Episode 10 – Game Theory with Warren Mosler

Macro N Cheese – Episode 10
Game Theory with Warren Mosler
April 6, 2019

Warren Mosler [intro/music] (00:04):

We damage people by causing them to become unemployed because in today’s world, corporate America doesn’t want to hire people who are unemployed, they never would. They want to hire people already working.

Warren Mosler [intro/music] (00:15):

The labor market is not a fair game. With or without unemployment, it’s not a fair game because people have to work to eat and business only hires if they can make a certain return on equity that they think is a good deal, or else they don’t hire.

Geoff Ginter [intro/music] (00:43):

Now let’s see if we can avoid the apocalypse altogether. Here’s another episode of Macro N Cheese with your host, Steve Grumbine.

Steve Grumbine (01:35):

All right. Thank you. This is Macro N Cheese and today I have Warren Mosler. He is the author of “Seven Deadly Innocent Frauds” and “Soft Currency.” So without further ado, Warren, welcome to Macro N Cheese. How are you, sir?

Mosler (01:50):

Good, good afternoon. Good to hear from you.

Grumbine (01:52):

It’s always a joy. I want to ask you…Obviously I’ve known you for some time now and what you’ve done from my personal life by, you know, making Modern Monetary Theory accessible to regular people, such as myself, who had long since lost hope. I just can’t put that in strong enough words.

Let me ask you, can you just give a synopsis of what Modern Monetary Theory is and how you came to recognize the facts that come about through the knowledge of Modern Monetary Theory? How did you come to learn this? How did it come to be and what is it all about?

Mosler (02:32):

Okay so, you know, what is it? How can I describe it for this thing in its most elemental form? And I started in banking in 1973, and I’ve always been a student of it in that I, when things were happening, I would trace it back to the debits and credits. If the Feds are adding reserves, what does that mean? What accounts do they debit? What accounts do they credit?

If Treasury is selling securities, what accounts are debited or accounts are credit? I worked at Bankers Trust on Wall Street were we were a primary dealer back then. I was Assistant Vice President of Ginnie Mae Sales and Trading. I worked with J. Pomeranz, we were at the very beginning of what are now known as derivatives.

And in fact, in the eighties, I probably, you know, I was in the middle of developing a good many of those derivatives myself. And so I, I just have a working knowledge of money, banking in the monetary system in a way that makes sense for me. And what was happening in the early nineties is the budget deficit was causing a major problem.

That was Ross Perot, “running the debt”, “going to take us down”, that type of thing. And Italy had a massive, perceived deficit problem where Italian bonds were actually selling at a 2% higher yield. These are Lira denominated bonds. So we could borrow Lira at 10% and buy government bonds at 12%, make 2% profit for basically doing nothing except taking the credit risk that Italy might default.

And that’s what got me started thinking about why Italy might not default, which if you could come up with a good reason, uh, there was a lot of money to be made, of course. And so I got deep into that. Everything, I called the rating agencies look at how many countries with their own floating exchange rates ever defaulted on their debt. And they’d list out seven or eight countries.

But then when you went into each one and check the details, it wasn’t what it seemed. And I was, for example, one of them was Japan in 1943 defaulted in Yen to the United States. It’s like, okay, they just decided not to pay; it wasn’t that they weren’t able to credit our account with Yen, they just decided not to do it.

Or they talked about Brazil, didn’t pay some bonds, but they went and checked, what happened was the inflation was so intense and the bonds were worth so little that the holder of the bonds didn’t want the money in any case – it was, you know, it was all worth less than a penny or something like that. So it just got written off into rounding and that was considered a default.

The, interestingly, the real default was the United States government, maybe in 1933 or 4, I forget the year when we went off the gold standard. That was considered a default on our promise to convert into gold. It wasn’t a default in a floating exchange rate, fixed exchange rate; but it’s interesting that that’s one of, one of the world’s major defaults was the United States defaulting on its obligation to convert dollars to gold.

So there weren’t any, and when you ask people why someone with their own currency, floating exchange rate, doesn’t default, they say, “Well, it’s because they can always print the money.” But when you go back at every crisis, nobody ever printed the money. So that could be the reason. If it never happened, I mean, it could be, but it was unlikely reasonable – it never happened.

And so I started thinking about it, now I’m continuing to thinking about it. And I was with my research associate, a guy named Tom Schulte, and it dawned on me that we buy treasury securities from both the Fed and the Treasury, I was running an investment company at the time. And it doesn’t matter to us which one we buy it from. The money goes to the same place, the bonds come from the same place.

The bonds are held at the same place. They’re both absolutely, functionally identical whether we buy bonds from the Fed or the Treasury. Yet when we buy bonds from the Fed, that’s considered monetary, And when we buy bonds from the Treasury, that’s considered fiscal, right? Well, if they’re functionally the same, they’ve gotta be the same. And that’s when it dawned on me.

They’re all monetary. Fiscal has nothing to do with it. They aren’t selling bonds to . . . the Treasury is not selling bonds to finance themselves. They think they are, and they go through those motions, but it’s all monetary. The whole 3 trillion at the time was just one big reserve drain.

They’re selling bonds because if they don’t, then interest rates would drop (at the time) to zero – there was no support rate – and not because they needed the money to spend. Now I’m getting a little technical there.

So what came out of that, looking closely at the debits and credits, was another obvious thing that the United States government, if you look at it as a whole, spends first and then collects taxes. Okay? It spends first and then borrows. Alright, so that the government has to spend first, before it can collect taxes. It has to spend first, before it can borrow back its own currency.

And that’s because what became obvious is that all the funds to pay taxes, that can be used to pay taxes, can come only from the government. If they’re not, if they come from somewhere else, that’s called counterfeit.

And now after that, people jump up and say, “Well, the banks can create money and you can use it to pay taxes,” but the banks are functioning as agents of government when that happens. They’re under a Federal charter, they have an account at the Federal Reserve and the Federal Reserve allows them to do that as a privilege of being a member, a Fed member bank.

It’s not, it’s not like some private, you can go out and open up some bank somewhere without ever talking to the Fed and use that money to pay taxes. It doesn’t work that way. It’s only if you’re an agent of the Federal Reserve.

Grumbine (08:05):

So let me ask you a question, Warren. When we have people talking about, “Hey, that’s bank money, the banks are making money.” The question always comes up. What’s the difference? And there is a difference, you know, at least in terms of how these debts are settled between bank credit money and the federal government spending money, so to speak, into existence. What is the difference between the two?

Mosler (08:32):

So Ellis Winningham, I just read a quote from him, which was, I thought, excellent. And not that it’s exactly on point, but it’s close enough. And he said, “Look, if you know, why, why do banks need government bailouts? Why can’t they just create their own money and bail themselves out?” So if they can create their own money —

Grumbine (08:50):

Great point!

Mosler (08:50):

That’s kind of a good point, isn’t it? So that tells us, that tells you there’s a difference here between government and the banks, right? Banks, Citibank, or somebody needs bailout, why don’t they just, they can create all the money though, why don’t they just do that? What do they need a government bailout for? So obviously it’s not the case. Okay.

So the problem is the word money. And I don’t use the word money if you’ve noticed, except casually speaking, you know, I need some money to go to go to a restaurant or something like that. So, and it’s because bank loans are accounted for, which is what the word create means as “bank deposits”.

 And for every asset, there’s a liability because things are described as one person’s asset is another person’s liability when there’s a relation between the two. And so when the Federal Reserve bank is a “bank” and when the Federal Reserve buys anything, the thing that buys is its asset, and the thing that, the way it pays for it, is it creates a liability, which is a deposit.

And it creates, it credits accounts on its own books. Banks don’t have anything to do with that process, that’s just the Federal Reserve. When they make a loan, it’s best to think of a loan as a, they create a note and then the bank purchases the loan from the borrower. Okay?

So if you go to a bank to borrow money to buy a house, you sign a mortgage and the bank purchases that from you, and it pays you with a deposit. So that’s how a home loan creates a deposit. The loan creates an asset that is bought, purchased by the bank. The bank has a loan as the asset, and the deposit is a liability. So banks can create bank deposits.

The Federal Reserve bank can create deposits at the Federal Reserve bank. No bank can create deposits on any other bank’s balance sheet. Each bank takes care of its own books. Okay? And so the Fed, to pay taxes to the Federal Reserve, you have to use, you have to have an account at the Fed. And that account has to be debited by the Fed for you to pay your taxes.

And all the commercial banks have accounts at the Fed. And so when you use your bank to pay taxes to the Fed, they debit your bank’s account at the Federal Reserve Bank and your bank doesn’t have any control over those numbers.

Those are numbers are all changed up or changed down by the Federal Reserve. So you’ve got a government, that state, with its currency, the dollar, and it has to spend first before it can collect taxes. It has to spend first before it borrows its own money back. So the idea of running out of money is just totally inapplicable.

And then, if you look very closely at, well, how does institutionally, how do they spend while the Treasury tells the Fed to credit a member bank’s account? So it says “credit Citibank or JP Morgan to pay General Dynamics for some airplane we just bought” or something like that.

And so the Fed then credits the account, and it’s in the way they say it is the Treasury gives the Fed instructions, but the Fed itself, the bank changes the numbers up or down. When you pay taxes, the Federal Reserve Bank has instructions to lower the balance in your member bank’s account, change that number to a lower number.

And the interesting thing is there’s no such thing as like money moving anywhere. When the Fed changes the number down in one account and changes a number up in another account, there’s nothing like that moved inside of any wires or anything. It’s very much like if you watch a football game on your TV, you can see the players moving.

But if you get very close to the television, all you see is dots flashing on and off. There’s nothing moving. Not – none of those dots are changing places, they’re just going on and going off. And so it’s the same thing with dollars. Balances are going up and balances are going down. It’s not some thing, there’s not some stuff that’s moving around and there’s some limited amount of it or something like that.

You can, in the example I’ve used forever is you go to a football game and you kick a field goal and you get three points. Where did the stadium get those three points? They gave you a score, but they don’t come from anywhere, it’s just scorekeeping. Or for playing cards and I’m the scorekeeper. How many points do I have?

I don’t have any, well, then if you get a hundred points, how do I give you a hundred points if I don’t have any? Okay. I just changed the number up on a piece of paper to plus a hundred for you. And if somebody else goes down a hundred, I write down minus a hundred. Do I get as a scorekeeper, have more points? No. So the Federal Reserve, the government, it doesn’t have, or not have dollars.

It’s just scorekeeper for the dollar. It just changes numbers up and down for the players. The players are all the member banks and for accounting purposes, they have the Treasury in there as a player, but we can get into details. It’s just to be able to keep track of things. It’s not because there’s something they can run out of or not run out of, it’s just a way to keep track of things.

Grumbine (13:37):

So let me, We asked the next question then. Yeah. You know, in our current environment, you know, a lot of us progressives are fighting, you know, round the clock for a New Deal, trying to get folks to understand that we can, we can spend.

And that the only real constraints here are the availability of real resources to be purchased and to create and produce the products and services that the demand requires. My question to you is this – where did we go astray? At what point in time did this become mysticism that no one understood.

I mean, it seems to me like we’re fighting against the demon that is just ignorance, that is misinformation, etcetera. But somewhere along the line, somebody had a great idea that maybe we should go ahead and make it so that people have no idea how to get these programs.

I mean, they’ve been, they’ve been literally shamed out of believing they could have a better life and they stopped believing. How did this come about?

Mosler (14:36):

Well, I’m not sure you can find a time, certainly in American history, that we ever understood anything differently. You can find the occasional people who’ve written something very, very close to this who understood it. But I don’t think it was kind of, you know, common knowledge you might say on how it worked.

Grumbine (14:55):

I mean, this is unique to Modern Monetary Theory. I guess what I’m trying to say is you’ve somehow or another found Atlantis. So you’ve, you’ve identified life on another planet. It is that big of a deal when we talk about this, because the insights that MMT gives us, provides us with a roadmap to do great things. I mean, we get to the moon in this way.

We get to another planet this way. We, we fix the climate, we fix healthcare, we fix education. I mean, there’s so many things that come with this knowledge. It seems like you would think people would be jumping all over it yet there’s this, there’s this barrier. And it’s the incredulity of average America, that just completely can’t believe that anything’s possible.

Mosler (15:39):

So let’s look at one more thing I actually tweeted. And that is the labor market is not a fair game. With or without unemployment, it’s not a fair game, because people have to work to eat and business only hires if they can make a certain return on equity that they think is a good deal; otherwise they don’t hire. Nothing bad happens to them if they don’t hire anybody.

And so your first week in game theory, it’s all mainstream, mainstream game theory, you know elementary mainstream game theory will tell you, this is not a fair game. And so you’re going to expect real wages to go, gravitate, towards subsistence levels, whatever that is, unless there’s some support for labor. Now, we used to have a lot of support for labor, with labor unions.

And then in the eighties, they were all broken. And that’s when the link between productivity and wages started, you know, a wedge started being driven in there where our productivity kept going up, but everything started going to profits instead of wages.

And I know there’s benefits and everything else, but still that, you know, it’s pretty clear in the data that that’s what happened because labor lost its support. Now that doesn’t mean necessarily you need to bring back labor unions because they have their issues also.

But the principle is that real wages are going to stagnate near subsistence wages unless you do something to support them, because it’s not a fair game. You can have unemployment down to, everybody’s got a job except there’s one last guy who’s unemployed. And then he sees a job offer. Well, he’s got two choices, take the job or his family can’t eat.

You know, it’s not like, well, all these other people have jobs so I can demand more money. You’ll look at his position, he’s not in any better position just because everybody else has a job. And so it’s not, it’s just, you know, absolutely not a fair game. And so, it shouldn’t be any surprise that wages aren’t going anywhere.

Even with unemployment coming down, the Phillips curve doesn’t seem to be working the way some had suggested. And so – I know there are people who throw in evidence that it is working, show little things, but it’s not working the way anybody thought it would work. And so, which says as you got towards lower and lower unemployment wages would go up and up. It’s just not happening.

And so, and that’s why it’s a very simple thing, it’s pure mainstream. And you don’t read about that or hear about that anywhere. And it’s, I’m sure it’s learned somewhere in elementary micro classes somewhere because it’s not. You need to tell an economist about it, they go, “Oh yeah, of course.” But then it never gets mentioned or used anywhere.

Now as progressive, to me, that’s a critical insight into what’s going on and we need – and so you want to come up with, I’d love to come up with some kind of, if we don’t want that to happen, if we don’t want the gap between high income and low income to be what it is, and we can all make the case that it’s there only because of institutional structure, it’s not there because of skills or merit or anything else.

There is some gap that develops with skills and merit, but it’s not anything like this. This is all institutional structure. Then what do we have in the institutional structure that’s promoted, promoting, this that we can take, eliminate, because it’s being caused by some of our, our laws are causing this to happen that wouldn’t otherwise happen?

Wouldn’t happen in the society, non-monetary society somewhere. This is, this is something happening within our laws. And also, what other actions that, can we add to the institutional structure that may be needed to keep this from happening?

So one of the things we can add is, what’s been popularized as, the Job Guarantee, which I call a transition job because that supports wages, labor from the bottom up. And it’s immediately universal and it creates a floor for wherever, whenever we want it for real compensation. Now, if we make that floor higher than the available resources, we’re just going to generate inflation.

But if we, if it’s a reasonable floor and it is within our productive capacity, we can – we have to, we set that; and since the monetary system itself is a monopoly, we are the monopolists setting the basic, the wage floor in the economy in terms of real wages, that this share of real Gross National Product, that goes to people working for a living, we’re setting that through our policy – if you look carefully for it.

Grumbine (19:46):

You raising an important question, and it was regarding labor unions, and I just don’t want to get too far past that. With this knowledge, labor unions would have significantly more, in my opinion, they’d have far more leg to stand on if they actually understood how the monetary system worked.

Mosler (20:05):

That’s true.

Grumbine (20:05):

It seems like they’re begging for, for, you know, scraps at the table. You know, like, sir, please give me some more porridge. And instead of actually understanding the way it works, I mean, if they were to join forces with us and they were to start taking this knowledge to their unions, you would think that we would have an explosion of knowledge and an explosion of activity driving toward a more equitable society by, by just leaning on labor unions, even though they have their flaws – if they understood, perhaps that would strengthen their position. It’s just an idea.

Mosler (20:39):

well, the flaws in too many high profile cases got extreme. You know, the wealth being earned by the union leaders that are not necessarily acting in the national interest, at least they got framed that way. I’m not saying they were, but, and the corruption, the organized crime involvement in the whole thing, yes, it worked to support real wages, but you had some byproducts that let’s just say, turn people off.

And so to try and go back to that is probably not the path of least resistance. And also the industries got fragmented, and we have foreign competition where before the big business had pretty good domestic oligopoly going where they could just sit down and agree at what prices should do, which functionally makes them monopolies and then passed.

It was path of least resistance was to just pass the increases onto the productivity increases onto labor. And everybody was happy. Sales were good. Business was good. So we don’t – you need strong business to have strong labor. So we don’t have either of those in the way we used to, we’ve got a few businesses, but not the way we used to.

So the times have changed and I’m certainly not anti- union or anything like that, but I think there are better ways to do it now. People are working from everywhere, from home, from cell phones, from you don’t even know where they are. The whole idea of unionizing people that have a floor is not likely.

And then you’ve got the problem where the union would, members would get high wages and the rest of the economy wages were going down. And so it wasn’t a universal thing. And, uh, I don’t want to go into all the difficulties that we faced with it. But it’s just a whole can of worms right now. And it’s not to me, you know, the progressive solution that I’d like to see right now.

I’d rather do it through the transition job wage and through other legislation that would eliminate the other institutional sources of this distribution issue, such as eliminating all Treasury securities and not letting the Treasury sell anything longer than the three month bill, just to not to be too disruptive to process.

You know, get rid of that whole trillion dollar, whatever it is, cottage industry, that’s, that’s supporting a huge distributional issue and same thing with stocks, right? You’ve got insured pension funds shouldn’t be allowed to be in the stock market because it’s, if you win, you win, if you lose the government pays. So that doesn’t make any sense.

So you know, they shouldn’t be there and it didn’t always used to be that way. I saw Rohan did a very nice article on this. He said it more eloquently than I could. Something I’ve said for a while is that corporation has limited liability, which is a gift from government. It’s institutional structure, it’s a government support.

And with that comes, anytime the government does something like that comes a responsibility to make sure it’s serving public purpose. And there this pretty good argument that that it’s not right now, it needs a whole lot of modifications to serve public purpose.

And it has absolute, right, I mean, it’s. . . the authority is there to say, “Alright, look, if you’re not serving public purpose, you go back to personal liability of the investors and see how well you do with that.”

Nobody’s going to do that because limited liability is just a massive form of public support, so any corporation you say is private industry and everything, it’s not. . . it’s being supported with limited liability. I’m getting off track, maybe a little bit here.

Intermission (24:19):

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Grumbine (25:08):

That’s okay. It brings me to the next question though, which ties in back to the Job Guarantee. So it sounds to me like in a modern money economy and the current global labor situation, that the most responsible thing that we can possibly do is institute a Federal Job Guarantee; or as you say, a transition job, because this not only sets the wage floor.

It basically does the work that the unions were trying to do through legislation, nationalizes it across the country, and then puts labor in a position where they have options, where they, where they’re no longer with the threat of destitution hanging over them to take whatever slave wages, or so forth, that are thrown at them. They have an option. They don’t have to take what is in front of them. They can make choices that are different.

Mosler (26:03):

It levels the playing field and it takes away this unfair competition. But right now they’re got two hands tied behind their back. And so it’s just due to the institutional structure we have, again, so, as being deficient. And so now we put this in, and we have to, when I say deficient institutional structure, the other critically important contribution of Modern Monetary Theory is that the cause of unemployment, by design is taxation.

And the third thing, which is the beginning, is that the money story starts with a government trying to provision itself. So you look at other schools of thought and it starts with a business like the circuit theory trying . . . goes out and borrows money to hire people. They produce something. It pays them. They sell it and they trace the monetary circuit, but it begins with businesses borrowing money to hire people.

The whole credit crisis system was. That’s not. . . MMT says, “No. The money story begins before that. Why is anybody working for this money to begin with? Where does this money story start? And it starts with the government trying to provision itself.” We show examples like the British colonized Ghana, right, wanting to grow coffee there. How do you do it?

And so what you have as a state, the British at the time that wanted to move resources, which was human labor from whatever these people were doing in Ghana before they got there in a non-monetary society, they wanted to move into the coffee fields.

Today, we want to move people who want to move people from the private sector, into the public sector, we want judges and soldiers and police officers and public health and all these other people in the public sector. How do you move people out of the private sector into the public sector? That’s where the money story starts, okay.

And we do it through the monetary system. And so if we go back to Ghana, what the British did was they implemented a tax. They started a new currency and let’s just call it the crown, for lack of . . . it doesn’t matter what it was called. And so they were offering crowns to people who wanted to come work in the coffee field, but nobody wanted to work for a crown.

Nobody ever heard of it. There’s no reason that anybody would give up hunting and fishing and taking care of the children and educating them to go down to the coffee fields to grow coffee for this crown thing. So what they did was they implemented a hut tax. They all lived in these huts, these grass huts. And they said that every, you know, there’s going to be a 10 crown a month tax or whatever on every hut.

And if you, if the hut doesn’t pay its tax, we’re going to go burn it down, we have the military. So now they’ve created this tax liability. Everybody has to pay 10 crown a month or get your house burned down.

And so now they’ve created something that didn’t exist before, that’s people looking for paid work in their currency, which is what we call unemployment and unemployment is not people looking to volunteer for the American cancer society who can’t get a job – it’s people who need money. And it’s created by taxation in a non-monetary society where you don’t have monetary taxation.

There’s no unemployment as we know it, it can’t be, it’s just not applicable. So the taxation by design is there to create people who need the currency for the further purpose of provisioning the government, in this case, provisioning the British with labor in their coffee fields. They would then have all these people showing up looking for work in the coffee fields.

And now they can hire them by paying in crown because the people needed it to pay the tax. And you said, “When did they, people, understand how it worked?” They understood that they had to get paid first before they could pay the tax. The British would spend first and then collect the tax. So they certainly understood it 200 years ago in Ghana. It was perfectly obvious to everybody.

And of course, the British would always spend more than they collected because people would earn the money first, and they’d earn more than enough just to pay the tax normally to have a couple of extras in their pockets or whatever they hold them for a while until the taxes were due. And then at some point later taxes were paid.

So the British always ran a deficit and always spent more than they collected. Those extra crown they spent were called the money supply. Those were the crown people had in their pockets or in their homes or in the merchants would have them in their shops. And, they all knew that the British would spend more than they collected.

And that’s where the money supply came from and that the spending more than you collect is called deficit spending. And the amount that you spend, that’s more than you collect, it’s called the public debt. And they all knew the public debt was the money supply, as they casually called it back then. Today we’ve lost sight of that. We have 20 trillion of public debt.

What is it? Well it’s our . . .not wrong to define it as the net money supply for the economy – means the government has spent 20 trillion more than they’ve taxed. And those dollars sit out there in bank accounts until they get used to pay taxes. So it’s the 20 trillion or the dollars spent by the government that haven’t yet been used to pay taxes.

That’s that’s our public debt and that’s all it is. But anyway, the point of the story was that the money story starts with this government trying to provision itself, which is very different from the mainstream story.

And a few years ago, when, uh, President Obama said, “Look, all the money comes from the government.” There was a big uproar, “No, it doesn’t. Real wealth is generated in the private sector,” and all that. And then he backed off. Okay, he got it right and he backed off.

Grumbine (31:26):

Why do you suppose that is? I mean, for real, why do you..? I mean, each I’ve seen this happen with Trump. I’ve seen this happen with Obama. I’ve seen others accidentally slip up or whatever. What are they protecting? I mean, is it, is it the insanity of regular people that just can’t fathom that money is, you know, not my precious some finite thing.

Mosler (31:50):

It’s a tax credit from the government so that they can’t . . . Yeah, I think it’s just too hard for them to understand it. So they can’t defend the position that they inadvertently let out. Somebody starts asking them questions; suddenly they realize they’re in over their head. They can’t say anything. So they just agree with the experts, you know, they back off. It’s their, their path of least resistance.

Grumbine (32:10):

Yeah. That’s a shame. You know, you, you said a while back, “the headline left had failed Progressives,” and you know I’ve hung on with that. And I get a lot of pushback, obviously from people that I consider to be fellow travelers in our, in our sphere.

And, you know, it’s because I look at this and I say, “My goodness, this really, if I can get this, you know, I’m not the sharpest knife in the drawer, dag gone it.” We should be able to get to a point where we can take this knowledge and do something with it.

And you look at what happens to the lowest, the people that who can least afford the errors that come from this lie or this misunderstanding or whatever, they’re, they’re destitute, they’re really struggling. And it’s so preventable. So what do you think the headline left keeps doubling down on this failure? Do they not want to win? Do they care? Is it just about power or are they afraid they’re going to be seen as a kook?

Mosler (33:10):

Well, look, you know, I name names, so maybe that’s made me unpopular. But now I’ve talked to Dean Baker about it, extensively, like two or three hours at a time in his office. And he thinks, he thought at the time, the battle could be won, explaining it his way; and then if he explained it my way, or the right way, the battle would be lost because you’d just be totally marginalized.

And so the way to win the battle was to do it that way. And I talked about Lerner’s Law and the whole thing, and that he’s, that’s how he, he says, “Look, I’ve been at this a lot longer than you,” which I’m not sure if that’s true anymore. I guess he started before I did. I started in 1992 or three. He probably started 1970 something, so, okay, fine.

But he’s been losing since 1970 also. And so, you know, and so then I don’t know when the last time I had that conversation with him, eight or 10 years ago, maybe who knows. And he lost all the battles, you know, and it’s still being lost. And so he’s actually slowly coming around, but he truly believed that his way would prevail.

You know, Social Security was a useful fiction that they needed to keep that going in order to prevail, to save it. And I’m saying, “No, you’ve got to tell it what it is, tell it the right way and you know, to save it.” And I can’t say he’s wrong, you know.

He starts telling me how people think and what’s going to happen, and why he has to use his explanations that he does, violate every bit of [inaudible] while you can, because tactically, that’s going to win in Congress cause he knows Congress and he understands what people do. So I have to defer to that. I can’t prove that it’s going to be wrong. And he goes about doing it.

So do all the others and then they keep losing, right? So, I guess at some point they say, “Economics changes one funeral at a time.” They have to be gone and the next generation is going to try, maybe they’ll try to get it the right way, and then maybe they’ll win.

I feel like we’re more on the verge of winning than we’ve ever been. But on this Job Guarantee thing, I’ve been very concerned that we’re going to lose this because of the way the MMT community is presenting it.

Grumbine (35:31):

Now, do you think that’s the conflation of Job Guarantee versus Transition Job?

Mosler (35:36):

Yeah. Not, and not just the name, but the idea that it’s a human right. Everybody’s entitled to a job. We can do all kinds of useful things with these people. Then they use the word “these people” which is totally annoying to me, but you know. But it’s, let’s not look at it that way. But so, and it’s like, okay. And, you know, you’ll see a Bloomberg interview and they say, “Well, government might have 20 or 30 million people.

What are they all going to do? Is it going to be useful work? Oh yeah, there are all kinds of things.” You know, like wrong answer, wrong answer. The answer is, the right answer is: The whole point is for them to transition back into the private sector. Taxation caused them to become unemployed. It’s like the British, you know, they put a tax on everybody’s hut.

They needed a thousand people in the coffee fields and 2000 showed up. Well, what does that mean? It means the tax was too high, created too much unemployment. So you either hire them, give them something to do cause your tax is what brought them over there. You don’t just send them back home and then go burn your house down because they can’t pay the tax. Yeah. That’s stupid, right?

We’re going to put a tax on your house. If you don’t pay, we’re going to burn the house down and we’re not going to give you a job to earn the money. We have the money. So now we’re going to burn your house down. They never did that. They either hired them or they lowered the tax so they wouldn’t need it and they wouldn’t be showing up in the coffee fields. Okay.

But today we could lower the tax to try and create enough, you know, restore demand. But we’ve, there’s one more thing – we’ve damaged people by causing them to become unemployed. Because in today’s world, the corporate America doesn’t want to hire people who are unemployed and haven’t worked. They want to hire people already working.

And the Fed in New York just did a study on that, that showed the exact same thing. And there’ve been studies done all over on that, that showed this exact same thing – that business prefers to hire people already working and stays away from unemployed. There’s a lot of risk hiring unemployed.

You don’t know if they’re on drugs, or if they’re going to come in and not take a bath or something or get in fights or what their work habits are. You want to hire somebody who you’d go to their supervisor, “Yeah. They’ve been coming in every day for two years . . . really good people. Okay. We’ll hire ’em.” So we sort of demonstrated that I’d like to say proved it, but you can’t prove it.

But they have Jefes Program ( Jefes y Jefas de Hogar Desempleados) in Argentina where 33 million population, they offered a job to every head of household in 2001, after the whole place blew up with 32 dead in the street of Buenos Aires. They floated the currency, and Daniel Kostzer was at the Labor Department.

They offered a job to every head of household, which is a little more limiting than we would have done, that wanted to work. And it paid almost nothing. You know, very low wage job. They got 2 million people entering the program out of 33 million. That’s enormous. And these are people who no one ever thought could work in the private sector.

They were Indians and people who were outcasts down there. And over a two year period, a million of them transitioned into the private sector and they had the best economy in the world. So, we know that the private sector, that was a demonstration that once people were already working and demonstrated work habits and have a supervisor, business will hire them, give them a chance if you have a good economy going.

And so that’s what happened. So the tax by design created the unemployment. So we could provision government by then hiring the unemployed, those that the tax caused to be unemployed; but the tax created more unemployed than we wanted to hire. So we either have got to hire them in regular public service jobs.

If we want green jobs fine, just hire people to green jobs, they’ll call it a Job Guarantee or Transition Job. Let’s not undercut the public sector employment situation by bringing in quote: “low cost JG workers” to do things that would normally be done by full, you know, full or properly paid full time people. We’re not trying to undermine the public employment system here.

Grumbine (39:23):

That’s a great point. I never, you know, you bring up a very valid point. You know, the Job Guarantee is not intended to suddenly become the next doctoral recruitment plan. By trying to make it be everything for everyone, you kind of eliminate the point of setting the floor.

Mosler (39:41):

Right. But if they say,, “Oh, these people can clean up trash at the beach . . .” If you want the beach trash cleaned up by the public sector, go hire people to do it. Okay. That’s not what this is about. I’m not saying they can’t do it, but you got to separate. Years ago, Paul Davidson, you know, he’s an economics professor probably almost 90 now, when I first wrote full employment price stability, and he says, “You know, I think all the public sector jobs should be called the ELR at the time, JG jobs.

Let the higher skilled people, let the government hire off the bottom and let the higher skilled people go to the private sector.” I looked at him and like, “Okay, not my, not my ideal place I want to live.” But you know, I understand his logic behind it cause that’s what he believed. So we don’t, I don’t want that. That’s not what I’m looking at as a progressive economist here. Alright.

So what, what we have is, you know, what happens if you get all these people, you don’t say, oh lots of useful work. If there’s real useful work for them to do, just hire them. If we need more teachers assistants, if we need more people answering the phone at the police department, just hire them to do that, if you think that’s important and you campaign to do that.

But once the public sector’s at what I call “the right size,” where we want, where we’ve got the people we want and we’ve still quote, you know, “overtaxed” as evidenced by the residual unemployment and we want these people to go back to the private sector, we have to lower the tax and put them in a transition job with JG job, whatever we want.

I don’t really care what you call it, to promote the transition from unemployment back to the private sector because the private sector won’t hire them while they’re unemployed. But once they’re employed, just like in Argentina, they will transition back to the private sector. And that’s the right answer for these questions.

And there’s nobody in the right, there are no right wingers who would think that’s a bad idea. If you say, what’s the, what are all these people going to do? Well they’re going to transition back to the private sector. That’s the whole point.

You know, these people have become damaged because they’re in the public sector, because they’re unemployed, private sector would like to hire people, but they don’t want to hire these. You put them in a job. Now the private sector will hire them. Look here’s the New York Fed study.

 So we put this in place and I don’t know if we’re going to get 5 million or 10 million or 20 million, but whatever we’re going to get, they’re going to be transitioned back into the private sector. Well, what if they’re not? What if they just stay there? Well, you know, if they do, they do, we’ll cross that bridge when we come to it.

But in the meantime, we’re going to transition, you know, as many as possible and then we’ll see what’s leftover. And in any case, it’s a superior buffer stock, an employed labor force, than unemployment. Okay. So it becomes a better price anchor. It’s more anti-inflationary to have people in a transition job than to have those same people unemployed for the same reason. To be a successful price anchor, they have to be liquid.

They have to be somebody the private sector wants to hire. So then we could keep lowering taxes until, you know, assuming we’ve got public spending at the level we wanted. If we want free schools and medical care and everything else, Medicare for All, that’s fine.

But at that level of spending, if we still have these unemployed, we have to lower taxes, so they’ll go away and we can do that, we can do that a lot more aggressively because they are employable. They’re a much more liquid buffer stock. So we’ve accomplished a higher degree of price stability. So we’re moving them to the private sector and we’re going to have lower inflation than otherwise.

And there’s no dispute about that. Inflation will be lower with a more liquid buffer stock. There’s no mainstream economists that can argue with that. So we have a totally bulletproof presentation. My presentation, I called it Maximizing Price Stability in a Market Economy.

And along with Professor (Bruno) Silipo Damiano in Calabria, Italy, we wrote a paper on this; and in 2017, it was published in a journal of policy models (Journal of Policy Modeling). I think it’s the number two mainstream economic journal in the world. So I’m mainstream. Okay. I’m not one of those heterodox people. Don’t put me in their class [inaudible] anymore.

It’s totally mainstream. And it’s a, it’s a full blown Job Guarantee Transition Job Program with graphs and models and everything else published in a mainstream journal presented to the, it was introduced as legislation to the European Parliament by people I worked with, who worked with the people at Five Star (Movement) who are now part of the ruling coalition.

And I was actually in Brussels presenting it in front of the committee. What do they call it? The ESN, called The Finance Committee, finance ministers, whatever it is there where it has to be presented (FICO ESN Finance Committee/Erasmus Student Network Finance Committee).

 And it’s made it through the process, not that the European Parliament can actually do anything or enforcing anything, but it’s actually gotten through the process. So it still hasn’t been rejected from becoming law. It hasn’t become law yet. It’s made it a lot further than anybody though. I think it’s worked its way through, straight through for like a year and a half through the process now. So, okay.

And it’s, and it’s got a solid bulletproof mainstream published paper behind it. Now is anybody in the States promoting the Job Guarantee using any of that to promote it? No. Why not? Because they think theirs, the way they’re going to do it will work better than that way. And maybe they’re right. I don’t know. Okay. I can’t say they’re wrong, but it’s the same as Dean Baker.

I couldn’t say he’s wrong. So I can’t say these proponents are wrong with what they’re doing and they’d say, oh, we’ve got this much popular support for the way we’re doing it. So we’re going to keep doing it that way. It’s like, okay. But you know, all I can do is present it the way I see it. And that I think is the way I would propose it if I was in a position – it’s the way I did propose it and did get it into the European Parliament.

Grumbine (45:16):

So, Warren how do these policies play in the US Virgin Islands? Kind of lay that out for us.

Mosler (45:24):

It’s not the same policies per se, but it’s the same mindset that gets you to policies that can work. So for example, we’ve been, we have a, we pay our income taxes the same as people do in the States. We fill out the same forms, but for whatever reason, the Federal Government has decided that our tax money stays here.

We get to keep our own income taxes. It doesn’t go to Washington, and it gets spent here. We get to keep it here and spend it here directly. And they call that, it’s called VI Source Income, income earned here in the Virgin Islands. It’s kept here, taxes get paid here and it gets kept here.

And if you’re a U.S. citizen and you live here, the taxes on your worldwide income, whether it be VI Source or not all gets paid here and kept here, and everyone thinks that’s a big advantage because Florida has to send their tax money to Washington, we get to keep ours. So why aren’t we doing better?

Well, it’s because yeah, Florida sends their tax money to Washington, but then Washington spends that money back in the States and all the States get their pro rata share. And they all scratch and claw in Congress to make sure they get their fair share of that federal contracting and spending and everything else. And so it’s actually just an administrative advantage.

We send the money to Charlotte Amalie, which is where offices are and they then spend it, that’s in St. Thomas; and then they all spend it here in the three Virgin Islands. Florida sends their money to Washington and they get their share spent back in Florida. So when you look at it that way, there’s no actual economic advantage, but there’s a big difference.

For every dollar we send to Charlotte Amalie here, we can get a dollar spent here. For every dollar Florida sends to Washington they get like a dollar and 35 (cents) this year because Washington spends more than they tax. They run a deficit, it’s a trillion dollars this year and that’s not anybody’s taxpayer money. That’s just New York Fed crediting the accounts of whoever the Treasury decides to pay.

And then later shifting those dollars to securities accounts, right? So it’s not anybody’s tax. There’s no taxpayer money involved anywhere in this process. And so that’s bonus money. So the States, for every dollar they tax in tax liabilities, they get a dollar (and) 35 (cents) in spending. For every dollar of our tax liabilities, we get a dollar. So it’s a huge disadvantage.

And I explained this to the officer at the Federal Reserve Bank who did the country report from Puerto Rico a few years ago because Puerto Rico is in the same position we are. And our incomes here are maybe 55% or 60% of the national average, the Virgin Islands and Puerto Rico. We both get to keep her on income taxes.

And I told him, I said, “I think if you do the econometrics, you’ll see that this could entirely explain the difference in income and why we don’t do well, why we underperform.” And he says, “You know what? I don’t have to do the econometrics. I can tell by just looking at it here you’re absolutely right.” So number one, we’re massively disadvantaged by not being a participant in the deficit spending.

And it’s easy enough to remedy. They just have to, of that trillion dollars, our per capita share would be $300 million. So they would, of their trillion dollars of contracts going out every year, maybe 300 million of contracts would come to universities and businesses and things that would be located here. And then it would help our local economy the way it helps the local economy in the States.

They wouldn’t be giving us any taxpayer’s money. I’ve talked to Congressmen about it. They have no problem with that. It’s not exactly MMT, but there’s certainly elements that get involved there. The second thing is we can do things to generate VI Source Income that other States can’t.

So for example, if you have an NBA team, that’s got $115 million payroll, you’re paying a million dollars a week of federal taxes. They come down here to train, they’re working down here. They’re getting paid down here they are generating that income because they’re earning it while they’re working here as VI Source Income. So for the weeks they’re here, we would get a million dollars a week in tax money.

They pay it to Washington and then the IRS would transfer it over to us. It’s called the IRP (Integrated Resource Plan), and it would be our money. Well, we could make it, certainly work with any one of these NBA teams. Where if you train down here for 10 weeks, we’ll apply the $10 million we’re getting to your infrastructure here, go do the training facility, whatever you need.

And if you do a 10 year contract, we’ve got a hundred million. We can do a bond issue, build a really nice stadium and you’ll have a great place to train and at our expense. So we can use the tax system we have to provide incentives like that to bring in sports tourism with that kind of incentive. And then we’d have a huge advantage over anybody else trying to attract these teams for training.

Right? Let me just say, we’ve got a few issues here. So for example, we’re running a $600 million budget. We’re running at least 150 million deficit. There’s a shortfall right now. The accounts payable had been run up to over 150 million, vendors aren’t getting paid. The government hasn’t paid its power bill. It’s behind 40 million. It hasn’t given tax refunds back. It’s behind 60 million.

Grumbine (50:13):

I want to thank you very much for your time. I hope we can have you back on again soon.

Mosler (50:18):

Thanks Steve.

Grumbine (50:20):

You got it man. Bye bye.

Ending Credits (50:27):

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