the interest earning asset, IOU of the government. So, that’s what we hold now. When the bonds mature, the government credits our account, principal plus all of the remaining interest, and the funds are converted back into checking accounts; they move from saving back into checking accounts. [00:22:04]

I couldn’t get the twelve trillion. I wanted the actual number, 12.4, wherever we are today, but this is as recent as I could find. This is the national debt clock, the sum total of all of the outstanding bonds that the Treasury has issued. And, what we would argue is we shouldn’t call that the national debt clock; we should just rename it. It’s the national world dollar savings account. All it does is keep a record of the total amount that’s invested in savings as opposed to checking accounts at the Fed. It’s nothing more than that. [00:22:44]

Something about the issue of solvency, the tipping point problem. Can the government run out of money? The U.S. government can’t run out of money any more than the Washington Nationals Baseball team stadium can run out of points. Every time a ball game is played at Washington National Stadium, some team scores some points and they appear on the screen and then the other team scores and some more points appear on the screen. And there’s nobody behind the screen going, ‘Hey Johnny, we’re running out of points here’, you know, right? Look in the trust fund. That’s not the way it happens. You just add the points. [00:23:30]

Same exact thing with the way the government operates. And this is the quote that Marshall brought up earlier and the one that Warren likes to use a lot, and I like it too. So here it is in writing so that you know we didn’t make it up. This is Ben Bernanke in an interview on Sixty Minutes just last year when Pelley asked him, "Is that tax money the Fed is spending?" And Bernanke says, "It’s not tax money. The banks have accounts at the Fed much the way that you do, have an account at a commercial bank. So when we want to lend to a bank, we simply use the computer to mark up the size of the account they have with the Fed." [00:24:00]

It’s exactly like putting points on the screen at the baseball game. Just mark up the balance. Can you run out of points? Can the government run out of money? No. There is no solvency issue when you are the issuer of the currency. OK, this is a quote from Alan Greenspan saying largely the same thing. "A government cannot become insolvent with respect to obligations in its own currency. A fiat money system like the ones we have today can produce such claims without limit." [00:24:34]

My parents told me money didn’t grow on trees. It didn’t for us. Then, why, if this is true, why are the PIIGS in trouble? Why are Portugal and Greece and Ireland and Spain and Italy; why is there all of this talk about them not being able to fund themselves? I mean, they have a fiat currency. [computer glitch] Why are they in trouble? []00:25:07]

And the reason they’re in trouble, and this was discussed some this morning, is that all sixteen nations that adopted the Euro, gave up their sovereign currencies in favor of a stateless currency. The Euro is a stateless currency. It is a fiat currency in that it is non-convertible. You don’t get to take it in and ask for gold at the end of the day, or any other commodity. But, it is not a sovereign currency in the way that the U.S. currency is sovereign, and that imposes certain constraints on the governments that use this currency. [00:25:41]

It means the default risk, solvency, is a legitimate problem for the governments that use this currency. Every one of them, not just Greece and Portugal, but Germany and France as well – every one of them could default on their debts if they’re unable to raise enough money by either taxing or borrowing from those who already have Euros. They must borrow or raise taxes; they must collect money before they can spend. It’s the only way they can do it. They are all users of their own currency. They are the users of their currency, much like California, Illinois, New York, New Jersey – they’re just like states in the United States. They’re in the same relationship relative to the currency as are individual states in this country. [00:26:31]

This is the hierarchy of money. So the entire thing in Euroland is denominated in Euros. For any particular government, look at the hierarchy of money. What is it that sits at the top of the hierarchy? It’s the Euro. What is the relationship between the currency at the top of the hierarchy and the government? In this example, the government does not control the currency that sits at the top of the hierarchy. And that turns out to be a huge problem for Greece. [00:27:03]

And we’ve seen problems with other currencies, not just the Euro, but we saw problems with Mexico, 1995; we saw problems with Russia in 1998, Southeast Asian currency crisis in ’97. They all issued paper currencies. But why did they have problems? Why did Russia default? Why were there currency crises? Isn’t that inconsistent with everything I’ve said? No, because I said that the currency needed to be a fiat currency, non-convertible, floating exchange rate. Non-convertible. Every one of these countries had fixed exchange rates. And, as a result, every one of their governments became the users rather than the issuers of their currency. [00:27:45]

I don’t know of a single example of a currency crisis or a debt default by a sovereign government that has issued obligations in its own currency when it has flexible exchange rates in a non-convertible currency. I don’t know of one. The U.S. can control its currency and therefore, by implication, its economic destiny. [28:11]

There is a relationship between the power the state has in the monetary sphere and the power that it can exert in the political policy sphere. There is no revenue constraint for governments that control the money that sits at the top of the hierarchy. Does that mean that we should spend without limit? No. No. Emphatically no. As the economy recovers, spending will need to be regulated to prevent inflation. But I would argue, and I think what we’re all here to argue today is that it’s time to stop allowing the monetary system to limit our range of policy options. It is causing unnecessary human suffering and it’s time for us to begin to recognize the advantages of a Modern Monetary System. Thank you. (Applause) [29:00]

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audio available here

1st Fiscal Sustainability Teach-In and Counter-Conference?George Washington University, Washington DC?April 28, 2010

SESSION 2: “Are There Spending Constraints on Governments Sovereign in their Currency?” - Q&A

Q: [00:29:15] [male] [inaudible: something about Argentina and Russia]

A: [00:29:35] [male] So . . . Many of you who have been to the Fed, you know you start everything off with “So.” So what happened in Russia [he laughs] was that they had a fixed exchange rate, the ruble was fixed at 645 to 1, and they were borrowing dollars in order to keep it going because people were— would rather have their dollars than a ruble. When you have a fixed exchange rate, the dynamic is, if you get paid in rubles, you have three choices: You can do nothing, you can buy ruble securities, or you can cash them in for the reserve currency, which was dollars. So with a fixed exchange rate the treasury competes with the option to convert, and you see that all the time, and the fixed exchange rates, the interest rates, are actually controlled by the market. And so what happened in Russia is as the treasury competed with the option to convert, interest rates went up and up and up, and finally they were paying 200 percent and there was no interest rate where people would rather have the rubles than the dollars and they ran out of reserves, couldn’t borrow any, and defaulted on their conversion obligation. Now, at that point in time, what most countries would do would be just to float the currency and say, Okay, look, there are no more dollars for now and the ruble’s floating and just keep the money— the central bank operational. What they did in Russia, when they ran out of dollars, they just turned out the lights and went home, shut off the computers, didn’t open for up four months later. When they did open up, they went in through the hard drives, and, sure enough, the ruble balances were still there, and they were— they basically honored them. There was a little bit of restructuring, but nothing particularly serious on the interest-rate side. And so it *was* a fixed-exchange-rate collapse, or blowout, and they just shut everything down. Now in Mexico they had the same kind of blowup and they just— what was it, three to one, three and a half to one, or something like that? Was it three? Three to one back in about ’95, they were supposed to honor these tessa bono [ph??] obligations, where you were able to turn these in, they were at an index to U.S. dollars, where you could turn in and get— and they were guaranteed you could get enough pesos where you could convert those instantaneously into 40 billion dollars. Well, there was no amount of pesos that could be converted into 40 billion dollars, so the whole thing collapsed, and they wound up dishonoring their promises, rolling some into Brady Bonds, and they let the currency float, they just— and so the peso went to nine to the dollar or somewhere around there. And they kept business as usual with the— as a floating exchange rate. Okay, so I don’t know if that answers your question or not, but that’s what happened.

[Voice; inaudible]

[00:32:25] [male speaker again] Argentina. Yeah. Argentina was fixed one-to-one to the U.S. dollar. Same type of thing: Interest rates went up because of the option to convert, they ran out of dollars, and one night in a deflationary mess that followed with after thirty-two dead in the street one night Buenos Aires they reopened with the floating exchange rate, they let the peso float. Okay, Russia, the difference was, when it blew up they just turned the lights off and went home. They could have kept it going if they wanted to, they didn’t know what buttons to push at the central bank, or they were afraid for their lives, the central bankers, and just left, okay, which is the story I’ve heard also.

Q: [00:33:06] [male] [inaudible] Can you explain [inaudible]

A: [00:33:24] [female: Kelton??] Yeah, I think the lesson to be drawn from the arguments that I made are that the debt-to-GDP ratio is largely irrelevant so long as the debts have been written in a currency that you have a monopoly over the issue of. So the U.S. Government can always meet, on time and in full, *any* payment that comes due in U.S. dollars, *period*. Okay? If you’re borrowing in a currency that you do not control, you cannot create, like Greece cannot create the Euro. It is prohibited by the master criteria, Article 104, you can’t print money. So they can’t always, necessarily, serve as on-time and in-full obligations that come due; it’s not a sovereign currency.

A: [00:34:16] [male] Let me just add to that, if you look at Italy back in the eighties, they had one of the best economies in the world with debt-to-GDP ratios well over 100 percent and inflation rates in double digits. So the problem with inflation is not that there’s any real economic problem, it’s a political problem. People don’t like it, and you will get thrown out of office if you allow inflation. Not because it’s not good for employment and output, it’s just considered immoral. It’s the government robbing us of our savings, and hidden taxes and all these types of things. And it has to be respected, and democracy reflects the will of the people.

A: [00:34:15] [female; Kelton??] Keep in mind also that Japan’s debt-to-GDP ratio is roughly 200 percent, but as long as the borrowing is done in yen, it’s not a problem.

A: [00:35:01] [male; Bill??] If you read their book carefully— have you read their book?

[response??]

[Bill??, contd.] If you read their book carefully, you’ll see— and you go through each case and trace the currency systems being run, the circumstances surrounding the default, you’ll only find one example of a sovereign, truly sovereign government in modern history that has defaulted, and that was Japan, and it was during the war, and the reason they defaulted was because they said they weren’t going to pay back debts to their enemies, and it had nothing at all to do with the question of solvency, it was a political decision. And so, you know, I think the book is being used very frequently now by commentators as, See, this is the definitive piece of research, and in actual fact it’s highly *limited* research and applies to a very small number of circumstances that we don’t find in very many countries.

A: [00:36:14] [another male] Look, I’ve had very strong conversations with David Biersitz [??] of Standard & Poor’s about this, separating the difference between ability to pay and willingness to pay, and the last time on that last go-around I sent you a copy of that, but they have stopped downgrading on ability to pay, I believe, they are now downgrading on willingness to pay, which is what happened with Japan. So what we’re saying is, there’s always the ability to pay; there may not be the *willingness* to pay. Very different things.

A: [00:36:44] [female] Just to add on to the Argentina story, it’s instructive for another reason. Argentina actually is a very good case study of how you launch a currency. When the state was bankrupt, the provinces were bankrupt, what they did is they actually issued their own IOUs. They issued [patacornes?? lecops?? foreign terms], the varieties of local currencies. Now, our states are prohibited from doing that, but in Argentina they could, and so you get back to Stephanie’s point, Why do you trust the currency you didn’t have before, you didn’t use before, the vast majority of people are not using, you know, there’s no trust that was built in the system, and the reason was because the states taxed the population in these [lecops??] and they negotiated that you could pay your utility bills in [patacornes??]. And so, although everybody was up in arms and saying, you know, You can’t be using this system, and, granted, it didn’t last very long, you go to Argentina and you see every store says “Aceptavos patacornes” [??]. It is very effective to launch this currency. Once they floated, they had no need for them anymore.

A: [00:37:45] [male] In Russia, after the central bank shut down, they traded what they called arrears, which is I thought a fantastic word for what things are. So the states with the— whole corporations would trade arrears with each other.

Q: [00:38:15] John Lut [ph??] from the great state of New Jersey, or infamous, as it currently may stand. I want to thank Stephanie very much for her very clear presentation. I did want to ask you a specific question, though. When you’re talking about countries, everybody believes you but you see that lurking look in their eyes and [they?] say, Well, what happened to Germany after World War I or the latest case, Zimbabwe? Could you explain that in clear terms?

A: [00:38:36] Stephanie: No, but I hope Marshall can. [Laughter]

[00:38:40] [male; Marshall??] I’ll be doing a full presentation

A: [00:38:42] Stephanie: That is *the* topic of Marshall’s presentation. Will you be staying for the full day? . . . Okay. Well, then. I was going— Okay.

Q: [00:38:52] Roger Erickson [ph??]: Another question about getting back to treasury bonds. We’ve all heard, most of us have heard now that we went off the gold standard under Nixon in 1971. The question that rarely gets asked is, Why does anybody bother selling Treasury bonds anymore, at least very many of them, and a follow-up is, Is there any country in the world that doesn’t bother doing that to any extent?

[00:39:21] [male] That’s the short answer.

A: [00:39:24] [male] What happens is that when new countries start, they just have what they call central bank credits, but then when they become real countries, then they start using treasury securities, so then they become real countries like everybody else. And even Russia was like that. For years they were just central bank credits, so they had it right to begin with and then moved on to be like everybody else. I have seen that happen many times.

[00:39:44] [male] But that doesn’t answer the question. Marshall, can you elaborate on why?

A: [00:39:38] [Marshall] Yeah, it’s a legacy of— As you say, Nixon closed the gold window in ’71, Bretton Woods was completely eliminated in ’73, but we didn’t sever the *legal* connections to that system at the time, so that the laws that were enacted in Congress are predicated on the old gold standard thinking, so that by law you have to issue debt dollar for dollar to fund the spending. So it’s simply a legal legacy. There is no operational reason for it. And I think one of the things we have to do at times, and that we don’t do well enough at times, is we tend to conflate the descriptive with the normative, and I think we have to make clear to people that, and I think Bill’s been very good at this, especially recently, I think the [blowoff??] from a couple of days ago, that there are certain theoretical aspects which are impeded from happening in an operational sense because of these silly legal constraints, and that happens to be one of them. One of the things that we’ve talked about is that just let the Treasury run an overdraft facility with the Fed as opposed to issuing bonds, but there’s no real reason for that other than the legal legacy.

A: [00:41:12] [male] Yes. One other thing and I you know this is the interest-earning alternative to holding reserves, which in the United States until a year ago didn’t pay interest, so what we needed to do was to put in place the alternative that doesn’t require selling treasury bonds, and that is to pay interest on bank reserves, so Canada had done this ten years before, so Canada no longer had any operational reason to sell treasuries, although they may not understand this and they’re still selling treasuries and there could be a legacy of law also. Now we’re in the same situation, now we’re paying interest on reserves, and so we don’t need to sell the treasuries anymore for operational purposes, but we still have the law.

A: [00:41:57] [different male] From a function point of view, the reason to sell term securities would be to raise the interest rates for the term structure, and clearly that’s not what they want, what they’re trying to do.

??: [00:42:07] [different male] But you’ve pointed out many times that that only requires very-short-term bonds.

A: [00:42:10] [male] But if you want thirty-year rates to be higher, if you want mortgage rates to be higher, you could go sell ten-year securities to drive up rates, if that was the public purpose. That would be the only reason you would sell ten-year securities would be some public purpose behind having higher ten-year rates. Now I don’t think anybody thinks there is, they’re doing it for another reason.

Q: [00:42:30] [male] So I know Bill’s going to comment. Could you also just slip in is there any country in the world that’s just forgone selling treasury bonds?

A: [00:42:38] [male; Bill??] The example that I’m going to tell you about is Australia, because I know it very well, and the traditional system under the convertible currency was what was called a tap system under the issuing date, and what the government would do in that system would be, they’d decide on what yields they were going to offer, and let’s say they’d say 4 percent or whatever it was, and then they would announce the tap was turned on, and if people took up— if the private investors took up, wanted to hold the paper at that yield, then they would, that buy, and if they would, there was a shortfall, the central banker would buy—strike forward. After convertibility collapsed, the end, it was soon after that that we started to worry about budget deficits and the [manifest??] surge occurred, I’m talking about mid-’70s onwards, there was a constant public debate among the sort of characters that I hang out with, as a professional economist, about the *dangers* of the tap system and the *dangers* of allowing there to be any shortfall at all that the central bank might take up. And there was a really grand debate and what happened in the early ’70s they decided that the tap system was dangerous and they realized that— they decided to change the system, and they turned to an auction system that was *purely* available to the private sector, and the auction system then allowed the private sector to determine the yield of the issue. Obviously, the last unit of debt sold would be the highest yield that was being prepared to be paid by the private investor, and they prohibited the central bank from buying *any* of the issue, other than small amounts infrequently for operational reasons, and they soon solved that anyway by creating a support rate, so they minimized the use of that, they minimized *made* for that. And you read the literature on this, the government papers, they separated the dead issuance from treasury into a separate unit, and if you read all of their papers, they talk about the reason issuing debt and structuring it in this auction system, why, was to maintain fiscal discipline. They knew damn well that the central bank could buy it all, they know damn well. I know the reserve bankers very well, I talk to them regularly, they know the central bank could control the whole yield curve if they wanted to. But they won’t, it’s voluntary, but they won’t because they want to maintain what they call fiscal sustainability, which is the antithesis to what I call fiscal sustainability. As to whether there’s any country that doesn’t, my understanding is, No. But they’re all caught up, we’re all caught up in the same ideological tangle.

A: [00:46:19] [male] Even worse. A few months ago I was at, one of the guys in debt management at Treasury and they’re extending the maturity of the treasury, more years, more tenure, it’s like why are you doing *that*, don’t you guys want mortgage rates to be lower, why are you [??]. He says, Well, we’re worried about downgrades, the ratings agencies have come in and told us if we don’t extend the debt we risk being downgraded. Okay, so the deeper you look, the worse it gets.

[00:46:44] [male] So then, as a final comment and I’ll be quiet, many people have blamed this area, I mean the last thirty years in the deregulation of financial markets, on the mania for deregulating *everything*—Thatcher and Reagan and people like them—but, based on everything we’ve heard today, it seems that everything else was deregulated at the same time we were hyper-regulating our monetary systems, which is inexplicable.

A: [00:47:14] [Bill] No, it’s not inexplicable at all, because they wanted to— the whole paradigm and the whole ideology was to create freedom, so-called freedom, for the private sector and hamper the government sector from having any freedom, ’cause you can’t trust the public sector, you can only trust the private sector, because the rhetoric is that the private sector is market-disciplined and the public sector isn’t. It’s entirely consistent.

A: [00:47:41] [male] Can I just add one thing, because I think Edward, Lynn, and Roger all have raised a similar point, you know. *Do* they actually understand the way things work? And so the possibility is, Yes, they do, and so we create these myths or frauds because this is how we’ll constrain the government because otherwise the politicians will run away and start growing the size of government. But actually it is we don’t trust the voters. We don’t trust the populace, we don’t trust *democracy*, that is what it really is all about, because ultimately that is what’s going to constrain the politicians, it’s democracy.

Q: [00:48:24] [male] This may be a digression, but I stumbled on to looking at the Fed balance sheets, which I guess come out weekly or monthly. Why is their goal— They do have treasuries they list as assets or liabilities—why do they have gold on the Fed balance sheet, and what is it there for?

A: [00:48:40) [male] Because they had it there before and they don’t want to sell it. It’s like the national forests or any other asset. But there’s no monetary use for it.

[00:48:53] [male] You know they do lend it also, and there’s some talk they’ve been using their— they haven’t been transparent about what they’ve been doing on the lending side. I don’t know what’s going to come of that.

[00:49:04] [silence]

Q: [00:49:25] [female] I’m Theresa Sabenko [ph??], I’m not an economist, I’m an investigative journalist, that’s why many things are [probably?? pretty??] new to me, but I listened to the president of the European parliament yesterday. He was just mentioning a few things. But what I learned today, I wanted to ask the panelists if this currency, the Euro, is a problem right now, because that’s the way it is, because there’s no state connected to that. Wasn’t there enough knowledge that they did that, or was it something on purpose again that is being created right now? Where to look for the remedy for this, because they?? are right now talking about introducing a common language, which the president is fighting. I mean, is it a scheme or is it just the lack of information?

A: [00:50:20] [male] No, there *is* an awareness of the problems. In fact, no less than Otmar Issing [ph??] from Germany, who’s one of the hard-liners on— he’s one of the practitioners on strong money, good-as-gold, etc., etc., he readily conceded that a European monetary union in the absence of a political union longer term is not viable. And I think that— But they also realize that politically the nations, the individual nation-states within the Eurozone, were not able to create this new entity called the United States of Europe. And the hope was that the use of a common, of a monetary union would ultimately lead to a political union. So there have been these institutional constraints, they’ve been recognized right from the start. You know, Randy has written about this since the mid-1990s, so has Yom Kreigel [ph??] and other colleagues of Randy’s, I’ve written about it since early 2000, Bill’s written about it as well. So there is an awareness, but there was a political restriction that I think kept it going. And, you know, the question often then arises, Well, why didn’t they just keep it as a narrow bloc, why did they create these problems by allowing countries like Italy and Portugal to come in in the first place, and that’s a much longer story, but basically you’ve got three Germanies: You’ve got the Germany of the Bundesbank, you’ve got the Germany represented by people like Helmut Kohl who believe that you want to bind Germany within a broader Europe within these European structures and to make it as wide as possible, so there was a political impetus from him, and then you have Germany number three, industrial Germany, the Germany of BMW, Siemens, you know, and the like, and they rather like the idea of keeping countries like Italy and Spain in there as well, because they thought, Wow, we can lock them in at these exchange rates, they won’t be able to competitively devalue against us, and so it will help to sustain our competitiveness. So there were a lot of unique political circumstances that drove this, and there was also the problem that you had a country like Belgium, which is essentially part of, in many respects, you’ve got the Benelux countries—Belgium, Luxembourg, and the Netherlands. The Netherlands and Luxembourg fulfilled the original Maastricht criteria. Belgium didn’t; I think Belgium had one of the worst debt-to-GDP ratios, it was over a hundred percent, but you couldn’t really well have a Eurozone where you allowed the Netherlands and Luxembourg to come in but you didn’t allow Belgium to come in, and once Belgium was allowed it, then the Italians were going to put up their hands and say, Well, if they’re going to be let in then we should be let in, and likewise with Spain and Portugal. So it became politically unsustainable to pick and choose. Although if you ask the Germans, I think, hand over heart, they would have preferred a much narrower core Eurozone and it would have been much probably much more workable,, although ultimately you would still have the same problems but it’s deferred the moment of reckoning, that’s been the main issue.

A: [00:53:31] [male] I’m glad you asked that question because I actually jotted down a little note, something that we probably should talk about, which is that, see, the Euro is still a tax-driven currency, so it fits that part of the story, it’s tax-driven. The problem is that we don’t have the fiscal authority to issue that currency, we have individual nation-states, so these are much more like U.S. states, so sometimes I’ll get the question, people ask, Well, hold it a second, it sounds like there’s nothing backing up the Euro according to our scheme, and why is it so strong then? Well, it’s a *tax-driven currency*, okay, you have to pay your taxes in Euros, and it actually doesn’t *matter*, it’s sort of a bizarre situation, it doesn’t matter whether the governments default on their debts, the Euro can remain strong. Greece can go down, and, who knows, the Euro might go up. People will be glad Greece has defaulted and is now kicked out of the union so the Euro could be a very strong currency even while all of the member nations deteriorate and collapse.

[00:54:43] [female] Thank you.

[00:54:50] [male] Okay, we have a question.

Q: [00:54:55] [male] Here’s my question. It’s about the operational necessity for having treasury bonds. Because my understanding is that treasuries are used in order to target a Fed funds rate, that you need the treasuries in order to keep the interest rate at a certain level. My question about this is that if you prefer using monetary policy over fiscal policy as a driver of government action, don’t you need a constant flow of treasury securities in order to keep on the run securities constantly coming in order to keep a liquid market in that vehicle.

A: [00:54:44] [male] Let me bypass the question this way: If the Fed wanted a 2 percent Fed funds target, it could just trade Fed funds. It could say I’m two bid two offered; banks, do whatever you want all day, we’ll add it up at the end. So, you know, from that point of view, that would be sufficient to target interest rates.

Q: [00:56:02] [male] But that’s a political nonstarter, they’d never be able to get away with that, they wouldn’t do that. From a political perspective, that would never fly.

[00:56:11] [male] Right. I’m just saying, from an operational perspective, all the Fed has to do is set the overnight rate in terms of a bid and an offer, which is what they do in Canada and Australia, where they have a [corridor??] which does that. But from an operational point of view, you don’t need treasuries for that. Now, based on the way we’ve got our institutional structure, where the Fed has to use a repo market where they’re doing overnight loans back and forth where they’re required to use treasury securities as collateral, then you’re correct in that sense, but again, that’s a self-imposed constraint, and what we saw after the middle of ’08 was they started expanding that collateral base because using treasury securities was ineffective, and so you saw them overcome this self-imposed constraint through a variety of things, always missing the point that all they really had to do was trade in Fed funds, and you’re right, politically they never got there.

A: [00:57:08] [male; Bill??] Just two points on that. In ’90–’96 we elected in Australia a conservative government [inaudible...to tell on that I think], and for the next ten out of eleven years they ran surpluses increasing, and they sold it to the public as rail bridges started to crumble, public education started to crumble, hospital waiting lists started to increase, they sold it to the public as getting the debt monkey off their backs, and because they were now obviously retiring debt as it became due, and by 2001 the bond markets were so thin that there was a huge outcry. Now who did the outcry come from? Well, it came from the Sydney futures exchange at the beginning, and all of the other traders that were using the government debt as what I call corporate welfare, basically as a guaranteed annuity in which they could price their risk off, and this led to the government having an official inquiry—remember that one?—they had an official inquiry onto what the size of the bond market should be, and they were blithely running surpluses all the time, and they agreed, they caved into the pressure particularly from the Sydney futures exchange, they caved into the pressure and announced that they would continue to issue debt at an agreed amount, they came up with an agreed amount of millions per quarter, even though they were running surpluses, they continued to issue debt. I thought that was a really [inaudible].

[00:59:01] [male] We put a paper—

[00:59:02] [Bill??] Yes, that was the Connaught [ph??] government inquiry into the optimal level of debt when you’re running a surplus.

[00:59:10] [male] Yeah, that was a good paper if anybody wants to see it.

A: [00:59:12] [Bill??] You can download it off my research center off [CofFEE’s?? inaudible] website, go back to 2002, December 2002, and you’ll see all of the documents and all of the special pleading from the top end of town on why the government had to issue debt even though they were running surpluses, despite two facts. One is that at the same time the recipients of the corporate welfare were leading the charge to deregulate the welfare state for the workers and deregulate the wage system and get rid of social security, and secondly, despite the fact that the top end of town were the ones that were leading the myths about the onerous debt burdens the deficits they used to run were causing. The second brief story is it’s very interesting now with Basel 3 about to emerge which will change some of the rules relating to the quality of assets having to be held by banks under the capital adequacy regulations, the banks are starting now to suggest that the deficits aren’t going to be high enough to produce enough debt for them to satisfy their requirements, and they’re starting to pressure the Basel process to allow commercial paper to count as high-quality assets in the capital-adequacy calculations. I think that’s very ironic. [laughter]

A: [01:00:45] [male] Plus the idea that you need international bank standards makes no sense. You set your own.

Q: [01:00:57] [male] My name is Jeff Baum [ph??]. I’m actually an investment manager, so I come from a bit of an operational side. I kind of get the general idea of what you’re saying here, and it’s all very new to me, so I’m trying to get my head around it, but it sounds like basically you’re saying that the government, or, in my mind, the Fed, can create currency, therefore they can spend as much as they need to—I get that. There’s an inflation consequence because of this, but I haven’t heard too much about what that consequence can lead to. There’s obviously some sort of distributional question, and I guess that’s the *political* question, I haven’t heard that addressed, I don’t know if you guys do that or if that’s for the politicians, but then it just changes the question from But we can’t afford this to What are we going to spend it on, and maybe there *is* a big question there, as Randall was saying, that once the voters figure that out it turns into a big political fight. I don’t know if you guys heard, there’s some quote somewhere that says democracy can only last until the voters realize they can vote to the purse strings of the treasury. So I guess my question is, Do you have any kind of summary about how this turns into a political question, and what are the distributional consequences of that?

A: [01:02:20] [male] I’m sure several people will comment, but I think that what the public needs to understand is if you’re saying you want the government to do this, you want the government to spend on this, that means we’re going to devote real resources to this. Do you really want the government to devote our nation’s capacity to supply you with this, and if you do, then democracy wins and we do it. But you got to realize that means less resources here, okay, so to get it out of the deficit hysteria, the affordability, and so on, it’s a *real* issue. Do we want to devote an ever-rising share of our nation’s output to be put to taking care of aged people? Put it that way, and let the population vote on it. They might vote yes, they might vote no . . . okay? That’s democracy.

A: [01:03:19] [male] Two points I’ll make. One is that if we get the debate along the lines that you’ve suggested, then we’ve effectively won the argument, because we’ve always said ultimately it’s a political argument. You know, I’ve had exchanges with people and I’ve written on blogs and often get these debates, and it ultimately comes down to saying, Look, you are making a political argument. You and I might happen to disagree on the best ways that the government can use the money here, but that’s okay, I respect that, this is a pluralistic society and we can have differences of views, but let’s at least get past the operational issue. And the other point I would make is that even the notion of affordability, it’s applied in a very, very selective way, as I’m sure you’ve noticed. I mean, when we declare war, we don’t sort of say, Well, we’re running a budget surplus and can we afford to go to war, we just do it. Or we don’t say, Well, we’re going to buy this aircraft carrier, so we’d better check with our bankers in China as to whether we can afford it or give them a line item and see if they want to red-line anything. Nobody actually ever does that, but that’s the logic of their position, if you follow it through to the conclusion. But somehow when we get onto a subject like health care or Medicare or Social Security, it’s like, Oh, well, affordability becomes an issue, so I think it’s more a reflection on our skewed value system than anything else, actually.

[01:04:55] [female] Just one point on the distributional issue, one of the things that you hear a lot about now is the growing size of the national debt and the growing interest burden, and we really need to make that a distributional topic, because it goes directly to this argument that we’re passing this on to the next generation and the generation after that, becomes a generational argument, which it absolutely is *not*, okay? *All* of the interest payments will be made by the people who are alive at the time the interest payments come due, and what we’re talking about is a *shift* of income from those paying taxes to those receiving payments because they’re bondholders. And so the bigger the share of the interest, relative to the size of the economy, the bigger the command of the goods and services the bondholders can wield against the rest of us. And so that becomes a discussion that we definitely would want to have.

[01:05:51] [male] Thank you very much [inaudible] time for a break and we’ll come back here in fifteen minutes [inaudible] and we’re going to be talking a lot about the debt and deficit and grandchildren. And so thank you very much [applause]

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audio available here

SESSION 3, Warren Mosler

[00:00:00] I take my business cards out here, and these are twenty dollars apiece if anybody wants to buy any. Nope. Any takers? Nope. All right, if anybody wants to stay after and help clean up the carpet and tidy up the room, I'm going to pay one per hour. All right, well, five per hour. One per hour, anybody want to stay and help? Ok, not a lot of takers. Then I add one more thing, look, there's only one way out of here, and there's a man at the door with a nine-millimeter machine gun [laughter], ok, and you can't get out of here without five of my cards. [laughter] Ok, now things have changed. I've now turned litter into money, now you will buy these, you will work for these things if you want to get out. The man at the door is the tax man, and that's the function of taxes. Stephanie talked about how taxes do it. But you can recreate that.

[00:00:58] [some problems with the computer, some crosstalk]

[00:01:15] We wanted to replicate a currency for the students to understand national income accounting and how a currency works, and that it doesn't matter if you're a small open economy, and what they did is you need something like twenty buckaroos a semester to be able to get your grades in the economics classes. And the way you earn buckaroos is you can do public service, community service, at some of the local institutions, whether it's a hospital or the police department or helping out locally. And they pay one per hour. And so back ten, fifteen years ago, whenever these were started, they were worth - and they were freely exchangeable. So you would have to go earn your buckaroos, you'd have to get, you'd have to have twenty of them to pay your taxes, your buckaroo tax. But you didn't have to earn them; you could buy them from other students, you could do work for them, nobody really cared what you did for them, you just had to somehow get buckaroos to turn in. Just like you have to pay your taxes here, whatever you do to get your money. [sound of coins dropping in a pile]

[00:02:17] So the students would go to work and they'd earn these things, and at the end of the year, the first year, I did the accounting at the post-Keynesian conference for the buckaroos. And it went something like this: the total tax was 1000 buckaroos across the classes. The students came and earned 1100 buckaroos, and they paid 1000 for taxes. The school ran a deficit. They spent 1100 but they only collected 1000. Did that affect their credit rating with the rating agencies or anything? Of course not.

[00:02:53] Now notice the school's deficit, they spent [inaudible] [crosstalk having to do with audio?]

[00:03:15] The value went from five dollars apiece to fifteen dollars. The school has an infinite amount of them. Does that mean the school is infinitely wealthy? No. Was the school collecting them from these students to get the buckaroos to be able to pay them? No. It had a zero interest rate policy; it did not pay interest on these excess hundred buckaroos that were out there. Did that cause hyperinflation? No, the currency gained in value, it appreciated, it didn't go down in value.

[00:03:43] So none of that, and do we see that happening in the real world? Sure, we've had Japan with a zero interest rate policy for twenty years, it's been one of the strongest currencies in the world, with the lowest interest rates.

[00:03:54] Again, if the school needed to pay out, anticipate paying buckaroos out next year or the year after, should they start trying to run a surplus, collect more than they spend, so they'd have them to give out later? There is no such thing as accumulating a reserve in your own currency when there's a floating exchange rate like that. Could they even run a surplus? On day one they couldn't; how are they supposed to collect more than they spent? They gotta spend them first and then collect them.

[00:04:21] And if you look closely at the Federal Reserve, at how the accounts clear, that happens with our government. You guys who are in the markets, you know that on the days when we buy Treasury securities, when we're paying for those 44 billion dollars in notes that were just sold, in the old days anyway - now we have excess reserves - but two years ago the Fed would have to come in and buy securities the same day that it's selling them, because it has to do repos to add the money so we can buy them back.

[00:04:49] Ok. The p-word. There are three ways to spend with a gold standard: tax-financed, debt-financed, and money-financed, which was called "printing money". Tax-financed was easy: you'd tax and then you'd spend; debt-financed, you'd sell bonds and then you'd spend; and the last way was printing money. And that's where the term "printing money" comes from. It has no application whatsoever with today's currency arrangements, but it's still used and it still has the same connotations.

[00:05:18] The reason they used to debt-finance was because if the government just spent by printing money and didn't sell bonds to get that money back, that was convertible currency: you could get gold from the Treasury, you could cash it in. And that - so they were always at the risk of running out of reserves and going broke and that type of thing. So any government deficit spending had to be - and that's why the laws, rules Randy was talking about that are left over from the gold standard include the requirement that the Treasury borrow money before it spends.

[00:05:51] Inapplicable with today's currency arrangements. We're still on the gold standard thinking. What's the evidence? Why did the Democrats cut Medicare? Why did the Democrats raise taxes? Why did the Democrats visit China? I'm using Democrats for, I can't remember the word, emphasis. That's not that hard a word to remember, is it? [laughter] They tell me it gets worse, I just turned 60 last year. I'm using Democrats for emphasis, okay, not - I happen to be running as part of the Democratic party. Why did the Democrats form the bipartisan committee to report back on ways to reduce the deficit? Why did the Democrats put Social Security and Medicare on the table? Why are we here, right? Gold standard thinking: they think the government has run out of money. It's not because they're worried about inflation, although they are, they might be. They think that government is spending now, limited by how much it can borrow from the likes of China, leaving that debt to our children to pay back. We've all heard this many many times. We've seen our, President Obama, Secretary of State Clinton, Treasury Secretary Geithner over in China to negotiate with our bankers, to make sure everything's okay, because they believe we're dependent on them to fund everything from Afghanistan to health care.

[00:07:14] How does a non-convertible currency work? Well, we've already gone through this. Anybody need a repeat on turning litter into money?

[00:07:28] In the first instance, what is the purpose of a currency? And what - I'll just not go into the history, we've already heard that, but even with my example, with my cards, why was I doing that? It's because I wanted to get the carpet clean. I wanted to get resources from the private sector to the public sector, I wanted to provision the public sector. Why does the University of Missouri put this buckaroo tax on, why do they, what's the point of that currency? It's to provision the public sector.

[00:07:57] There are a lot of ways that - there are ways this has been done in the past. One is through a command economy where you just conquer somebody, take the slaves, and they do the work for you to provision the public sector. You used to wake up with a lump on your head and you'd be in the British navy; that was a popular way to provision the public sector. We pretend to be more civilized today with our monetary economy, where we impose a tax, with a man at the door with a 9 mm to enforce it, and then show you what you have to do to earn the money to pay the tax. And that's how we provision our public sector.

[00:08:33] Unemployment fundamentals. Unemployment is people looking for paid work. Taxes create unemployment. None of you were looking for paid work for my business cards when you came in the room. None of you were looking for paid work, work that paid in my business cards, until there was a guy at the door who won't let you out without five cards. The first thing that happened by requiring that tax is you all became unemployed, as we define it. People looking for work who couldn't find it, who need to get paid in that particular currency. The students were not unemployed until the school imposed a tax on them in buckaroos. Suddenly they needed, they were all now willing and able to work to get buckaroos to be able to pay the tax. In the first instance the point of taxes is to create unemployment.

[00:09:23] We take people out of the private sector, we get their time out of the private sector with taxes. Government spending then employs those we just unemployed. The whole point of unemploying you with my cards in the first example was to be able to then employ you to get the carpet cleaned when we left, otherwise why am I doing this? I didn't tax you because I needed my money. The whole point of getting the students unemployed with the buckaroos was to get student labor to help out in the hospital. They didn't do it for the currency. The whole point of taxing to create unemployment is to then use those people in the public sector. If we're going to tax, and then not hire all of them and leave 20 million people looking for paid work who can't find it, and because of our monetary system can't support themselves, and we're destroying our entire social fabric, why are we doing this? We should lower the taxes. You're going to do a certain amount of work for me based on how many cards you need to pay in taxes. If I don't want all that work I just cut the tax, and you'll go away. You're not going to be here beyond what you need to pay the tax and to net save. You're going to lose a few in the wash, the parents are going to take some home as souvenirs. Unemployment is the evidence that the budget deficit is too small, that the government has not spent enough to cover the demand to pay its own tax, plus any residual savings demand that comes from that tax liability. Unemployment can always be eliminated with a fiscal adjustment. You either cut the tax and the people go away, or go ahead and hire them to do what you wanted them to do, which is the reason you started the tax to begin with.

[00:11:00] Save the questions for later.

[00:11:04] Monetary operations. The federal government neither has nor doesn't have dollars. Government spending: how do they do it? Just like Chairman Bernanke said, they just mark up the numbers in our bank account. It doesn't come from anywhere; it doesn't use anything up. Government taxing: they simply mark down numbers in our bank accounts. They don't get anything; they don't pile anything up.

[00:11:34] Deficit spending: that means the guy in Treasury has changed more numbers up than the guy at the IRS has changed numbers down. There's a difference between the two, and it's called the deficit. We can call it whatever we want. The national debt is that difference from the beginning of time, 13 trillion dollars. [sound of coins clinking]

[00:11:52] Everybody says, you know what you forgot? You forgot about inflation; you forgot about what can happen if you overspend. So I just want, I don't want anybody to say that, so I'm doing this. They're going to say it anyway. [laughter] There are some reporters in this room; they're going to say this, but, look, my conscience is clear, I threw the slide up. [inaudible] [laughter]

[00:12:16] Now after the government spends, they don't just throw it out the window, they could, then it would be in cash, but what they normally do is put it in a checking account at the Federal Reserve. It's called a reserve account because it's the Federal Reserve Bank. (All right, I'm doing the second one first.) Reserve accounts are checking accounts at the Federal Reserve Bank. They call them reserve accounts, the Federal Reserve Bank, they give it a fancy name and then when people say, well, our reserve balances went up, they sound professional, but all - they're just checking accounts.

[00:12:44] The national debt - okay and there's another kind of account at this central bank, at the Federal Reserve Bank, called Treasury securities. They're savings accounts. That's already been covered, I'll just leave it at that. You give them money; you get it back with interest; that's called a savings account.

[00:13:01] Cash is the exact same information as your checking account but it's written on a piece of paper, so instead of getting your balance on a computer screen or bank statement, you get to carry it around with you; it is a bank statement. Cash is just a bank statement. It says a hundred dollars; it's the same thing, it's a thing you can use to make payments to the government for taxes.

[00:13:21] Once the government has spent, that money appears in one of those three forms. So if the government spends without taxing, just spends, that's called deficit spending, say on day one the government just spends a hundred dollars, it's going to be one of three places. It's going to be cash in circulation, or in your checking account, or in your savings account, somebody's savings account.

[00:13:46] There's no other choice: the dollar has no other existence, other than those three places. And all of this equals the world's net savings of dollar financial assets. There are thirteen trillion dollars or so in the savings accounts and checking accounts and cash equal to the penny to the cumulative deficit spending. That's how much the government has spent and stuck into those accounts, but hasn't yet taxed and taken out of those accounts. Spending puts the money into the accounts; taxing takes it out. If you put it in and don't take it out, it's a deficit; it's our savings; it's held by you, me, China, whoever owns Treasury securities.

[00:14:25] A little diagram to explain it here: to see how it works, just to make it graphic, that I did a long time ago. It appears in Randy's book Understanding Modern Money. Up at the top, you have (I'll do it from here so I have the microphone I guess). In the middle you have the non-government sectors; that's all of us, everybody except the government. Now let's start at the bottom: the government imposes a tax. We have to pay this tax or we can't get out of the room; we're going to lose our house and our car. When I say tax, just think of a property tax, because that's easy. If you start thinking of an income tax, what if you work, what if you don't work, it works, but you'll lose track of the rest of what I'm saying. Trust me, it does work, but think of it as a head tax or a property tax, just to keep it simple.

[00:15:13] So the government levies a tax, and now we need the money to pay the tax. Notice I have taxes going out - down into the drain. I don't circulate them back. There is no such thing. We ship real goods and services to the government - the government's doing this because it wants to provision itself - and the government gives us the money we need to pay the tax. Goods and services to the government, money to pay the tax, some gets paid in taxes, some gets saved. Where does it go? It goes to the tin shed in Canberra - the warehouse over on the right. In Australia, it's this tin shed; over here we've got a big concrete building. And that's how it's held: it's held in one of those three forms: cash, reserves, or Treasury securities. All that Fed operations do is shuffle around the difference between cash reserves and Treasury securities. When the Fed buys securities from the private sector their securities go down and their cash reserves go up. When the public wants more cash the reserves [sic] go down and the cash goes up. The total is always the same; it's always equal to the deficit.

[00:16:22] The only place that net financial assets can come from is government deficit spending. This is all accounting; no theory, no philosophy; ask anybody at the CBO, and they'll say, yeah, that has to add up to the penny, or we have to stay late and find our arithmetic mistake. So last year the government spent a trillion and a half dollars more than it taxed, that money went into the warehouse, it's now held as Treasury securities, reserves, or cash, otherwise known as savings, and sure enough last year savings went up by exactly that amount, to the penny, when you include all the non-government sectors. Deficit spending adds to our savings. I think I just said that.

[00:17:02] Now, we're going to walk through an example that's going to take intense concentration here, so are you ready? Okay, we're going to assume you're the only person in the economy - we're going to personalize this - and you happen to have a hundred dollars in your checking account, and the government wants to deficit-spend a hundred dollars to hire you as a consultant. Washington hires a lot of consultants, so I figured this is as good a thing as any of what deficit spending is - what money's spent on.

[00:17:30] First thing they do is they offer for sale - we can start in anywhere, but I'm going to start with them offering a Treasury security - they offer you a hundred dollars worth of Treasury securities, and you say okay, I'll buy it. Because you buy it at auction, you get to choose your interest rate, and the highest bidder gets it - the lowest bidder gets it, the highest - lowest yield, highest price. So you say yeah, I like that yield on that Treasury security, I'm going to buy it. So you just took your hundred dollars out of your checking account, it goes into your savings account, called a Treasury security. Have you lost anything? Has the government taken away your money? No. I've never heard anyone say, ah, I wish the government would pay off these Treasury securities so I could get my money back, and I don't think anybody else has either. They are money; in fact it's better than money, or you wouldn't have bought it; it's voluntary.

[00:18:14] So now you still have your hundred dollars, it's just in a savings account instead of a checking account. Now the government "has the money", in their mindset, to pay you your consulting fees. So you go in and you give them some advice, and they pay you a hundred dollars, and they put it in your checking account. You now have the new Treasury security, and you've got the hundred dollars back in your checking account, and nothing is crowded out. It has nothing to do with loans, deposits, banking, anything; it's just a self-contained thing. It has no effect on any other part of the private sector. And if you remember my previous example, the government spent more than it taxed, you held it in a warehouse, and you held it in a the form of a savings account: you had a checking account; now you have a checking account and a savings account.

[00:19:01] Government deficits add to savings, to the penny. The deficit clock could be renamed the savings clock. This has already been covered - the same thing.

[00:19:13] Fiscal sustainability review. Spending is not constrained by revenues. Spending is changing numbers up; putting numbers into our checking accounts. Taxing is changing numbers down, taking numbers out of our checking accounts. Borrowing is moving numbers from our checking account to our savings account. There is no numerical limit to any of this. Paying interest is changing the number up in our savings account. The government can always make any payment of dollars it wants to make. This is all we're talking about; it's a nominal system; we're talking about there are no nominal constraints.

[00:19:52] The risk is inflation, and not insolvency or not-solvency; there's no solvency risk.

[00:19:58] There are self-imposed constraints on this process. There's a budget process, which tells the guy at Treasury, you can't spend whatever you want, you can only spend what's been approved. There are debt ceilings; there are no-overdraft rules; there are all these silly things left over from the gold standard, when it mattered, because back then, if they didn't do it right, people could cash the money in and take the gold supply, which would be a default situation.

[00:20:23] So now we can get to the main thing, to why we're here: is Social Security broken? Well, we have to define what broken is: first, what's the public purpose? What's the presumed problem; what is the real problem?

[00:20:40] Public purpose of Social Security: well why do we do this? To provision seniors at a level that makes us proud to be Americans.

[00:20:50] What's the problem with Social Security? Are seniors taking their Social Security money and flying in private jets to the Super Bowl and staying in the box seats? No. [laughter] If the problem is that they're living at too high a standard of living, I can understand that. If the problem is, look, we're feeding our seniors and that food, we really need it for the soldiers in Iraq, or in Afghanistan, and so we're going to lose the war if we don't starve our seniors, I can understand that. We're producing 8000 calories per person per day; there's no reason to limit the intake of our seniors. We have a housing problem, which is vacant homes in record numbers; there's no reason to have them out on the streets. So what happens if we provision them too low; well then they're eating out of garbage cans and we really don't like those images on European TV where suddenly they think they're better than we are - and Australian TV. [laughter] So the idea is, the public purpose is to provision our seniors at some minimum level, or some level, which I'll call a minimum, at a minimum that makes us proud to be Americans, and not at some level that's too low where we're embarrassed or a level that's too high so it's embarrassing.

[00:21:58] Collective provision versus individual provision: our seniors are not happy when they have to tap their children for money, no matter how much money they have; it doesn't make them feel good, and it doesn't make us feel good. And it makes us all feel better to know that - and it gives the seniors a feeling of independence to be getting the money from the government collectively, and then spending it, even though they know it's coming from us - it's taking, it's consumption that we are forgoing for them to consume, whether you want to look at it in real terms or in nominal terms. It's certainly not the actual money, we know that, but it is still a shift in provisioning, and it allows - I believe - I like collective provisioning versus individual provisioning. I just think it's a much better way to do things. You might disagree; that's fine. That's a political choice. So what is the presumed problem? Are they living too well, which is what I was just talking about? Are the opportunity costs too high, that is, are they using resources we need? And the answer to those are no.

[00:22:58] Is the trust fund a limiting factor? Absolutely not. The trust fund is a record of what we've done. Every time we tax and the man at IRS changes down the number - at FI - wherever the guy is, I don't even know where that guy is - but whenever he changes down the number on our checking account, he changes the number up on the Social Security trust fund - why? Because those two balance and then he knows, okay, this went up a hundred, this went down a hundred and ten, wait a minute, we've made a mistake, oh no, this is a hundred, hundred and - okay, we're in balance, I found my mistake, I can go home. When somebody changes the numbers up in our checking account to make a Social Security payment they change the number down in the Social Security trust fund. Now they have something to balance against. Now we also have a formula for paying out benefits, and that trust fund helps us with the formula a little bit, because we have individual records. But it's not "the money". The government never has or doesn't have "the money"; there isn't any such thing; those are not dollars. "Accounting" means a count; it's record-keeping, it's a record, it's not a constraining factor. If it goes negative, it goes negative; a light doesn't go on and - you know - something breaks open and Bill gets drowned in the flood.

[00:24:04] The real problem, which has already been discussed - but I'll just tell it my way for a second - if there is a real problem, is the dependency ratio. That's the ratio of workers to retirees, is the real problem, not the money. If, in thirty years, we've got three hundred million people retired and one guy left working, that guy's going to be really busy. [laughter] Doing all the laundry, growing all the food, manufacturing all the Poligrip for us to keep our teeth in. And so, what do they say, and the mainstream economists agreeing, they say, therefore, we've got to make sure everybody's going to have enough money to pay this guy, but, uh uh, that's not going to matter.

[00:24:47] Mainstream economists also agree that the only real thing that will be useful fifty years from now is knowledge and education. We can build cars now and put them away for fifty years, but that doesn't work. There's hardly anything that we can build now, actually physically, plant and equipment, that's going to be of any value fifty or a hundred years from now. The one thing that we have, that people left us from fifty or a hundred years ago, is our technology, our know-how, our software, and that type of thing. It's not the hardware. However, because we think it's a money problem, we think the problem is these guys are all going to need a lot of money, because look at how high the prices for laundry services are going to be when there's only one guy doing it for three hundred million people, we need to cut back and sacrifice today and run surpluses and tax more than we spend, put twenty percent of our people out of work, and, ironically, the very first thing we cut is the only thing that they would agree they're going to need, which is education.

[00:25:42] More on Social Security: the trust fund is record-keeping. Social Security contributions are regressive taxes that function to reduce take-home pay and aggregate demand. Why is a Democratic administration supporting a tax that taxes those people at the lowest income levels the most? It's not even a fair tax, it's completely regressive. Why are they doing that? They're not trying to do that, it's not their agenda. They believe we've run out of money.

[00:26:15] Social Security payments are progressive distributions that add to take-home pay and aggregate demand. Why are they cutting these? Why did they just cut 500 billion out of Medicare? Not because they think we shouldn't have it, or because they think there's something wrong with a progressive distribution to help aggregate demand. Because they think we've run out of money. Why are they contributing to the unemployment problem? Who is unemployed? We just grew at 5% for a quarter, at six percent, maybe another five percent this quarter. That's very high real growth. Well, who's getting all that real wealth? It's sure not the people who've been losing their jobs or seeing real wages fall. It's not the lower income group. Well then, who is it? It's somebody else.

[00:26:56] We've seen a Democratic, populist administration preside over the largest upward transfer of real wealth from low-income to high-income people in the history of the world. That is not what they were elected to do, and not what they intended to do. It's because they don't understand the monetary system and monetary operations. It's not even theory. They don't understand actual operations.

[00:27:18] Oh - [laughter] - sorry, I forgot about inflation. [laughter] To get out of a hole, first you have to stop digging it, as they say, or you can't fall out of a ditch. Yes, when you buy everything that's for sale and use up all the excess capacity, the excess demand can drive up prices. And you can even drive them up a little bit in the meantime. But you do get supply-side considerations as volume goes up, prices per unit volume come down, you gain efficiencies. So it's not clear that you're going to get all that much, but certainly inflation can be an issue. It's certainly not the case now. Right now if you look at core CPI the risk is deflation, not inflation. If you look at housing prices I don't see a lot of inflation risk in that market. Will you suddenly gap from today's prices to hyperinflation because somebody spent an extra dollar? Of course not. That's not how it works.

[00:28:11] If you look at the worst financial collapses in the last twenty years, let's look at Mexico in approximately 1995, I forget the dates. The peso was three-to-one, something like that, three and a half to one, absolute collapse, the currency up in smoke, no faith in government, no faith in everything, and it went to nine. They had about a sixty percent drop. It didn't drop to zero, the peso didn't go to a million-to-one. Russia totally collapsed. The ruble machine was shut down. Everybody turned out the lights, pulled out the plug, and left the central bank for six months. The ruble went from 645 to 28, a seventy-five percent drop. It didn't hyper-inflate, or do anything like Zimbabwe, or Germany, which Marshall explained, which were entirely different situations. So even in situations far more extreme than anything we can imagine, which were fixed-exchange-rate regimes blowing up, which we don't have, you don't get sudden jumps in inflation; there just is no such thing.

[00:29:10] What happens if Social Security checks get too high? What happens if we are overpaying? How would we know? Well, unemployment would get too low with all the spending, whatever that means. The economy would grow too fast, whatever that means. Seniors would be living too high. Prices would start going up. Then what happens?

[00:29:30] Well, then the option to raise taxes or cut benefits might make sense. Right now, it doesn't make any sense. It only makes sense if you think we're running out of money because we're running a deficit. And that we're...I've got to race on; I've got to get to China. Not because the government doesn't have the money, but because spending no longer makes sense. It's a political choice.

[00:29:52] Why are Social Security cutbacks on the table? Only one reason: Our leaders don't understand the monetary system. They don't know spending is not constrained by revenues. They think that to spend what we don't tax we have to borrow from the likes of China for our grandchildren to pay back. It's all a tragic mistake of epic proportions.

[00:30:17] Let's talk about China for a minute, before I get to the Eurozone. How does China get their dollars? They don't start out with any dollars. They sell some things at Wal-Mart and K-Mart and Target and our department stores, and they get paid, and the money goes into their checking account at the Fed. Technically that's part of the national debt now; we now owe China that money. What do we owe them? We owe them a bank statement that shows how much they have there in their checking account. Then our debt management people take over, at Treasury, and they auction off Treasury securities, and China buys Treasury securities. And what does the Fed do? They move the money from China's checking account to China's savings account at the Fed. And now we owe China all that money with all that interest, and how are we ever going to pay them back?

[00:31:02] How are we going to pay back the whole thirteen trillion in those savings accounts? Just like we do every week, when tens of billions come due. We transfer that balance, plus interest, back to the checking accounts at the Fed - debt paid back. They have three choices with what they can do with that checking account: leave it alone, put it back in a savings account, or spend it.

[00:31:22] Well, what if they spend it? Then they go buy something from -- I don't know, euros from Deutschebank or something -- and then we transfer the dollars from their account to Deutschebank's account. And the European Central Bank transfers euros from Deutschebank's account to China's account. All these other countries are doing the same thing.

[00:31:42] So, what is the problem? What are we leaving to our children and grandchildren? They're just going to need one account, just like we need, to just debit and credit these funds. The whole thing could be done on one spreadsheet. You could run that whole part of the Fed with about a hundred thousand dollar a year budget if you wanted to. There's nothing to it.

[00:31:59] People say, "Well, what happens if China dumps all their dollars and the dollar goes down? What are we ever going to do?" At the same time, those same people are saying, "We need China to revalue, their currency's undervalued by 50%." On the one hand, they want us to revalue their currency up, which means have the dollar go down by 50%; on the other hand, they're panicked over what might happen if the dollar goes down 50%. Guys, you can't have it both ways, figure out what you want. I don't have time to get into it, but it's not a problem either way. It doesn't--

[00:32:27] [crosstalk about time remaining]

[00:32:39] What's wrong with the Eurozone? The UK, the US, and Japan are not the next Greece. We've talked about this. I'll just review a bit quickly. Greece is not the issuer of the euro; Greece has to have money in its account or its checks will bounce. It's the same with all the other member Euro nations. The Euro nations are revenue-dependent, like the US states, businesses, and households.

[00:33:04] Think about the US, the United States in the last two years. If we'd had all the states, but we didn't have the US Treasury; if we'd had the Federal Reserve Bank, but we didn't have the US Treasury to run a deficit. When the Treasury ran a deficit of $1.5 trillion last year, all that money went to the states and the people in the states. That wouldn't have happened. Instead, the slowdown and the collapse would have forced up the deficits of the state governments, because they would have been making the unemployment payments and they would have been losing the revenues.

[00:33:30] Could they have sustained that kind of deficit spending without collapsing? California's ready to collapse, and their deficit's only some...only 5% of GDP, or maybe a little less, depending on how you measure. No way.

[00:33:46] That's what's happened in Europe. They've put themselves in this situation. They've been in true Ponzi. Ponzi is when you have to pay somebody back from getting the funds from the next person. The US government, Japan -- Japan with 200% debt-to-GDP -- is not in Ponzi. They don't pay people by getting the money from somebody else. They don't get the yen from somebody else. They just change the numbers up, like we do. That is not Ponzi. Ponzi is when you have to get it from somebody else.

[00:34:10] Europe has put themselves in Ponzi from day one, and we've been pointing it out from day one. Now Ponzi works on the way up. Madoff went a long time before he collapsed, and so did Stanford. It's on the way down where it all comes apart. We're seeing the back end of this coming apart. And we're seeing the dilemma that they dealt with, at the beginning, when they set this thing up, and that was: How do you balance the idea that you don't want moral hazard risk for all your individual members? If the central bank would guarantee all their debt, they'd have no debt problems, they'd have no problem. However, then it would become a race to the bottom. Whoever deficit spends the most wins, whoever inflates the most wins. It would be an instant recipe for immediate hyper-inflation. So you have to have some kind of constraints.

[00:34:59] So they had two constraints. They had the growth and stability pact, which said you could only run 3% deficits, which at the time we said, and they knew, was unenforceable -- because you enforce it with fines. And that's just unenforceable, because if you're allowed to run any deficit you want and you get fined, you just run a larger deficit and you pay the fine. It doesn't make any sense at all. And the other thing they did was they left the nations as financially independent, like the US states. That made them market forces [unclear, possibly "to enforce it"]. But again, market forces don't come in right away. It's only when things are on the way down.

[00:35:29] On the way up, they were okay. As soon as things started turning down with a venegeance, like they did this time, suddenly the game's up and they've got some serious problems. Now they've got answers. They can just have their banking system loan to these-- buy all the government debt, and not haircut... allow banks to buy all they want, just pass a rule that says banks can buy all they want. But then they've got their moral hazard issue. Now they're back to whoever deficit spends the most wins.
[00:35:55] [crosstalk about time remaining]

[00:36:03] Ok, the shoes left to fall. They don't have credible bank deposit insurance. If Greece goes down and people realize they're going to lose their fifty thousand euros in their bank account, the rest of Europe can be a big problem. They're already having runs on the banks. It gets a lot worse. It shuts the whole payment system down. There's no credit-worthy government to act counter-cyclically.

[00:36:24] Thank you very much. I'll turn it over to questions. I do have a proposal for the Eurozone, which I'll save for question-and-answer, if anybody wants to hear it. That way I'm not using up my time.

[00:36:30] [applause]

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audio available here

[00:36:40] [crosstalk]

Q: [00:36:58] [unintelligible] When you describe the moral hazard in the Eurozone, would your description then be different if there were [unintelligible] political superstructure [unintelligible]?

A: [Warren Mosler] If the deficit spending was done at the new fiscal authority, call it the European Parliament, then you don't have the race to the bottom. It's when you split things up, it makes them compete with each other. For example, if you have federal pollution control laws you don't have a race to the bottom, but if you have state pollution control laws then the state that allows the most pollution gets the most business. So yeah, that [unintelligible] would take care of it.

Q: [00:37:30] [Joe Bongiovanni, Kettle Pond Institute] When you floated your proposal on your blog about the European central bank paying out a trillion dollars, I asked you the question, "Is anybody going to issue any debt to do that?" And eventually you answered me back and said, "No, there would be no debt issued." Am I right about that?

A: [00:37:52] [Mosler] It's just a payment. It's not a loan, it's a payment.

Q: [00:37:57] [Bongiovanni] So, does that hold true for deficit spending by us, then? That is to say, our central bank, when we're going to deficit spend, can they also just make the payment without issuing any debt?

A: [00:38:10] [Mosler] What I'm saying is, if the federal government pays you money, it can either pay you money or loan it to you. If it pays it to you, you have no debt. If it lends it to you, you have a debt. So when the European central bank pays... makes a per capita distribution of a trillion euro [to] the member nations, it's not added to their debt, they don't owe it back to the European central bank. When the Federal Reserve makes a payment, it goes into someone's checking account. We can call that a debt, if we-- it's how you define which account that money is in. We don't count that as--

A: [00:38:50] [Stephanie Kelton] It's like helping our state governments.

A: [Mosler] Right, right. But if the Federal Reserve makes a payment to anybody, whether it's a payment to the state of Connecticut or a payment that goes out and buys a box of pencils, it goes into somebody's checking account. It goes into a reserve account at the Fed, through your member bank. We don't call that "debt." It's only when we move the money from the checking account to the savings account that we call it "debt." So, what's called "debt" at the Federal level I would not call it "debt." I never would have called it "debt" from the beginning. It used to be called "debt" because we owed the gold that were in reserves. Once the gold was gone, it's no longer debt, it's payment in kind. It's just a store of nominal wealth for the other guy. It's not a debt. The European central bank hasn't started on a gold standard, so they don't automatically call something debt that isn't debt, so they don't have the problem of creating debt when they spend. It's a little bit of a technical answer, but the answer is that a payment from the European central bank is not booked as debt anywhere, because the never have booked it as debt. We book it as debt because we have a gold standard tradition that caused us to book it as debt. It's both-- they're all the same thing.

Q: [00:40:06] Question for Warren Mosler: since I'm a foul-mouthed leftist blogger, I'm going to frame this as polemically as I can. Speaking to the question of the Tragic Mistake theory, is there a reason to choose the theory of the Tragic Mistake, as opposed to a theory that this is a deliberate act of policy that's meant to cause as many people as possible to suffer and die? How would I choose one theory as opposed to the other?

A: [00:40:38] [Mosler] I forget the saying, but it's better to presume innocence than to-- how does that go? You know, my book up there that I've got, called "The Seven Deadly Innocent Frauds," it's John Kenneth Galbraith's last book. "The Economics of Innocent Fraud," and he said it more eloquently than I did, but it's the idea that when you presume innocence, you're making a much stronger statement than imputed guilt.

Q: [00:41:08] You would have evidence to back this up?

A: [Mosler] Which?

Q: Why should we presume innocence, based on the record of the last thirty years or so?

A: [00:41:21] [Mosler] Only as a point of logic, that you're better off presuming innocence. As part of the argument, As a rhetorical tactic, you presume innocence. Presuming innocence is a far superior rhetorical technique. Especially if it's something that's really simple to understand, because then you're really throwing the onus on the other guy: "You're either a complete idiot, or you're subversive, which is it?"

A: [00:42:08] [Mitchell] Someone asked me at lunchtime whether the European leaders knew about options to solve their current issue, and I said to them that if you read the documents, and the debates going back to the Delors papers, and then subsequently, you will be left with the unambiguous impression that they know all the options. Most recently, the German Finance Minister was interviewed and it was in German, I couldn't find it in English. I was going to try to put it in the English version, but it was in German, but fine.

[00:42:56] And what he said in the interview was that when they framed the common currency system, they had a choice. And they had a choice to add elements that would have made the current crisis much less a crisis. And those elements were a system to deal with asymmetric shocks, in other words, a fiscal redistribution system; and also, as Warren said, a single fiscal authority. And he said that that was debated, and if you go back to the original debates you see the debate there. And they chose, as an explicit choice, to exclude those characteristics from the system, the very characteristics that would have made the current crisis significantly less severe. They chose explicitly to exclude them from the system.

[00:44:02] And as soon as the common currency came in, Germany then introduced their so-called Hartz reforms. And these were reforms that-- because previous to that, they were able to maintain their export competitiveness through exchange rate movements. Once they lost that capacity because of the common currency, they had to work out another way to stay one up on the other countries, and so they brought in the significant deflationary measures in their labor market: casualized significant sections of their labor market, reduced workers' real wages and conditions, the whole Hartz agenda. And these were all very explicit choices and decisions they made within the context of the institutional system they were setting up. They knew the alternatives. And they knew that once the crisis hit, then the weaker countries - in a trade sense - would melt down, as they are. So, I'm not so sure I agree with Warren in emphasis. I think that they--

A: [Mosler] It's rhetoric, though, just rhetoric.

A: [00:45:09] [Mitchell] I understand the rhetoric. I think that I prefer to say that they aren't innocent. They took an ideological decision. They were scared to death. There's a cultural animosity within Europe stemming back to the Latin and the Germanic cultures. The second World War's had an incredible influence on the way they've structured the evolution of the European community, and now the EMU, and the ideology surrounding all of that led them ... The Germans dominate, they don't trust the Italians and the Spanish, and particularly the Greeks. And they set up a system that would punish those countries in the event of a crisis, and they deliberately did it, and they know the options. They know all of the options that could reduce the pain, but they don't want to do it.

A: [00:43:04] [Mosler] There have been statements out of Greece that they owe us these loans for war reparations. I've got my book here that I brought some copies of, which you can download for free at moslereconomics.com, or you can buy for $10. Shameless promotion here.

Q: [00:46:20] [Bob Hahl, Kilowatt Cards] You said that, and it's pretty clear, that raising taxes reduces demand for goods and services, but it also seems to reduce other kinds of things like greed, or power, unbalanced power - very rich people have enormous influence. I think back to the situation after World War II when the upper tax rate was 90%, and people always talk about that as if there were a lot of people paying 90% marginal rates, and I don't think very many, if anyone, ever did. I don't think anyone made that much money. What happened was, faced with a choice, if you're an employer, of taking money out of your company and giving 90% of it to the government, or distributing some of it to the workers instead, and getting something for it, that that was a better choice. And so I can understand the idea of lowering taxes, but at the same time you're also unbalancing society, and you're letting people accumulate so much money and we don't know what kind of crazy thing they're going to do with it.

How do you control that? We don't let people keep bazookas and land mines to protect themselves, but we're letting people get rich enough to compete with countries.

A: [00:47:40] [Mosler] Second amendment. No, those are all very legitimate political decisions. Those are political decisions. Those are the consequences of policy, but it doesn't mean the government's going to run out of money.

Q: [00:48:02] How does that jive with the notion that tax rates should be used to regulate aggregate demand?

A: [Mosler] We didn't say tax rates--

Q: Ok, taxes. The tax code has been used to redistribute income, and in my opinion, right now it has been hijacked to favor upper-income households. Now we have huge income inequality in this country, so again, how does that jive with this notion of--

A: [00:48:39] [Mosler] There's a bigger problem with that, because what also tends to happen is people wind up with the same after-tax money, so when you raise tax rates, and let's say wages stay the same, tax rates go up, and government stays the same size, that means the higher incomes go high enough to adjust for the taxes. So after the Clinton years, you see, "Oh gee, look, we collected an extra trillion in taxes because of the higher rates." Yeah, but those people earned an extra $5 trillion in income. So, it's a moving target as well. There's a lot of intuition, I guess we called it, and illusion as to what's going on, when you dig down into it. Everything government does has distributive consequences, and those should be the first and foremost political decisions, not whether we've run out of money or not, or whether we're going to borrow from China.

[00:49:29] What these myths have done is taken our eye off the ball of what I would consider are the important decisions. I did a paper with Randy and James Galbraith, we gave it to the GAO, [unintelligible] unsustainability, and we said, "Look, the problem is 100% of your time, money and effort is going into figuring out government solvency, and none of it's going into the inflation problem. So what you've got is 100% of your resources going into the thing that doesn't exist, and nothing going into the thing that could actually be a problem." And that's indicative of what's going on at all levels of government, because they don't understand the monetary system.

Q: [00:50:08] But this is more than hyperinflation, more than just political, we are talking economic. Income inequality is an economic issue that is challenging .. It's one of the biggest challenges to our democracy.

A: [Mosler] What I'm saying is it's not getting the attention it deserves because they're worried things that shouldn't be getting any attention. We're not going to get attention to those issues until we get rid of the things that are taking all of our attention, like China, and the budget deficit. If we stop thinking about those, we'd have time in Congress to talk about something else.

A: [00:50:39] [Randall Wray] I want to add a couple of things. So, we're arguing taxes drive money, taxes don't pay for government spending. So that's the fundamental point. And then the question is, "What kind of taxes?" And Warren said the head tax is actually the best thing to drive currency from inception. But once we--

A: [Mosler] I said it's the easiest thing to understand.

A: [Wray] But once we've got a monetary economy, we can use an income tax, we can have an inheritance tax, and so on. So then the question is, "What other things can taxes do?" And so yes, we use taxes to punish certain kinds of behavior, and then we can use tax breaks to encourage other kinds of behavior. We could use inheritance taxes to try to prevent accumulation of dynasties of wealth. We could try to use taxes to address income inequality. One word that you said that I don't like is "redistribution" because we can always raise the income of people at the bottom, without taking from income at the top. The reason is because we don't really take income and give it, because taxes don't pay for the government spending. We can always have as much welfare as we want without taxing the rich at all.

[00:51:56] Then just the final point I would make, I'll just state it as a claim, and I think that you said this: in fact, taxes never reduced income at the top. It does not work. They have too much political power. They get the exceptions written into the tax laws. So you never achieve the 50% tax rates on the rich. So we should think about a different way to prevent income inequality, I don't think the tax system will work. Prevent the income in the first place, that's the best way to do it.

Q: [00:52:30] I would like to thank you for this explanation about the European Union, and I have a question. Many things are a matter of politics, and I had... the journalists got a very clear understanding of that yesterday, when there were questions about Greece and how to solve that. There was a clear separation that the President is not going into financial issues, there are so many other things that are coming up, and that are to be discussed with the American Congress, that he said it was not his venue, and my thinking is that at the time the decision was taken that some things were excluded. It was some time ago. The people who are right now deciding about things may have not heard about that, like they were busy doing other things in Europe, like there was solidarity in power and then the President was then part of the movement. So my thinking is if there is a [unintelligible] of information, and knowledge that can change things, what I see here, there are actually people who could be in power to introduce some new things, new solutions, but they are not available. And because there is so much going on--

[00:53:52] What I'm trying to say is that there should be a stronger voice of these statements that I hear here, just like out there. That may be the case, there are people who could make use of that, and it's just not available. And I'm used to that as a journalist, because it's our job to connect certain niches of the society. It might be even the case, right now [unintelligible] that much, but there was this opposition between Germany and Russia, there was this German influence at the beginning of the forming of the European Union. It may changed right now, and it may be time to try a little... I'm not trying to tell you what to do, but I'm trying to say what you represent may be really appreciated at the very levels, only you know there is a way how to get it out there. There may some kind of lack of information.

A: [00:54:59] [Marshall Auerback] I'll just say, well, you're a journalist, you can write a story about this. That's the short answer. The second point, in regard to the American context, is that there have been voices out there. In fact, I would say that virtually everyone on this panel has been amongst those voices. I've been reading Bill's stuff many years, I've been reading Randy's stuff, been aware of the stuff from the Levy Institute for at least the last twelve years, and they have been voices in the wilderness, they have been marginalized. The people that are Obama's main economic advisors right now are the architects of the crisis in the 1990s - Larry Summers, the Bob Rubin-ites - they're all in power. The argument at the time was, "This is a financial crisis, and we need experts who are familiar with the markets to deal with this." And my response has always been, "Well, look, if I go to a doctor, and he botches up my surgery by amputating the wrong arm, I'm not going to go back to him just because he has greater familiarity with my body." But that seems to be the general consensus, the way things operate.

[00:56:10] In regard to the question on Europe, some of us have been writing about this. I've been writing about this. Bill's written a lot about this. Rob Parenteau has written a lot about this. And we've been going to London, and to many places in Europe over the last several months. I've been talking about the epicenter of financial instability gravitating from the US towards the European Union because of this euro problem that Warren described so well. And for a while, people couldn't understand why I had this obsession with this stupid argument, but to me it's very interesting, because even though we'd like to think about Europe as somewhat a more social democratic paradise than the US is, in fact, it's neoliberalsim's last stand. I think the most extreme ideological tenets of neoliberalism are now embodied in the Maastricht Treaty, the stability pact, and if this thing blows up, as I think it might be, this will be the classic over-reach moment, and I think this could be the area [era??] where all of sudden people are going to say "Well, some people did actually obviously diagnose this." I remember Warren last summer saying, "There's a solvency problem in Germany" and most people saying, "Germany? Are you kidding? That's absolutely insane."

[00:57:20] But as this thing begins to metastasize a lot more, I think people are going to say, "What is it that caused this problem, and who is it that actually diagnosed rhis correctly?" So I think in that regard, what's happening in Europe is very, very significant, maybe in some respects even more significant as to what's hapening in the US.

Q: [00:57:44] [Roger Erickson] I want to get back to the question that was raised by the person that was behind me, "How do we protect our systems against these kinds of disconnects?" And actually, if you go outside the narrow field of economics, there is very rich literature on this very question. If you look at the field of ecology, systems theory, anthropology, many others, and all the way up to military operations, there are literally thousands of tomes and books and theories, mathematical models, physics models written about this, and what ties them all together is system stability. So eventually, as people are saying, we'll wake up and we'll realize that things are going south. The general response about how you protect it is, the simple answer is, that in any complex system, what keeps system stability is eventually interaction, and the knowledge throughput, the data shared throughout the system.

[00:58:42] So the simple mantra that comes out of this is "Interaction drives awareness." Until we have more crosstalk among these different professions, our electorate and our elected officials are not going to have a general consensus on it. [00:58:55]

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audio available here

[00:00:05] Ok, hopefully I’m not going to have any video problems here, or technical problems, so I’m doing the bit that you’ve all been waiting to ask, because we get it all the time: Will the US turn into a modern day Weimar Germany or Zimbabwe? First of all I want to acknowledge that there’s been some excellent work done on this by one of my colleagues Rob Parenteau. We’ve written a lot of stuff together and I know he’d want to be here today, but he wrote a piece on Weimar and he writes 'The Richebächer Letter' (www.richebacher.com). He wrote a very good piece on Weimar which first started to make a very good historical comparison. So I’m indebted to him, and as far as Zimbabwe goes Bill Mitchell has done, well Bill always does very very good work, but he did a particularly good piece on Zimbabwe, 'Zimbabwe for Hyperventilators,' so like Minsky who said he was standing on the shoulders of giants when he talked about Keynes, I say the same thing about Rob and Bill and Randy and all the other people on this panel so I’m the hack by comparison.

[00:01:19] So will the US turn into a modern day Weimar Germany? So let’s start, I know some of this is stuff we’ve gone through it before but I’m going to start with a few operational points that been already made, to show that we’re not the only ones making it. I’ve got quotes here from an economist called Abba Lerner, he is often known as the father of functional finance. He was a Keynesian, I think it’s fair to say that he’s one of the progenitors or forbearers of modern monetary theory.

[00:01:48] So his comment, and it is as Warren gave you an illustration of it before he said the modern state can make anything it chooses generally acceptable as money. It is true that a simple declaration, as Warren showed you, that such-and-such money will not do, even if backed by the most convincing constitutional evidence of the state’s absolute sovereignty. But if the state is willing to accept the proposed money in payment of taxes and other obligations to itself, the trick is done.

[00:02:17] (technical glitch)

[00:02:27] The other point, we talked about the purpose of taxes, we said they serve to regulate aggregate demand, not to raise money so that government can afford to spend. And again, the other idea that I think was a very important insight by Lerner is that he said that the central ideas of government fiscal policy is spending and its taxing, its borrowing, its repayments of loans, its issuance of new money, etc.etc. should be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrines of what is sound or unsound. So we look at the impact of policy, the effects of policy. That’s ultimately what we’re looking at. We’re not particularly interested in some vague notion of a debt to GDP ratio which is considered unsustainable or the general concept of fiscal unsustainability.

[00:03:19] the constraint as we’ve said is inflation. It’s not fiscal largesse or fiscal profligacy per se. And I often do this with Lynn Paramour and I would say What sort of visual cues do you have. I often do this at a conference. Here’s two pieces of paper. This is one with a picture of a dead president on it, and this is one is just a piece of paper, this one they tell you is worth a dollar and this one is probably worth about three cents. Now I tell people that if I told you tomorrow that this piece of paper could be used as something with which you could pay your taxes I suspect it would be worth a lot more to you than the three cents whatever it is that you use to pay your taxes.

[00:04:02] When we talk about this being backed by the full faith and credit of the US government what we’re really saying is the US government guarantees that you can use these pictures of dead presidents, which aren’t backed by anything, there’s no gold nugget, it’s not rimmed by platinum or any precious metal. You can use this basically to pay your taxes and that’s what confers the value.

[00:04:26] Ok let’s go into the history lesson. So when we look at Weimar... let’s take a step back. When we talk about these operational realities that I’ve mentioned earlier invariably, I mean I can tell you 9 times out of 10, ah, you look at the Huffington Post blog yesterday you could, we get comments saying, Well you're just going to get hyper inflate, your going to turn this country into a modern day Weimar Germany. So I’ve heard this so many times, and so did Rob, that we decided to actually look at the history. Clearly, Weimar Germany came into existence after WWI, a very damaging war, hugely more damaging in many respects than WWII. The country's productive capacity was absolutely shattered, and more importantly virtually the entire world was really pissed off with Germany and as a result the war reparations claims that they imposed on the country were extremely punitive.

[00:05:23] And many people at the time, such as Keynes, for example, realized that this imposed a tremendously harsh economic consequences on Germany and that the imposition itself was going to be impossible to be repaid. As I say here in 1919 it was reported that the German budget deficit was equal to half GDP. Half GDP. And what are we talking about in the US today? We’re talking about 8% of GDP I think it may have peaked at 10% and that’s including TARP, so let’s get a sense of perspective here.

[00:05:55] By 1921 in Germany, war reparation payments equaled one third of got spending. One third. So I think that is an important consideration to look at and I think more importantly is that the payments were demanded in a foreign currency. They weren’t being demanded in Deutsche Marks. They were being demanded in, the governments demanded huge gold reparations.

[00:06:25] Now by contrast as I said in the US you’ve got a fiscal deficit this year, I think it’s projected at, I think the latest out of the CBO is about eight and a half per cent of GDP, assuming that GDP is what everyone thinks it will be.

[00:06:37] So the scale of the fiscal responses, although large, are nothing like they were in Weimar Germany. So there is a big difference right there. Weimar Germany then didn’t have the gold so they had to aggressively sell their own currency, buy the foreign currency in the form of the financial markets. You keep doing that over, and over again, it drives down the value of your own currency, which causes the prices of goods to go over higher, and that starts the inflationary process. As I said earlier the US does not do this. The US gets to use debt in its own free floating non-convertible currency. You can’t exchange the dollar into anything, much as some people would like that. So there’s no external constraint along the same lines as Weimar Germany.

[00:07:21] Now I’ve also made this point here about German trade union membership. I am not, let me repeat, I am not making the point that unionization is a bad thing, that unionization causes inflation, and that we shouldn’t have unionization, in fact I think if we had more unions in this country, and stronger unions it would actually be better. My point really here is that you had a very, very significantly larger union membership in Weimar Germany than you do in the US, and they had considerably more political power than in the US. You had a social democratic government which was by and large it was very ideologically sympathetic to unions, but more importantly, and this is the point that Bill Mitchell made earlier, unions were able to negotiate cost of living adjustments in their wage packages after the mark fell in 1929. so this creates this automatic feedback mechanism for price inflation to wage hikes and it keeps going on and on and on.

[00:08:15]. If you build these cost of living adjustments into the wage contracts, of course you can feed the inflation almost automatically. We don’t have that in the US. Absent such mechanisms in the US, or any country for that matter, nominal wage and salary growth can’t keep up with consumer prices, so ultimately the impact if you don’t do that is deflationary. If the price of oil and food and everything else starts going up in the US and your wage packages are not indexed to that in any particular way, your purchasing powers ultimately are going to go down, so you have to defer consumption expenditure in other areas to meet the cost to buy these essentials. As I say, that’s potentially deflationary, not hyperinflationary.

[00:08:56] Now the US as I say here does display some social democratic rhetoric, but as Warren has already pointed out, this administration, despite being an ostensibly progressive Democratic administration, has presided over one of the most regressive wealth transfers in history. It’s amazing to me that it’s happened, and it's been allowed to happen. But that’s the reality and it could have been worse if we’d allowed some of these abominable programs like PPIP to go ahead, which fortunately we didn’t do.

[00:09:27] So what finally broke down Weimar Germany, the straw that broke the camels back was by May 1921, the so-called London Ultimatum. The Germans were asked to make an annual installment in payments of 2 billion in gold or foreign currency, in addition to a claim on just over a quarter of the value of German exports.

[00:09:50] So an extremely punitive measure, it was a condition virtually impossible to fulfill. The Germans attempted to fulfill it. They accumulated foreign exchange by paying with treasury bills and commercial debts denominated in marks, but the mark simply went into freefall. So they finally said, "You know, we can’t pay up anymore." You are seeing a small parallel to, with that today in Greece, its not to the same degree but obviously its... the positions are reversed, it’s the Germans imposing conditions on the Greeks, saying "You know you have to pay X" even though the Greeks don’t have the money, so they’re trying to get blood out of a stone. But we don’t clearly have hyperinflation in Greece, but it is an interesting parallel.

[00:10:33] So the response to that was that the French and Belgium troops occupied the Ruhr to secure reparation payments. The problem was that the Ruhr was one of the industrial powerhouse regions of Germany, and they employed about a quarter of their workforce in that area, and they exported a huge amount from that area. Effectively you take away their... the largest chunk of their manufacturing capacity is eliminated to begin with, then you occupy a chunk of the country which has a huge portion of what’s left of manufacturing capacity, and then you say, "Now pay us the money." And you can see why a central bank printing money in that situation, or creating currency in that situation, is not going to be able to do so, won’t be able to call forth goods and services. And you do create the conditions for inflation, and then hyperinflation. So again, it’s a very different situation from what we have today in the US.

[00:11:32] Now the modern day example everyone likes to go with: Zimbabwe. Zimbabwe as you well know had a civil war, even before Mugabe took over. It was a long-lasting civil war, that lasted through the sixties and seventies, low intensity guerilla warfare, but ultimately became much more serious to the point where ultimately there was an accord brokered by the British government. In 1980 President Mugabe became the new leader of the country in a coalition government. But by that point, a large chunk again of the country's productive capacity had been destroyed, even before the onset of the land reform.

[00:12:15] Now this just gives you an illustration. There was some recovery, Zimbabwe, as you can see, did all right after Mugabe first came in. You had reasonably high growth, 11% in 1980, and it was positive throughout most of the decade of the 1980’s until a severe drought in the early 1990s which created great damage. But again there was a recovery from that. So even though we had some problem with productive capacity the economy was growing. So what was it that ultimately caused the problems in Zimbabwe? Well you have the legacy of colonialism. I used to have a girlfriend in Zimbabwe many moons back when I was at university and I remember visiting the country in 1982 and I thought, "God life is hell for these white farmers." because they lived in these absolutely gorgeous palatial mansions, they had loads of staff working for them, there wasn’t apartheid as such but you had a very very cushy lifestyle. And 250,000 whites basically controlled over 70% of the most productive agriculture in the country, a nation of six million people, so that’s clearly a socially unsustainable situation.

[00:13:29] There were many attempts by the government to coax the white farmers into giving up a little then in order to make for a more equitable situation later and there was no give. As an aside, I think we talk a lot about income inequality in this country and to me, if its not something that’s addressed in a decent amount of time, you do get a huge socially unsustainable situation which will beget an even more extreme political response later. So I think it is in that regard the situation of what’s happened in Zimbabwe in terms of the misguided reforms that were subsequently introduced, it’s a legacy of the fact that we didn’t deal with the problem of inequality much earlier in that country.

[00:14:22] So what happens, Mugabe begins his land reform program. It’s a misguided land reform program. He seizes land from the whites, gives it to, mostly he gives it to his cronies in the ZANU party. Unfortunately many of them don’t have farming expertise and, not surprisingly, agricultural production in the country absolutely collapses; it collapses by almost 50%. The country then finds it is in a situation if in order to avoid mass starvation it has to use valuable foreign exchange reserves in order to import imported food. That creates an additional problem. You don’t have foreign exchange to pay for raw materials, so manufacturing capacity absolutely collapses and the end result is that you have about 80% unemployment. But here’s the statistics. I got this again from Bill Mitchell, output fell by 29%... manufacturing output fell by 29% in 2005, 18% in 2006, 28% in 2007. It’s worse than what you had in Latvia over the last few years, again, though self-inflicted.

[00:15:34] So you have no foreign currency to buy raw materials, the Bank of Zimbabwe uses foreign reserves to import food, and as Bill has pointed at on his blog, the land reform destroys domestic food production, foreign exchange is used to buy food to prevent starvation because, I guess, even as cruel as that government was, Mr. Mugabe didn’t think that it would be a good idea to allow mass starvation in order to bring supply and demand back together again. So you have no funds left to import raw materials, manufacturing output collapses, you have 80% unemployment.

[00:16:09] The government in the meantime uses, well, Mr. and Mrs. Mugabe use the foreign exchange reserves for their personal shopping expeditions to London and in general the government uses the foreign exchange reserves, what’s left of them, to increase net spending without ______ productive capacity. So it’s effective use is as a personal piggy bank. The same thing happened for example in the Philippines when the Marcos family was in power. You just basically steal what’s left in the piggy bank and use it for your own good.

[00:16:39] It’s a totally dysfunctional situation you have there. Obviously, again you could argue that this country does suffer from some political dysfunction, but I think we would agree that, at least not yet, it’s not quite as bad as Zimbabwe. And again the analogy is the wrong one.

[00:17:12] There are other examples of this. The loss of taxing authority during the civil war by the Confederacy is another example of a situation where a government's inability to impose a tax ultimately did create hyperinflationary conditions.

[00:17:25] So political dysfunction and the inability to tax is an extremely important means of safeguarding the value of a currency. But in general as I said, despite what you might hear from the propagandists on the right, left, center, almost from everyone, there is no valid basis of comparison between the US and Weimar Germany or Zimbabwe.

[00:17:45] Any bad government can wreck an economy if it wants to, that’s quite evident. A sensible government using fiscal, the path of fiscal capacity provided by a fiat monetary currency system can always generate full employment and yet sustain price stability. Now I know we’re going to be talking about this later, but one of the things I’d like to talk about briefly is productive capacity.

[00:18:12] We talk about calling forth productive capacity and, as a few people have mentioned earlier, the most effective means of calling forth productive capacity is by ensuring that you have a productive labor force. And one of the means by which you insure that you have a productive labor force is by establishing a government job guarantee program, which I think will be discussed at greater length later. The point is that if you have a government that has shovel-ready labor, ready to be piled back into the private sector when private sector demand arises, not only is this good social policy but it actually means that you do create non-inflationary conditions because it means you are effectively retaining productive capacity, which can be used.

[00:19:03] If you have long-term unemployed, the social pathologies build up and you actually... these types of workers lose their productivity. So in fact even though you might have significant output gaps via unemployment, if you have long term unemployment it does create, it can potentially create difficulties if you don’t have these people in a position where they can actually call something back, bring something back into the economy as a whole. So I think that’s an important conclusion to draw as well.

[00:19:31] The other point I would make, which also comes up a lot in these discussions, Warren and I have had these discussions with people and they talk about Greece, Portugal and they talk about the US spending money and they say, "You know, eventually you’re going to default on your debt." And we've both probed them on this question. We say, "What do you mean by default? Do you mean that the US is somehow going to, social security checks are going to start bouncing, or that we’re not going to make a payment to a bond holder?"

[00:20:01] They go, "No, no what we mean by that is that the currency is going to fall so much that you’re going to get huge amounts of inflation and therefore that is tantamount to insolvency." We’ve had this debate, with let’s see, with Caroline Baum at Bloomberg, we’ve had this Martin Wolf at the Financial Times, and Charles Goodheart has even said the same thing. He’s a former member of the monetary policy committee the Bank of England. The only point I’ve made to these people is that if you buy a credit default swap in a country like the US or Germany, or any country in fact, you don’t get paid out if they run a rate of inflation. It’d be nice, I mean I’d love to, I’d buy credit-default swaps in every single country that I could find, actually, because anytime they run an inflation, any rate of inflation I can get paid. But clearly that’s not the way that we define default. So again, misleading terminology, misleading hints, are all examples. You can always call people on that and I think we should do so much more aggressively in the future.

[00:20:57] So that’s my presentation. Thank you very much.

[00:21:00] Applause

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audio available here

[begin Q&A for SESSION 4]

NEW VOICE: male [00:21:49] Can you hear me? The reason I went to Rome in 1993, I was open to the idea that governments don’t default because, in their own currency, because all they’re doing is spending first and then collecting later. The securities function for interest rate maintenance to fund the debt. And a paper came out of that called Soft Currency Economics, and afterward I ran into Randy and Bill and ??Catalina?? and then they all started looking up the history of these ideas. And so it’s interesting they came up with ideas first and then found the history afterwards. Which is not necessarily normally the way things work. We then discovered Lerner, we discovered Knapp, we discovered ??Innis??

Now we’ve discovered somebody last week, ??Brumel??, is that his name? From 1946 the Reserve president in New York. ?? [00:22:43] the same thing we’ve been saying about quantitative easing. You notice things, we see how they work, then we go back in history and find reasonably prominent people who’ve said the same thing. Secretary of the Treasury, ??Menninger?? from the Confederacy said the same thing about how currency worked and explained that’s how he was going to set it up. So what happens is I think historians who don’t know how the currency works don’t find these things because they’re not looking for them. We find you have to have enough knowledge when you’re looking at something about circumstances to be able to recognize them as any kind of value. What’s that thing that was found back, the ball with the holes in it from some four thousand years ago, which ??Zabau?? said was a means of accounting. It was a clay ball with holes in it where pebbles would fit in. and I’m saying no those were used for money because you would, what you do is you have the clay ball and the stone would fit in when you took it out and spent it that would be the thing you’d accept for taxes. You knew it was the same stone when it fit into that clay ball.

[00:23:43] That’s a monetary mechanism. All the record books show that this thing was an accounting mechanism to keep track of things, stones. I think history is going to more and more find the things we’re talking about.

NEW VOICE: male [00:23:59] I think the point about Marshall’s talk is very clear and easy to understand in terms of the public debate now and a simple way of saying it. Not to say that Marshall wasn’t exquisite in his oratory [laughter] but the simple way of saying it, if you take an economy, you trash about 60 or 70% of its productive capacity then any spending will start to generate inflation. And if you wanted to avoid hyperinflation in Zimbabwe then you would have had to have had mass deaths of the population from starvation. Private investment would have had to come to virtually a sudden halt, because you lost all that supply side. Whenever anyone raises at your dinner parties about Zimbabwe. It had nothing to do with demand.

[00:25:07] It was a supply issue. They trashed their supply. And the last, I know in the US you’re doing a pretty good job of trashing your supply at the moment, running down the capacity of your work force and your industrial structure, but you haven’t done it yet and the companies are still out there, there are still workers that will work for them if there’s a demand for the products and all you need to do is get the production, your supply side working again. In Zimbabwe they lost it. It was non existent. About 60-70% was lost. That’s why they had hyperinflation.

NEW VOICE [00:25:50] I’ll add something on the Confederacy because it helps to drive home points we’ve made in every one of these sessions. Yeah, the Secretary of the Treasury was trying to tell the government, look we need the taxes to support the currency, because taxes drive the currency. But the government was saying hold on we’re already putting such a huge burden on our population because they’ve got to fight the war and we’re taking all the resources away from them for the war effort and we don’t want to burden them also with the taxes. Ok, but see, , our point is you’ve got to have the taxes in order to match the resources that you’re withdrawing. Ok it’s in real terms. You’ve got to reduce the demand with the tax system and you also have to have a reason why people will accept the currency. And so people would not accept the currency and that is why they had to just continually print out more and more and more. [00:26:44]

NEW VOICE female[00:26:53] On the point of hyperinflation, so that I think the key components here are a supply shock, a tax collection fall out, but also I think you have to have a ratchet that you could have something that fuels additional expenditure and in most cases that you observe around the world that have hyperinflation, what was the initial inflationary shock was fueled by some sort of indexation, whether it was of wages or prices. And I think that falling off of the tax base will do that too, but you could fuel it artificially as opposed to what we were saying earlier that you have to let inflation dissipate by one mechanism or another through the economy.

NEW VOICE: male [00:27:43] Ok Edward Harrison here and I have two questions that are unrelated. The first question I have has to do with indexation of retirement benefits. That is social security and things of that nature. If, you had mentioned that we don’t have a very strong labor movement in the United States but there is an increasing number of retirees, and social security is it effectively indexed to the inflation rate? So how does that play into the situation?

NEW VOICE: male [00:28:24] Just quickly, if it causes a shortage of real resources because the seniors are getting all the food or getting all the housing, and there’s not enough left for anyone else it’s a real problem that has to be addressed. It’s not there yet, but that’s certainly a possibility. That we could over-provision a sector of the population and have to make adjustments.

NEW VOICE: male [00:28:44] I agree, it could be inflationary in the future. Indexing wages passes through a lot more quickly because wages are a cost. And so as wages go up, prices have to go up. Ok, but with social security, yeah it’s once we get to full employment and high level of aggregate demand, could be the case twenty years from now when we have, well most of the people in this room are going to be retired and on social security.

Q: [NEW VOICE: male] [00:29:20] The second unrelated question I had had to do with what happens - the hyperinflation scenarios. Now, in terms of a country that issues its debt - has a sovereign currency - we were talking about the outcomes as being inflation or currency depreciation. Now a lot of people talk about a third outcome, which is interest rates increasing, and my question on this is to the degree that the central bank really could go into the market and buy up any sort of securities that it wanted to, obviously that is - that would control interest rates. However, aren't interest rates a question in regards to currency depreciation - imported inflation via currency depreciation?
[30:12] So, just to sort of just make it more plain what I'm saying is, if the currency goes down, the price of oil and other imported goods goes up, that creates inflation and as a result of that inflation, and also the currency depreciation, you would normally expect interest rates to rise.

A: [30:31] [Mosler] Interest rates are set politically by the Federal Reserve. So unless they - that's part of the reaction function, they're not going to go up. So you have the Bank of Japan set rates at zero for twenty years.

Q: [30:41] Then, you know, they set the short-term rate but the long term rate is effectively the imputed Federal Reserve [crosstalk] funds rate going forward.

A: [30:51] [Mosler] Right, right. But let me suggest they also can set the long rate if they want to [crosstalk]

Q: [30:55] That's what I just said [crosstalk] in terms of going in and doing so, but that's an ideological political decision.

A: [31:03] [Mosler] Right. [crosstalk] They say Fed funds are going to stay at zero for ten years and then a ten-year will be at zero.

Q: [31:07] Right. So I personally, I find that that sort of intervention not something I would support, and I guarantee you that lots of other people wouldn't support that either. So I think that that's a political problem. The concept of the Federal Reserve going out the yield curve and then setting rates.

A: [31:26] [Mosler] Okay, and the Treasury does the opposite when it issues long [??] it's setting rates higher than otherwise, so either way the government is setting long-term rates, now the - either by default or by active policy, or lack of it.

[31:39] The other thing is, and I'm going to venture off into theory here, we've been in operational fact, but I see a lot of reason to believe that those zero rates are actually deflationary, not inflationary. Because again, Japan has a very strong currency after all these years and so you look for the channels where zero rates would be deflationary rather than inflationary. One is on the supply side because the cost of inventory is very low, so you don't get the kind of bottlenecks, and it keeps the cost of production and new investment down by having a zero rate policy, so you have positive supply side effects . On the demand side it takes much - the - all the nations are net savers, and the larger the budget deficit, the larger the net savers, so lower rates reduce income directly. And the other thing that tends to happen is bank net interest margins tend to grow as rates go down, which transfers income from savers with some reasonably high marginal propensity to consume to banks that have zero propensity to consume and reduces interest income. So through the interest income channels there seems to be - I have a lot of reason to think that zero interest rates are actually deflationary.

[32:47] If you look at currencies that have zero interest rates, such as the UMKC buckaroos, and my cards that I tell you you have to have to get out the door, paying interest on buckaroos is not going to increase the value from fifteen dollars to twenty dollars. We know where the value comes from. It comes from the monopolists setting price. And the currency is a public monopoly, and at the end of the day the value of the currency is what you have to do to get it from the monopolist, from the government. So in other words the price level is necessarily a function of the prices paid by the government when it spends, at the point of spending, and spending policies have a whole lot more to do with the price level than anything else.

[33:26] There are two ways for monopolists to spend, one is at market prices and the other is on a price constrained basis. An example of that would be if you have the electric monopoly for the city of Washington. You could say, okay, it's ten cents a kilowatt and let supply adjust, or you could say we're going to sell two billion kilowatts at the market, and let the market determine price. A monopolist always sets price and lets quantity adjust. With a currency monopoly we do the opposite. We set the budget and let the price adjust, well of course it's going to be chaotic like it is, but we have the ability to set price and let quantity adjust. In other words just be on the bid side of the market and not pay the offered side. And that's where Bill's JG and Randy's ELR [??] comes in, where in a market economy you only need to set one price, in this case it's the price of unskilled labor, and we can get into that later, I think it's [inaudible] -

[34:17] [audio cuts out??]

Q: [34:18] [inaudible]

A: [34:22] [??] Well if I keep talking I'll stay awake, so [laughter]. It's just a couple of points I'd make and Ed[??] - your first premise is disputable. It's the premise that's always wheeled out, but it's not necessarily inevitable. First of all, a depreciation in the currency is not inflation. It's a once-off price adjustment, inasmuch as import prices are weighted in your CPI or whatever your measure of inflation is, it's just a once-off. For that to become inflationary there has to be some secondary effects where the participants in the real income distribution don't agree to share the real income loss.

Q: [35:16] [inaudible]

A: [35:17] [??] Yeah. So depreciation isn't inflation; that's a myth. That's a myth that's commonly put out there

Q: [35:26] [inaudible] doesn't that almost naturally mean [crosstalk]

A: [35:32] [??] It doesn't naturally do anything.

Q: [35:35] All the resources, that is, the price of oil, as an example, the price of natural gas

A: [35:39] [??] It - it -there's a real income loss to the economy.

A: [35:42] [Mosler] That's a one-time shift.

A: [35:44] [??] It's a one-time real income loss.

A: [35:46] [Mosler] [inaudible] the definition of inflation.

A: [35:48] [??] Yeah. That's the first point, but the second point is that

Q [35:52] [inaudible] you're talking about the difference between permanent [inaudible] versus a one-time - you would have inflation as measured by price levels.

A: [36:08] [??] No, a once-off adjustment in the price level is not inflation. That's the myth. Inflation is a continuous increase in the price level. So you can have adjustments in Australia in July 2000, we brought in a ten percent GST, a value-added tax [crosstalk]

Q: [36:29] [inaudible] argue definitions but the reality is -

A: [36:30] [??] No, I'm arguing the reality. All that happened in Australia when we put a ten percent impost - hold on - all that happened was for two quarters the measured CPI jumped up and then it just - that was it.

Q: [36:45] That's exactly what I'm saying.

A: [36:47] [??] Once off adjustment. [crosstalk]

Q: [36:48] A lot of people would call that inflation. [crosstalk] So it's a definitional issue. [crosstalk]

A: [36:53] [??] That's the point I'm making: it's one of the myths out there.

A: [36:55] [Mosler] [inaudible] - call it that but that's -

A: [36:57] [??] That's one of the myths out there that should be addressed. The second point is that there's no intrinsic or inevitable relationship between a deficit position of government and the exchange rate. All the empirical work shows that there's no systematic relationship between the fiscal balance and the exchange rate. And it's quite plausible that you could have a strengthening exchange rate with very large deficits as a percentage of GDP if those deficits were creating conditions that allowed the capital account to improve. And if you really want to think about a country with - and I think Warren mentioned it - with a very strong currency and huge public debt, the highest in the world, and ongoing relatively large deficits think about Japan. They haven't had any systematic meltdown in their currency; they've had deflation all of those years.

Q: [37:55] [??] Well they did go to 150 to the US dollar at one particular juncture in time. And they wanted to do that in fact, so given the fact they're at 94 to the US dollar and they were at 150 you could say that that's a fifty percent reduction in the real income of the people who live in that country relative to everyone else and as a result you would expect therefore people would be upset by that.

A: [38:23] [Mosler] You're right, but don't forget it was an active policy of intervention to push it up to 150 and then when they stopped intervening it got strong again. It didn't get weak on its own. They had to push it up.

A: [38:34] [Auerback??] Can I try a different way of responding so - let's put it in the framework of how does the central bank tend to react to inflation and currency depreciation? I think that you're correct that they do tend to raise the interest rate, because they accept two - what we're calling - myths. One is that if you raise interest rates that fights inflation, and that they should fight inflation that could result from currency depreciation and rising price of the commodities that you import for example, because raising interest rates is going to increase government spending on interest. And so you might actually stimulate the economy thinking you're going to slow it down to fight inflation. And then the second belief is that raising interest rates helps your currency to appreciate and what Bill is telling you - there are no variables out there that economists have ever been able to find that are correlated with the currencies. There is no model that works. So there actually is no evidence that raising your interest rate appreciates your currency and as Bill was saying there's no evidence that budget deficits are correlated with currency depreciation. Just plot the US budget deficit against our currency and there just isn't any correlation. Sometimes currency appreciates with a budget deficit, sometimes it appreciates with a budget surplus. There just isn't a correlation for this. But yes, I agree with you, central banks think this way and so these are myths we have to try to dispel.

A: [40:13] [??] Yeah I mean the example in Australia we were running massive record surpluses and our exchange rate went down to 49 cents US. And these characters here used to call us the half-price country. [laughter] And now I'm here to advise you that you are now very cheap to come here [laughter] and you're getting cheaper by the day and we're running huge deficits.

A: [40:35] [Mosler] We may not be visiting you in December. [laughter]

Q: [40:42] Dennis Kelleher, Rebel Capitalist. I have a hypothetical question - I don't know if I should have disclosed that, but - let's assume that a government has been enlightened and started practicing modern monetary operations and understanding it, and the link between wage growth and productivity was restored. What impact or potential impact would that have on inflation?

A: [41:19] [Mosler] Which link is that?

Q: [41:20] Pardon? [crosstalk]

A: [41:21] [Mosler] Which link specifically?

Q: [41:22] The wage - the [crosstalk] right now - [crosstalk] wage growth - for years we had a linkage between wage growth and productivity. When productivity increased wage growth - wage - grew with that. Sometime in early, late seventies or eighties that was completely severed. So now we have productivity skyrocketing, wage growth stagnating. So -

A: [41:46] [??] It's the same the world over. And the empirical studies have never been able to come up with a systematic relationship between wage share movements, which is what you're really talking about, because the wage share is just the ratio of the real wage to labor productivity, and that clearly in all countries has diverged - in - depending where you start, but in the eighties and nineties clearly, and there's never - that's never been - prior to that, you had a very close correspondence with that. I mean that was in a way the capitalists, if you like the terminology, they were smart enough to realize that you had to have someone to buy the stuff, and in the eighties and nineties they worked out a different way and that was to load the workers up with debt, and get a double whammy - steal the productivity in the first place and then load them up with debt so they could still realize the production. But we didn't have major inflation breakouts in the fifties, in the sixties, in the seventies when there was an extremely close correspondence in all of our countries between real wage growth and productivity growth. The wage share in Australia used to be 62%, now it's 51%. And that's been a systematic erosion of workers' entitlements. And prior - when it was 62% for years - I mean Nicholas Kaldor used to call it one of the stylized facts - the constancy of the wage share. And it's only in this neoliberal era that that is no longer a stylized fact. We saw no inflation during those periods. Inflation occurs - sorry Warren - inflation occurs if expenditure nominal demand growth outstrips the real capacity of the economy to respond to that.

A: [43:33] [Mosler] Or the price shock.

A: [43:34 [??] What's that? Or a supplier price shock that's not isolated from the distributional system. And it's quite possible that if workers are enjoying - you know in Australia we've had a system of national arbitration, national wage determination like a Scandinavian system, and it's always considered that real wage - productivity growth provides the real space for nominal wage adjustments. And as long as the real wages don't grow faster than productivity growth, you're unlikely to get nominal demand outstripping real capacity. And the only way you could actually get ongoing aggregate demand growth that will engage your real capacity without indebting your household sector is to make sure real wages do grow in line with productivity growth.

A: [44:34] [Mosler] Do you know the game theory story? The other thing is, it's a basic mainstream game model - game - the first year, week, of game theory tells you that the labor market, whatever that is anyway, isn't a fair game, because people have to work to eat, and business only hires if they feel they can make an acceptable rate of profit. So the idea is, as the unemployment goes down, then people who are left unemployed, their bargaining power goes up and they're able to negotiate higher wages, and therefore as we get to lower - you know, there are productivity differences also, but the fact is, if you're the last guy waiting for a job, and everybody else has one, and you're offered a job and you don't take it, you're still going to starve. So you don't have any more bargaining power because the unemployment pool is lower. And we saw unemployment fall below four percent in the late nineties even with the core inflation coming down, so that whole idea that there's this NAIRU, etc - I don't see the support for it either in the data or in mainstream theory itself, where once you take a look at rudimentary game theory, there's no reason to expect real wages to do anything except stagnate, unless there's some kind of support, either through some kind of Australian type of thing, or some kind of support to at least make it more of a fair game.

Q: [46:02] Hi, I'm Bryce Covert, I'm with New Deal 2.0, and my apologies if this has already been touched upon, I'm not an economist so I'm not following everything, but it seems like the danger that you do admit to spending is inflation, you know you had that warning, and you're talking about it a little bit now. I understand the differences between the hyperinflation of Zimbabwe and Weimar Germany but in the US, how much of a risk do we have of that and are there things that should be done or can be done to prevent inflation that we're not doing? Are we going to run that risk or do you think we're pretty safe?

A: [46:45] [Mosler] Let me just say I think we're very safe but the risks of inflation are political, they're not economic. If we're wrong and inflation goes up to four or five percent, when we thought it was going to go to one or two, we don't lose any wealth as a nation, we might lose at the ballot box. We don't lose anything in terms of employment and output, and in fact most studies show it's actually more likely to improve things. And we don't get hurt in terms of investment or anything else like that. Again, studies show that it helps those things. But you do lose at the ballot box. So we do come up with policies that will cater to what voters want and how voters feel good about living their lives.

A: [47:24] [??] I'll make an additional point. Jamie Galbraith makes this point very well, I've seen him make it a number of times, and he talks about the asymmetry of risk. And he simply says that, look, if you don't spend enough, there's a major danger of a relapse and that's coming at a time when we already have, officially, nine and a half percent unemployment, unofficially - but by any honest measure it's close to twenty percent. You have very high debt levels in the US, you still have an ongoing housing crisis. So that's the - you have a significant - possibility of a significant relapse, 1937 style, if you don't spend enough. Now, if you spend too much, what's the risk? Well you'll get full employment, you'll get a lot more capacity being used, and you might eventually get inflation. Okay, you get the inflation, you can solve that through a tax. It's a very easy problem to solve. Or you simply stop spending, or, equally likely, the automatic stabilizers start taking care of themselves; the economy begins to grow again, more revenues come into the government, social welfare expenditures come down. So that in itself will start to create a fiscal drag on the economy so it seems to me that risks are so stunningly asymmetric in regard to not spending, and that can be done either through direct government spending or by massively cutting taxes, that if I was a trader making a bet right now, inflation-deflation bet, I think it's still heavily weighted towards the deflation side for all the reasons I've outlined.

A: [48:57] [??] Yeah, see, we really need to get into what we mean by inflation, and we need to distinguish between different things that might cause prices to increase, even sustained price increases. So Keynes had this definition, "true inflation". True inflation only occurs when aggregate demand is too high, that is where you've already fully employed your resources and you continue to increase spending. That is true inflation, and the way to fight that is by reducing aggregate demand. So that is when you need to raise taxes, cut government spending, or somehow get the private sector to stop spending, maybe clamp down on banks so they can't lend, so people can't borrow and spend. That's how you fight that.

[49:44] Now what happens if you have an oil price shock? Do you fight that by reducing demand? No, that would not make any sense. You have to find another method. Now, as Bill keeps alluding to, in the kinds of institutional arrangements we have in the United States, an oil price inflation is going to end itself very quickly, because we don't have very much indexing of wages in our society, or of government spending in our society, that is going to cause an oil price shock to lead to a wage-price spiral, or something like that. But we could have those and if we did, then the way to fight that is through institutional change, not by clamping down on aggregate demand. You want to change the institutions, maybe centralize wage bargaining would be a way to do it, and figure out how you're going to share the costs of adjusting to higher oil prices.

[50:41] So we really need to identify why we got the inflation. If it's because the currency is depreciating, again, in the United States this isn't very plausible; in a country like Mexico, they have very high feed-through impacts of currency depreciation into rising prices, so they've got to deal with that problem, something that we don't have to deal with. And then finally, what everyone is talking about is the current outlook, the current situation in the United States, it's just about impossible to identify a way that we could get inflation going even if we wanted to. And this is where Japan has been for a very long time. We have to remember that we just had two billion people come into the market economy, and they all want to produce stuff and sell it to us, and they're willing to work at very low wages, and their firms are willing to sell at very low prices. It's just not a plausible argument, even if we got closer to full employment, that we're going to get significant inflation pressures, other than, yes, commodities prices could go up and we could have a very short-term increase of prices, which is what Bill was trying to get to, that's not inflation, but it is going to cause a redistribution of income.

A: [52:03] [??] I think it's really telling that - and it's sort of a - it's building on Warren's point - that we're always talking about inflation threats, when you've got, maybe - I'm not sure in America, it's about seven or eight point two percent currently, [inaudible] measures, in Australia it's 13.2, in some countries, in Spain it's at least 30 percent once you add in underemployment - of your labor resources unemployed. And we're worried about inflation. I mean, one of the greatest successes of the neoliberal period has been able to convince us, and as relates to - Marshall said that the risks are just asymmetric, well, so are the costs. The costs of unemployment dwarf any other economic costs you can possibly identify. And this goes back to a famous interchange between the American economists Harberger and - Arnold Harberger - and Arthur Okun, and I think it was Tobin who said it, yes?, "How many Harberger triangles can you fit into one Okun gap?" And, for non-economists, the Harberger triangles were these measures of inefficiencies, microeconomic inefficiencies, of the sort that you might get with some inflation. And the Okun gap was the lost output from having unemployment below - above full employment. And the answer to the question, "how many of these microeconomic inefficiency measures can you fit into one macroeconomic inefficiency measure," the answer is "Lots." [laughter] And the point about it is that the macro costs of unemployment and lost income and all of the related social pathologies and intergenerational pathologies that follow are massive. And you're sitting here in this country, and my country, and other countries idly sitting by wasting forever billions of dollars of income generation every day. And the only thing you can come up with is worrying about inflation. Even if inflation was a risk I wouldn't worry about it right now because the relative costs are just not even commensurate. And that's the big success of the neoliberal era, to get us to, to disabuse us of the notion that unemployment is a cost, and unemployment should be a policy target. We now under our central banking inflation-targeting, inflation-first type policy emphasis, we now use unemployment as a policy tool. We're now using the most costly pathology of market-based economies as a tool to discipline something that is nowhere near the scale of cost. And that's the success of the neoliberal era, and it's a damn shame.

A: [55:15] [??] You're giving our presentation.

A: [55:16] [??] Sorry. [laughter] [applause]

A: [55:20] [Mosler] I think it's fair to say that the cost of lost output over the last two years is greater than the cost of every war the country's ever fought.

A: [55:26] [??] It's massive every day.

A: [55:32] [Mosler] It's probably fair to say that the losses from unemployment over the last two years just in terms of lost output are far higher than all the costs of all the wars the US has ever fought in its history combined. Seriously. That's just gone forever. Plus the ongoing losses because it's all path-dependent. Once you change your path, you've lost it, the growth rates have to be much higher to get back onto path.

A: [56:00] [??] And millions and millions of dollars a day, every day, our countries are forgoing. Millions of dollars a day. Inflation will never go anywhere near that.

A: [56:10] [Mosler] Well, if we have twenty percent unemployment, I known not everybody's equally valuable, but it wouldn't surprise me if the losses are twenty percent of GDP every year, or something close to it.

A: [56:20] [??] Maybe that's the graph we need.

A: [56:23] [Mosler] Yeah, well, the output gap. So what they do, is when they compute the output gap, is they assume some minimum level of unemployment for inflation control. So even the output gaps, which are huge now, are - far underestimate what the actual output gap is if they didn't have that artificial constraint of five percent unemployment, for what they call the NAIRU. And now they're talking about moving that up to six and seven and eight percent, where Europe's been at nine for how long? Forever, right? Ten, yeah.

Q: [56:54] I think it was Keynes who used the example of paying people to dig ditches and then paying other people to fill them up again, and I always thought it was curious that it was politically acceptable to discuss something as useless as that in a serious idea, and I gather that one of the reasons for that is that the thought of government paying people to do something useful which would compete with the private sector is kind of what's - makes you go into that sort of nonsense realm. And basically what I'm thinking is that there is a sort of minimum profit margin that the private sector demands, and they don't want government competing and employing people and lowering their profit margins. And where I'm going with this is that we have repealed the laws against usury and made profit margins in certain financial endeavors very very high, and everything pales in comparison. People who would become engineers instead become bond traders. And if we're ever going to focus people on doing useful work at perhaps lower margins, don't we have to get a handle on usury?

A: [58:11] [Mosler] I'll be the first to say that the financial sector is, by and large, a total waste of human endeavor [laughter], but I'll let Randy - my tag line is "the financial sector's a lot more trouble than it's worth" - but I'll let Randy comment on putting Keynes in context. But the other thing is, the size of government is a political choice, how much we want, and it's there for public infrastructure. Digging holes and filling them in is not public infrastructure. Go ahead and put Keynes in context.

A: [58:41] [Wray??] He was being sarcastic, he was saying, if you guys are so stupid you can't think of anything useful for these people to do, we could at least hire them to dig holes and bury money, so that wasn't his prooposal. He wanted to hire people to do useful things. And let me just tell you, the next panel we're going to talk about the job creation program, and so the people will do useful things. But the other thing is, they won't compete with the private sector. You want to ensure that they won't compete with the private sector; you want to complement the private sector. So I just want to clear that up, but that will be addressed in the next panel.

Q: [59:16] Do you have any notion that by repealing the laws against usury is part of what's wrong?

A: [59:22] [Wray??] Well of course, what Keynes wanted was full employment, and euthanasia of the rentiers. Euthanasia of the rentiers. He wanted to drive the overnight interest rate down to zero, and I think many of us up here support that. And I think that that is a way to put finance back into its place. It's only part of the answer. So downsizing finance, we agree with you, well I think we all agree with you, probably all of us. [crosstalk]

A: [59:50] [??] So now we have inflation covered, I think, and after a break of 15 minutes we'll move to the final panel which is policy, what are we going to do about it. [applause]

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audio available here

Session 5
Policy Proposals for Fiscal Sustainability
L Randall Wray
Pavlina Tcherneva

[00:00:00] [WRAY] I'm going to start off, and I'm going to set the framework, and then Pavlina [Tcherneva] will talk about the specifics of the policy proposal.

[00:00:13] Here's an overview: I'll talk about the causes of unemployment; the appropriate goals for a sovereign government - and by that we mean what we've been talking about all day, one with a sovereign floating exchange rate, non-convertible currency; cause of unemployment - Bill [Mitchell] was getting into this in his last comment; some lessons from the New Deal - which we gradually forgot; and then abandoning the commitment to full employment - and this is almost the exact title of a book written by Bill Mitchell that is very good talking about this period. And then Pavlina will take over and talk about the Job Guarantee program in both theory and practice and how this can be used to achieve what we think are the appropriate goals of a sovereign government and contrast that with the view that growth alone is an appropriate goal, and then conclude.

[00:01:19] The causes of unemployment: I wanted to look at two different kinds of problems. The first is short-run causes of unemployment. For example, we find ourselves in a deep financial crisis, with unemployment rates that are approaching Great Depression levels, and what causes that, and then turn to over the long run we also operate with chronic unemployment. That is, we don't normally achieve full employment, and I'll talk about two problems there: first, demand gaps, and second, structural unemployment -- that is, growth without job creation.

[00:02;10] So, in the current crisis, we lost over 8 million, approaching 9 million, jobs already, and I've put "already" down because I don't believe we're anywhere near through the crisis. I think this is 1931; that is, we're 2 years into the crisis and we could very well see continued job loss for many years. But, even if we only take the official projections of the so-called experts who do believe that we're starting on the road to recovery, even they agree that unemployment is going to remain high for years. So even if it doesn't get worse, they are saying the best case scenario is very high unemployment for a long time.

[00:03:00] The lost opportunities from this period - Warren [Mosler] was talking about the lost output and so on; of course we've got that. But we also are losing opportunities for people who should have been coming into the labor force in the past two years, for example, my college graduates, who are finding it very difficult to get any kind of job, much less a decent job. We have people who have had to take part-time employment rather than full-time employment, and of course career advancement has been hindered by the downturn. So there are lots of lost opportunities because of the crisis.

[00:03:42] I think that if we do a careful assessment of the number of jobs that we need right now, it's probably well above 20 million jobs, because not only do we have to replace the jobs that have been lost and make up for the jobs that should have been created to take care of the people who would have come into the labor force if it had been operating at a higher capacity, but also, even if the business cycle peaked back in 2007, we were nowhere near full employment.

[00:04:15] So, to provide enough jobs to take care of those, and get us to something close to full employment, we're going to need 20 million jobs, well over 20 million jobs probably. And just contrast that with what Obama was promising when he came into office: We're going to either create or save 2 to 3 million jobs. Obviously it's far too little. Nobody really is looking at big enough numbers. I am told by by people who work with politicians in Washington that a new jobs bill is still possible, but they're talking about tens or maybe hundreds of thousands of jobs. It's not going to be adequate. Nobody is thinking on the scale of the kind of program we need. We need a massive number of jobs.

[00:05:07] Now the problem is that Washington during the first two years of the crisis really wasn't focused on job creation; it wasn't focused on Main Street. We all know it was focused on saving Wall Street. Maybe it needed to do that; we probably have different opinions over whether that was necessary or not. But in any case the problem is that right now both the politicians and the population at large believe we've already spent so much money, how can we possibly afford to create 20 million jobs now. It's too late. We're not going to be able to save Main Street because we spent too much on Wall Street.

[00:05:47] And so I think that this confusion about what's affordable has become the major barrier. Now there always is a barrier to proposing this program. We've always encountered resistance to the idea that the government should be responsible for ensuring full employment, and we'll try to make that case. But now, this affordability, and, oh no, we've already spent so much money on Wall Street that we can't possibly afford a reasonably-sized employment program, that now the deficit hysteria is the main barrier to getting us out of this deep recession that I think will continue for many years. So, that is sort of our short-run unemployment problem, dealing with crisis and getting things going.

[00:06:38] But we have had a long-run employment problem, and that really results from two really different causes. First is, and Bill [Williams] was alluding to this, and this is dealt with in his book that I mentioned, that unemployment came to be used as a policy tool. That is, unemployment was not a problem to be tackled by government policy, No, unemployment became the policy tool to deal with the supposed problem of inflation. So, policy actually was targeting unemployment, using that to keep inflation rates low. And so I know all the economists or anyone who studied economics, knows about the NAIRU approach; we're trying to get unemployment up high enough that it will prevent inflation or prevent inflation from accelerating. And so that is the use of unemployment as a buffer stock. That is, and Warren [Mosler] described this process, those unemployed people are supposed to help keep wages from rising. And then that helps keep the pressure off prices and so it keeps inflation low. Or, Marx called it the "reserve army of the unemployed." And so it's sort of ironic that you had people like Milton Friedman adopt a Marxist ideology that we need that unemployed "reserve army" to keep labor in check. OK, so that was one aspect of the problem.

[00:08:26] And then there is another aspect, a structural unemployment problem. I'm not going to read the long quote here, but the ILO has produced a lot of research on structural unemployment, and they noted in 2007 -- the date is important because this is at the peak of the business cycle -- that we had 200 million unemployed people around the world. No doubt this is a vast undercount, OK, I don't want to argue about that, but obviously it is a very large number, and they emphasize this is in spite of strong economic growth. And unemployment -- every region in the world has to face major labor market challenges.

[00:09:11] So what they're saying is that strong economic growth is not a solution to this unemployment problem. It is going to exist -- even with strong economic growth. OK. And why is that? It is because growth fuels productivity growth, which they said averaged 26% up to that business cycle peak over the past decade, on average around the world, but jobs had only grown by 16.6%. And meanwhile, of course, populations are also growing, and so the unemployment problem is becoming worse in spite of very strong productivity growth. In fact, it's not "in spite of," it's "because of."

[00:09:56] It's because labor is becoming more productive that we don't need as many workers in order to have economic growth. And again, the economists in here will recognize this is David Ricardo's machine problem. So David Ricardo pointed this out back in the 1820's. He said this is going to be a continuous problem, that through labor-saving technological advance we are going to create a growing pool of unemployed labor that we can't put to use. So Ricardo was very pessimistic about the long-run outcomes. We were able to put this off for a very long time because we were able to find ways around this problem by opening up new markets, creating new sources of demand. But it has become a chronic, global problem that growth alone will not create enough jobs. OK.

[00:10:52] So what do we think should be the goals of a sovereign government? Now I think there are many. We have mentioned several times that we conceive of, in John Kenneth Galbraith's terminology, there is a public purpose, so there are things we want the government to provide for us. OK. Maybe we want decent social security for the aged, but taking a step back from that, and just saying in the most general terms possible, what are the most important things that a sovereign government should do for us? Well, it ought to insure that we have full use of domestic resources, and it has the fiscal capacity to do this. Economic growth and promoting economic growth alone is not going to give us full capacity use.

[00:11:48] So, we think that government ought to be focusing on full employment because it is much more important to have labor fully employed than it is to have, say, our agricultural resources fully employed -- although we ought to aim for that too. But let's make full employment a primary goal. And, as Warren [Mosler] keeps emphasizing, for political reasons, not really for economic reasons, we need to make price stability also a goal. The problem is that for a very long time orthodoxy has thought these two goals are completely in conflict. You cannot have both of these at the same time. You either can have full employment and then you're going to have inflation, or you can have price stability but you're going to have to have a lot of unemployment. OK, so, what we're trying to do is to promote a program that can give you full employment with price stability, OK, and that this should be the goal of sovereign government. And our argument is that it has the capacity to do this.

[00:12:58] OK, Bill [Mitchell] sort of got into this in his last comment, and because I presume most people here are not academic economists what I'm going to say is pretty obvious to you, but to academic economists this is all new. Now, they recognize [laughter] that unemployment does have a cost, and that is, OK, you don't fully utilize, you get these open gaps, as Bill was talking about. All right, we lose some net income because those people could have been working and earning income and producing goods and services, GDP could have been higher. And so that's what economists focus on, and it's significant. And as Bill and Warren [Mosler] have been arguing, the losses in the past two years are just tremendous in terms of lost GDP. OK, so that's one thing.

[00:13:52] But... the sociologists and political scientists would point to these other things, which are also huge, and they are almost always ignored by economists. OK, just run through very quickly: poverty, social isolation, crime, regional deterioration -- because unemployment usually is regionally concentrated and all the Americans know we can identify parts of the country that suffer from unemployment to a greater extent than others -- health issues, family breakdown, school dropouts. You know, this is well established in the literature outside economics. It promotes violence, ethnic hostility, even terrorism. The loss of human capital, because when people are unemployed for a long periods of time they become unemployable, partly because of behavioral changes, but also because of the way that potential employers perceive them. Two years unemployed, I don't want to take a chance on you. So, whether it's a real human capital loss or a perceived capital loss, it will prevent them from having the same job opportunities they would have had if we hadn't gone through this two year period. OK, and hysteresis: long-term unemployed become unemployable because of all these things I'm mentioning here. You become homeless and this is going to have a very long-term impact on your employability.

[00:15:33] OK, benefits of full employment. Again, the economists are going to point to the first one: They produce goods and services, they add to GDP. Of course that is a big benefit. But there are lots of other social and political benefits of achieving full employment. On the job training and skill development... If you are employed you will be increasing your human capital. Poverty alleviation -- I'll mention this again in a few minutes. Community building, social networking. Pavlina [Tcherneva] will talk very briefly about Argentina. We went down there and we saw the benefits to communities of creating jobs in areas that had had no jobs before a jobs program was created. Social, political, and economic stability are all promoted by full employment. And then finally there's this notion that our colleague Matt Forstater has written about -- and unfortunately he was going to be here, but he couldn't. There are positive feedbacks, reinforcing dynamics, so in a sense there is a multiplier effect of all these things. So, if you just add up the benefits, we get more GDP, we get poverty alleviation, and so on. There also is a multiplied impact greater than the sum of these individual benefits from achieving full employment.

[00:17:05] OK, we went through a period similar to what we're going through now, and of course we had two major reforms that I think had a huge impact on our experience in the post-war period. The first was that finance was downsized and constrained. Read John Kenneth Galbraith's The Great Crash, and it will sound extremely familiar. The account he gives, the kinds of financial institutions, innovations, practices that were all put in place, the rising inequality, the growth of finance, all previous to the 1929 Crash, sound an awful lot like what we went through in the past decade. OK. Anyway, we massively downsized finance, and mostly that was not the government downsizing: The markets downsized it. This time around we prevented the markets from doing the downsizing. Markets wanted to downsize Wall Street, OK; and if we had left them alone they would have done it, but we stopped them this time. And then we constrained them, and this helped to promote financial and economic stability in the post-war period.

[00:18:26] The other kind of reform that we had was the direct job creation. We created about 13 million jobs in the alphabet soup of programs that we had, so I've listed some of these here, and the unemployment rate was greatly reduced by these programs. And Marshall [Auerback] has written on this, because I know some writers have argued that it didn't reduce the unemployment rate, but that's because they counted these 13 million people as still unemployed even though they're showing up to work. So it really was a political decision, made now, to understate the true impact of the New Deal.

[00:19:08] Now the problem is that gradually this first reform was eroded in the post-war period because financial institutions found ways around the constraints, which of course is natural profit-seeking behavior. By growing competition from unregulated financial institutions, the so-called shadow banking system, and a regulatory response to that: Oh, the commercial banks, that are heavily regulated, can't compete with the shadow banks, that are lightly regulated, so we need to reduce the regulations. OK? So for all those reasons we got rid of most of the New Deal constraints on finance.

[00:19:50] And, of course, the problem with second, the direct job creation, is that in the post-war fairly rapid economic growth we came to believe we don't need these programs. Growth alone, trickle down, rising tide raises all boats, and all these arguments that the growth will create the jobs so we don't need the government to engage in direct job creation.

[00:20:17] In the post-war period, for the first two decades or so, we had the golden age of capitalism, the highest sustained growth rate. We had no financial crises in a twenty year period. Normally in US history, every 20 years we had a depression. We not only didn't have a depression, we had no financial crises. We had minor recessions, but we recovered quickly. But It wasn't true just for the US, and Bill [Mitchell] could tell you the same story about Australia. And it wasn't just true for the developed nations. The developing world also had the highest sustained growth it had ever experienced. In fact, it was better than our Industrial Revolution. The developing world was growing faster than the UK did during the Industrial Revolution. So, in a sense, it was a golden age of capitalism.

[00:21:12]We had a commitment to high employment. Now Bill would talk about a commitment to full employment in Australia and they probably came close to achieving that. In the US, we never really embrace that, but we did embrace high employment. We achieved unemployment rates for white males of 3%, almost as good as Australia. But it was only white males. We were not really committed to full employment, including women and especially African Americans, and so their unemployment rates were much higher than this. We had the... A lot of people misname the 1946 act, they say the Full Employment Act, but it wasn't the Full Employment Act, it was the Employment Act, OK. But it did commit the government to trying to maintain a low unemployment for most groups, if not full employment.

[00:22:12] We had the creation of the US middle class over this period that was sustained by jobs and decent wages. The problem is -- Minsky started writing in 1957, arguing that, yes, we have created the conditions for economic stability, a generally high-wage economy, a high-consumption economy, a constrained-finance economy, and all of these things are conducive to rapid economic growth with financial and economic stability -- the problem is stability is destabilizing.

[00:22:47] OK, so he predicted that the financial institutions are going to gradually break free of these constraints and they're going to engage in riskier behavior. And he also foresaw that we could start to get inflationary pressures building even before we get to full employment in this kind of economy. I don't have time to go into that. But, anyway, in 1962, in spite of this golden age, the US rediscovered poverty, found out that actually we still had poverty in 1962. And so this was sort of a shock in Washington. It's a book by Michael Harrington [that] pointed this out.

[00:23:34] And so they decided that we needed a war on poverty, and Minsky actually was involved in this War on Poverty. He was close to Shriver and Hubert Humphrey, and he wrote lots of letters to them, and actually wrote papers and was writing a book on poverty and employment at this time (he was at UC-Berkeley), and he said the problem with the war on poverty is that you're focusing on the supply side, you're trying to stimulate the supply side, economic growth is going to create jobs, and then we just need to make sure we have workers that are ready for the jobs. So we need to emphasize more training, and getting people to change their behavior, get rid of the culture of poverty, the Moynihan thesis, and so on. And then we'll have welfare for the people who aren't able to work. OK, So that's what the War on Poverty was.

[00:24:28] Minsky said this is going to fail. And he wrote letters to all these people, and they say the war on poverty is not going to reduce poverty. It's going to fail. Why? Because, first, it's demoralizing: You're telling people who are unemployed -- and poor -- that you've got to reform yourself first, OK, and then maybe you'll be able to get a job. Without supplying them a job. So even if they did it, even if they went to school, got educated, got training, we're not creating any jobs for you. OK? There was no significant job component in the War on Poverty, and Minsky calculated that if we just supplied one minimum wage job to each poor family we would lift two thirds of all poor families out of poverty. Even if the minimum wage pays a total annual income below the poverty line, the family is still getting income from other sources. And so he actually went into the data and calculated one minimum wage job per family would eliminate two thirds. So, instead of the War on Poverty, he said, give 'em jobs. You'll get rid of two thirds of poverty. Later Stephanie [Kelton] and I calculated the same thing in the Clinton boom, came up with exactly the same number. One minimum wage job per family would eliminate two thirds of poverty. OK.

[00:25:53] The final objection that Minsky had was, he said, OK, you're going to provide welfare, maybe that's a good thing. The problem is that Americans are not going to support a generous enough welfare safety net in order to lift people out of poverty. And of course that prediction turned out to be true. Yes, we gave welfare, but it was never enough to lift a family out of poverty. What we really needed to do is give them jobs. And Americans, he argued, will support that. Americans believe that if you work you ought to be able to get out of poverty. But Americans don't support giving welfare to lift people out of poverty. Now the poverty rate did fall, and some people have wrongly said it was the War on Poverty, but it wasn't. It had nothing to do with it. If you actually look at the data, the reduction of poverty rates from 1962 to 1973, which was a large reduction of the poverty rate, fell almost in half, it was almost entirely due to Social Security payments to the elderly. So we greatly reduced the poverty rates to the elderly. That had nothing to do with the War on Poverty, OK; it was Social Security. And the other was the civil rights movement that increased the labor market outcomes, mostly for African Americans, OK, and that was a long-term trend actually, That had had been going on since World War Two; it was just a continuation of the trend. And actually, for African Americans, the poverty rate continued to fall until Reagan. For the US as a whole, it stopped falling in 1973. OK. So, anyway the War on Poverty did fail, just as Minsky argued that it would.

[00:27:39] OK, from '73 forward, the US, and -- Bill [Mitchell] argues in his book, most -- or is it Bill -- all other developed nations abandoned the commitment to high employment and full employment outside the US. And this was associated with the rise of free market ideology. We can all remember Reagan's campaign against welfare queens who supposedly drive Cadillacs, government is the problem, supply-side/trickle-down economics is all we need, Clinton arguing that we need to end welfare as we know it -- and I actually think there was a very good aspect to Clinton's agenda here. He said we need to change the way Americans look at poor people. We need to make them see them as deserving poor, and the only way to do that is to get them off welfare and into jobs. I think that was completely correct. The problem is Clinton didn't give them any jobs. He said we're going to take away welfare, now you go get a job. But he didn't provide the jobs. If he had provided the jobs it would have been, I think, a successful policy.

[00:28:55] Bush, of course, talking about the ownership society -- If you're interested, you can go to the Levy Institute. I wrote a paper in 2005 that said this promotion of the ownership society, for most Americans the only thing they own is their house, and what we have got going on in the United States, writing this in 2005, is a way that is going ensure that Americans are just going to lose their homes. OK, so it's actually going to reduce ownership in society.

[00:29:23] And, then, finally, under Clinton, the Democrats sort of very strangely and ironically became the party of fiscal responsibility, which has always been the role of the Republicans. Now it became the primary policy of the Democrats: We've got to balance the budget. And they learned the wrong lesson from the Clinton years, when we ran a budget surplus, because the economy performed very well in terms of growth. Of course, it was a debt, household debt, fueled boom which was absolutely destined to eventually collapse. But the lesson they learned was, oh, budget surpluses lead to rapid growth, when actually it was the rapid growth that created the budget surpluses. So, anyway, the Democrats become the party that's always advocating tightening fiscal policy.

[00:30:22] And finally we had the rise of something that takes a variety of names. Jamie Galbraith called it the predator state, many people call it financialization, or neoconservatism, or neoliberalism. Minsky actually called it the rise of money manager capitalism, and that that over the past decade -- well, longer period than that -- but over the past decade has built up the conditions which finally led to this crisis. This is my last sentence.

[00:30:57] Now Pavlina [Tcherneva] is going to take over and talk abut the specific policy proposal.

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audio available here

Pavlina Tcherneva,

[00:31:00] Ok this is the final stretch, so hang in there. Today most of the day we have mostly focused on our operational understanding of government spending. So now we get to the vision. How do we utilize this operational understanding of government expenditures to get past the obsession with the financial ratios, with these numerical measures of government success, and actually get to the real thing? Talk about financial ratios in context of what is happening to the real economy. So our vision is, I’d say a Smithian vision, Adam Smith’s vision. Adam Smith said that the wealth of a nation rests within its people. This is what Bill was talking about, not wasting human resources. So how do we do that? [00:32:20]

So this is what we think of features of responsible fiscal policy. We don’t use unemployment and human livelihoods as means to check inflation. This whole idea that Randy was addressing that somehow unemployment is a necessary evil, and we have to put up with it in order to maintain price stability. The empirical evidence first of all, is very spotty on this. Economists constantly redefine their NAIRU or their inflationary barriers and you look at the data and its very difficult to find this particular level. So let’s just measure fiscal policy in terms of employment creation effects. This is how we tend to see things. And so long as we are living in a monetary production economy, where the access to livelihood is a wage-paying job, then that should be the criteria for responsible fiscal policy. [00:33:34]

But we can debate that. These are the questions that sort of emerge from the historical perspective that Randy provided, and also you will see how we believe that this kind of approach utilizes this operational knowledge that we’ve just built to build a very sustainable system. So we are redefining sustainability in terms of employment creation, price stability, as opposed to certain debt/GDP ratios. [00:34:00]

We have to switch the conversation, we really need to re-orient our thinking about fiscal policy. I like to argue that its done in a backwards way. That what we are attempting to do is plug some demand gap, whatever that means. And Randy’s was alluding to this, we fix our growth rate, er come up with measures of potential output, we don’t really know how much labor went into the production of that potential output, what happened to the structure of the economy, how much was output produced by labor replacing technology. [00:34:37]

We have no sense of the sort of dynamic forces that are determining output. So we would like to measure potential output in terms of men and women put to work. So the way to flip fiscal policy is not to target a demand gap, because that’s not very clear what that means, but instead to target a labor demand gap. [00:35:00]

And you know we’re arguing that this delivers more bang for the buck. We do not know today how much more, even if we agreed that maybe deficit spending is sustainable, even in the most sympathetic, I would say, commentators to the deficits I would say ‘look we need to push further, we’ve got to deficit spend. We still don’t know how much we need to spend, how large deficit spending is large enough to produce the real outcomes that we are aiming for. So what we are proposing is that we actually tie deficit spending directly to the objective and you know exactly how much you need to spend. [00:35:38]

How many people do you want to put to work? Obama wants to save and create 3 to 4 million people, ok put them to work, you know exactly what your wage bill is going to be, you’re going to find out your materials and your costs. If you want to create ten million jobs you know what your budget is going to be and you have directly achieved the goal as opposed to going backwards through this vision of producing growth and hoping that somehow the growth will lift up all boats and trickle down to the economy and produce the kind of job growth. [00:36:06]

So we see a responsible fiscal policy as an employment stabilization via direct job creation, and we see direct job creation as a permanent feature of policy making, because the objectives are to guarantee full employment, not for the short run but also for the long run. In other words this is very different from depression economics, which is Paul Krugman's euphemism, finally the return to Keynesianism is because we’re in a depression. No, we would like to achieve sustainable fiscal policy throughout the short and the long run. [00:36:44]

Ok, so what is the job guarantee in theory? Let me just synthesize some of these ideas very quickly. There is an alternative to the NAIRU, that is, we can use an employable, or employed pool of labor as the buffer stock, not the reserve army of the unemployed. So I’ll explain a little bit about what that means. This is the job guarantee Bill refers to. This program is a job guarantee, there are various other - public service employment, direct job creation, you name it. But what that basically means is that you provide an unconditional offer of a public sector job at a minimum wage to anyone who wants to work. This way, as a permanent program, and an unconditional program it attains and maintains full employment. [00:37:33]

Ok, so essentially the features of the job guarantee is that this is a bubble up policy, this is not trickle down economics. It is a policy that hires off the bottom. It deals precisely with those that are either never employed or the ones that are last into a job and first out of a job. So, it’s a bottom up approach. It operates with flexible markets via a buffer stock mechanism, so this is the part that we need to explain how the job guarantee serves as this buffer stock. And I’m using Bill Mitchell’s terminology here, who basically made the case a number of years ago that, just like any other commodity buffer stock, you can stabilize the price of that stock by simply selling it when the price is too high, and buying it when the price starts falling. So you can envision labor as being a kind of a buffer stock [00:38:00] where you offer employment to all those who want a job at a base wage. And that would be your stimulus, essentially, that produces growth. [00:38:48]

As that demand trickles up to the economy and the private sector rejuvenates and starts demanding labor, then the private sector will be able to hire from the public sector pool, by bidding up the wage. Once the private sector has been saturated, or has hired as much as they desire, if you observe sort of an overheating economy, inflationary pressures, the private sector decides that it needs to downsize, then those workers will be laid off and instead of moving into unemployment they move into the public sector buffer stock. So essentially what this program does is it establishes a wage floor to labor. Today the wage floor of labor is essentially zero, because you can hire somebody that is willing to work at a premium above the zero wage that they are earning at the very moment. [00:39:50]

So this is how, we can talk more about this sort of mechanism, but this is a program that then deals with any kind of unemployment that you’re trying to solve: cyclical unemployment, the long-term structurally unemployed, seasonal unemployment, as well as the entrance into the labor market (you know, my college students that are looking for a job). The benefits of this program of course is that it also creates an employable pool of labor and it maintains and enhances human capital. We like to always argue that this program offers both a job as well as an opportunity to improve skill through training and education.[00:40:42]

It’s a targeted program as opposed to this indiscriminate aggregate demand that management plan that we seem to be implementing today, or the way fiscal policy is conducted today. It’s very targeted. You know where the unemployed are, you take the contract to the worker. You deal with distressed areas. You look at their resources, you look at their needs and you mobilize them. So it’s a very targeted approach. It also is an approach that takes workers as they are. You’re not trying to educate people and hopefully they will find-- they will become employable in the eyes of the private sector and find employment. You provide the opportunity, and then also you provide other opportunities to train to become employable and transition to the private sector. So this program can be seen as a transitional employment program. It’s a safety net that captures the unemployed and prepares them for private sector work if they so desire. Of course the projects have to be useful and valuable. We all think that there are plenty of useful things to do. [00:41:46]

So just to summarize: it’s a voluntary program, nobody is forced into working for this job guarantee, the spending level is always at the right level, however many people show up for work, that’s how much you spend, you don’t spend more than necessary and you don’t underspend in a sense, and it has a transformative impact on workers, on firms, on communities and on the economy. I think I’ve already said a lot of the things that I’ve listed here. [00:42:16]

Firms also benefit from this because it replaces unemployed with employable workers. It reduces their training costs. They have a visible pool of labor, they know what these potential private sector workers have worked, what kind of experience they have received, and they benefit from that as well. This is a policy that can lift the floor, so we’re going back to the earlier discussion about taxing the rich and how do we redistribute, well you can improve the income distribution by lifting the floor, and if you set the wage at the appropriate level that would lift people out of poverty. [00:42:56]

Ok, it’s a permanent program, and by permanent program again I just want to emphasize that it doesn’t mean more demand, it might mean better distributed demand. [00:43:07]

Ok the job guarantee, the macro-stability. Just let me touch on this once again, the wage provides an in-built inflation control mechanism. This is because the compensation package establishes the floor. This is the floor to the standard of living for the entire nation. Again you spend on this fixed-price floating-quantity rule. This is what previous speakers were alluding to previously. You fix the price of labor and then let the budget float with the needs of the economy. When the economy decelerates the budget expands as those workers enter the public sector, so it has an expansionary effect. When the economy grows the budget automatically contracts as workers move out into private sector jobs. So that’s the counter-cyclical mechanism. And wages become the benchmark for the prices to the extent that wages are an input of production of all reproducible assets, then will serve as an anchor to prices as well. [00:44:15]

Ok, so full employment and price stability also promotes currency stability. And the idea here is that we are establishing better anchors than the current system. We use labor as that anchor. This is not a solution for all labor market problems. We can use this program as an institutional vehicle, as a program to address specific goals. We may want urban inner city renewal, maybe you want green infrastructure investment, you can use those resources then to direct them to the specific things you want to do. There will be other things that you might want to deal with, labor market discrimination, and other things. This is not a panacea for all labor market problems, but it’s definitely better than the unemployment buffer stock. [00:45:10]

So let me very briefly talk about Argentina. Argentina is one of the most recent cases of implementing a program that mimics the job guarantee. It is not job guarantee, I want to emphasize it’s actually a limited program. But it was a large-scale program, it was implemented quite quickly and in our view effectively. So we have been studying this program and looking at the macro effects as well as well as going to projects and visited those projects to see what they did and how they impacted people. [00:45:39]

Now, even though it was a smaller program it still exhibited the features that I was just discussing of this sort of macro universal job guarantee program. The Argentina program was implemented as an emergency measure. It was depression economics, people took to the streets, they demanded from their government jobs, the government gave them jobs. And they gave them jobs, the program was running, up and running in a few months. Just like the New Deal era experience, we were able to organize things to do for the unemployed relatively quickly. It was a part time job, it offered 4 hours of community work to the unemployed heads of households at a minimum hourly wage, and 2 million people showed up for work. This is about 13% of the labor force in Argentina, and Argentina, granted, is coming down from 25% of unemployment. So their levels were close to our real actual unemployment levels, but look higher than our official levels. This program had a considerable impact on the poor, and especially on women and minorities who had access to these jobs. [00:46:52]

It was counter-cyclical, it stabilized output, prices, and currency. You look at the data and you find all of those indicators stabilize. GDP growth was between 8 and 12% between from 2003 to 2007 and only in the last year it dipped to 5%. So it’s job creation that produces growth as opposed to the other way around. The government budget moved into surplus. There were a variety of things going on there but of course you’re generating large amount of incomes which are being taxed. The multiplier effect of this program, I’ve looked at some of the measures and some of the more conservative measures is 2.57. Meaning that for every dollar spent on the program you’re creating 2.6 dollars of output. [00:47:44]

Now, and what happened? Did people get stuck in the public sector? No. Actually what happened was that as the economy recovered many workers transitioned into private sector jobs. It was organized in a very interesting way. I can tell you about all those institutional details, how it was administered, how the resources were mobilized, but suffice to say it was federally funded, locally administered, the government actually maintained a database of skill and experience of the unemployed, helped them to transition to private sector jobs as well, and from our visits as well it was obvious what kind of impact this program had on the poor, it empowered, it provided on-the-job training, every project that we went to see [00:48:00] had an adjacent room with literacy education, with training, with various other courses that they could take. I like to see this as a new form of microfinance, as opposed to lending to people you just give them a grant for the wages and for the materials, get them on their feet, get them to produce something, and pretty much every project that we saw was some people that set up shops, carpentry shops or baby clothes tailoring shops or toy shops, or something that they could then sell on the market. But they were also products that were freely distributed to the poor. Lots of food kitchens, daycare center, public libraries, elder care, centers for the abused etc. [00:49:27]

Again, the employers hired from the pool. The economy, the economy stabilized very quickly. One benefit of this was that it formalized the informal sector. In Argentina actually there’s a very large share of the economy that is a grey economy. Those that used to work under the table were issued social security tax cards, they would be-- when they transitioned to private sector jobs now they were working under contract. The program established a wage floor. From all the people that transitioned ... sort of a wage floor, because it was a limited program. But from all the people that transitioned from the public sector job to the private sector, they were all hired at a premium, 97% of those were hired at a premium. [00:50:06]

And communities were transformed. I can give you lots of examples, but what was interesting was the unemployed themselves proposed a lot of these projects, they were the ones that actually invented the kinds of things that they did. They did massive landfill cleanups, and recycling initiatives, and on and on and on. So these are some pictures of projects that we visited, and lots of food kitchens. There were lots of poor communities, but there were things like health promotion programs, subsistence farming, there were a lot of projects outside of the greater Buenos Aires area which we visited that dealt with agricultural projects, water irrigation, clay pits, etc. [00:50:55]

So again, growth itself is not the appropriate target, you have to wed it to job creation. It can promote inequality, this sort of pro-growth, or growth at all costs approach can promote inequality, it can harm the environment. We haven’t really said anything about the environment yet. So we are really looking at a bottom up approach that looks at full employment through direct job creation, a job guarantee. We view this as a program for shared prosperity. You can set an environmentally sustainable growth path and maintain price and currency stability [00:51:37].

We can do it, we have done it once in the past, as have other countries in one form or another. It’s the right thing to do. I think we could debate this but you know I want to get back to the point about having access to a job as a basic human right. And in my opinion I think Obama just needs a Rooseveltian resolve. We can talk more about this later, but just the wage bill, just the wage bill of hiring 20 million people at a - I think Warren has proposed $8 an hour - where you could do a living wage of $10-$12 an hour, we’re looking at 350-500 billion dollars. Compare this to the other expenditures. [00:52:25]

But I want to emphasize, costs here are not in terms of financial costs, it’s not necessarily the problem. I just want to show you that in perspective you get, you deliver so much more bang for the buck in real, in real terms, if you target your programs. So we have a deficit in convictions, I think, a deficit in cleverness, not necessarily in the ability to fund. And let me end with a couple of quotes. One is by FDR that says that the liberty of a democracy is not safe if its business system does not provide employment, and produces and delivers goods in such a way as to sustain an acceptable standard of living. [00:53:07]

And the last quote is a quote from Keynes this is something we as academics constantly run against, and that’s this idea that we have to keep 5% or 10% of the population in idleness, "The Conservative belief that there is some law of nature which prevents men from being employed, that it is rash to employ men (or women) and that it is financially 'sound' to maintain a tenth of the population in idleness is crazily improbable, the sort of thing which no man could believe who had not had his head fuddled with nonsense for years and years." [00:53:45]

Thank you.

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audio available here

L. Randall Wray, Professor of Economics, Research Director of CFEPS at the University of Missouri – Kansas City, and Senior Scholar at The Levy Economics Institute of Bard College

Pavlina Tcherneva, Assistant Professor of Economics at Franklin and Marshall College, Senior Research Associate at CFEPS and Research Associate at The Levy Economics Institute of Bard College

[00:54:00] [Joe Firestone] O.K., do we have any further statements from the panel or would you like to open it up...

[Marshall Auerback] Go to the questions.

[Joe Firestone] O.K., over here.

Q: [00:54:17] [Dennis Kelleher, Rebel Capitalist blog] Two things, and I'm not sure you if you wanted to talk about it. And I think our friends at the Cato Institute would appreciate this. A job guarantee would eliminate the need for a minimum wage, correct? I mean a federal minimum wage, you could do away with it because the government is, the government is basically setting the base wage, right? I think they would love that.

[54:42] [Kelleher continues] The other thing is that, I'm curious, I advocate a universal living wage. It's a wage that's based on, since we have this insane policy of waiting ten, twelve years to increase minimum wage, there is a theory, a movement, that says let's pass a universal minimum wage, that says, you know what, instead of having to deal with this issue every seven, ten, twelve years, let's just say we will pass a wage that is indexed to the cost of housing -- not necessarily CPI, but the cost of housing. And HUD has an index it has that does that on a regional basis so it's not straight across the board based on the entire country, it's based on region, the cost of housing in a region. Is it possible to use something like that as a means of a base wage?

A: [00:55:45] [Warren Mosler] Yeah, certainly if the political will is there for that. Certainly there is no objection to that and I'm sure--would support it.

[00:55:55] [Mosler continues] Just wanted to add something I just remembered to Pavlina's. The size of this employed buffer stock, we'd expect it to be much smaller than the pool of unemployed for a given level of price stability. So for right now, if maybe the mainstream would think maybe we needed maybe 4 or 5 percent unemployed for price stability under normal circumstances, this might be only 2 or 3 percent because it's a much better buffer stock than unemployed because labor can actually flow back and forth and so it becomes more of a transitional job between unemployment and private sector employment than it does...there still would be elements of just a career public service job.

[00:56:36] [Mosler continues] In terms of what you want to do politically with it, yeah there's a lot you can do, you can introduce benefits from the bottom up. You could say two weeks vacation and then the private sector would have to have two weeks vacation to compete. You could say child care, you could put anything in it you want and introduce benefits from the bottom up -- health care -- and so competitive markets for courses would move those benefits up the scale.

[00:57:05] [Mosler continues] So what it does is allow us to use competitive market forces to achieve goals, it gives us a tool for that which is the American approach to things so it is a hybrid type of approach that gets rid of the moral hazard aspects of other approaches.

A: [00:57:21] [Bill Mitchell] In the South African case, we've had a really big debate about it, because one of things I've been doing was designing a minimum wage framework for them which would embed in the public works program we've been working on, and over there, of course, you've got...the approach I used, to help out the process, to use poverty lines and nutrition rates and things like that.

[00:57:52] [Mitchell continues] And, of course, then you find out that there's objections from the government: 30% of private employers are paying well below what you've suggested as your minimum wage. And, I said this to the Treasurer of the country, that what you've got to decide in any nation is that aims to be a civilized, sophisticated country is what is the minimum price you want people to be able to do business at? And that minimum price has to be a wage that provides people with an inclusive capacity to interact in society, and if your private sector are paying below that then you don't want them in your country.

[00:58:40] [Mitchell continues] That's the reality. Otherwise, you've got no aspirations to be a sophisticated, civilized country. And so the job guarantee wage is, you don't do away with the minimum wage, it becomes the minimum wage. And then you can add on whatever, like Warren says in political terms, you can add on whatever, in Australia we call them social wage benefits: child care and access to all sorts of other benefits that are outside the direct employment contract. But it is the minimum wage and you have got to set it at a level that you aspire to be the actual living minimum, not some penurious sort of penalty rate.

Q: [0:59:30] [Roger Erickson] I'm Roger Erickson again. Listen to this, I'm reminded again of something in a different field and the question is about policy. What we've heard described here is options for how we could be doing things differently but that's not how we can get this group or this population currently in this country to start exploring or selecting some of these other options. So there are two ways to look at this, one is historically and we have lots of to go on. If you look at small group theory, all these things get worked out through affinity bonds because the group is small enough that everyone is aware of group options as well as individual ones.

[01:00:14] [Erickson continues] The problem is scaling up to large populations. The only thing we've learned, I've learned today, is how we address this is we either have a war or a severe depression. We have to find a mechanism where a population can become self-aware enough to address this kind of...what it's leaving on the table, short of having a major depression or a war, and the only example I can think of, of groups that have done this very large scale, are large military groups and they do what you would expect from any systems theory, they drive interaction and awareness through absolutely political or operational decisions.

A: [01:00:55] [Bill Mitchell] I mean, as Pavlina said, India's got a bigger population than the U.S. and India has introduced the rural Job Guarantee, as a national employment guarantee, it's employed millions of people, already.

Q: [Unidentified] We'd love to hear how they did that.

A: [01:01:11] [Bill Mitchell] They did it because the growth in the Indian economy, which was urban-based in technology and construction...

Q: [01:01:21] [Roger Erickson] I'm sorry to interrupt you but just to make it brief, it's not what they did but how, whoever became aware first got the attention of their politicians.

A: [Bill Mitchell] I'm just explaining how they did that.

[Roger Erickson] OK so...

[01:01:32] [Bill Mitchell] They were faced, the motivation was that they were faced with an urban crisis because the rural poor had no option but to try to flood into the cities to enjoy the growth that was occurring there and they knew that wasn't sustainable for housing and other reasons and so they suddenly realized that the reason this migration is occurring is the lack of jobs in the rural sector.

[01:01:55] [Mitchell continues] Solution: Create jobs. Who's going to do it? The private sector isn't going to do it, we've got to do it and they did it. Millions of jobs have been created in the second largest population in the world.

Q: [01:02:08] [Roger Erickson] So the hundred dollar question is what do we have to do to make the existing Congress aware of things that it has taken them years to become aware of?

A: [Bill Mitchell] That's a good question.

A: [01:02:18] [Unidentified] Well that's a serious political question and I...it's going to take a grass roots effort. It's going to have to come from the grass roots because of, we're talking about, our political system is seriously dysfunctional. To get anything, something like this out of our current political system is just unrealistic. So it will be an incredibly difficult endeavor to do something like this but it doesn't mean we don't undertake the effort to do it and to start advocating this on several needs, several levels.

[01:03:00] [Unidentified continues] You know, conservatives, right-wings have had an incredible noise machine that they have used for several decades now. There's no reason why people on the left can not, don't have to do the same thing and particularly do it on a grass-roots level. You know, we can do it; it's possible. There are certain think tanks out there, progressive think tanks that are hopefully...will get on board with something such as this, soon. But it's going to take a long time. I don't know if I'll see it in my lifetime.

A: [01:03:39] [Marshall Auerback] I disagree, actually. Funnily enough, Warren and I have both talked about this, he's been on the campaign trail so he's had probably more media interaction but, whenever I've presented this idea, and I've presented it at a number of conferences, lot of speeches. I presented it once when I was in a debate with the former Governor of the Bank of Canada and, actually, it got a surprising degree of what I would call bipartisan support. I think as Randy said, a lot of people on the right like the idea that you can legitimize government expenditure by work and, especially when you sell them on the idea that it makes, it's not that we want to eliminate welfare, but you say it makes welfare redundant because you have this program in place it does actually tend to command a lot more appeal.

[01:04:28] [Auerback continues] Funnily enough, a lot of times I get, I've had objections from unions rather than from on the Right because what the unions think is that you're trying to create a slave class of labor that's going to undercut their wages and you have to try to explain you're trying to fill the gap and create a full employment pool which ultimately enhances their pricing power. So, in the first instance it can be a little bit deflationary because if you have someone who's been paid, say, $40 an hour and all of a sudden he's lost his job and he has to go to $8 there is a once off adjustment but then the adjustment mechanism the other way which is much easier. So I actually think this is one of our winning ideas which actually could get much greater political acceptance than you think.

Q: [01:05:16] [Jeff Baum] Yes so, again this is obviously coming to a lot of political questions and I think the big difference between the United States and basically every other country, especially India, is that there's just so much, number 1, there's so much noise and, I mean America is genetically averse to anything that sounds socialist, right? This is a socialist idea, how dare you, we believe in private industry so regardless of the merits of the argument there's all the noise.

[01:05:47] [Baum continues] But following on what you just said, how do you stop, if this becomes the minimum wage, what stops every minimum wage worker saying, "Why should I work in private industry? Why don't I just go work for the government, I can't be fired." And, effectively, that's the kind of argument you'll get from industry is that you're going to compete against private industry and that's going to drive wages down. I'm sorry not drive wages down, it's going to support wages and therefore we're not going to be competitive with government. Where's the argument there?

A: [01:06:18] [Warren Mosler] Look, we're going to have active fiscal policy that keeps, for a given size government, keeps taxes low enough so that the private sector will be able to have the means to hire everybody which means they're going to have to still have the means to pay a higher wage. So if we start off at an $8 an hour, first of all that's not going to be disruptive. I don't think anyone quits their private sector job for that or very few people.

Q: [Inaudible]

A: [01:06:41] [Warren Mosler] Well yeah. It's full-time work. There are still people who are going to work baby-sitting and whatever. So -- you'll get a few and then we conduct discretionary fiscal policy so that this pool, the private sector hires these people away and maybe they'll have to pay ten or eleven or twelve dollars so it will be some spread but then that spread will stabilize and then that will be the stabilized private sector wage, let's say, unless we over stimulate...we have too much aggregate demand, we allow too much aggregate demand and then our pool of buffer stock workers shrinks to zero then, of course, it's no longer a buffer stock and then you lose control of prices on the upside just like with any other buffer stock.

[01:07:21] [Mosler continues] But if we conduct policy to keep it at two or three percent, whereas before we had unemployment at four or five percent we've actually reduced the public sector because the unemployed are in the public sector. Look the thing is, and don't forget when I told you about my cards in creating, if there's a tax to get out of this room and of, whatever, and then I don't hire enough, I don't offer enough jobs so you can get the money to get out of this room, why did I do it? Something's really wrong with my policy, I should be lowering the tax or giving you more work. Right? I should be increasing my spending or cutting my taxes. We got to get discretionary fiscal policy to the point where these people we've taken out of the private sector and not used in the public sector because either we don't want them, we don't want to spend, whatever, has got to be minimized.

[01:08:18] [Mosler continues] We want to minimize it but we also want to have a buffer stock as a price anchor. Now, every monetary system uses a buffer stock policy, a gold standard is a gold buffer stock, unemployment is an unemployed buffer stock. What we're saying is an employed buffer stock is far superior to an unemployed buffer stock and far superior to a gold buffer stock. It's larger, deeper more flexible, and most important, whatever your buffer stock is, it's always fully employed. There's always a bid for the buffer stock. On a gold standard, gold is always fully employed, you can always take an ounce of gold and sell it to the government and get money for it, you can always monetize it.

[01:08:57] [Mosler continues] In a wool buffer stock, where Bill started, there's always a bid for wool. Sheep are fully employed. [Laughter] No, it's true. So, right now, we use unemployment as a buffer stock, this clearly shows we don't have any idea what we're doing. Not only do we not understand the monetary system we don't understand that, well that's part of it. We don't understand a buffer stock always anchors a monetary system. We should be using an employed buffer stock.

Q: [01:09:21] [Jeff Baum] I get that point, I just think once again from someone who said before...I think that you kind of assume that everyone does because they don't understand it? Or they do understand it, they just don't care and it serves their interest.

A: [01:09:35] [Warren Mosler] Well I'll just just give you the benefit of the doubt for rhetorical purposes. [Laughter]

[Jeff Baum] Well, yeah. well, you tend to do that a lot.

[01:09:40] [Warren Mosler] Privately, I could say a lot of other things that you probably don't want to hear.

[01:09:45] [L. Randall Wray] I wanted to correct a misunderstanding because a lot of people do jump to this. We're going to guarantee a job offer for anyone who is ready and willing to work. And then they say, oh, well then they'll never get fired. No. We never said that.

[01:09:56] [Wray continues] They don't show up, they show up drunk, they don't do their work they are fired. Anything that the private employer can do, legally do to their employees, the employers in this program will do. And socialist, I think if you tell most Americans what we're going to do, we're going to require that people who ought to be working, define disabilities I think very narrowly, they're going to have to work instead of welfare. And you ask them, "What would you call that system?" All Americans are going to call that, "Oh, that's capitalism." They wouldn't call it socialism.

Q: [01:10:39] [Jeff Baum] Didn't they all ready say they converted from welfare to workfare? I don't know exactly what that meant but wasn't that Clinton's big thing?

A: [1:10:45] [L. Randall Wray] Well...but without the jobs.

A: [01:10:47] [Warren Mosler] At a minimum, you have to sell your time and that has value. And look, we're not talking about the government owning the means of production. We're talking about the government providing for public infrastructure. Public infrastructure is all the things you hire people for and then you've got this transition pool where you facilitate the transition from...back to the private sector and that's what this does. What, we're 750,000, I think out of the 2 million in Argentina 750,000 went to private sector unemployment within two years. People who never would have done this before, was it more than that?

[Pavlina Tcherneva] Yeah, I think it was more.

[01:11:22] [Warren Mosler] More like half, a million, that's enormous. These are people who had never been in the private sector, never held a private sector job. The biggest service this did to the economy, well one -- all the direct things, but secondarily it allowed the economy to expand at very high rates without labor bottle necks. It's an extreme facilitation of the private sector, where right now private labor does not flow from unemployment to the private sector very well at all. It takes a lot of demand pull to get that done which is to everyone's disadvantage, to the detriment of all of us.

A: [01:11:56] [Bill Mitchell] Just in terms of your concern about the business sector. I've been on about this for, what is it, thirty-two years now, since I was an undergraduate.

[Warren Mosler] Since the second grade.

[01:12:13] [Bill Mitchell] Well as Warren said, I got the idea sitting in my fourth year at Melbourne University and I was sitting in an agricultural economics class and at that time the Australian government was running what's called the wool price stabilization scheme. And it worked by the federal government when the private market didn't want to buy as much wool as was put onto the market the government bought it up and stored it in big sheds. And when the markets were strong the government wanted to stabilize the price, it just released the wool out of the sheds and back into the market. And it was very successful, it was used to satisfy the rural lobby to stabilize their income so they weren't fluctuating. It was very successful. And I remember sitting in this very cold winter day in Melbourne, in Victoria, where I grew up, thinking well I didn't really care about...it seemed like a full employment of wool scheme. Every bit of wool that was produced was employed, either in the shed or in the private sector somewhere. And at that time Australia was just going into very high unemployment, it was 1978, and I said I don't really care about wool so much but I care about labor and we could use a buffer stock to do that for workers.

[01:13:31] [Mitchell continues] But the point about business is, I often give talks to the business community and they're as right wing in Australia as they are here and I've given talks in the Netherlands where they are as right wing as they are in South Africa and elsewhere and its more to Warren's point. I ask them the question, they're all in suits and what have you, and I say where are the unemployed now? And its a question they'd never really asked I don't think and eventually I get them to admit or understand that the unemployed are all ready in the public sector. Now you are having debates in Congress somewhere down there or up there, I'm not sure of the direction, about extending unemployment benefits. Well, that's a recognition, and you'll obviously do that again, given the skull and the crosses I would imagine, but in Australia we have the unemployment benefits guaranteed. But that tells you where the unemployed are, they're in the public sector. So then I say to the assembled businessmen, typically men, I say, "Well what are they doing in the public sector?" And I can get them to chant, "Nothing." And then I say, "Well are you happy about that?" And I can get them to say, "No. The bastards." [Laughter]

[01:14:47] [Mitchell continues] And I say, "Well wouldn't you rather they'd be doing something productive in the public sector?" And they say, "Yes." And once you go through this logic you can sneak up on them. [Laughter] And in the end they become supporters of the job guarantee doing community-based development work, doing environmental care services, doing aged care services, because they would rather, their ideologies and their prejudices would rather see them doing something than nothing. It's very easy to persuade them.

[01:15:22] [Unidentified] I would like to echo what Marshall was talking about. It kind of surprised me and woke me up. I have right wing friends, I'm sure you do, too but there's one thing that does echo with them, "Put them to work and they'll pay taxes." And believe me, they agree with me on nothing else and they think it is a good idea. Believe it or not...

[01:15:45] [Marshall Auerback] By the way work-fare, work-fare with the state-administered program and one of the reasons why it didn't work goes back to the old argument that states don't create currency so it creates, there was an external constraint. But even at that it did reduce the welfare rolls for a time when you had employment being created, but it can administered on the local and state level but it has to be funded at the federal level. That's a key point.

[01:16:18] [Bill Mitchell] I meant to say something about work-fare, in Australia, we call it "work for the dole." And its nothing like a job guarantee because it's... a job guarantee is an unconditional offer, the government sets the price and says we'll take anybody. Work-fare and "work for the dole" are compliance programs to force people to do sort of like Shylock in the Merchant of Venice. The government wants you to do something for the pittance of welfare they offer. It's typically not anything like a living wage. It's a program, not an entitlement. It's usually short term projects not doing very much at all. Whereas a job guarantee is an ongoing guarantee and people say to me, "Well what if someone wanted, liked working in the job guarantee?" And I say, "Well, what's wrong with liking your job? It sounds to me like a good thing if you actually settled into the job guarantee for life and made it a career move. What's wrong with that?"

[01:17:24] [Mitchell continues] Most people won't do that but some people might. And then it's up to the private sector to restructure their jobs, and their wages and conditions offered to make themselves competitive. What's wrong with that, that's going to increase productivity.

[01:17:43] [Pavlina Tcherneva] Just one final note on the work-fare. It was considered a success only because of the reduction in welfare rolls but when you look at the actual conditions of the recipients, poverty did not change and, in fact the income they received was less than if they had remained... The income was through jobs was less than what they would have gotten on welfare. So it was considered a great success through the Clinton Goldilocks years, right? But now it is a whole different ballgame. And so you have also these additional issues if you would like to facilitate this transition from the public to the private sector as well, you also have to provide certain protective services if you will. You gotta provide some sort of transportation, day care services that will facilitate this transition into the private sector so there are things to do.

[01:18:37] [Joe Firestone] You have a question.

Q: [01:18:38] [Unidentified] Yes. I want to ask, well not a job guarantee related question. I have a friend, an Australian economist and he told me he had to give up on his academic career because he had not mainstream views. So I want to ask did you have to hide your true views in order to advance in your, obviously you're professors so you teach students? Did you have to initially hide your true vision in economics in order to get the jobs?

A: [01:19:25] [L. Randall Wray] I don't think anyone here did but we were special cases. Let's say that our goal was to get a position at Harvard, Yale yes, you absolutely would have to hide this and wait until you had tenure and then you could finally promote this and write the kinds of things, I mean the things related to this. But none of us made that choice.

A: [01:19:49] [Stephanie Kelton] But we know lots of people who have suffered the slings and arrows, these kinds of things. We've seen university departments, economics departments implode over differences between those who hold these kinds of views and those who hold the more conventional views. And I think we all know people...yeah at Notre Dame.

[Unidentified] The Fighting Irish, literally. [Laughter]

[Joe Firestone] We have a question back here.

Q: [01:20:15] [Unidentified] This is more of an idea than a question but just on the question of how do we kind of implement getting this idea on to the mainstream, I think everyone knows the President's debt commission is going on right now, I don't know if everyone knows that since they have no budget they're actually outsourcing their roles to the Pete Peterson Foundation, including the listening tour is actually going to be the listening tour that America Speaks is putting together that the Pete Peterson Foundation is paying for. The Foundation went to America Speaks with a bag of money to do it all themselves and they said they wouldn't do it if it were just the Peterson so they got MacArthur to lend their name but it's all Peterson money. We know what Peterson wants to do with it. There are twenty hearings around the country on June 26 and the thing is they're all open to the public.

[01:21:10] [Unidentified continues] So this is the exact type of thing that if there is a coordinated effort, if we can get people into those meetings then we can raise this and at least pull the discussion to a more balanced place than where Pete Peterson wants it and he paid millions of dollars to make sure they end up with the recommendations that he wants. So, again, the organization is America Speaks and I feel like this is something that this group could do by email and try to get folks into as many of those meetings as possible with this idea offered up as something that the people want.

[Warren Mosler] Any bloggers in here?

[Unidentified] One or two.

[Joe Firestone] We got all kinds of bloggers. Not everyone is raising their hands.

[Warren Mosler] Can't hurt, can't hurt.

A: [01:21:57] [Stephanie Kelton] I understand, and Randy and I heard yesterday some things like you're talking about but I understand these are very difficult to penetrate, that the groups are pre-screened. It may be even an invitation-only although it may have the appearance of being open to the public and a mix of everyday common Americans. But my impression is there is a gatekeeper and it might be pretty difficult to penetrate those meetings.

Q: [01:22:33] [Joe Firestone] Just a question. You focused really, wholly on the job guarantee with respect to the policy implications or policy considerations. Could you comment some on the health care issues and the environmental issues and some of the other policy issues where we are not attempting to meet any of our problems due to budgetary considerations? Those considerations always come in first and seem to control the agenda, they're kind of in the background but, this is off the table because it costs too much or that is off the table because it costs too much.

A: [Warren Mosler] I think you just said it all. [Laughter]

[Stephanie Kelton] I was...

[01:23:18] [Joe Firestone] I'd like to hear you say it. I say it all the time but I don't hear you say it [inaudible].

A: [01:23:24] [Stephanie Kelton] I think this comes back to what we've been hammering at all day long which is that there are all kinds of self-imposed constraints. If you say that you're only going to fund Social Security out of the payroll tax and you use, you establish these Trust Funds and you say the Trust Fund must have a positive balance or else we're not going to clear the checks at the level that's been promised then we're only going to be able to meet 77 percent, or so, of promised benefits after some date. I was rereading, I was telling Warren yesterday, I was looking at the Trustees Report from 2009 for Social Security and Medicare and what the Trustees are projecting for the Old Age Survivors Insurance Trust Fund OASI, the Disability Insurance Trust Fund DI and you put them together and you get OASDI and you get what everyone commonly refers to in everyday language as the Social Security Trust Fund.

[01:24:19] [Kelton continued] Those are both projected to go bankrupt at some future date. In the 2009 Report, the day of doom is now 2037 on those two programs. Health Insurance Trust Fund, the Medicare care side is also projected to blow up. That's supposed to go bankrupt. The Supplementary Medical Insurance Trust Fund (SMI) is projected to be solvent into the indefinite future. As far as the Trustees can see, 75 years and beyond, there is no problem with the SMI Trust Fund which is Medicare Part D and Medicare Part B. Why is there this difference? Why are the other three going broke but this one is perfectly fine? And it happens to be that the government has guaranteed to make all payments for Medicare Part D and Medicare Part B out of General Revenue and tied the payment of benefits for other Medicare payments, hospital benefits, and Social Security to the availability of the funds in the Trust Funds. And so, I mean it's crazy, it's right there in the Trustees Report and they say it very clearly that the reason Supplementary Medical Insurance plan is solvent as far as the eye can see is because the government says so. It's as simple as that.

A: [01:25:45] [Warren Mosler] Just to your last question.

Q: [Joe Firestone] So the whole problem with respect to Social Security and also Medicare is just to have the government say so?

A: [Warren Mosler] Yes.

A: [Stephanie Kelton] Exactly, it is an accounting problem, it's not a financial problem.

A: [01:26:00] [Warren Mosler] So look, I think we also tend to agree that unemployment is a large cause of the environmental degradation. Nobody cuts the trees down when they don't need the money and don't need the jobs. So, so many of these things that go on are in the name of creating jobs when that shouldn't be the case, we should be at full employment anyway and then the pressure for that would go away.

A: [01:26:26] [Bill Mitchell] Here's a snippet of policies that are current and that I've written about and that are on my blog. Health care, America has a crazy health care system. It's a dysfunctional health care system and you could be very well advised to look at the Australian system, Universal Health Care. The poorest person in Australia has immediate access to first class health care whenever they want it. And nobody suffers from lack of income in relation to health care. So I think Universal Health Care is something you should aim for. The government will always be able to afford that if there's enough real health care resources available and if there's not, then you could redeploy people who I'm just about to be put out of jobs in the financial sector as doctors and health care professionals.

[01:27:20] [Mitchell continued] Environment, I've written that, and your government is toying with the same sort of nonsense as my government. Emissions trading schemes, market-based trading schemes are ridiculous. You need rules-based schemes. That is you need to identify, in say Australia's case, it's the biggest coal exporter. Coal is not a viable long term industry in environmental terms. Give it twenty years and then close it down. It's a rules-based approach. The sort of emissions trading systems that Europe has been implementing are dysfunctional and will create a worse problem.

[01:27:59] [Mitchell continues] Financial sector, we need radical reform of the banks. Banks need to go back to being financial intermediaries, not speculators. And I would immediately outlaw almost all OTC trading and redirect those workers into other jobs that might help us solve cancer and create environmental care solutions and things like that. The only speculation I would allow is that there can be readily attached to the real sector, for example, forward markets provide a counter-party for a manufacturer who wants to hedge exchange-rate exposure on some manufacturing contract that crosses borders, that's fine. That's speculation that serves a real purpose. Any speculation that doesn't should be outlawed and I would create public sector jobs to provide gambling advice to those that I've outlawed. [Laughter]

[01:29:05] [Mitchell continues] So there's some policy initiatives. I would...The future to our inter-generational challenge dependency ratio challenge is first class education at all levels and public education in my country services, by far, the greatest majority of people and I'm not so sure here but probably secondary school still does here. And I would have massive injections of public spending into education to increase their productivity. As our dependency ratios will surely rise we will be able to get more output per unit of worker and not have to worry about the real resource shortages that might arise. But as we said this morning the irony is the solution we've adopted is to trash our education systems and therefore we are undermining our future when we think we're actually supporting it. So there's a few snippet policies.

[01:30:12] [Joe Firestone] One more question and then I think we're going to have to wrap it up, at least, the formal ceremonies for the day. Can you pass over the microphone before you start?

Q: [01:30:26] [Unidentified] This should be a short question. We've added now three countries as examples of that social unrest provided the impetus to get policy makers' minds focused on this. We all know, most of this audience knows about different parts of the United States so, at least I'm very curious to know, is there any significant difference in the resistance of people to discussing these ideas in Australia as compared to the United States?

A: [01:31:03] [Bill Mitchell] No. With all due respect, the dialog is more civilized in Australia. Fox News couldn't exist in Australia.

Q: [Unidentified] What do you mean? He came that way.

A: [01:31:21] [Bill Mitchell] The boss exists, that's why we got rid of him. [Laughter] But the type of journalism wouldn't survive in Australia, we would think it was a joke. Even the, what I would call the extreme right in Australia is more civilized than Fox News. And one of, we were having a conversation with someone this morning, one of the differences might be I sense there is much more of a religious zeal here than there is in Australia. We don't have the fundamental sort of puritanical origins. We were criminals after all. [Laughter] And I think you've commented, Randy, when you've come across, when you've been interviewed by our press, that you were surprised by the sort of questions the press and the way in which the public discourse and policy discourses is played out. It's more civilized.

[L. Randall Wray] It's more intelligent.

A: [01:32:29] [Bill Mitchell] It's more intelligent Randy's saying. Well I wasn't going to sort of say it [Laughter]. But at the end of the day the neo-liberals invited us too. But our welfare state has been degraded but not destroyed. And I think that they haven't been successful in getting rid of Universal Health Care, they haven't been successful in getting rid of a decent minimum wage system, they haven't been able to completely trash public education. They've tried all of those things, they haven't succeeded in doing that and they never will. It's too culturally embedded in us, in our, we're a more collective society than the U.S., we have a more, we have this concept called mate-ship, and everybody's a mate, even your enemy is a mate in Australia. And that's a very strong collective tradition, goes back to the settlement, goes back to our war efforts, and our ANZAC tradition and all of that stuff. At the end of the day we will not allow a fellow worker to go without health care if they don't have income, we won't allow them to go without housing if they haven't got income, it just wouldn't happen.

[Joe Firestone] There is one last question.

Q: [01:33:56] [Unidentified] Just one. Just to follow-up on that. All my life I've seen the right-wingers arguing for things that are plainly destructive and you just said they were trying it in Australia and they couldn't succeed but what are they doing it for? Why do we have so many people trying to do this kind of stuff?

A: [01:34:24] [Marshall Auerback] You know I'm Canadian and just a little anecdote. One of the reasons we almost didn't avoid the sub-prime bubble was because AIG came up to Canada when the Harper Tory government come into power in 2006 and they argued for us to liberalize our insurance markets so they could offer programs like Credit Default Swaps that was AIG's doing. And the Tories were no more ideologically predisposed to do this than the previous Liberal government was. Maybe they just wanted to expand their money-making machine across the world and maybe they always want to do that.

Q: [01:35:13] [Unidentified] So is it just like when you have a two year old who can crawl all over you and do terrible things but the reason he does that is because he doesn't know he can hurt you. I mean, are these guys like just children trying to get what they can and do what they want and not know that it has consequences?

[Bill Mitchell] I don't think there are any psychologists on the panel. [Laughter]

A: [Warren Mosler] I think they do it for the funding.

Q: [Unidentified] It seems to me it's somewhat for the fun. To make it more exciting, to make life more interesting.

A: [01:35:50] [L. Randall Wray] But a big part of it is, so you can step back and look at the big picture but there are little stories about each one of these, so each individual firm, each individual sector is trying to get a bigger share. And so, they're advocating for things they see as in their own individual interest and then we can step back and we can say, "When you add all these things together it's a disaster." I think that's part of it. Now, I do believe in conspiracies, too -- but I don't think you have to go there to explain why, if you're Goldman Sachs and you're going to be peddling Credit Default Swaps and you're betting against your customers, you would like to see that allowed.

Q: [Unidentified] There used to be moral, there used to be things you wouldn't do.

A; [Unidentified] Yeah, and there used to be regulation too.

A: [01:36:35] [Warren Mosler] But the other thing is you have a lot of successful people who think that it was because of their own doing and then fund organizations that support self-reliance and all these things we consider right-wing types of things, less government and that type of thing. And you're not going to stop that, it's just human ego.

A: [01:36:56] [Bill Mitchell] Yeah, I think the question about regulations is important. I mean the big difference between Australia to here in the financial sector is we really kept the regulations on the banks. And not one bank went close to failing in Australia. I mean we didn't even have a recession because the financial implications were very muted in Australia. And that's because we still maintained most of the regulations. Like you ditched your 80/20 rule, we didn't have an 80/20 rule we had a 75/25 rule, we didn't ditch it. The modification we had was anybody who wanted to go without a 25 percent deposit had to insure. And the banks had to insure them. And that's a fundamental difference.

[01:37:48] [Mitchell continues] And the other big difference, of course, was that, and I think you've made this point sometimes too, Warren, is that when did the sub-prime crisis become a crisis? When did we get this sort of debt melt down? We got it when we, there was no doubt at the margin that people who should never have got loans. But when did good debt become toxic debt? When people lost their jobs. You could have avoided a whole lot of the bad debt problems if you had an earlier and more substantial fiscal intervention. Whereas in Australia we had a very early fiscal intervention and a relatively large fiscal intervention. And the deficit terrorists were saying, "This is ridiculous. What are you doing? You're going to kill us." But it saved us. And it stopped a lot of the good debt becoming bad debt. You didn't do that here. And that's cultural and, whoa, intelligence, as Randy says, I didn't say it. [Laughter]

[Warren Mosler] When you're upside down the blood goes to your head.

[01:38:57] [Joe Firestone] I'm sorry, I'm afraid we have to stop. It is the time, the witching hour. So I'd like to thank all the panelists who worked so hard on this and who came so far and who really sacrificed a lot in order to do this today. I'd like to thank you all for coming, for all the questions and for all the statements and it's really been a very exciting day and a very satisfying day, especially for me.

[Unidentified] I think we should give Joe a hand. [Applause] Joe created a website, FiscalStability.org And...

[01:39:41] [Joe Firestone] Actually it wasn't I who created it, it was Lambert.

[Unidentified] Lambert. OK, Lambert. And on that website, since conferences like this do cost money, they do cost money, there is a contribution, if you find it in your heart and in your pocketbook, there is a contribution button there in the margin you can click and contribute to help defray...

[Unidentified] And also say other helpers came together to [applause]

[inaudible]

[Joe Firestone] And we also want to thank the Department of Management and George Wash...

[01:40:44] END TRANSCRIPT

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audio available here