Episode 116 – Beyond the Deficit Myth with Brian Romanchuk

Macro N Cheese – Episode 116
Beyond The Deficit Myth with Brian Romanchuk
April 17, 2021

 

[00:00:02.690] – Brian Romanchuk [intro/music]

You put all your eggs in the basic income basket and then people will want a tax cut, so, whoops, there goes the basic income. They’ll just chop it and the middle class won’t really care because they’re getting almost no net benefit from it.

[00:00:19.080] – Brian Romanchuk [intro/music]

So if you don’t like what banks are doing, just regulate them differently. You have to have regulators willing to do their job and regulate, and that’s been the problem is that there was just the attitude that we got to let the overall financial system regulate itself and that didn’t work very well.

[00:01:26.690] – Geoff Ginter [intro/music]

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

[00:01:34.550] – Steve Grumbine

All right. This is Steve with Macro N Cheese. Folks, I have Brian Romanchuk joining me today. Brian is famous for his blog, Bond Economics. He is also an author, has written a bunch of different books, great books, by the way. They are not entry-level. Let me just say that. They are not entry-level. They are very good, though.

And his latest book, which I have recently purchased and has just come out, as a matter of fact, Modern Monetary Theory and the Recovery. Strongly recommend getting it. Brian is just a wealth of knowledge. He doesn’t take anything lightly. He goes into everything with a very curious eye. And so I felt like it was very important to bring on this great guest who we’ve had on about a year ago, I think, and just see if he can explain his book.

This book covers not only what MMT is at a junior level, but it also goes into it at a more intermediate and advanced level, followed by understanding the recovery that we’re looking for through this Covid-19 experience. This book was written a year ago, but we’re looking at the recovery as it is not only today but over the long arc over the next couple of years. So without further ado, let me bring on my guest. Brian Romanchuk, welcome to the show, sir.

[00:02:46.610] – Brian Romanchuk

Hello.

[00:02:47.690] – Grumbine

So you wrote this book and you’ve written a bunch of these books, and I’ve been eagerly waiting for you to release it. Now that it’s out, I guess the question is, what is the book about?

[00:02:57.950] – Romanchuk

I started it last year in the midst of the start of the pandemic and the very uncertain activity was collapsing and the initial plan was to be a relatively short report, which was going to be more about what happens after. And then it grew to being more about MMT.

And so how I frame the thing is, it’s not just what is MMT, although that’s a subject of the book. It’s also why were previous recoveries after recessions slow? And how do we avoid that going forward, after there’s going to be an initial bounce, and then after that, how do we avoid a long period of underemployment like we saw in previous decades?

[00:03:46.880] – Grumbine

So most people are accustomed now, Stephanie Kelton’s book, The Deficit Myth, has been on the New York Times bestseller. We have had book club readings. People that you never expected, like Ice Cube and other celebrities have started picking up this book. It has been acclaimed. It has been critiqued.

It has been discussed all around the world by many, many different people and so there’s a general understanding or at least a familiarity within the public now of the basic structure of MMT and some of the overriding issues regarding what we typically hear in the news and political pundits and the media. And it’s almost always wrong. Your book would not be an entry-level like I said, to start with.

If you’ve read The Deficit Myth and you’d like to dig a little deeper, I recommend purchasing this book for sure. With that understanding in mind, let’s just dive right in. Our last couple of recoveries were very slow and that makes the subject even more poignant now because we’ve just been through a lockdown for a year. You start off your book describing MMT, the short version. Why don’t you talk about that?

[00:04:57.740] – Romanchuk

Well, one of the features of that “What is MMT” is it can be read, I believe, within preview features online. So at the minimum, you can browse on the Web and read that section even if you don’t buy the full book. Obviously, I’d like people to buy the full book. And you mentioned The Deficit Myth. This book is really aimed at people who would want to step beyond that.

It’s actually harder to write a book like The Deficit Myth because it has to be well written, easy to understand. You don’t use jargon. And she didn’t even use time-series figures. So it’s difficult to do that. But for the “What is MMT” summary, I did a little bit unusual structure, which may have been a mistake, but what I did is I said I don’t want to repeat exactly the same pattern of a description that other people have taken.

It might be good, but the problem is, is you can get that from The Deficit Myth. And the other thing is, is some people are not understanding those descriptions. So I decided to do it a little bit more from a conventional economics point of view. Let’s just do it in plain English. What’s the interesting part of MMT? And the first thing I realize is that when we talk about MMT, there’s two aspects to it.

You have what I call narrow MMT and the equivalent I’ve heard Warren Mosler say is “core MMT.” It’s sort of a minimal set of principles and most primers online, like The Deficit Myth, is often focused on what is a narrow sense definition of MMT, what’s sort of the minimum description. But the thing is, if you look in academia, MMT is larger than that. I call that broad MMT, and the issue in economic debates, a lot of things people want to talk about, it’s in that broader area.

And if you’re interested in a subject that’s in broad MMT, but you’re reading something that only discusses narrow MMT, you run into, well, what about this? And it’s not really covered. And that’s what I try to underline, that a lot of things you have to go beyond the basic primers online. You have to start digging into academic research or higher level books. And a lot of people don’t want to do that.

And in some cases, that appears to be a deliberate strategy. I don’t really want to name names, but at least some mainstream economists seem to be just taking a deliberate strategy of outright lying about MMT and misrepresenting it. And it’s a political strategy. It’s not particularly nice, but it’s been done before in economics. So it’s just that’s the way it is. And on the other side, people are lazy. They don’t want to be told, oh, you got to read a whole bunch of articles and the literature.

And they want a really simple, brief explanation. And if they don’t immediately get that, say ah, this is too complicated. I want to know about it. And there’s sort of two legs. And so we have to go, what are those broader issues? And the thing is that broad MMT gets very broad. If you go to an MMT conference, there’s a lot of things being discussed and that goes far beyond what the narrow MMT is.

[00:08:40.380] – Grumbine

Absolutely. You’re talking about intersectionality, power dynamics, legal considerations. Absolutely. Keep going. I just want to interject that.

[00:08:50.430] – Romanchuk

Yes. And so for the narrow part, which is sort of the bit that helped push MMT to prominence, was more just a narrow question of how does a fiat currency operate? And really the core idea was the job guarantee. And basically, the issue was if you have a free-floating, fiat currency, what determines the value of the fiat currency? And the argument was that the value is ultimately determined by the government policy.

It’s not pegged to metal like gold, a commodity that has some use in industrial processes or jewelry or just convention. It’s an arbitrary value, but it’s set by government policy. And this was Warren Mosler and Bill Mitchell independently came up with the idea that you peg the value, when I say peg, peg is not the word, but you in essence give a value to the currency by what the government is willing to buy labor at, which isn’t the usual phrasing.

Obviously, with the job guarantee, you can say, look, we can create a floor for wages, create a reference for wages in the economy, which would be then used by the private sector. And what stops the currency from inflating, like prices dropping, is you use taxes. There’s a basic model called the monetary monopoly model, which is sort of the simplest possible model that describes MMT. It is just that the government imposes a tax. People have to pay the tax.

Since the government has a monopoly of money creation, they’re forced to go to the government to work and they get paid for their labor that allows them to pay taxes. It’s a very simplified model and it can be extended, but it basically comes down to the value of money is driven by two forces. One, the taxes create a demand for currency. And then, on the other hand, the government supplies currency at a fixed price for the job guarantee.

And then the idea is that now that the currency has a value, the private sector can then use it and then use an exchange and we get the modern economy we see. The thing to be careful of is that that’s a theoretical model. It has historical ties to the actual creation of currencies in colonies, which was a fairly brutal process, to be blunt, and/or experimental currencies. I think it’s the buckaroo at…

[00:11:45.550] – Grumbine

UMKC, yeah.

[00:11:47.520] – Romanchuk

 UMKC. But that’s really theoretical and the real world is more complicated, especially now. Without a job guarantee, there’s no easy relationship. What determines the price level, i.e. what is inflation? But if you have a job guarantee, you then have a true minimum wage in the economy. And then private sector wages basically have to be set as a markup over that unless a job is really attractive for whatever reason, like, for example, interns.

Many interns are willing to work for nothing just for job experience. But most jobs we have to pay, and you basically have to say, well, you’ll probably have to pay more than what the job guarantee wage is. You don’t have to. But the odds are people might say, well, I may as well just work for the government. So you have to sweeten the pot, pay a bit more and you pull people out of the job guarantee.

And this way, private-sector wages, at least at the low end are tied to, or should be linked, to the job guarantee wage. And so the government has a tool that actually is setting a price in the economy, the price of wages, the price of labor.

[00:13:04.740] – Grumbine

Can I ask you a question before you go further? When we talk about job guarantees, the average person thinks it’s always make-work. They don’t realize what the macro implications of a job guarantee are. But from a macroeconomic perspective, it’s something that no basic income could ever solve. I was wondering if before we go further, you could just take a moment, describe what those macroeconomic implications are.

[00:13:32.240] – Romanchuk

Within the book, the way I built it, it’s brief. I don’t necessarily give the definitive answer and I don’t claim to do so. What I’ve done is I say, look, here are references with more information on the job guarantee, section 3.3. I do a very brief overview of Pavlina Tcherneva’s book on the job guarantee, The Case for a Job Guarantee. So I did an overview of that. It’s very brief. It’s just a section, a thousand, maybe two thousand words.

If you’re just on the high-level macro viewpoint, you’re paying people to do jobs. But one of the things is you’re not working for a factory and selling things to the private sector. You don’t want to go into competition with the private sector with this thing. That sort of defeats the purpose because now the government would start driving businesses out of existence. That’s not the purpose.

So to a certain extent, from a macro point of view, they’re paying them to do jobs that make things better. And from a pure macro aspect, people are better off. But it’s not the same thing as if the government were running factories, which doesn’t look good. But macro models are more useful for discussing what’s happened to the business cycle where they would make a difference, they’re not necessarily how do we make the world a better place?

And we have to say, well, if we want to make the world a better place, what we do and having people do useful things makes the world a better place. So that’s the thing to keep in mind. How it would work, it’s going to vary a lot on jurisdictions. One of the things that Pavlina says: You don’t want to reinvent the wheel. We already have all kinds of job programs. There’s already things that already exist.

And so depending upon the country, you want to reuse whatever systems are available. And so, I’m Canadian and the structure in Canada’s will be markedly different than in the US. The key to it is that for a federal system like Canada or the US, the entity that’s paying the bills should be the federal government because you don’t want to put the pressure on, let’s say, a province or state because if their economy goes south, they can go bankrupt.

Whereas the central government can’t be forced into bankruptcy. You have to be careful to say they can’t go bankrupt, but for all intents and purposes, there’s no involuntary bankruptcy. So they want to pay for it at the federal level, but it might be administered at the local level. In Canada, that’s the path of least resistance. But the actual jobs could be created by things like charities.

The government could be very hands-off in many cases. The government will just have inspectors validating that the charities are, in fact, actual charities and they’re not, let’s say, sweatshops or something like that. These are real charities and the government just pays the bills they submit and then they’re doing whatever the charity needs them to do. It could be done on a city basis.

Certainly, if we’re talking the Green New Deal, there’s some environmental remediation work that could be done that’s labor-intensive and not capital-intensive. So they could do all of those tasks. And if things are going well, it’s not necessarily a lot of people. Right now there would be a lot of people in the bottom of the recession.

Once expansion hits, it could be two, three percent of the population. The unemployment rate may be higher than that, four or five, but you’re not normally going to be finding jobs for 20 percent of the population. It should be a number that’s comparable to unemployment in an expansion.

[00:17:36.590] – Grumbine

I want to jump in for a second. Warren Mosler and Rohan Grey had been talking back and forth about job guarantees, and I know from a standpoint of perspective, you have folks that have a more conservative view. In other words, the private sector rules. This is a transition job. The idea is that when the economy in a countercyclical way takes people off of work and they go into the job transition program, as Warren would say, a transitional job and then back to private sector employment.

There’s a more progressive view, which is there’s nothing wrong with public sector employment. It doesn’t need to be transitional. It can be a permanent job. It will be the base wage. So there several perspectives here to consider. That’s not the purpose of your book, but I am curious. How do you see that?

[00:18:25.810] – Romanchuk

Well, I’m just going to jump back to an early section. Right at the beginning, I’m not sure how I titled the section. I basically said this isn’t a book about politics and the reason is straightforward. I have very strange politics. I’m a Canadian prairie populist. There isn’t a good parallel in any part of the world with Canadian prairie populism. They were movements that rose up. They were really mad, mainly about Easterners, but they were mad about society and they made changes.

And then basically, once the reforms were put in place, they disappeared, although there’s still parties that were in existence, but it basically went back to politics as usual until the West got mad again. And then they had another uprising. And they switched between the left and the right. And to be honest I might be on the more conservative wing of that. But by American standards, that doesn’t mean any . . .

[00:19:23.140] – Grumbine

That makes you a Marxist. [laughs] I’m just joking.

[00:19:26.010] – Romanchuk

Yes, because to the prairie populists, the welfare state was basically forced down the throats of politicians in the East by movements in the West. Basically, what you had was the classic “jump in front of the mob and call it a parade” Liberal Party enacted this and took credit for everything. But they were pushed by populists in the West to do this, plus the rise of Keynesians. But back where I am. We have nice high marginal tax rates.

We’ve got highly subsidized university education. Health care, it’s not completely nationalized, but all the what you’d call emergency stuff is. There’s only elective surgeries that might be you’d have to pay out of your own pocket. So what the American left is fighting for, we have here. So I’ve got a very different perspective of things. I’m relatively comfortable with the policy settings in Canada that would be less comfortable in the US.

[00:20:32.560] – Grumbine

Well, I guess the question here, it’s not really the politics of it all, but you had spoken earlier about narrow and broad MMT. And I think that this is one of those core differentiators is that a broad or post-MMT viewpoint or however you want to frame that has a more expansive view of the public sector power dynamics. It takes things like the neoliberal constructs and it actually discusses those in context of MMT frameworks.

[00:21:04.330] – Romanchuk

Yes, that’s one way. To be honest I didn’t really draw that. But yes, that would be one summary because certainly the broad MMT is closer to the academic side. And as I know, the academics tend to lean left, but maybe I diverged too long with my little anecdote. Going back to the job guarantee, I would probably take closer to Warren’s view, but you’re doing it to fulfill a public purpose and that’s it.

They’re doing jobs – to a certain extent it is at entry level. Whether you create larger permanent public sector, if I were to sound like a mathematician, say, orthogonal, but that’s a separate policy decision. What you think about political economy, should we expand permanent civil service? Because to a certain extent, if you said you’re going to be working on some environmental tasks, you need some training and we want you to do this for a long time.

After a certain point, you say, well, you need something beyond the job guarantee wage. But certainly, for some people they could be permanent and some people would be very happy with that. If it’s structured to allow part-time work or for people with disabilities of some sort, they may be very happy with the job guarantee job and there’s no need to push them out. They can stay.

There isn’t a push to leave but they can leave, is the way I would see it. The other issue with the job guarantee that comes up a lot and I discuss, and it wasn’t really discussed in Tcherneva’s book, is the issue of a job guarantee versus basic income. That is a big debate. Some people will say they like both, and that’s fine. But I’m in the camp, somewhat skeptical about a permanent basic income.

[00:22:58.460] – Grumbine

I would share that.

[00:23:00.530] – Romanchuk

Yeah. As we’ve seen in the pandemic, one-time payments actually work pretty well. They were the best option for dealing with the pandemic. Paying people to stay home was literally the best decision. That resembles a one-time basic income guarantee, and perhaps maybe as a countercyclical policy you set up a framework to send out checks. But in the longer term, what you’re doing with a basic income, it’s equivalent of a negative income tax.

[00:23:35.870] – Grumbine

Isn’t that Milton Friedman’s baby?

[00:23:37.880] – Romanchuk

Yeah. If you’re a leftist, you have to ask, why am I supporting the same policies of Milton Friedman? And if you don’t sense a problem with that and you’re on the left, I think you need to be a bit more careful. And there’s a reason why libertarians enjoy it. The issue with it is if you’re an average taxpayer, everything the government gives you on the universal basic income is going to be taxed back.

You’re going to be neutral. Where the neutral point is, it may not be exactly in the middle of the income distribution. Obviously, the people at the higher end will benefit less, but sooner or later you’re going to have a significant portion of the population where you have to pay more tax to match what you’re getting from the basic income. And if you run the numbers on that, you end up with a high marginal tax rate.

And you can say, “but MMT says you don’t need taxes,” which obviously is a little bit awkward. The taxes are there for inflation control and the universal basic income is high multiplier spending. You’re handing people, who on average have a high propensity to consume, so it’s going to be a very effective form of stimulus. And so what happens is you’re stimulating the economy with a large fiscal stimulus.

Sooner or later, you have to offset that stimulus. You could do it with other things. We could be cutting maybe some other social spending, but if it’s a non-trivial amount of money, it’s going to be a large stimulus, and so eventually it implies a large offset. And then you look at what does the income tax schedule look like to offset that spending?

And you’re up against the awkward problem that everyone is going to be seeing these really high marginal tax rates and they’re not going to be happy. And it becomes very easy to campaign on, “I’ll reduce your tax rates and oh, yeah, the poor people get a bit less on the basic income,” and that’s it. You put all your eggs in the basic income basket and then people will want a tax cut. So, whoops, there goes the basic income.

They’ll just chop it and the middle class won’t really care because they’re getting almost no net benefit from it. That’ll be highly disputed by many of the backers of the basic income. Do you say, “Well, we’ll tax the rich. We’ll tax property.” We’re taxing people with the low propensity to consume and basically, you get less of an offset to all the money that you’re handing to people with a high propensity to consume. So you have serious inflation control problems.

Whereas with the job guarantee, if the economy overheats, you don’t have that problem because if the economy is overheating, presumably employers will say we’ll hire more people because there’s shortages. So, they’re bidding people out of the job guarantee program and so there’s less money spent into that program. And so naturally, it alone can’t drive the inflation cycle. And plus you’re tying the wage so you’re not driving up wages at the bottom of the distribution.

[00:26:55.270] – Grumbine

So, Brian, we realize that the job guarantee is there as a counter-cyclical stabilizer for the economy, but the second chapter of your book dives into the era of sluggish recovery. I imagine this is a great segue into that section.

[00:27:11.380] – Romanchuk

Yeah. The era of sluggish recovery. What my concern is – I’m not going to say this is going to happen – I want to say what happened in the modern era. And for me, that’s sort of 1990 on, and that coincides with the rise of inflation target. That’s when inflation stabilized. The US didn’t have a formal inflation target, but in Canada we had it, 1992 I think roughly is when it came in.

New Zealand was a little bit earlier, but that’s when inflation stabilized. You could call it the neoliberal era. The term neoliberal, it’s basically used as an insult and so it’s losing its meaning. But it was a movement away from state control. Let market forces decide things. And I’m not too deeply concerned about the definition of neoliberalism, but that’s the era. And really, it’s a labor market story.

What really was most interesting about MMT when I first read it was actually the book from Bill Mitchell and Joan Muysken, Full Employment Abandoned: Shifting Sands and Policy Failures. That was one of the first academic textbooks that was MMT-oriented. There were shorter books by Warren Mosler, but this one was an academic monograph. It was one of the first ones. And so I read that. But most of it was talking about the labor market.

And from a fixed income point of view, you discovered the labor markets within the domestic economy are the most important market. What is driving inflation? What’s driving the cycle? It’s the labor market. And what happened in the 1990s was the OECD Jobs Study. They did a study looking at employment frameworks and they announced this is the way we should be doing it.

And what we saw was, in the developed countries, they all moved their frameworks in the same direction at the same time. It started earlier – you could go back to Reagan-Thatcher – but the early 1990s, a lot of this really developed a lot of momentum. And this would be an explanation.

Why did inflation stabilize in the early 1990s? The mainstream? They’ll have a different story, but from reading the book, it was that it was a deliberate push to reduce the power of labor and reduce strikes. And this had the side effect of reducing inflation. But the thing is, is that we moved to a new structure where there’s more persistent underemployment and unemployment.

[00:30:12.900] – Grumbine

That’s a little bit of a negative, huh?

[00:30:15.090] – Romanchuk

Yes, and obviously some of this could be welcome. And I work part-time and this is voluntary, but I’m in a position where my wife works full-time and basically, this was our decision. It’s nice to have that flexibility, but this is not necessarily what most people want.

[00:30:34.830] – Grumbine

From my vantage point, and I just want to interject, the rank and file people that are poor without choices, most of them wouldn’t be too thrilled about this, just as a perspective. It’s definitely been deleterious here in the United States anyway.

[00:30:48.930] – Romanchuk

You can argue that unemployment rates have also fallen. The performance before the 1990s had a lot of problems. You did have relatively persistent unemployment with higher inflation. So you could see the results of the policy were relatively awkward. And people, generally speaking, are comfortable, at least the middle classes, with the lower inflation. And certainly, in the 1990s, there was a burst of job creation, new jobs in tech.

But the issue is that a lot of the job creation was on the backs of the tech bubble. And then you also had a housing bubble which didn’t blow up in the 1990s, but it developed momentum. And in Canada, it didn’t really start until actually when my wife bought our house late 90s. If you looked at the example of Winnipeg, the average house price is actually unchanged from early 1990s to the late 70s. I mean, Winnipeg was a bit of a decline.

Montreal had various separation crises so house prices didn’t move either for a long time, but there was significant inflation. But then in the late 90s, you had a housing boom underway and caught up to the US and so you created a lot of jobs in the housing market – building houses, realtors. So you had some sectors of the economy doing well, but they were reliant on exuberance in the housing market and a lot of household borrowing to go buy stuff retail and those chickens came home to roost in 2008.

So that is the thing, that you clamp down on labor, and since growth was slower, they used the housing market basically to offset the tightening of policy elsewhere. On the other issue was government austerity policies became quite popular and fiscal policy was relatively tight starting in the 1990s, there was a mantra around the developed countries about having relatively tight fiscal settings.

And it’s a little bit of a debate how you define fiscal tightness. But certainly, in Canada you did. The US cut a lot of military spending. When the Cold War was over there was a peace dividend for at least a little while which hit the electrical engineering field that I was in at the time. And certainly, in Europe, you had tightening of fiscal policy. So roughly speaking, what you saw was the way the system worked was they used falling interest rates to stimulate housing, which generated jobs to offset the tightness elsewhere.

And so the 1990s of so-so recovery and it got a little bit hot once you had the tech boom. There was also non-tech. There had been a massive underinvestment, fixed investment to be underdone for a couple of decades, and so there was a catch-up on fixed investment. So we had a little bit of a mini-boom in the late 90s and then the tech sector blew up. It was driven by consumption.

And then, of course, 2008. And then you saw what the underlying economy was like once you’d taken away the housing stimulus. And it was a very slow recovery after the crisis. Canada was a bit better because our housing market didn’t blow up. We were off setting records for housing. We had a bit of a slowdown. We didn’t have that same crash that the US suffered. At least not yet.

[00:34:47.870] – Intermission

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[00:35:45.130] – Grumbine

Interestingly enough, the housing market crash had less to do with MMT and far more to do with elite control fraud. I just interviewed Richard Bowen, who was a Citibank whistleblower and best friends with our friend Bill Black. And so the United States housing market, it was an incredible amount of elite control fraud that played into that. I don’t know.

Hopefully, Canada doesn’t have that kind of level of fraud to contend with. But I know that in the US, our entire system is baked into it. It’s ridiculous. Let’s roll it to the next level here in your next chapter, you’re talking about doing better in fiscal policy reform. I guess the question is, why don’t we just jump to guessing about the future? How does the book play out?

[00:36:32.440] – Romanchuk

See the book was written largely wrapped up last summer. And generally speaking, I stay out of the forecasting game. Because this is a book, at best, if I were going to forecast, I could do it six months out. But, you know, that would have been what’s happening now. And a year from now, do you really want to read a book that predicted what happened in March 2021? The answer is no. It’s not very interesting.

So the less forecasting I do, the longer the shelf life of the book. Right now, I’ve gotten more optimistic about the Biden administration, and in a sense, it’s certainly less tied to the old dogmas. And you’re seeing this with Larry Summers. I don’t want to talk too much about him, but basically, he’s taken over the Republicans’ job of critiquing. He’s launched a full-fledged assault on Biden’s fiscal policy.

And I don’t want to get too far into it, but I would have suspected when I was writing the book that that wasn’t going to happen. Based on the track record, I would have said the Biden administration was going to be closer to the Obama dogma, and that is changing. But they’re still not going to necessarily sound like MMT-ers. But they’re willing to let the economy run hot and that’s what the Fed is saying that they’re doing. So this certainly isn’t what I would have expected. And so you’re getting the economy running hotter as a possibility.

[00:38:14.750] – Grumbine

Can I jump in there real quick? Many of our listeners are still considering the Biden claim that he was going to give us $2,000 checks and he dropped it to $1,400. So I want to be clear for folks, Biden doing better than expected is not an endorsement. You couldn’t do much worse than what most people predicted. And a lot of people thought that he was going to lead a very austere, almost Republican-like administration.

And so far, the results are whether they met your expectations, which would be ridiculous to say that you had some idea that he was going to be like FDR. Sorry, he’s not FDR, but he’s doing more fiscal spending than anybody had any reason to believe he would after 40 years of watching him talk about excitedly cutting Social Security and everything else. So it is a huge shocker in that sense. Yes.

[00:39:06.320] – Romanchuk

Compared to the administration he was a vice president in.

[00:39:08.390] – Grumbine

Amen!

[00:39:08.750] – Romanchuk

And his track record in voting. Right now I really don’t know how fast the bounce back is going to be with the vaccine rollout. There’s going to be one. From people who follow economic data, the new really big numbers over, let’s say, a three-month period, seven percent annualized, which if it did that for four quarters of seven percent growth, it’s not going to be sustained for four quarters.

You’re going to get relatively fast growth. And from my point of view, I wouldn’t be jumping up and down too much about further stimulus per se. I would say, yes, maybe you want to make structural changes in the economy. You can help people out and so forth. But I think to a certain extent you’re going to be getting a good bounce in activity and we don’t really know how big that bounce is going to be.

[00:40:11.090] – Grumbine

I think it’s about distribution, right? I don’t think that it’s so much at the macro level or the aggregate. I think it’s really more about the disaffected folks that are kind of left out in the cold or maybe had to shell out a lot more to survive during the pandemic than the $1,400 that they received to make up for it. So I think while it certainly will help with the macroeconomy, aggregates later, I think that there is still a huge segment of the population that is still drowning and they lowered the water to eye level. And I think if there’s going to be any pushback, it’s more so at the distributional level.

[00:40:46.460] – Romanchuk

You know, that’s the thing. This is where I’m a little bit isolated. The advantage of Canada is with the health care system. By and large,  a lot of downturn was absorbed through the existing framework. You don’t have to pay for medical care. And so you don’t have the same issue, you don’t worry about paying for treatment, to the same extent.

And a lot of the payments were done through various programs that I didn’t need to use, I didn’t dig too much. They basically modified existing programs to give people support. It was relatively targeted. So to a certain extent – there’s issues in Canada, it’s not a utopia – but I think there’s less problem, less immediate cases of outright concern than you have in the US.

But that’s the thing is that from my perspective, maybe I’m just being cautious on this, not necessarily just a big check is the best way to do it, although to a certain extent, if you give people a check and then tax it back, if it’s taxable income – hey why not? But hopefully, as the vaccine rollout continues, there should be less need for an emergency payment anymore.

[00:42:03.650] – Grumbine

Just one quick thing I want to interject. The one thing that is missed, and frequently is missed not only by us talking about it, it’s frequently missed by the mainstream media, and that is creditors are allowed to snag up your stimulus check before you even receive it. And so it’s really not as protective of individuals. Once again, it’s still backstopping the capital class as opposed to the people at the bottom who are struggling. I just wanted to make that point for my listeners.

[00:42:31.910] – Romanchuk

Normally, if you had done a spending bill like this, if you’d handed out money, let’s say, two years ago, it really would have made things jump. But that didn’t happen because basically, it’s all flowing into rent, buying food. So it was just meeting normal expenses and it was replacing a broken flow of income. So to a certain extent, that’s why most people were shocked.

Well, governments around the world threw a huge slug of spending as big deficits. And to be honest, not that much of a bounce. And the reason is all it did was allowed people to continue their existing patterns, which is great, but it’s also keeping landlords afloat. So that’s one reason why it was relatively popular because it was basically the landlord bailout.

[00:43:25.820] – Grumbine

Exactly.

[00:43:26.830] – Romanchuk

And so if things go well, there will hopefully be less need for that in a few months. And the bounce-back could be pretty fast. Like I said, I’m not a forecaster. I might be overestimating. There’s certainly a lot of scope for people to say, “hey, let’s go out and spend money” and there could be a lot of catch-up spending. So it might be a lot of the emergency in a sense for the economy at large will be over. I mean, obviously, there’s going to be hard-luck cases. Once again, a lot of that is inherent to the US system. But hopefully, that might be addressed in later rounds of new programs, which, to be honest, I’m not an expert on. But

[00:44:09.130] – Grumbine

Sure.

[00:44:09.530] – Romanchuk

It needs to be, from my point of view, targeting. There is a fetish for means-testing, but my bias is targeting is definitely better. But to a certain extent, you can get that through the tax system anyway. If benefits are taxable, eventually it’ll just be taxed back. So it’s not that big a deal. The only thing is you perhaps might have to do withholding on it for people because otherwise they’ll be shocked when they see the tax bill. What they’re going to see is less than the headline amount because you’re immediately getting withholding tax.

[00:44:46.010] – Grumbine

It’s really about the flows, if I’m hearing you correctly. It’s not so much the stock, it’s really the flows that we’re concerned with.

[00:44:52.730] – Romanchuk

Because that’s the thing. Disruptions are the problem. The recession is really disruptions in usual cash flows. And that’s what we have to avoid because that’s when you get cascading failures. But basically, if all you’re doing is keeping the flows going, there’s a massive capacity for the economy to take it and without seeing inflation and so forth. But admittedly, I mean, there is a lot of disruption. You are seeing some price rises in different sectors.

We actually had a renovation done and you need plywood and things. Those prices are rising because there are supply disruptions, but it’s very localized. In many cases what’s happening is you have to wait. There’s not sort of an across-the-board price rise. You say, “Oh, you want that? Well you have to wait a few months,” and that’s how the system works. To get a real inflation, you need to pay people more to keep the thing going. And employers aren’t going out of their way to hand people raises.

[00:45:52.820] – Grumbine

This brings me to the next point. The next chapter of your book is the long version of “What is MMT.” And we’ve had Mosler on talking about his white paper and we’ve talked about some price leveling. The government is the monopolist from his perspective. But I am curious, I’d like to touch on it since you were just talking about MMT’s theory of inflation. Would you take some time to address MMT’s perspective of inflation?

[00:46:18.820] – Romanchuk

Yeah, that’s the subject everyone wants to talk about and it’s the one I’m least comfortable with.

[00:46:23.650] – Grumbine

That’s why I put you on the spot, Brian. [laughs]

[00:46:25.930] – Romanchuk

My problem is there’s the Brian’s theory of inflation, which I developed pre-MMT before I’d heard of it. So to a certain extent, I don’t think anyone should know what Brian’s theory of inflation is. I had to sort of translate various sources into what are people saying about inflation that I have to translate into the way I explain. I have to understand and explain it. And there’s a few facets. The first thing that I’d say is, look, inflation is complicated. I have looked at it, and I have a book on break-even inflation analysis.

People trade inflation. What’s inflation going to be through index-linked bond market, and it’s complicated. If there was a simple model that could explain inflation, everyone would know what it was and the market would be solved. It would be boring. But that’s not happening. If a simple model could explain inflation, people would be using inflation like markets. And the reality is that we don’t. I’m no longer in the market, but from what I saw, no one had such a model.

[00:47:34.270] – Grumbine

Before you go further, I just want the folks to understand that when we talk about inflation, inflation by Warren Mosler’s perspective is a rise in all prices. It’s not just a rise in the cost of bread or milk. It’s the rise in prices across the board. But you can look at a certain sector and see that there’s inflation in that area, wherever there’s scarcity. We’ve often said interest rates create inflation. The interest rate policies at the Fed create inflation.

Supply not keeping up with demand, a demand that could be realized by a distributional approach to getting money in the public instead of having an oligarch with a billion dollars in their pocket and only spending on small things, having a billion people with a thousand dollars in their pocket suddenly gives them all buying power. And that could create a run on different products and services that supply could not keep up with. I would say they typically jump straight to the word “hyperinflation.”

[00:48:30.520] – Romanchuk

You know, actually, what might be my next book – I’ve started it – what is inflation? And for someone in markets, when I see inflation, I mean consumer price inflation. In the US, that’s the CPI, Consumer Price Index. You can come up with wider definitions of inflation, but usually that’s what we’re talking about. You can say a generalized – because you also have producer prices and then you have asset prices.

Then you have wages. In theory, you could say all of these things are the price list of everything. But usually, I’m focused on what about just consumer prices, and they move up and down. It’s strange that free marketeers would need price discovery and the whole shtick. The only reason anyone cares about Austrian economics, the only theoretical victory they had was, oh, the price mechanism, and socialism doesn’t have a price mechanism.

It’s called the socialist calculation limit. Prices matter. They provide a signal, but then people get mad when prices change. But that’s how capitalism works. It’s supposed to have changing prices, but the actual process, if you look at consumer prices, it’s a whole bunch of different sectors and each one behaves a little bit differently.

If you look at oil, gasoline, the thing that people are very sensitive to, it’s very volatile, but it’s driven by what’s happening in global energy markets and it moves around a lot, as you can see, there’s a reason they have digital signs because they go up and down every day. But that’s very different than, let’s say, a box of cereal. The list prices don’t change much, although certainly in my local store that everything goes on sale.

They have rotating sales on everything. But normally with most goods, the price is administered, say, here’s a price, boom, and they don’t move it very often. So the CPI has all these different factors. And then, you have another one is rent. Rents move by their own dynamic. And so the overall CPI, it’s a mess because all these different factors, each one is behaving differently.

But the post-Keynesian theory of inflation, it’s not sort of a simple here’s a supply-demand framework. You look at what are the price of goods versus what are workers paid to produce things. And then what you see is wages and prices, by changing the ratio between what people are paid versus how much you charge them, you get a different breakdown of income in the economy. If wages rise more than prices, the incomes flow to the workers.

If prices rise towards final goods and not wages, the profits flow towards capital. And so it’s a conflict. It’s a story of conflicts. And that’s why in the 1970s, which is the year of high inflation, that coincided with a period of a lot of strikes and you had labor power, and so they drove up their wages to try and keep up with the cost of living. But it’s a very different view than, say, the neoclassical view where supply and demand curves and the central bank, we have inflation expectations and the central bank moves expectations by being credible. It’s a completely different viewpoint to the process.

[00:52:06.390] – Grumbine

Very good. I guess because I want to make sure we close this out. Criticisms of MMT are nothing new. Every time you open up any RSS feed with buzzwords, you’re looking for MMT. You get probably a 10 to one ratio of negative MMT articles just because everybody wants to take a potshot. And there’s some probably good faith ones.

I haven’t seen too many, to be fair, but there are quite a bit more of the ones that have already been asked and answered a million times. They’re poorly framed. They’re absolutely written in bad faith. But there are some critiques out there that are legitimate questions. And you took a crack at this, your final chapter “Other Than M Matter.” You frequently raise critiques. You want to just take a crack at a couple of them?

[00:52:52.330] – Romanchuk

I said, “You can’t really talk about MMT without discussing these critiques,” and basically I said there’s ones that I can deal with and the ones that I can’t. I start off with the ones I can’t deal with. These are a lot of bad faith ones. And this is the vast majority. Just sampling. If you say pick a random tweet or a random article on the Internet, it’s going to be in the category “I don’t want to deal with it” – bad faith or stuff that’s not really answerable.

And from what I see it’s like “an MMT supporter said something wrong.” OK, maybe they did, maybe they didn’t. But that’s not really a criticism of MMT.  The other one was a proponent like, let’s say Warren Mosler, was wrong about Turkey. Well, maybe they were, maybe they weren’t. But you can’t really say, well, everyone associated with the school of thought has to be right about everything. There’d be no economic school of thought that would survive that.

It’s not a realistic standard. From the mainstream, more conventional, we say, well, economics says this and this means MMT is wrong. Well, basically, they made the assumption that MMT is wrong, so therefore… Of course. Well, duh. And so the other thing is basically the critics just make up stuff. And this is exceedingly popular because there are certain high-level people who basically made stuff up and that’s repeated. The same description is repeated because they don’t go to the source material.

And the final argument is people don’t like the politics, which is fine. There’s the people who like free markets, so they don’t like progressives, and so they don’t really like the politics of MMT. So those ones you just can’t really deal with. It’s whatever. It’s a little bit better. It’s really pivoted to the Deficit Myth. Basically, you can find dozens and dozens of attacks on the Deficit Myth. The Deficit Myth, it’s the lightning rod for MMT criticism, which is good and bad.

At least they’re reading something written by an MMTer, which was unusual because before it was just Paul Krugman said X. And so they’re actually quoting more likely quoting out of context stuff from Kelton. But the other thing is, though, if it’s not in that book, whoops, it’s missed. And it’s a best seller. I mean, it’s a great book. My book will never be a bestseller. It’s just got too much weird stuff in it. You can’t get too complex and be a bestseller. That’s the reality. So this is the problem is that it’s missing a lot of MMT. Once we sort of get beyond that, what are the critiques that are interesting?

[00:55:39.920] – Grumbine

I’ll tell you, the one that I want to hear most about because this is the one that we always get hit with. We already kind of touched on inflation. OK, but what I really want to talk about is the lie the politicians and voters,  and probably the biggest one is that MMT, quote-unquote, “ignores the banking system.”

[00:55:58.770] – Romanchuk

OK, there are two legs to this. One is sort of a simplistic one where I quoted someone who I don’t really know who he is but yet in the article he basically said – because you said perfectly – politicians need to lie to the voters and tell them we can’t do this because otherwise people will want the government to spend money. That there will be just an overwhelming desire to spend. And that’s really sort of an ancient critique.

But to be honest, I don’t see it. That’s just pure politics. And frankly, no, if you link it to inflation, now, people are actually pretty comfortable with the way things are now in the middle class. So it doesn’t really fly. But there’s a more sophisticated one, which is the time consistency problem. It’s a relatively highbrow one that they tend to miss: the costs of a little bit high inflation is less than unemployment.

And this was very popular from the 1970s that there’s an incentive for politicians to have lower unemployment and higher inflation. And then you just keep repeating and so you get the cycle. But it’s interesting. Well, it’s a theoretical debate, but if you have a job guarantee that we hope solves the problem of unemployment, suddenly, though, that whole trade-off disappears.

So like, hey, everyone will have a guaranteed job, so there’s no need to do that. So that particular critique disappears. I think there’s hyperinflation. Everyone brings up hyperinflation. I didn’t talk too much about it, but it’s nearly impossible to generate hyperinflation in a developed economy. Things have to go severely wrong. I think I discussed it a little bit, but hyperinflation is just too ridiculous.

No one really understands it. Well, there’s a handful of people who really understand hyperinflation. And the odds are anyone who brings up hyperinflation has no idea what they’re talking about. So I don’t spend too much time discussing it, but it’s pretty hard for it to happen. And the circumstances just things have to go really wrong and there’s nothing in MMT for them to go in that direction.

[00:58:17.180] – Grumbine

The one that I really want to hit on. The combination of fraud and nefarious actors that abuse certain aspects of the banking system typically are used as a backstop against everything wrong with MMT. And this is where the weird fetishizing of the myth of independence of central banks, the lack of understanding of what MMT’s position is on banks, and Warren Mosler has written extensively about it. I know that the Modern Money Network has talked extensively about this. I am curious about your perspective of that critique that MMT doesn’t address banks.

[00:58:55.430] – Romanchuk

There’s a few angles. There’s a very narrow critique. And I think someone quoted me out of context. Somebody said way back, “Aha! Money is a government monopoly.” And the argument is, well, look, if you look at a monetary aggregate, most of it is in the banking sector’s deposits and, aha! There’s no monopoly. I discussed this briefly. It’s a little bit complicated, but the MMT position is pretty simple and I’ve forgotten the formal name for it.

It’s the base, the base money, the payment system is government money. And then you build the banking system. You have formal banks and so you have deposit. And that is explicitly backed by the government. The payment systems, they have to be bailed out. They’re part of the central bank. The banks are utilities. Supposedly the rumor is in the financial crisis, the Bank of Canada used to scare the Canadian banks and say, well, actually, we could just let you go bankrupt and we can just nationalize the payment system.

And I don’t know if they actually said that, but that was the rumor I heard that they can protect the payment system, they can let the banks themselves go into receivership and that doesn’t matter. I don’t know. I mean, obviously, there’s going to be side effects, but that’s something that kind of scares bankers and forces them to toe the line on what the central bank wants. But the formal banks well understood MMT. They’re just layered on top of the government.

They do things that the government doesn’t want to do and they provide stuff and they develop banking machines, but basically, they’re utilities. They’re utilities sitting on top of government money. And that’s understood. And a lot of it’s ignored or just silly. It doesn’t make sense. This MMT primer’s about banking coming more from the left and MMT ignores the evils of banking and so forth. Like I said, that’s a political argument. But compared to shadow banks, I’m pretty happy with banks.

I worked in the bond markets and bond markets are nonbank finance. You can call it shadow banks. The financial sector, you have formal banks, and then you have the nonbank stuff, and the nonbank stuff isn’t heavily regulated. It’s heavily regulated, but not as regulated as closely as banks. And that’s where a lot of things blew up in the financial crisis. The formal banking system itself, it was only because it got dragged down by the nonbank stuff that they had problems.

So if you don’t like what banks are doing, you just regulate them differently. You have to have regulators willing to do their job and regulate. And that’s been the problem is that there was just the attitude that we got to let the overall financial system regulate itself, and that didn’t work very well. But that’s just a question of its regulatory policy.

[01:01:58.710] – Grumbine

Let me step in there for just a second. Warren Mosler says that banks are publicly created charters, but we have deregulated them, to your point, and that’s why they function in the way that they function. However, there’s a movement to push for public banks. And Warren’s position has been, hey, we already have public banks. If you want them public the way you want them, then regulate them.

And the other side of that which you would go with the broad MMT or the post-MMT crew would be you’re skipping the power dynamic there. Let’s just make public banks. Let’s make them publicly owned so that they don’t have the same profit motive driving their behavior. So I think that this is one of those things that’s evolving with the broad MMT perspective as opposed to the traditional, which is: we see the banks, they’re not acting how you want them.

Warren has a very robust proposal for how he would reform the banking system. You can find it on his website Center of the Universe. But again, the political strategy of many is to, in fact, create this public banking network. It’s not fundamentally wrong. It’s just simply people have made it out to be something that it’s not. I’m just curious what your take on that is.

[01:03:08.910] – Romanchuk

Well, I don’t delve into that because once again, Canada is in a very different place. The US banking system, to be honest, it’s very much backwards. The payment system you look at and say, “They’re doing what?” Most other developed countries have a much more robust way that payments work. It’s much friendlier to consumers. The US has specific problems.

In Canada, you’re dominated by a handful of banks. I would say the issue, it’s relatively easy to deal with. Oh, well, you have a sector of the population that isn’t served by banks. Well, you look at those five banks, gather them in a room, and say, “Look, serve this population.” And that’s the end. It’s faster than the government. You could say, well, I mean, we do have it, but it’s at the provincial level. I believe Alberta has one, but by and large, I mean, we have Caisse Populaire.

We have co-operative banks but not at the national level. But at the national level, you had postal banking that used to exist in a lot of countries. By and large, postal banking disappeared. You could build them in Canada, but it’s not clear exactly who it would be serving. So the US is different in that respect. But certainly, from the Canadian perspective, it’s just a lot easier to just slap a mandate on the banks to do something.

If the question is if you’re going away from payment system, if you’re not just worried about the ability to access the banking system, but the ability to get a loan that, then, yes, you can see there’s a public sector. The way Canada has done that is through various credit programs for student loans or mortgages. The government is all over the mortgage mandate through a Crown corporation, and there’s a development bank, a development bank that helps set up financing. We already have the mechanism in place, and so the US situation is different and that’s the thing. But the question is that’s very much an American system.

[01:05:17.280] – Grumbine

We’re exceptional. [laughs]

[01:05:18.570] – Romanchuk

Yeah, exceptional, but you can say, look, I can’t really say that. You know, all I would say is, well, what do other countries do? And it might give you ideas what’s working in other countries.

[01:05:28.950] – Grumbine

We don’t do that. We think we got it going on. We think we’re exceptional.

[01:05:33.470] – Romanchuk

Yeah, that’s the thing. But it’s different. That is very much it seems to me – I mean, I could be wildly wrong about this, but it’s a topic that doesn’t come up too much in other countries. The postal bank exists, as far as I know, in Japan it’s still going strong. I haven’t been paying attention, but it is very country-specific.

[01:05:53.700] – Grumbine

Brian, thank you so much for joining me today. Folks, we discussed the book Modern Monetary Theory and Recovery. Author is my guest, Brian Romanchuk. You can find this all over the place, but I strongly recommend picking it up and letting everyone know what you are learning. It’s important to take the knowledge that you got from Kelton’s book if you read The Deficit Myth and keep growing because there’s so much more to learn.

And Brian, you are a wealth of knowledge. And I appreciate the fact you’re really trying to delve into deeper issues. And I love that you just don’t say this is the way it is. There is nuance there. So I really appreciate you joining me and presenting the nuance and I appreciate you taking time to answer all my silly questions because this is how we learn and I always learn from you. You’re always taking me to a new place. So I really appreciate it.

[01:06:40.800] – Romanchuk

OK, thanks a lot. And hopefully, inflation questions that’ll be my next area of interest and my next book should be easier.

[01:06:50.910] – Grumbine

All right, folks. Well, this is Steve Grumbine and Brian Romanchuk with Macro N Cheese. We’re out of here.

[01:07:01.870] – Ending credits

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