Episode 44 – The Green New Deal: Non-Fiscal “Pay-Fors” and Balance of Payments with Nathan Tankus

Macro N Cheese – Episode 44 
The Green New Deal Non-Fiscal Pay-Fors and Balance of Payments with Nathan Tankus 
November 30, 2019  

 

Nathan Tankus [intro/music] (00:00): 

We’re just going to have a lot of things that are destroyed a lot more often. And the big thing the Green New Deal’s going to do is mobilize people to do it – is for the mobilized people to respond to disasters, to rebuild communities. One way you can think about a domestic banking system is if one of these banks has more payments flow out, then flow in. Then you can say that it has a balance of payments deficit. 

Geoff Ginter [intro/music] (00:32): 

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

Steve Grumbine (01:30): 

In this third and final episode with Nathan Tankus, we go through the process of understanding balance of payments, both at the domestic level and the international level. You know, I look at Social Security as a basic income. I look at that as something that can be expanded, it can be . . cover different things.  

It already covers certain disabilities, it already covers survivor benefits. It already covers a lot of different things. It could fill a void there. It could be expanded. It could be altered to meet our needs. I guess my question to you is, and this is going to come back to, you know, we just offered up the federal job guarantee.  

We just talked about housing as a right. We’re talking about basic income and offsets for these individuals that work higher level jobs and being able to provide them with a subsidy or a premium, as you stated, to get them more in line with their prior income. And the question that MMT always is facing, answering, I should say, not facing, answering is the question of how you’re going to pay for it.  

And the idea here is, is that, you know, we already pay for it. This was a great statement. The other day Bernie an AOC stated it, but also quite frankly, Stephanie has been very clear in stating it’s not about finding the money. It’s about finding the votes. We have the ability to pay for all of this stuff.  

That’s in no way, shape or form a financial issue whatsoever. But you and I have talked offline a little bit. There are some non-fiscal. non-pay-for, pay-fors, if you will, in terms of how to fund a Green New Deal. And, you know, obviously people that are learning MMT have heard me screaming, “Taxes don’t fund spending,” and so forth.  

And to the extent that we’re talking about financing a Green New Deal through fiscal policy, that’s correct. So the question comes down to is what are these non-fiscal offsets that we keep hearing about, these pay-fors, if you will, that play into clearing the space for a Green New Deal. Talk to me about that. 

Nathan Tankus (03:41): 

So this is what I presented at the MMT Conference, and there’s a forthcoming report co-authored by me and some other MMT authors and the report is going to be titled Monetary Policy for the Green New Deal. And the essential idea is that a lot of the time in terms of MMT’s public rhetoric, what it talks about is financial constraints and is emphasizing the important point, which is still not understood by tons of people that there isn’t a financial constraint to public spending.  

And the way we articulate that is by saying taxes and borrowing don’t pay for quote, unquote “government spending.” And what’s meant by that is when you consolidate the federal reserve and the treasury, it simplifies a lot and it focuses attention on what’s important, which is when the government makes a payment, the payment increases settlement balances, money, in the economy. And then after that, it sells a bond.  

Often it reverse repos a bond, and that drains settlement balances from the banking system to connect back to the repo conversation that we started out with. And so the essential thing to focus on from an MMT point of view is the settlement balances, the quote, unquote “money” paid for the spending, and then a bond sale happened after the fact to drain those settlement balances, to drain that money.  

So bond sales are a monetary policy operation. They’re about setting interest rates, to a lesser extent they are about providing safe assets to the non-bank financial system, but they’re not about making sure that loosening the federal government’s financial constraint, as it were, it’s about monetary policy.  

So that’s what we mean when we say that taxes and bonds don’t pay for government spending, but there’s a second sense in which you can talk about pay-fors which we do talk about. We don’t necessarily use the pay-for language, but I think they actually can be a use to using the pay-for language, which is that taxes can be a demand offset for public spending.  

They can quote, unquote “partially pay for government spending,” but this is still very different from the financial constraint sense because it’s not this simplistic, a dollar in and dollar out system. We have to know how much a given tax is reducing private spending to know how much government spending is being paid for.  

You know, obviously the thing that we make the most hay about is that if you tax the rich, because they are so rich, a lot of where they’re going to come up with the money to pay the tax is reducing their savings or running down their assets. It’s not going to be them cutting their expenditures on goods and services.  

So, you know, maybe they’ll buy one less piece of art, but we don’t need very expensive arts to provision people housing, food. We need housing and food or resources that can make housing and food. So the short way to say that is taxes don’t, dollar for dollar, pay for spending. We have to know what type of tax it is, who it’s targeting; and then we’ll have a better sense of how much that tax is reducing demand.  

And if it’s taxing the very richest people, it might not reduce demand very much. So we’ll have a wealth tax of 2%. It might raise the same dollar amount as the spending programs you’re proposing, but it’s not going to create the fiscal space as it’s not going to dis-employ the resources that you need to redeploy with your spending program, but the bright spot to that sort of pessimistic thing like, Oh, we don’t think we can get the money from the rich, like we thought we could.  

We don’t think we can get the resources from the rich, like we thought we could. The flip side of that is that there are all these, what I call non-fiscal pay-fors available. In other words, there’s all these things that we can meet with financial regulation and with other non-financial forms of regulation that can disemploy resources, that can unemploy resources, that the Green New Deal can reemploy that don’t involve taxes or spending at all.  

And that’s why I call them non-physical pay-fors. And the monetary policy for a Green New Deal Report is focusing on green financial regulation to ream the financial system, but also shrink the financial system to make room for additional government spending beyond our ability to just produce more.  

Producing more is kind of a most obvious non-fiscal pay-for. If we just employ more resources and we actually have a pretty depressed economy, then you don’t need any other “pay -fors,” quote, unquote. But the new report is basically saying even if we do get to “full employment,” quote-unquote however defined, unlike what some people claim like Josh Barrow claims in the op-ed in the Financial Times, responded to, the world that MMT is talking about is still very different in a full employment world, because you have things like credit regulation that can reduce banks trading money, and potentially create room for government spending to increase demand.  

Another one that I should mention, which the report isn’t going to really talk about, but definitely deserves to be a big part of the conversation, and it deserves a lot more research is of course environmental regulation. There’s always this narrative about, you know, environmental regulations cost jobs, and unlike the way the Right talks about it, it depends on what type of financial regulation that you’re pursuing, but we can also just flip that narrative around.  

If you’re saying that environmental regulation is going to cost jobs, then what you’re really saying is we don’t need to raise taxes to pay for the Green New Deal. We can potentially impose environmental regulation, you know, close down some factories that we think are just like too carbon intensive, involve too much fossil fuel, and take the now unemployed labor, unemployed energy, and potentially other resources that we can recover from those production processes and redeploy them elsewhere.  

So when you take the MMT lens and you add on top of this idea of a non-fiscal pay-for, from this in resource terms, MMT is always talking about fully paying for spending and wants to make sure that there is always resources available to meet the spending out there. But then also we have these non-physical pay-fors available that aren’t available from anyone or at least most of the public frameworks out there.  

And we can push this forward and illustrate the ways in which we can manage demand in economy without interest rate policy and without the sort of, “Oh, you got to raise taxes on the middle class in order to pay for these spending programs.” 

Steve Grumbine (10:35): 

Are we really, in essence, managing aggregates here? Is this about managing aggregate demand as opposed to actually quote, unquote “financially funding programs?” Is that what I’m hearing? 

Nathan Tankus (10:48): 

Yeah. It’s about managing aggregate demand, but also what you get when you take this point of view is you also have to manage demand spatially. So for example, if you impose a tax or you have a non-fiscal pay-for which reduces demand, you know, let’s say $50 billion in California, but where you want to build the factories and where you want to employ the labor is in the Midwest, maybe you can start readjusting resources and importing resources from California, which are now unemployed; but that’s a little bit more awkward and you know, there can potentially be some hiccups along the way.  

So with the MMT point of view, once we take away this fungible view of the world where we’ve done our macroeconomic job, we’ve done our economic policy job, if we’ve made sure there’s exactly to the penny $100 billion dollars in pay-fors to a $100 billion dollars in spending, once you lose that simplistic narrative, then what you realize is you really kind of have to more actively manage the economy.  

You have to aim, shutting down some factories in the Midwest and, you know, building some new factories or employing some people to do something else in those same areas. And this is part of why there’s such a huge divide in this country is because people don’t segregate, people don’t look at spatial differences in unemployment.  

People don’t realize that there are a lot of places in the country that basically have been in an ongoing depression for many, many years. And, you know, it gets mixed up in these averages. But if you take the sort of targeted point of view with MMT, when you start to get to . . . it’s not just that we need to look about which taxes or which non-fiscal pay-fors will reduce enough demand for our spending, but we also have to look at where that demand is going, both which sectors of the economy that demand is going and where geographically that’s when it is going.  

So in some ways it’s a bigger task. The MMT task is a bigger task in terms of managing the economy. But on the other hand, it makes us a lot more cognizant of the issues and it makes us pay attention to issues that other people aren’t paying attention to. And I think could be a much more effective way of managing the economy.  

So my headline would be, yes, we have to manage aggregate demand, but we also have to manage sector demand; and we have to manage demand over specific geographies. We need to make sure that demand is not just balanced in the economy overall, but we need to make sure it’s balanced in the Midwest and on the coasts. And you know, in the South. 

Steve Grumbine (13:35): 

You know, this brings up a point I didn’t anticipate trying to talk to you about, but wow, what a great thing I think talk about. Back in Ronald Reagan era, Ronald Reaganomics’ book came out and talked about how, you know, basically if there are 500 cable splicers in California that are unemployed, but there’s a thousand openings for cable splices in New York City, we don’t have unemployment, we have underemployment and that it’s up to the people to move cross country to where the jobs are.  

And basically this philosophical belief really put the pressure and the pain on the little people to make adjustments to what business felt like it was in their interest. And couple the job guarantee approach with this and what you’ve got if I’m seeing this correctly, not only do you have an incredible feedback loop and basically a scientific test center to figure out the target aggregates by putting your fingers on the pulse with the job guarantee and getting that feedback loop from local communities, but you also get to stop the flight from these communities and rebuild these areas.  

Basically literally doing what we say is rendering the rich irrelevant by eliminating the concerns of capital flight at the local level, where these states are not monetarily sovereign and have limited options other than luring business in to create jobs or public finance, publicly funded programs and offsets. 

Nathan Tankus (15:05): 

I think that’s exactly right. Pavlina actually has a paper from a while ago called I think it’s called Unemployment as an Epidemic, which is basically taking epidemiology approaches. The approaches they use is the study of the spread of disease and treat unemployment as kind of the spread of a social disease.  

And I think that is the essential point. The job guarantee is not just an aggregate demand policy, but it’s also what’s called in policy circles, a placements policy. It’s targeting the places. And you know, it does a few things. One is I’d make sure demand goes where it needs to go, where the most depressed areas will get the most deficit spending because the job guarantee pool is the highest there, but it also tells us where is labor underutilized and where is it overutilized.  

It can be harder to tell just how depressed an area is if people have dropped out of the labor market and aren’t seeking jobs. They can seem like, Oh, you know, those people, they just don’t want to work or whatever, when it’s really, they’re just completely discouraged from the workforce. Whereas, when you have a job guarantee in place, you know the size of the job guarantee pool, maybe there’s some people who will only work for a higher wage who are discouraged from working, but for the most part, you know what labor resources are available.  

And so we know that 10% of the population in the Midwest is employed in a job guarantee. Then we know we have space to employ labor out of the job guarantee pool in other activities. Whereas, the flip side, we know that the economy, not just generally, but a local economy is probably overheating if there isn’t much of a job guaranteed pool left, if it’s say 1% of the local labor force.  

So a job guarantee can give us not just directs demand, where it needs to go to rebuild certain communities, but it also gives us much more accurate information of in terms of how economies even down to the county level are doing. We know much more accurately in, especially the state level, we know much more accurately what the employment situation is and what the demand situation is because of a job guarantee than we would otherwise.  

I mean, this dropping out of the labor force problem and the collapsing and depression in certain communities, I think has been part of what’s confined policymakers to just how bad things are in combination of what you pointed to, which what Reagan said, which I think is a very common perspective from the neoliberal Democrats and Republicans is people should just move where the jobs are.  

And not only is that extremely callous and pulling people from their communities, but more importantly, it’s not the way you should be running in an economy. You should employ people where they live. You should give people jobs, not just because it’s better for their lives, but because it actually is not a great use of our resources to have a housing boom and gentrification in New York City and on the California coast and in half a dozen other cities while their communities are collapsing.  

So people can like live with four roommates because that’s the only way you can get a sort of halfway decent job is moving to these 12 areas. You know, people have basically taken people’s direction to do that. And it’s been a disaster. You know, it’s not the way you should run an economy. We need to redistribute demand.  

We need to build housing and improve housing throughout the country. And, you know, people want to and should be in it’s more effective to have them rebuild their own communities rather than crowding everyone into a dozen oligarchic economies that are basically only doing well because they have billionaire tech people or billionaire financiers, or just literally just Microsoft and Bill Gates, in the case of Seattle. 

Steve Grumbine (18:47): 

You said something just now that maybe wasn’t meant to trigger yet another thought, but it did. And it’s a big one. You know, part of the Green New Deal is a direct response to cataclysmic climate events that we feel are coming within the next decade. And it’s not just about, you know, coming up with a plan in the next decade, it’s actually about mitigating the carbon footprint within the next decade to meet certain levels, to stave off what could be seen as another extinction level type activity at the worst side or in a more localized situation, creating flight or refugees across the globe and decimating coastal cities and making more land trapped cities or locations arid, and basically unsupportive of quality of life.  

So as we predict more disasters coming, more combustible situations, if you will, within the environment as a whole, and we see more of these natural disasters strike, rebuilding communities is going to be, I would imagine, a huge part of what we see in the future as these coastal communities are decimated, as the new strains of diseases come from the ice melts, and new bacteria and other things being released back into the environment that have long since been forgotten.  

I mean, there’s a whole new wave of things getting ready to hit us that many of which we have no means of preventing. And you look at places like Puerto Rico that were decimated by hurricanes. And you look at places like Flint, Michigan, which are decimated by a boneheaded decisions by politicians and the flight of industry and the flight of white flight, quite frankly, and capital flight out of that area.  

And you’ve got the situation where real natural disasters are happening, both manmade as in with Detroit and climate based when you consider places like Puerto Rico and Florida, the coast of Florida and others. This seems like a really big part of the mobilization effort that a Green New Deal will bring about.  

And I’m just curious on what your take is on dealing with the impacts, not just these carbon taxes and things like that, that are par for the course, but the actual calamity that comes when the shift occurs, you know, be it natural made, or whether it be man made, some of these things that are coming because there’s a combination of both there. What is it you see in play of the Green New Deal in terms of dealing with natural disaster? 

Nathan Tankus (21:18): 

Yeah, I think one of the most effective things that illustrate it was actually that little animated video that AOC narrated that was like based on Kate Aronoff’s Intercept story. I thought that was an extremely effective way of showing it that it was pointing to the Green New Deal and pointing to, you know, benefits of it.  

But it was also pointing that a lot of the practical work was just going to be rebuilding communities and defending communities from natural disasters, from a wetter world that like, we’re just going to have a lot of things that are destroyed a lot more often. And the big thing the Green New Deal’s going to do is mobilize people to do it, is going to mobilize people to respond to disasters, to rebuild communities.  

We’ve seen in California we’re now going to basically have fires almost all year round in California. And that kind of thing is just going to get worse. And you know, who do you need to respond to fires? You need people to respond to fires. You need firefighters and they’ve temporarily emptied the prisons, essentially, having people fight fire, who because of the felony records, wouldn’t actually be able to become an official firefighter if they got out of prison and went to LA to try to become a firefighter and a bunch of other places, and a felony record is disqualifying.  

Rather than kind of temporarily coercing prisoners into fighting fires on our behalf, you know, let’s have well-paid public servants who are going to be responding to disasters by doing firefighting, just like the Civilian Conservation Corps did millions of days of firefighting, millions of man-days of firefighting, as the sources say.  

We’re just going to need a massive mobilization of labor to build and rebuild our communities. And, you know, in this context, of course, this makes the idea that we should move people to where the jobs are right now, which are on the coast, because those are the places with tech or finance industries is totally crazy.  

You know, it’s an anti-resilience strategy to move everyone on the coasts when climate change is about to push them all inward. We need a managed retreat, and the best way to manage the retreat is to rebuild inland communities so there’s somewhere to go and put a job guarantee in the new deal as a whole is essential to that.  

And it is all central to also building a post-scarcity society. So people aren’t so concerned about millions of people coming from other countries who will be happy to work in public service to work in a job guarantee. We’re going to need something to do for millions of refugees and making the community more resilient should be a big part of that.  

Plus also of course, you know, using our local monetary powers to provide support for other countries to build more resilient communities themselves so people don’t feel like they have to all leave. Not because we shouldn’t be welcoming to immigrants, but because just as we don’t think it’s right that people should have to leave their homes in the Midwest to get a job on the coast, we don’t think people should have to leave their homes in South America, in Africa members of the CFA Franc in Asia, to come to the US or come to Europe to get jobs, to the extent that their communities are still going to be habitable depending on where they are in relationship to coasts and so forth and other climatological events, we should be supporting them getting more resilient in their communities because everyone deserves a job and water and housing and food and the necessities of life plus community in their own communities where they grow up, if they so choose. 

Steve Grumbine (25:06): 

You know, it’s powerful that you say that because when speaking with Fadhel Kaboub, he came on a while back and Ndongo Samba Sylla was on with him as well as they’re doing the MMT conference in Africa. And you know, when we were talking with them, they spoke to us about the Syrian plight and talked about how Syria had been a food secure nation, a food sovereign, and how drought and war had robbed them of their food sovereignty.  

And then people began to leave the quote, unquote “suburbs and outskirts,” and started moving into the cities where they were crammed on top of each other. Things were scarce and it bred violence there as well. And you look in the cities that we have and the scarcity narrative that we have, and you see violence.  

Everywhere there’s scarcity, even real scarcity, not just the false scarcity that we’ve pushed on to us. You see violence, you see danger, you see people holding on and gripping onto what is theirs and fighting those who try to take from them and so forth. Then it creates this dog eat dog world. As we get to the point where who’s going to have the last drop of water, so to speak.  

And I think that one of the facets of this Green New Deal and understanding the coming changes that will be happening whether, you know, you can’t make bargains with physics, as they say, and, you know, as this comes, there’s going to be some very real things to consider both in crime in terms of dealing with that scarcity narrative and the loss and the fear of loss and so forth.  

I think that a properly messaged, a properly sourced and properly financed Green New Deal allows us to mitigate violence that many people just assume is just bad people doing bad things because they’re bad people and they made bad choices. And here we’re going to have something that’s going to be undeniably climate change driven if you will.  

And people may not be able to see that, even though it’s clear that that’s what’s causing it. Can you talk a little bit about the violence mitigation this brings about, and some of the costs of violence and scarcity that you see in these urban communities as a result of this basically false scarcity narrative? 

Nathan Tankus (27:29): 

I mean, I think it happens to some extent in certain communities, but I think over the last 20, 25 years, that violence hasn’t gone away, we’ve just put that violence into prisons. That’s really what’s happening in the US society. You know, you can argue all sorts of different things about the trends of violence, but what is remarkable is that you have incredibly impoverished and damaged young people who are crowded together – commit violence.  

And it used to be that they were crowded together in public housing and in slums. And now they’re largely crowded together in prisons and prisons are the peak example of what you’re talking about. When you get a whole bunch of communities together, you introduce violence from authorities, violence from the guards, or violence from the police when it comes to the outside world.  

And you have very little resources. You have places where the food isn’t sufficient. There’s a private contractor, let’s maggots in the food, and let’s the food rot. And they’re basically as little resources as you possibly can have. And you’re taking a lot of violent, angry, damaged people altogether.  

And the violence that happens in prisons is horrific and is over the top. And so from my point of view, I think one of the critical things about moving to a just transition is also about empty prisons for two reasons: one, it’s just an indignity, and it shouldn’t be happening. And we shouldn’t tolerate that level of violence that happens both by guards to prisoners and prisoners among each other.  

And we absolutely need to empty those prisons, but also because the prisons are filled with millions of people who are a wasted benefit to our society. There’s no reason why these people can’t contribute to a just transition, can’t contribute to fighting and mitigating climate change. Indeed, as I was talking about, a lot of them already are in the sense that they’re employed as firefighters, employed to do other things, just for menial amounts of money and with little control over their working lives.  

And I think we need to guarantee that they have housing and a job and food and water on the outside, and we need to empty these prisons. In this way I think this is where the Green New Deal can and more urgently, should connect up with movements around prisons and prison abolition because I think that is the ultimate goal.  

And I think it’s actually kind of strategically and immediately necessary to divert the resources that are going into prisons and policing and re-divert it into mitigation and into care, and bring people into fair labor and also into helping to deal with the damage that our society has inflicted on those both outside and inside prison. 

Intermission (30:29): 

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Steve Grumbine (30:53): 

I’m going to confess, I’ve got goosebumps right now because I’m a systems guy, okay. I’m a project manager by trade, and I care very much about processes, the way you have your intakes, your tools, techniques, and your outputs, and that whole flow to mapping roles, responsibilities, and how things get done.  

And what I’m seeing that is different from anything I’ve ever witnessed in my entire life is a true, honest to God systematic approach to not only redesigning society, to where it works for all, but to actually addressing the environmental concerns that we all have or should have. And for those who don’t have, it would still benefit them inadvertently.  

But this is an entire end to end approach, a framework for addressing the way society can be restructured so that people are not being kept out based on the color of their skin, their gender, their sexual preference, their geography, literally every step along the way, there is a answer for how to move forward and a pathway for making it better and better and better.  

It’s not like day one is perfect. It’s like, perfect is the enemy of good. We’ve got an existential crisis coming upon us. And it really is up to us to take advantage of executing this. In this conversation with you, Nathan, I like to believe I talk about this stuff a lot, but I’ve learned more in our time so far together.  

This is just truly amazing. I really feel that cohesive end to end thinking. I hope we can translate that in terms that are more simple so that everyone can see the way this thing flows end to end every step along the way. This is beautiful. This is really empowering and positive and life affirming. I’ve really loved this. 

Nathan Tankus (33:21): 

Thank you very much. I would say, you know, I think MMT scholars and MMN have definitely been thinking in terms of thinking systematically. I mean, I think it can get exaggerated sometimes, but we definitely feel like there is a piece of the puzzle that has been missing in terms of the understanding of the financial system and understanding the questions about fiscal policy, which basically come down to how are you going to pay for it; and the pay for question that is an essential element to fill in a missing piece of a lot of other different projects that are important.  

You know, prison abolition has been at work. That’s been going on for decades and overlaps with people who are in the job guarantee space. People like David Stein writes on full employment and the civil rights tradition of the job guarantee. There is a lot of different interconnections and work around climate change as well.  

But I do think obviously I wouldn’t work on this stuff as much and as aggressively as I do and the same for a lot of other MMT scholars, if I didn’t think that this is an important answer to a piece of that puzzle in terms of building a vibrant, inclusive, caring economy. And as you say, the next step is just pushing forward the narrative so it will be as understandable as possible.  

And when the component of this, that I’ve been focusing on financial regulation, when the report, Monetary Policy for a Green New Deal, is finished, we’ll put that report out there, you know, have an op ed based on it and hoping that pushing forward the non-fiscal pay-for framing can have a nice, concise effect on the pay-for conversation and become something to be debated in the economic policy community, but hopefully will bubble up into the 2020 political conversation altogether. 

Steve Grumbine (35:01): 

Very powerful. You know, one of the things that jumps out at me is that obviously the earth is a sphere and as it turns, the atmosphere, et cetera, we can’t escape the behaviors of China and China can’t escape the behaviors of the United States. So this is a global situation and mitigating this requires a global act, but within the United States, the way I’m understanding this, we have the ability to deal with disasters that strike assuming that we are in time to mitigate everything we want to mitigate.  

We have a means of protecting ourselves to the best of our abilities while we work on a larger scale, perhaps obviously the quicker we can get the world community together to make drastic changes the better we have a chance of surviving across the globe. It’s not just a US geographical solution here.  

It truly is global. And I think that brings us maybe to our next point, which is, you know, understanding how these countries exchange goods and services and being able to build this just economy globally. And that comes down, I think, to some degree an understanding how the monetary systems of various communities work together to be able to impact the balance of payments and to be able to understand the flows that exchanges go on between different sovereigns in different systems, in different monetary units.  

Can you kind of set the stage for that and talk to us a little bit about this term balance of payments and understanding global financial transactions? 

Nathan Tankus (36:45): 

Sure. So what I would say is that balance of payments is often a term that’s invoked internationally, but there can be a balance of payments in any sort of financial system. So one way you can think about a domestic banking system is if one of these banks has more payments flow out, then flow in. Then you can say that it has a balance of payments deficit that it has to make up by either running down the settlement balances it has or borrowing the settlement balances from somewhere else.  

And as we always talk about for every deficit, there is a corresponding surplus. There must be a balance of payment surplus somewhere else. And it’s not that different in terms of the global economy. In the global economy when we say there’s a balance of payments deficit, basically what we mean is that when you net out all of the payment outflows that have happened, the payments to pay for exports, the interest payments, the dividend payments, and you net that out with the inflows, then you’re getting the balance of payments balance, or what’s more technically termed the current account balance; and this can be either in deficit or surplus.  

And if you count up all the current account deficits and surpluses for every country in the world, it should net out to zero. Obviously there’s some measurement issues, but, you know, in principle it should net out to zero. And so the balance of payment deficit or balance of payment surplus is just these net positions, these deficits, or these surpluses.  

And there’s what we call the spectrum of monetary sovereignty. Obviously, Fadhel talks about it, and Sylla talks about it. But to simplify a little bit, one of the big differences in the world is that the US makes payments to other countries in dollars. And so that when, even though the US is running a balance of payments deficit, a current account deficit, what other people are accumulating is generally financial assets denominated in dollars.  

And that is very different than when other countries, especially small open economies, run current account deficits because often you can use dollars to make payments between countries. So like, you know, even countries that there’s no involvement of the US at all now South Korea will make a payment to some European creditor in dollars.  

When a Brazilian exporter is exporting to another country in South America, often they’re making a payment in dollars. Then we can put to a lot of complicated reasons that that happens; but what I would say is to simplify is there’s a lot of investment treaties and trade agreements that impose dollar denominated obligations on other countries.  

And that for various historical reasons, there is dollar denominated debt owed by countries and private entities around the world that aren’t the United States and aren’t US companies. So as a result, the dollar has this dominant role. Sometimes we get criticized. It doesn’t mean that the US has monetary sovereignty and no one else does, as we say, it’s a spectrum, but this asymmetry where you can use dollars to make payments to third parties, but you’re not necessarily able to use your own currency to make payments to third parties.  

You can, if you’re the Euro, you can, if you’re the yen to a certain extent, can a little bit, if you’re China, but for the most part, the payments around the world are denominated in dollars. So that makes the dollar exchange rate to the rest of the world very important. And that also makes what’s going on with US interest rates very important. 

Steve Grumbine (40:30): 

Interesting. So typically what they call real money, or gold bugs, and the folks that are of the mindset of devaluing the dollar and they typically tend to be these Forex trader types, they’re always talking about the quote, unquote “value of the dollar.” And Mosler would typically come back and tell you that the federal government is the price setter; it’s the monopoly issue of the currency and so forth.  

However, there is a fluctuation out there in the foreign exchange markets that directly impact countries. I mean, take a look at Venezuela, for example, who had debt denominated in US dollars. It also had its currency pegged in US dollars, and it had a single commodity that it based its economy on that, quite frankly, it wasn’t the refined version of it.  

And so it was able to get beat by other countries in general. So is this a direct impact of that balance of payments in terms of a country lacking sovereignty with a peg? Is that kind of what you’re talking about? 

Nathan Tankus (41:34): 

Yeah. What I would say is, I think there’s two elements to this. There’s a financial element, and then there is a physical resource element. So there’s the financial element is who has payments in what currency imposed upon it. So the US imposes obligations on other countries, for example, to respect intellectual property, which often is produced by US companies and thus they’re charged US dollars to get access to them.  

So there’s this financial element, which structures what you might call the international currency hierarchy. But the international currency hierarchy is different from monetary sovereignty because monetary sovereignty is about the space that being a currency issuer gives you, or not being a currency issuer does not get to mobilize domestic resources to accomplish public purposes.  

And this is where the thing is like oil, and whether you have the refinery capacity in oil comes up because you can have a country where no one else in the world owes debts denominated in that currency. You can have just some country where there’s no one else owes your currency and thus is generating a demand for your currency.  

And you can even owe a lot of dollar denominated debt. You can even have a lot of public dollar denominated debt, but you could be so resource rich that you have a lot of autonomy in terms of how you run your economy. You can run big current account surpluses, or even just the fact that you have such valuable resources.  

You know, it might be oil might be something else, or might even just be a very productive economy. You can be higher up in terms of the degrees of monetary sovereignty or spectrum of monetary sovereignty, then a country that’s higher up the currency hierarchy because they’re resource poor while they’re physical resource poor, their wealth poor in their own country.  

And so this is an important distinction that like that obviously makes things complicated, but there’s basically these two elements that are interacts, but aren’t the same, which is the FI, the imposition of foreign denominated debts and the imposition of foreign denominated obligations and what physical resources you have and what physical resources you have control.  

And so you can have resource rich countries that have a lot of foreign currency constraints imposed on them, and you – flip side – can have very little or no foreign currency constraints imposed on you, but you don’t have many domestic resources. And so now that makes it complicated, but these are basically the two areas for monetary sovereignties emanating from is resource wealth and how much your economy is relying on imported inputs and the financial constraint that you face or don’t face.  

In other words, in the MMT terms, you can a floating currency with no foreign denominated debt, public or private, but be very resource poor. So you still are very reliant on the rest of the world. In flipside, you can have a country with a lot of foreign denominated debt with a pegged currency and so on and so forth, but it can be so resource rich that that doesn’t really matter, or it doesn’t matter for a given period of time.  

You know, for example, you might say that in 2003, Saudi Arabia had a high degree of monetary sovereignty instituted by its oil, but that is not necessarily going to be true in 2030, 2040, the way the world’s going to change around fossil fuels and climate change, which is why Fadhel is so adamant about Saudi Arabia developing monetary sovereignty through mobilizing its resources now, before it’s too late. 

Steve Grumbine (45:22): 

So this I guess is a good time to talk about Japan momentarily. Both Stephanie has gone out there and so has Bill Mitchell in recent times and saw a recent report basically saying that now Abe is pushing a fiscal stimulus out there, and it’s not so inconsequential, I guess, that MMT has been in their ears; but that said, Japan has carried approximately 250 to 300% debt to their gross domestic product for some time now and have seen zero inflation.  

And typically, you know, people talk about a standing army, world reserve currency, all these fancy things. And in reality is Japan shows that a tiny island nation with a lot of resources is capable of doing a great many things without having to annihilate the world, blowing them up and worrying about bombing Kadafi over gold or all these other fancy, nancy spinmeister conspiracies.  

Japan has just been able to basically issue its own public funds without any real impact. I mean, there’s been no inflation. Can you talk about Japan momentarily within the context that we’ve been talking? 

Nathan Tankus (46:39): 

Yeah, absolutely. First of all, one of the big differences is that Japan runs a current account surplus. So that obviously gives it a lot of leeway. But I think even without that, it just is, as you say, a very resource wealthy country, and as the policy makers complain, they can’t get inflation up in Japan.  

Part of it and ironically is that Japan is a high income country that gives a lot of resources public. It has housing. Then it provides public housing. It has the huge transportation networks, which it provisions publicly, and doesn’t really lean on cars so much. It has a healthcare system and all the public officials involved in those entities, don’t raise rents, and don’t raise transportation costs ironically, because inflation’s low.  

And as a result that helps keep inflation low. So you have an economy that is very well regulated, that has a lot of publicly provisioned resources. And when you have that, inflation as it’s conventionally defined and the consumer price index, it’s weighted based on what that quote, unquote “average person” buys and what people mostly buy is housing, is food, is clothing, is transportation services.  

So if a lot of that stuff is being publicly provisioned and the public isn’t raising the price on it, you’re generally going to have low inflation and you’re going to have low inflation regardless of whether unemployment is high or unemployment is low, unless they’re the ones that start to increase it.  

As long as you have public provisioning of resources that tends to keep prices pretty stable. In the US, we have overall inflation is low, but housing inflation has been high. It’s been driven by and there being shortages of housing in the specific region and the housing that does get built, it’s built to meet the luxury demand for housing rather than for a middle class people’s demand for housing.  

And so in that sense, things like the Green New Deal are kind of the perfect inflation stabilizing program, because with Medicare For All, they’re programmed to get healthcare prices under control, they’re programmed to get housing prices under control, they’re programmed to get energy prices under control.  

So it’s just publicly a provision to electricity, and we want to secure and get control of our food supply and prices. Once you start going down the list, we’re actually talking about most of what people need to live their lives and about keeping the prices on those things, Steve, to affordable. To get back to the broader balance of payments question for Japan specifically, it’s that they, I think, them running a current account surplus has been important to that, but you don’t necessarily need to run a big current account surplus to have a lot of space to run your economy domestically. 

Steve Grumbine (49:29): 

That brings me to, I guess, another question. I talk oftentimes about the race to the bottom of the United States, and you look at places like Kansas, you look at places like Texas and others who frequently try to lure businesses there by slashing the bottom out of the safety nets, slashing spending, offering tax sweetheart deals to these corporations, et cetera.  

And what you end up with is a very, very lopsided country where capital flees state A, goes to state B, and you’ve left basically a third world nation behind without any jobs, without any means of these people taking care of themselves. And Detroit is a great example of this, but in terms of balance of payments, in terms of, I don’t know if this is the right term.  

So forgive me in advance. If the sectoral balances, if you will, of each state and the terms of which one is a net importer, which one’s a net exporter, which one’s a net job producer and which one is not, and how we assess the non-sovereign states in terms of that balance of payments, in terms of that sectoral balances and understanding, how do we measure a state’s through that lens, Nathan?  

That seems like such an important question that I don’t hear much about. 

Nathan Tankus (50:50): 

That’s a great question. It really is a great question. It has been a big part of what MMT’s narrative about the Eurozone crisis has been, has been in contrast to narratives that try to focus just on, Oh, there’s a balance of payments crisis in the Eurozone and focus on the fiscal element is that we have something like Eurozone member States in the US, they are US States.  

And in some ways they can have more leeway in terms of borrowing than those Eurozone states. And in some cases, especially in the depths of crises. And big MMT argument has been that you do have states that run big trade deficits in the US but they get balanced out because we have a national banking system where you’re not going to cause a banking crisis by transferring deposits from the Midwest to California or wherever it is.  

But second, that there’s fiscal policy, there’s automatic stabilizers, even though they’re weakened, still function to a certain extent so that when income falls and demand falls in a specific region, payments from the federal government go to that state. And thus, you know, the state theory can have a big trade deficit when a much smaller, quote, unquote, “current account deficit.”  

Now these stabilizers aren’t strong enough to generate full employment in these local economies, that big spatial problem that we’re talking about earlier, but they do stabilize these economies relative to say Greece was stabilized or not stabilized during the crisis. But I think this has been important in terms of your actual data question.  

The big thing is we don’t have the data on that. I think if you launch a big research project, you could use some of the datasets that are out there about interest rate commerce, and you might be able to come up with estimates of what each state’s trade deficit, what their current accounts or most deficit is, but that’s not currently data that gets collected.  

And I actually think that collecting that data would be dangerous. I think a big part of these kind of narratives about Greece, they’re just a bunch of lazy bums accumulated was because you could point to a trade deficit and you could be like, see how much, you know, they’re importing. If they just hadn’t imported so much, everything would have been fine.  

Or if they had worked hard enough to export more, everything would be fine. And I think, you know, you already get that with a lot of liberals in terms of measuring the net federal payments from the federal government. A lot of liberals point to, Oh, this state pays less than . . . “these red States pay less in taxes than they get from public services.  

Look, that state is welfare.” Where really what they’re saying is that that state has poor people and more unemployed people and lower incomes. So they pay less in federal taxes and they get more in social services support. They think they’re targeting the wealthy of these areas, but the rich who don’t realize how good they have it, but really that they’re just laundering, you know, anti-porn narratives, ironically, once laundering, anti-porn narratives often about disproportionately black, poor communities in these places that are stuck with right-wing white voters who are disenfranchised.  

So I think it’s important to think spatially about where we want to place employment, place jobs, place spending programs, but I worry about publicly publishing trade deficit or current account deficit data about individual states cause I think it can sometimes play into scarcity narratives about the ways in which people try to divide up the US states that become counterproductive. 

Steve Grumbine (54:32): 

Okay. Nathan, I want to thank you. This has been one of the most powerful episodes that I’ve ever been involved in. Can you do me a favor and just close this out and kind of let us know what you’ve been doing, what you’ve been up to and where we can find you? 

Nathan Tankus (54:49): 

As I said, I’ve been working on this report as my purview of being Research Director of the Modern Money Network on Monetary Policy for the Green New Deal. And this has been the main project that I’ve been working on. Hopefully we can have it out in a month or two, and it’s going to be putting forward this non-fiscal pay-for framing and talking about the green financial regulations to shrink the financial system and make room for Green New Deal spending.  

Then that’s the main thing I’m working on. Watch out for a round table that I’m going to be doing on Pristine EDesigns, new projects, Just Money, John Haskell on Virtual Currencies. That should be coming somewhere around December, January, something like that. And we’re generally just writing all out a lot of these issues, writing about balance of payment issues with other MMT scholars and focusing on money and international law.  

And I’ve been doing a lot of work, what you might call on the micro side of MMT for like MMT and antitrust. And I had a paper came out over the summer with St. Jude’s DePaul called the Firm Exemption and the Hierarchy of Finance and the Gig Economy, which you can find out there that gets into some of the ways in which the financial system and doing things through lending and equity states biases our economy towards hierarchy and the ways in which having a system of grants and spending can democratize the economy and reduce inequalities, not just among households, but also among businesses and industry. 

Steve Grumbine (56:24): 

Sounds like that’s another podcast waiting to happen. 

Nathan Tankus (56:27): 

Yeah! It definitely is. 

Steve Grumbine (56:28): 

Awesome. Well, look, I want to thank you from all of Real Progressives and the Macro N Cheese team. I just want to thank you from the bottom of my heart. This was an amazing three hours of recording. We just went through and you, my friend, have earned all the respect that I could possibly throw your way. Thank you. 

Nathan Tankus (56:47): 

Thank you very much. Speak to you soon. 

Steve Grumbine (56:49): 

Alrighty, buddy. Bye. Bye. 

Ending Credits (56:56): 

Macro N Cheese is produced by Andy Kennedy, descriptive writing by Virginia Cotts and promotional artwork by Mindy Donham. Macro N Cheese is publicly funded by our Real Progressive Patreon account. If you would like to donate to Macro N Cheese, please visit patreon.com/realprogressives.