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Episode 12 – Debunking Economic Illiteracy in the Progressive Movement with L. Randall Wray
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Steve’s guest is L. Randall Wray, a professor of Economics at Bard College and Senior Scholar at the Levy Economics Institute. In this 2017 interview, Wray looks at the Global Financial Crisis from both sides now. The celebrated economist tells Steve how the rise of shadow banking led to banking deregulation, opening the door for massive fraud, leading to the global financial crisis. He then explains in detail how globalism affected average Americans, suppressing their wages for 40 years and forcing them to amass unsustainable personal debt. These two threads led to the GFC.
Wray compares the federal government’s response to the banking crisis with the reaction to the real economy’s crisis, the jobs crisis, and the consumer spending crisis. Is it any wonder that Wall St recovered, but the rest of the economy did not?
He maintains that only a federal job guarantee will prevent more pain. Manufacturing jobs are not coming back to the US any time soon. He goes on to address both the myths and reality of Social Security and Medicare. And finally, he offers a simple but truthful description of the relationship & interaction between the central bank, or Federal Reserve, and the Treasury.
Macro N Cheese – Episode 12
Debunking Economic Illiteracy in the Progressive Movement with L. Randall Wray
April 20, 2019
Randall Wray [intro/music] (00:02):
It’s not a lack of things to do that is causing unemployment. It’s a lack of paid work that’s causing unemployment.
Randall Wray [intro/music] (00:09):
If they want to keep at excessive lending, careless lending, dangerous lending, all of which helped to bring on the global financial crisis that wiped out tens of trillions of dollars of wealth all over the world; and we still have not recovered 10 years later.
Randall Wray [intro/music] (00:30):
If you go back to the colonies, do you know what they did with the paper notes they got back in tax payment? They burned them.
Geoff Ginter [intro/music] (00:45):
Now let’s see if we can avoid the apocalypse altogether. Here’s another episode of Macro N Cheese with your host, Steve Grumbine.
Steve Grumbine (01:37):
This is Steve Grumbine with Macro N Cheese, and I am excited to have Professor Randall Wray join us again. Randall Wray is one of the original developers of a school of economic thought known as Modern Monetary Theory, MMT. Randy Wray has been on the show several times and it is always a pleasure to have someone as accomplished as Professor Wray join me. So, this episode of Macro N Cheese begins now.
Grumbine (02:10):
Welcome to the show, Randy. How are you, sir?
Wray (02:12):
Right. Good.
Grumbine (02:14):
You know and we were talking about this a little bit offline. Our movement, I think has the best of intentions. I think the policies that we’re trying to put forward, largely . . . you can look at some semantic changes here and there, they’re largely the same proposals.
It just seems like nobody has a clue how to get out of their own way and actually make this happen and fund it and get past the lies and the myths of the right wing and also the center, which is definitely afraid of deficits and debt as well. Can you talk a little bit about what is holding the Progressive Movement back?
Wray (02:53):
Well, I think one is this great fear of politics, so that even people who sort of understand what we’re talking about are afraid to come out in the open and say things that they think would be politically very difficult cases to make. And so I think that’s a problem with our elected representatives. I have met with progressive Democrat politicians over the past 25 years.
And when I, when we start talking about budget deficits, they completely understand that a sovereign government is not like a household. They understand that there’s no necessity to balance the budget over the course of a year or ever, but they say, look, I can’t say that in public because the response, they don’t say of the funders, but I suppose funders are a big part of the problem, will be just overwhelmingly negative.
They will think that I’m crazy. I can’t say it in public. And so that is a big part of the problem. But I think also the problem is that a lot of Progressives don’t understand what they’re talking about. And when they’re confronted with say people from the Fed, with financial markets participants, their ignorance is exposed.
And so although a lot of their policy proposals, you know, they’re, they’re sort of on the right track, the goals are desirable, but the proposal to get toward the goal is very confused. And so they really weaken their case. And when they go in front of an audience where there are some people that understand the way financial markets work and so on. So that’s a big problem.
Grumbine (04:30):
You know, I was sitting there discussing Jill Stein’s or student debt forgiveness plan, and just see you understand the kind of pressure we as activists are even up against. The minute we said anything that was remotely not “Yay, Jill,” but was like the script of, Hey, this is wrong. Here’s how it could work. I mean, we’re talking about major, major fallout.
Just the regular working-class people are so tribal in nature that they can’t even allow themselves to learn proper. They just follow the leader. They’re on a Honda, so to speak. And then the leadership to your point is definitely afraid to say the truth. So these people down here are following them. These people up here are petrified of being cast aside as a crank or a kook. How do we break the log jam?
Wray (05:24):
Well, you know, I’m an economist. I’m not good at politics. My candidate has never won any election, presidential election. No one that I ever really supported has ever won. So I’m not the right person to give advice on politics. But you know, what we saw in the last election was the majority of Progressives decided to go with Hillary because she was a lesser evil. For me, that’s not a convincing argument at all.
She’s evil. Being a lesser evil than the one who won. It, for me, is just not good enough. She had virtually nothing in her platform that I would support. There’s no indication whatsoever that she would have changed the discussion. I mean, just the discussion. I’m not talking about what she can actually get through Congress. Just change the discussion about government finance. She would not do that.
I mean, there’s no doubt in my mind that she will carry on claiming that the Clinton budget surpluses were tremendously good for the economy and all this nonsense – that the Rubin-Clintonista group has been promoting for since Clinton got out of office. So she was an absolutely terrible candidate, but most progressive, most of my friends decided in the end that they were going to support her.
The candidate that we got in opposition to that was Jill Stein, as you mentioned, and her appearance on John Oliver’s show was a complete disaster. He tore her apart. You know, he’s a clever guy, I think probably basically a good guy and he demonstrates, she didn’t know what she’s talking about. So this is a huge problem.
If Progressives are going to get out there and propose something different, they’ve got to know what they’re talking about. And she didn’t. And I think in general, the Greens, when it comes to macroeconomics and budgeting, they do not know what they’re talking about. So it’s a huge problem. Aside from all the political stuff. I mean, just the economics. They don’t know what they’re talking about.
Grumbine (07:06):
Absolutely. I will tell you this. And this is a very encouraging sign. You know, I spoke with, Ajamu Baraka, her running mate, this was about a month ago. And in talking with Ajamu, he actually came to me. We talked. He is very, very interested in learning MMT. He found himself very, very attracted to some of the videos that Steven Hail has done.
He related very well to his manner and his way of presenting the material; and little by little he’s uncorked your information and others. I think it’s a really positive move. I like his integrity. I think his heart’s in the right place. And seeing him open to learning about what I consider macroeconomic reality is extremely encouraging for me.
Wray (07:53):
What you’ve said about him is also true of Jill Stein. I don’t want to sound overly critical. I think she’s also very open. She’s very intelligent. The problem was just trying to push a proposal that didn’t make any sense.
And I think, you know, if you’re going to get on television, John Oliver maybe ambushed her a little bit, uh, because he had done a, his staff had done a lot of research beforehand on a, on a particular position that she did not come to the show to present.
So in that sense, it might’ve been a bit unfair, but it had been a policy proposal of the student debt relief proposal and likening that to quantitative easing. And she tried to defend that, but it was something that could not be defended.
Grumbine (08:38):
It’s a great point. I mean, Jill, Jill’s been on with us before we, we obviously supported her throughout, but my concern is, is that I want them to be successful. They’re the most established, left party that we have in this nation. And, you know, as far off as they were from being competitive, at least they’re, to your point, changing the conversation.
If we can at least do that, I mean, we stand a chance of at least changing the fabric of the way we discuss issues. I mean, I think that’s, that’s kind of maybe the next most important thing we can do right now is alter the conversation.
Wray (09:17):
Yeah. But continue on . . .A former student of mine Yeva Nersisyan and I have written a critique of positive money, Greenbackism, and these, um, progressive proposals to reform banking and also to change the way that the government spends. And here’s another example of people who I think most of them are really trying to change things for the better.
They are Progressive, but the proposals just don’t make any sense. The people who are proposing them don’t really understand the way the financial system works. They don’t understand what the problems are with the financial system. They don’t understand how the government really spends.
They don’t understand what the real constraints on government spending are. And so they propose things that I think are pretty easy to shoot down – the idea that the government should just start printing up greenbacks to finance all of its spending and the idea that we can turn to what’s called low reserve banking, a hundred percent money, narrow banking, a variety.
It goes by a variety of different names. Positive money sort of tries to combine both of these things together into a completely, I think, incoherent policy that has zero chance of ever getting through.
Grumbine (10:23):
It was interesting. Robert Reich came out and apparently is in support of this thing called the Need Act. Are you familiar with the Need Act?
Wray (10:35):
No.
Grumbine (10:35):
Basically it’s, it’s reforming our banking system and, and giving us democratizing the dollar as they say. And quite frankly, I mean this idea of putting regular people over top of decision making at the Fed and so forth. I understand the idea here is to take it out of the hands of neoliberals, et cetera, et cetera, et cetera. But I sometimes feel like we make these things that are just fit for a bumper sticker.
And quite frankly, people, their knowledge or their willingness to learn is oftentimes about a thimble’s depth, in terms of both desire and patience. So we’re left in a society right now that’s looking for fast food politics. And a lot of the answers to these questions are not fast food friendly answers. How can MMT simplify its message and maybe even market better if you will.
I hate to do that, but reality shouldn’t have to be marketed, but in the case of this, I mean, we’re up against people that are dealing in these great “End the Fed” bumper stickers. Do you have any ideas on how we might be able to simplify the message to get it to these individuals who don’t give us a lot of time or energy or, quite frankly, any of their cognitive abilities?
Wray (11:56):
That is the next thing that MMT has to do. And I think since about 2012, that is what I’ve been trying to do, because I think as far as the theory goes and the policy recommendations and all of that, we had pretty much completely sorted all that out five years ago, 10 years ago. There’s really nothing more we can say. I mean, we understand how things work. We understand what changes need to be made.
The problem is framing it, and putting it simply enough and consistently using the right framing so that you don’t trigger the wrong neural networks in people’s brains and get them scared. I don’t know if you’ve seen or heard me talking about when I wrote the first draft of my first book, 1998, “Understanding Modern Money,”
I sent the first draft to Robert Heilbroner, who is the best selling economist author, at least in the English language, extremely nice guy, extremely bright. And I asked him if he would write a blurb; and somehow he got my phone number and called me at home. And he said that he had read over it. And in the nicest manner you could imagine, he said, “I couldn’t possibly write a blurb for this book.”
He said, “It’s going to scare the hell out of everybody. Money is the scariest topic there is. If you’re going to write about money, you have to be extremely careful. You are going to scare the heck out of everybody.” And he said, “You’re not writing in the way that it needs to be written.” And I think, you know, in retrospect he was right. It did scare everybody.
And that becomes a barrier to communicating. So we have to be extremely careful. If you just say, you know, the government spends by keystrokes. To us, that’s a perfectly accurate explanation. You couldn’t get more accurate than that. That is how they do it.
But to the people hearing that, that is the scariest thing you possibly could say, because what will prevent them from key stroking too much and causing hyperinflation. And we’re all going to be using wheelbarrows to take our cash to the store. And that immediately is what is triggered in them. And so you’ve got to be very careful. You got to frame it correctly.
So, you know, we’ve been reading George Lakoff and we’ve been trying to frame it correctly. I’m working on a book with one of my graduate students, “Money, the Illustrated Guide,” or something like that. And we’re going to be very careful in how we frame the truth; explain it, but frame it correctly so it’s not so scary. Then make it as simple as you possibly can do. So that’s the next step. It’s very hard.
Grumbine (14:38):
Let me ask you, because obviously in the world of the Green Party sensibilities, and when you cross those sensibilities, people start tuning you out immediately. You’re capitalist, you’re this, you’re that, you’re the other. It’s like my God, if you only knew, you know, I’m just trying to show you how to get where you want to get to.
But when you think about that, the idea of full reserve banking, the references to Iceland, what are some of the concerns that would immediately jump to mind? Someone like yourself as to what that full reserve banking even means to people that are just sort of casually hearing it and so forth?
Wray (15:19):
Yeah, well, it’s sort of related to what I was saying – the keystrokes. So government keystrokes the dollars into people’s accounts when it spends and banks keystroke the dollars into bank accounts when they lend. In part because of global financial crisis, you know, I think we all understand that banks lent way too much.
They lent to people who probably should not have been borrowing, but in any case, they had been duped into taking on loans that they shouldn’t have been taking on under terms that were extremely onerous, they couldn’t possibly afford and didn’t understand.
So anyway, they want to prevent that; they want to prevent excessive lending, careless lending, dangerous lending, all of which helped to bring on the global financial crisis that wiped out tens of trillions of dollars of wealth all over the world. And we still have not recovered 10 years later. Okay.
So they want to eliminate that. And they think that the way to eliminate that is to just ban bank creation of money, in their terminology, through lending. So that all that banks can do is to lend on deposits that are deposited with them. And they have to hold a hundred percent reserves against their deposits. In this way, they’re going to greatly constrain banking.
This proposal was very popular in the 1930s, even Milton Friedman and Irving Fisher, Irving Fisher was the greatest American economist of that time, bought on to this proposal. What we did instead was we regulated the banks and we insured their deposits; and we told the Fed, it is your responsibility to stand by to be a lender of last resort in case they get in trouble.
And the combination of those policies actually made banking safe for decades. Okay? So we didn’t choose the hundred percent reserve thing, but we chose something that worked, I would argue, just as well, even better by regulating the banks. Then protecting depositors if the banks got themselves into trouble and protecting the banks themselves, if the problem was merely a liquidity problem.
And then we had in place ways to deal with banks that became insolvent. We would resolve them. The government would actually take them over and wind down their balance sheets and protect all the deposits; that worked. Okay. The problem was we had the rise of a kind of financial institution that escaped the regulations.
We now know what to call them. For a long time we didn’t know what to call them. We now call them ‘shadow banks’ because Paul McCulley came up with this term. When I was a student, we call them non-bank banks, which is sort of a very strange terminology because they were not legally banks, but they did a lot of the same things as banks, but with no regulation.
So anyway, in response to the rise of these shadow banks, we deregulated the banks. So essentially they could basically do anything they wanted to do just like the shadow banks. And that is what led to the global financial crisis. So what I’m saying is the goal of constraining lending, constraining what the lenders can do, wiping out excessive lending, but also preventing fraud.
The global financial crisis was caused by massive, pervasive fraud. Every single piece of the business of the biggest banks was fraud. We need to reign all of that in – that is absolutely true – but the a hundred percent reserves or full reserve banking is not going to do that because it leaves everything except these narrow banks alone.
So we’re still going to have the shadow banks and banks like Goldman Sachs will give up their bank charter in order to continue doing what they’re doing now, which is basically screwing the customers on both sides of their balance sheets. That will still continue. So you’re not actually going to rein anything in with the narrow banking, full reserve banking, positive money proposals, all of that will still exist. It just will be outside the regulated banks.
Grumbine (19:49):
Okay. So you speak of the crash. And, you know, I personally was deeply affected by that. And it actually was the catalyst for me getting involved in MMT and swinging left bound. When you talk about that, we still have a lot of people that celebrate reducing deficits, celebrate, you know, austerity thinking they’re being good liberals ironically.
And in reality, during that time period, there was a real chance to save all of us from destitution and we whiffed on it. Didn’t we? I mean, can you talk a little bit about what could have happened during that time, as opposed to what did happen?
Wray (20:31):
Yeah. Well, Obama came in in a terrible situation, the deepest recession since the great depression and the worst financial crisis by far since the 1930s. And he had to deal with that. And I was a workshop trying to come up with policies to influence him. And we got a report back from people working with him that the total size of the stimulus was going to be 800 billion. Why 800 billion?
Well, because it’s not a trillion, that was the logic. It wasn’t that 800 billion was going to be enough. It was that it’s not as scary as a trillion dollars. So 800 billion. And that was going to be split over two years. So that’s 400 billion a year for two years. And that is what we got. Okay. It helped prevent the recession from getting worse than it was, but four hundred billion wasn’t nearly enough.
It didn’t nearly make up for the decline of private sector spending. The people in the administration knew that; all of us around the table knew that, that it is going to take much more than $400 billion a year. And so you can look at graphs of the data over that period.
You can see the little blip of the stimulus, and then it disappears after two years and the economy does not recover and still has not fully recovered 10 years later because the stimulus wasn’t big enough. Obama goes on television. He says, we really would like to do more. We know the economy needs more than this, but the government has run out of money. Absolutely ridiculous. Even Bernanke was talking about key stroking.
And so his advisors had to have been there telling him that that wasn’t true, but for, I presume completely political reasons. That was it. That’s all we got. The budget deficit did go to a trillion dollars, I think it was in 2009. So in one year a trillion dollar deficit, but that was not because of a stimulus. It was because tax revenue collapsed. Tax revenue collapsed because the economy collapsed. Okay.
So the budget deficit widened much bigger than the stimulus, but it was because of the falling tax revenue, not because the government was doing anything positive. What the government did over the whole course of the Trump administration was to reduce government jobs. The government input into the recovery was basically negative and completely different from any other response to a recession in the post war period.
It was the first recovery we ever had where the government actually acted as a drag on the recovery instead of leading us out of the recession. And all of this was because of that politics. But if you look at the reaction to the banking crisis, it was completely different from the reaction to the real economy’s prices, the jobs crisis, the consumer spending crisis that we had.
For the banks, the sky, while the sky wasn’t even a limit, we could go way beyond the sky. We could go to infinity and beyond to bail out the banks. The Fed originated $29 trillion in loans to save basically only the biggest banks – 29 trillion for let’s say Wall Street and only 800 billion for the economy. Or another way of putting it 29 trillion for the one percenters and 800 billion for the 99% who got left behind.
So it’s not surprising at all that what happened was Wall Street recovered. The biggest banks recovered and the rest of the economy did not. So it just shows you the difference and what they were willing to do to save the financial system versus the real economy where most of us live, where most of us work, and so on.
I don’t want to be misleading because there’s a difference between lending 29 trillion, originating 29 trillion in loans, and actually spending 800 billion. Some of that for public infrastructure, some of it was tax relief. Some of it actually led to job creation.
So there’s a difference between lending and spending. Yes, but what I’m saying is they realize there’s no limits to the keystroke lending that we can do, but the key stroke spending has to be very limited, but this is false. There’s no reason why we couldn’t have keystroke enough spending to prevent it.
Well, I mean, it would’ve been hard to prevent the downturn because yet you would have to foresee it and all that, but you definitely could recover from the downturn – but we didn’t do it.
Grumbine (25:14):
Let me ask you a question. I’ve been trying to formulate an idea here. Ellis Winningham has put it out there. We’ve talked to neoliberalism how basically the Milton Friedman school kind of put the onus on you and I to go into debt during the low times and go ahead and pay off our debt in the high times.
 And this all kind of started in spades, uh, during the seventies and eighties, as we’ve watched income distribution grow wildly for the 1%. And, and as we watched this, I’m wondering if this was really this problem we just talked through during the collapse.
I’m wondering if this was so much a, Hey, my hands are tied. Or if this was just the furtherance of neoliberal belief system that pushes us to private debt and thus further enriches the financialization of our economy and those at the top that are interest earners. I mean, is this a fair statement or am I reaching?
Wray (26:18):
Yeah. You know, first, I just want to say that I don’t doubt their conspiracies. Okay. There are all kinds of conspiracies going on. All right. But I wouldn’t want to leave the impression that I think that there’s this tiny little group at the top who knows what they’re doing and they planned everything. And the results we got is exactly what they were aiming for. I don’t think that’s true.
Okay. I think that there are lots of conspiracies. There are lots of different groups, lots of different interest groups and so on that don’t know what they’re doing. That don’t foresee the future. And we ended up where we’ve ended up. Okay. A big part of neoliberalism is globalization; and it’s globalization of trade, it’s globalization of finance.
And it is trying to enforce local property rights on everybody else. Property rights that protect the elites in the West. So intellectual property rights, the trademarks, the innovations, the inventions to make sure that our people who own these rights get as much money as they possibly can out of the rights. So that’s what the globalization is all about.
And as a result of that globalization, in a way, our elites don’t care that much what happens to the US economy because a very large portion of their earnings come from abroad because they are now very globalized. And if we’re going to have production in the US, the costs have to decline. They have to decline to the low cost producers, let’s say, largely in Asia now.
And so there is tremendous pressure to reduce costs if you’re going to produce anything in the US. How do you reduce costs? Well, mostly it’s going to have to be wages. Wages have to decline to global standards, which are much lower than ours. And so we’ve had downward pressure on wages since the 1970s, and as a result, they are largely stagnant in real terms.
So how can you possibly sell things to Americans while you’re waiting for the Chinese income to come up? In order to increase markets there, you have to sell things to Americans while their wages are stagnant. They can’t afford to buy anymore. So what are you going to do? You’ve got to convince them to go into debt.
And so, since the seventies there’s been rising on trend indebtedness of US households as they try to make up for the lack of wage increases. So they’re pushing this combination – globalization, and we will move our production outside the US unless you guys will take lower wages.
If you do accept the lower wages, then the only way we can sell stuff to you is to get you to take on debt. So all of these things are connected in a way that led to the global financial crisis – with the rising debt, the stagnation of income and the globalization
Intermission (29:43):
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Grumbine (30:32):
I’ve been accused often of being a far right winger when I say this, but I think you’ll get a kick out of it. Warren has said let’s let them give us their goods and services for our pieces of paper. I agree wholeheartedly. And when we have that massive trade imbalance or that current deficit that we have in our trade, I think last year was 500 billion.
Obviously that leakage has to be made up or the tub shrinks. So in this case, why not accept the fact that the industrial revolution in America is over and instead focus on rebuilding our bridges, focus on building out a green infrastructure, focus on building out all of the most advanced communication systems . . . sustainability in America.
Go ahead and get ourselves a medical care taken care of, education. You name it. And we can do that in house without worrying about the cost of industrialized jobs, you know, these factory type jobs. Doesn’t it seem like a win win for everybody?
Wray (31:38):
People are much too focused on manufacturing jobs. They say all the good jobs are leaving the US. Manufacturing jobs are not good jobs. I worked in the factory. Those aren’t good jobs. The thing that was good about them was that they were unionized jobs and they paid good wages. Okay? So now we’ve got in the US I believe it is seven or 8% of our jobs are related to manufacturing.
Trump promises to bring them back. He might bring back another 2%. It’s not going to be more than that. We’re not going to get more than 10% of our population in manufacturing. The other 90% have to do something else. And right now that is what they’re doing. They are, I think somewhere around 80% of the population basically has a job that is taking care of other humans. That’s what their job is.
They’re teaching them. They’re bathing them. They’re feeding them. They’re entertaining them. They’re transporting them. They are cleaning their house. They are mowing the lawns. They’re taking care of each other. And I don’t think these are bad jobs. I’m a teacher. It’s actually a pretty good job. The problem with these jobs is that they’re low paid for the most part.
Not all of them, obviously, but they are low paid. What’s the answer? Raise the wages. And most of these jobs, as you’re implying, are not going to leave the US. You raise the wage. They’re not going to leave the US. If someone is cleaning your house, they’ve got to be here.
There are service sector jobs that can leave the US, but the majority will stay here. Construction jobs, for the most part, they’re going to stay here. Cleaning up the environment, jobs are going to be here. So the answer is to raise those wages. Some of these can be raised by the government. Some of these jobs are government jobs. Some of these can be raised by raising the minimum wage.
We should go as quickly as we can to $15 an hour plus good benefits. That will help. It not only raises those particular wages to $15 an hour, it will tend to push up all the other wages, too, because this will become the minimum. And we can talk more about it. But the employer of last resort or job guarantee is the way to make sure that the lowest paid workers in the US can get a job at $15 an hour.
If you give that in the employer of last resort, a job guarantee program, that’s going to be the lowest wage. You’re going to push up all the other ones. So that’s how you do that. And that will go a long way towards solving our problems. We can go to full employment. We can replace any jobs that are lost through moving abroad. So say the call centers all go to India if we raise the wage to $15 that’s fine.
Let’s just replace those with good paying jobs, other service sector jobs in the United States. It will also raise demand. It will reduce poverty. It will reduce necessitous borrowing. People have decent incomes where they can afford it. If you start providing healthcare benefits with the job guarantee program, Medicare For All, everyone in the job guarantee program gets Medicare.
Private sector will have to supply decent healthcare, too. So you will be increasing that. And then you will be employing far more people in the healthcare sector, which is what really matters – making sure you can provide enough healthcare to everybody as you – you have to have a lot more people employed in that sector. You have to have a lot more people employed in childcare.
You have to have a lot more people employed in eldercare, and we can do all of that. That’s where people ought to be going.
Grumbine (35:25):
This brings up a great point. One of the other things that we get hit with from the Green Party and others, is this whole nonsense about automation and how automation is getting rid of jobs. And when we talk about the federal job guarantee, the first thing they say is automation. Can we just destroy that real quickly? I mean, I know that automation does displace some older work, but this is really kind of a misnomer. Is it?
Wray (35:54):
Well, automation has been going on since Adam Smith wrote about it in the pin factory. Of course automation destroys jobs, but it’s only our lack of imagination that doesn’t replace those destroyed jobs with more, better jobs. So of course the robots are going to replace almost all manufacturing jobs.
And again, that’s the reason why Trump’s claim that we’re going to create 25 million jobs like bringing back manufacturing jobs is just crazy. China is losing far more jobs than we have lost through innovations and use of robots and machinery and so on in their own factories. So it’s not that we’re going to get any jobs back from China.
China’s shedding jobs as fast as they possibly can in manufacturing. So while it’s true, that technological progress destroys jobs. That’s absolutely true. That doesn’t mean that we can’t find things, useful things for people to do. All you have to do is walk out your door and you can see the need for useful things to be done.
And ironically Greens really ought to be behind this because one of the areas where there’s a tremendous need for workers is improving the environment, retrofitting housing to put in insulation and so on. It’s not a lack of things to do that is causing unemployment. It’s a lack of paid work, that’s causing unemployment.
Grumbine (37:28):
One of the things that I had, all that fancy distance like in the nineties as a former systems engineer, I was big on the idea of virtual teams and work flex and providing remote access to individuals who don’t need to travel back and forth to a job just to push paper from one side of the desk to the other.
How great would it be if we could insense the different businesses and through maybe even through the ELR or the federal job guarantee to provide remote work to these areas that have been decimated by flight of corporations like these Flint, Michigan’s of the world and the other rust belt states, where we could push maybe call center type work out there, or service sector work that they could do from a laptop with a phone line, et cetera.
Here’s an opportunity it’s both green, would be an effective government policy on getting people that are otherwise disadvantaged back to work. And at the same time, providing great means of pumping money back into the economy through deficit spending. It’s just an idea. I don’t know if it holds any water or not, but it seems like a win, win, win, win, win.
Wray (38:41):
Yeah, I’m sympathetic, but we have to be careful. So a lot of this virtual work and flexible work arrangements and so on are for the benefit of the employers, not for the employees. It is to put together contingent work where people have to create a bunch of part-time jobs at low pay in order to earn enough to survive. I mean, that’s basically what it’s about.
Now I know that if you’re an engineer or you’re very good at computers or something, you can earn a good living this way, but most people can not do that. So they need protection. And that really there’s only two ways that you can assure that they will get enough hours, decent pay and decent benefits.
One is through unionization and the kinds of jobs you’re talking about typically are very hard to unionize. So you need to have people working together in the same place where they can build the understanding that we need to work together.
And we have to exert our power, or the employer, to get what we need, or the alternative to that is that you have to have a job guarantee, a universal job guarantee that ensures that everybody can get as many hours as they want at decent pay with good benefits and good working conditions that will then enforce the private sector to supply something at least as good as that.
So you have to have one or the other. Without that the flexible work arrangements are just continuing the path that we’re on, which is the destruction of good paying jobs.
Grumbine (40:25):
Right now, I was referring to the job guarantee, but utilizing remote work as a means of providing people, perhaps government jobs, service sector work in terms of nonprofit, whatever, whatever shape it takes. Just the idea of providing this opportunity in areas that are otherwise lacking work. That was kind of . . .
Wray (40:48):
Yeah. Oh yeah. The job guarantee proposal from Hyman Minsky 1960s has always been that you create jobs in every community. You create them where the unemployed people are. That was sort of the ideal of the New Deal Job Creation Program, too. You find what needs to be done in your own community and you create the jobs there so that people don’t have to move.
And again, that won’t be hard. You can walk into any of these almost ghost towns in the Midwest, and you can see plenty that needs to be done. And you can employ the people who are there so that they don’t have to move to cities in order to remain employed.
Grumbine (41:31):
One of the big things that we see right now is this push for HR. I think it’s 676, which is the Medicare For All, but it’s largely founded on paying for it through taxes when our economy is really quite frankly, still very fragile. Taking money out of the economy to pay for things erroneously like this seems like a bad idea.
Would you say that it’s more important at this point to push for a bill, even if it’s very flawed in this respect? Or would you say it’s more important to fight for the fact that we get this thing in there and the economy tanks because you’re literally pulling more money out of the economy that needs to be. Well, how would you approach such a proposal?
Wray (42:13):
Yeah, this is very tough. So Roosevelt set up social security on the basis that the payroll tax pays for it. And he did that for political reasons. It wouldn’t be labeled communism. People would feel like, well, I’m paying into social security. And that is why I get my retirement benefits. So it’s not socialism. I earned this and so on and so on.
And so over the years, social security became less and less like an insurance program where you pay in premiums and then you collect later because we expanded the coverage to your spouse and to your children, if you die young and to disabled people and so on and so on. And so, so the link between what you pay in on your payroll tax and what you could expect to get out of social security was increasingly broken.
So Medicare was set up sort of the same way. Comes along a lot later. And we take a payroll tax. We supposedly set that aside and you pay over your working life. And then when you reach age 65, you get to start collecting Medicare. So it’s set up the same way. The reason was politics. There’s actually no way to transfer purchasing power across time for society as a whole.
So the idea that workers contributed in the 1960s, when the baby boomers retire, they’ve accumulated these savings, they can then use to pay the retirement. This is just completely false. It cannot be done. We always have run surpluses in these programs, in social security and Medicare, which means, as you said, you’re taking money out of the economy because the taxes are bigger than the spending. Okay?
So you’re always taking income out of the economy. You’re depressing the economy, which is a crazy way to prepare for the future. You don’t want to depress your economy in order to take care of the future retirement of baby boomers. So it’s always been a problem, but politically it’s been a very popular thing. It has really protected social security because everyone says, “But hold it. I paid in.
You can’t take away my social security because I paid in all these years.” There’s this very strong belief. The problem is that the projections, and I’m not saying I believe these because they’re overly pessimistic. The projections are, we will reach a date in which social security will run a deficit. We’re not there yet, but there is a date that is projected.
The date keeps moving at which time social security will run a deficit. Medicare already with the Medicare only going to the elderly already also will reach a deficit; and we’re very close to that time. So if you expand Medicare to the whole population that makes it a much bigger program and you don’t raise the payroll tax, then it is going to have a big deficit. That is true.
Could we just expand Medicare to the whole population without raising taxes at all? Now you and I know the government doesn’t really spend tax revenue. So on the basis of paying for the program, there’s no problem whatsoever. We can key stroke the payments to the doctors and hospitals and so on so that everybody gets medical care with no problem at all. We can do the keystrokes.
Would the extra spending to give everyone the Medicare that they need cause inflation? Well, no, because the spending actually will go down compared to the system we have now. Medicare For All would cost about half as much. Our total spending would be about half as much. Okay?
Because we have the least efficient medical system on earth where so much of the spending goes to the insurance companies, which is basically Wall Street and to the administrative costs, which are tremendous.
A huge part of that is just trying to collect on the payments that are owed because we have a very complex system in which insurers, out of pocket, and the government all have to be billed for the procedures that you had when you’re in the hospital.
So it’s very, very complicated, extremely expensive. So actually the total medical spending in the US would go down if we had Medicare For All. So it’s not going to be inflationary. Our barrier is going to be politics.
Grumbine (47:08):
Terrible.
Wray (47:08):
Because they’re gonna say, well, how are you paying for this? Say, well, actually we’re reducing the spending, but there will be far less spending by employers, far less spending by workers, more spending by the federal government. So we’re going to be switching the spending.
Grumbine (47:30):
That brings me to a technical point. How does the Fed and the Treasury work together to ensure these payments clear? What does that look like? Because this is something that keeps coming up when we talk about these sorts of things cause people are obviously convinced their tax dollars are paying for stuff. What is the real operation look like between the Fed and the Treasury?
Wray (47:56):
Yeah, it’s complicated, but it can be simplified. And so I’m going to simplify it, but the way that I’m simplifying it is not at all misleading. Okay. So what I’m saying is a simplification, but it is not dishonest at all. It’s not misleading you. If you go back to the 19th century, the way that a government would spend or go back to our colonies, um, the government actually printed paper money to make its payments.
So you just ran the printing press and you made your payments. Okay. If you go back to the colonies every time that say the colony of Virginia would pass a law authorizing the colonial government to print money, they also would pass a law to impose taxes. And the tax that they imposed would generate the amount of revenue equal to the amount of notes that they were going to issue.
Okay. So then they would print them -the notes up paper money – make their payments, and then they would collect the paper notes back in tax payment. Do you know what they did with the paper notes that they got back in tax payment?
Grumbine (49:19):
What did they do? Use them . . .
Wray (49:22):
Burned them. They burned them, okay. That makes it very clear how things work. Did the Virginia colony need the tax revenue in order to make the payments? Clearly not. They had to spend the money to make the payments. They needed the taxes to get the money back so they could burn it. Okay. So the purpose of the taxes was to remove the notes from circulation to prevent inflation.
It was not to allow them to spend the revenue because they never spent the tax revenue. They burned all the tax revenue. So that is the way that it worked in the United States really until 1913. The Fed was created in 1913. We were an unusual country because we didn’t have a central bank. Most other capitalist countries had had a central bank for up to 200 years.
We got by without one. So we create a central bank. Now, what is the Fed? The Fed was created to be the Treasury’s bank. So instead of the Treasury just printing up notes in order to spend and then receive them back and burn them. What the Treasury would do is have the Fed make their payments for them. So the Fed since 1913 makes all the Treasury payments. How do they make them?
Let’s say that you’re a contractor and you sell something to the government. The Treasury tells the Fed: please make a payment to this guy’s bank account. Okay. The Fed will credit your bank’s reserves. That’s how the Treasury spends. And then your bank credits your demand deposit, your checking account. Okay. That’s how Treasury spending occurs.
Fed credits your bank’s reserves, your bank credits your checking account. And how is this done now? It’s all keystrokes. Okay. Now, when you at the April 15, you got to pay your taxes. How do you do it? You write a check and send it to the Treasury. The Treasury then presents that to the Fed and they tell the Fed: please debit this guy’s bank’s reserves.
So the Fed debits your bank’s reserves and your bank debits your checking account. Although now we all do it electronically. We file our taxes online and it’s all keystrokes instead of paper checks. Okay? So the Treasury spends by the central bank crediting a bank reserve. The Treasury receives tax payments by debiting a bank reserve. It’s functionally equivalent to burning the paper notes.
The bank reserves are debited. Where do they go? It’s just like burning paper notes. They’re gone. It’s just a debit from a bank account. That is how the Treasury spends. Now in the real world, in the United States, that’s a little more complicated than that. We have some special banks. We have some dealer banks and so on, but nothing that I just told you is misleading.
And if we went through all of the balance sheets that are involved, when the Treasury cuts a check to the point where you pay your taxes April 15th, the end result of the balance sheet will be exactly what I just told you. There are intermediate steps that I’m leaving out to make it simpler.
Okay? But the end result is exactly what I just said. Reserves are debited and there’s tax payments. Reserves are credited when there’s government spending. That’s all there is.
Grumbine (53:15):
That was beautifully simple. I love the fact that people are, their eyes are glowing. This is a first time many of them I’ve ever heard that. Well, I really want to thank you once again for joining us. This is a really important thing. We’re trying so hard to educate the people of any persuasion because obviously economics is really not political at the macro level.
And the way that we talked about financing, simple, this is how it is done. The issue is trying to educate our public – not accept crumbs at the table when the reality is that that is our national treasure that they have there. They’re supposed to be our servant. We should be demanding that it behave as such. Thank you so much. I really appreciate it.
Wray (54:07):
Ok. Thanks for having me on again.
Grumbine (54:08):
Yes, sir. Have a great night, man. Bye. Bye.
Ending Credits (54:17):
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 Progressives Patreon account. If you would like to donate to Macro N Cheese, please visit patreon.com/realprogressives.
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Steve’s guest is L. Randall Wray, a professor of Economics at Bard College and Senior Scholar at the Levy Economics Institute. In this 2017 interview, Wray looks at the Global Financial Crisis from both sides now. The celebrated economist tells Steve how the rise of shadow banking led to banking deregulation, opening the door for massive fraud, leading to the global financial crisis. He then explains in detail how globalism affected average Americans, suppressing their wages for 40 years and forcing them to amass unsustainable personal debt. These two threads led to the GFC.
Wray compares the federal government’s response to the banking crisis with the reaction to the real economy’s crisis, the jobs crisis, and the consumer spending crisis. Is it any wonder that Wall St recovered, but the rest of the economy did not?
He maintains that only a federal job guarantee will prevent more pain. Manufacturing jobs are not coming back to the US any time soon. He goes on to address both the myths and reality of Social Security and Medicare. And finally, he offers a simple but truthful description of the relationship & interaction between the central bank, or Federal Reserve, and the Treasury.
Macro N Cheese – Episode 12
Debunking Economic Illiteracy in the Progressive Movement with L. Randall Wray
April 20, 2019
Randall Wray [intro/music] (00:02):
It’s not a lack of things to do that is causing unemployment. It’s a lack of paid work that’s causing unemployment.
Randall Wray [intro/music] (00:09):
If they want to keep at excessive lending, careless lending, dangerous lending, all of which helped to bring on the global financial crisis that wiped out tens of trillions of dollars of wealth all over the world; and we still have not recovered 10 years later.
Randall Wray [intro/music] (00:30):
If you go back to the colonies, do you know what they did with the paper notes they got back in tax payment? They burned them.
Geoff Ginter [intro/music] (00:45):
Now let’s see if we can avoid the apocalypse altogether. Here’s another episode of Macro N Cheese with your host, Steve Grumbine.
Steve Grumbine (01:37):
This is Steve Grumbine with Macro N Cheese, and I am excited to have Professor Randall Wray join us again. Randall Wray is one of the original developers of a school of economic thought known as Modern Monetary Theory, MMT. Randy Wray has been on the show several times and it is always a pleasure to have someone as accomplished as Professor Wray join me. So, this episode of Macro N Cheese begins now.
Grumbine (02:10):
Welcome to the show, Randy. How are you, sir?
Wray (02:12):
Right. Good.
Grumbine (02:14):
You know and we were talking about this a little bit offline. Our movement, I think has the best of intentions. I think the policies that we’re trying to put forward, largely . . . you can look at some semantic changes here and there, they’re largely the same proposals.
It just seems like nobody has a clue how to get out of their own way and actually make this happen and fund it and get past the lies and the myths of the right wing and also the center, which is definitely afraid of deficits and debt as well. Can you talk a little bit about what is holding the Progressive Movement back?
Wray (02:53):
Well, I think one is this great fear of politics, so that even people who sort of understand what we’re talking about are afraid to come out in the open and say things that they think would be politically very difficult cases to make. And so I think that’s a problem with our elected representatives. I have met with progressive Democrat politicians over the past 25 years.
And when I, when we start talking about budget deficits, they completely understand that a sovereign government is not like a household. They understand that there’s no necessity to balance the budget over the course of a year or ever, but they say, look, I can’t say that in public because the response, they don’t say of the funders, but I suppose funders are a big part of the problem, will be just overwhelmingly negative.
They will think that I’m crazy. I can’t say it in public. And so that is a big part of the problem. But I think also the problem is that a lot of Progressives don’t understand what they’re talking about. And when they’re confronted with say people from the Fed, with financial markets participants, their ignorance is exposed.
And so although a lot of their policy proposals, you know, they’re, they’re sort of on the right track, the goals are desirable, but the proposal to get toward the goal is very confused. And so they really weaken their case. And when they go in front of an audience where there are some people that understand the way financial markets work and so on. So that’s a big problem.
Grumbine (04:30):
You know, I was sitting there discussing Jill Stein’s or student debt forgiveness plan, and just see you understand the kind of pressure we as activists are even up against. The minute we said anything that was remotely not “Yay, Jill,” but was like the script of, Hey, this is wrong. Here’s how it could work. I mean, we’re talking about major, major fallout.
Just the regular working-class people are so tribal in nature that they can’t even allow themselves to learn proper. They just follow the leader. They’re on a Honda, so to speak. And then the leadership to your point is definitely afraid to say the truth. So these people down here are following them. These people up here are petrified of being cast aside as a crank or a kook. How do we break the log jam?
Wray (05:24):
Well, you know, I’m an economist. I’m not good at politics. My candidate has never won any election, presidential election. No one that I ever really supported has ever won. So I’m not the right person to give advice on politics. But you know, what we saw in the last election was the majority of Progressives decided to go with Hillary because she was a lesser evil. For me, that’s not a convincing argument at all.
She’s evil. Being a lesser evil than the one who won. It, for me, is just not good enough. She had virtually nothing in her platform that I would support. There’s no indication whatsoever that she would have changed the discussion. I mean, just the discussion. I’m not talking about what she can actually get through Congress. Just change the discussion about government finance. She would not do that.
I mean, there’s no doubt in my mind that she will carry on claiming that the Clinton budget surpluses were tremendously good for the economy and all this nonsense – that the Rubin-Clintonista group has been promoting for since Clinton got out of office. So she was an absolutely terrible candidate, but most progressive, most of my friends decided in the end that they were going to support her.
The candidate that we got in opposition to that was Jill Stein, as you mentioned, and her appearance on John Oliver’s show was a complete disaster. He tore her apart. You know, he’s a clever guy, I think probably basically a good guy and he demonstrates, she didn’t know what she’s talking about. So this is a huge problem.
If Progressives are going to get out there and propose something different, they’ve got to know what they’re talking about. And she didn’t. And I think in general, the Greens, when it comes to macroeconomics and budgeting, they do not know what they’re talking about. So it’s a huge problem. Aside from all the political stuff. I mean, just the economics. They don’t know what they’re talking about.
Grumbine (07:06):
Absolutely. I will tell you this. And this is a very encouraging sign. You know, I spoke with, Ajamu Baraka, her running mate, this was about a month ago. And in talking with Ajamu, he actually came to me. We talked. He is very, very interested in learning MMT. He found himself very, very attracted to some of the videos that Steven Hail has done.
He related very well to his manner and his way of presenting the material; and little by little he’s uncorked your information and others. I think it’s a really positive move. I like his integrity. I think his heart’s in the right place. And seeing him open to learning about what I consider macroeconomic reality is extremely encouraging for me.
Wray (07:53):
What you’ve said about him is also true of Jill Stein. I don’t want to sound overly critical. I think she’s also very open. She’s very intelligent. The problem was just trying to push a proposal that didn’t make any sense.
And I think, you know, if you’re going to get on television, John Oliver maybe ambushed her a little bit, uh, because he had done a, his staff had done a lot of research beforehand on a, on a particular position that she did not come to the show to present.
So in that sense, it might’ve been a bit unfair, but it had been a policy proposal of the student debt relief proposal and likening that to quantitative easing. And she tried to defend that, but it was something that could not be defended.
Grumbine (08:38):
It’s a great point. I mean, Jill, Jill’s been on with us before we, we obviously supported her throughout, but my concern is, is that I want them to be successful. They’re the most established, left party that we have in this nation. And, you know, as far off as they were from being competitive, at least they’re, to your point, changing the conversation.
If we can at least do that, I mean, we stand a chance of at least changing the fabric of the way we discuss issues. I mean, I think that’s, that’s kind of maybe the next most important thing we can do right now is alter the conversation.
Wray (09:17):
Yeah. But continue on . . .A former student of mine Yeva Nersisyan and I have written a critique of positive money, Greenbackism, and these, um, progressive proposals to reform banking and also to change the way that the government spends. And here’s another example of people who I think most of them are really trying to change things for the better.
They are Progressive, but the proposals just don’t make any sense. The people who are proposing them don’t really understand the way the financial system works. They don’t understand what the problems are with the financial system. They don’t understand how the government really spends.
They don’t understand what the real constraints on government spending are. And so they propose things that I think are pretty easy to shoot down – the idea that the government should just start printing up greenbacks to finance all of its spending and the idea that we can turn to what’s called low reserve banking, a hundred percent money, narrow banking, a variety.
It goes by a variety of different names. Positive money sort of tries to combine both of these things together into a completely, I think, incoherent policy that has zero chance of ever getting through.
Grumbine (10:23):
It was interesting. Robert Reich came out and apparently is in support of this thing called the Need Act. Are you familiar with the Need Act?
Wray (10:35):
No.
Grumbine (10:35):
Basically it’s, it’s reforming our banking system and, and giving us democratizing the dollar as they say. And quite frankly, I mean this idea of putting regular people over top of decision making at the Fed and so forth. I understand the idea here is to take it out of the hands of neoliberals, et cetera, et cetera, et cetera. But I sometimes feel like we make these things that are just fit for a bumper sticker.
And quite frankly, people, their knowledge or their willingness to learn is oftentimes about a thimble’s depth, in terms of both desire and patience. So we’re left in a society right now that’s looking for fast food politics. And a lot of the answers to these questions are not fast food friendly answers. How can MMT simplify its message and maybe even market better if you will.
I hate to do that, but reality shouldn’t have to be marketed, but in the case of this, I mean, we’re up against people that are dealing in these great “End the Fed” bumper stickers. Do you have any ideas on how we might be able to simplify the message to get it to these individuals who don’t give us a lot of time or energy or, quite frankly, any of their cognitive abilities?
Wray (11:56):
That is the next thing that MMT has to do. And I think since about 2012, that is what I’ve been trying to do, because I think as far as the theory goes and the policy recommendations and all of that, we had pretty much completely sorted all that out five years ago, 10 years ago. There’s really nothing more we can say. I mean, we understand how things work. We understand what changes need to be made.
The problem is framing it, and putting it simply enough and consistently using the right framing so that you don’t trigger the wrong neural networks in people’s brains and get them scared. I don’t know if you’ve seen or heard me talking about when I wrote the first draft of my first book, 1998, “Understanding Modern Money,”
I sent the first draft to Robert Heilbroner, who is the best selling economist author, at least in the English language, extremely nice guy, extremely bright. And I asked him if he would write a blurb; and somehow he got my phone number and called me at home. And he said that he had read over it. And in the nicest manner you could imagine, he said, “I couldn’t possibly write a blurb for this book.”
He said, “It’s going to scare the hell out of everybody. Money is the scariest topic there is. If you’re going to write about money, you have to be extremely careful. You are going to scare the heck out of everybody.” And he said, “You’re not writing in the way that it needs to be written.” And I think, you know, in retrospect he was right. It did scare everybody.
And that becomes a barrier to communicating. So we have to be extremely careful. If you just say, you know, the government spends by keystrokes. To us, that’s a perfectly accurate explanation. You couldn’t get more accurate than that. That is how they do it.
But to the people hearing that, that is the scariest thing you possibly could say, because what will prevent them from key stroking too much and causing hyperinflation. And we’re all going to be using wheelbarrows to take our cash to the store. And that immediately is what is triggered in them. And so you’ve got to be very careful. You got to frame it correctly.
So, you know, we’ve been reading George Lakoff and we’ve been trying to frame it correctly. I’m working on a book with one of my graduate students, “Money, the Illustrated Guide,” or something like that. And we’re going to be very careful in how we frame the truth; explain it, but frame it correctly so it’s not so scary. Then make it as simple as you possibly can do. So that’s the next step. It’s very hard.
Grumbine (14:38):
Let me ask you, because obviously in the world of the Green Party sensibilities, and when you cross those sensibilities, people start tuning you out immediately. You’re capitalist, you’re this, you’re that, you’re the other. It’s like my God, if you only knew, you know, I’m just trying to show you how to get where you want to get to.
But when you think about that, the idea of full reserve banking, the references to Iceland, what are some of the concerns that would immediately jump to mind? Someone like yourself as to what that full reserve banking even means to people that are just sort of casually hearing it and so forth?
Wray (15:19):
Yeah, well, it’s sort of related to what I was saying – the keystrokes. So government keystrokes the dollars into people’s accounts when it spends and banks keystroke the dollars into bank accounts when they lend. In part because of global financial crisis, you know, I think we all understand that banks lent way too much.
They lent to people who probably should not have been borrowing, but in any case, they had been duped into taking on loans that they shouldn’t have been taking on under terms that were extremely onerous, they couldn’t possibly afford and didn’t understand.
So anyway, they want to prevent that; they want to prevent excessive lending, careless lending, dangerous lending, all of which helped to bring on the global financial crisis that wiped out tens of trillions of dollars of wealth all over the world. And we still have not recovered 10 years later. Okay.
So they want to eliminate that. And they think that the way to eliminate that is to just ban bank creation of money, in their terminology, through lending. So that all that banks can do is to lend on deposits that are deposited with them. And they have to hold a hundred percent reserves against their deposits. In this way, they’re going to greatly constrain banking.
This proposal was very popular in the 1930s, even Milton Friedman and Irving Fisher, Irving Fisher was the greatest American economist of that time, bought on to this proposal. What we did instead was we regulated the banks and we insured their deposits; and we told the Fed, it is your responsibility to stand by to be a lender of last resort in case they get in trouble.
And the combination of those policies actually made banking safe for decades. Okay? So we didn’t choose the hundred percent reserve thing, but we chose something that worked, I would argue, just as well, even better by regulating the banks. Then protecting depositors if the banks got themselves into trouble and protecting the banks themselves, if the problem was merely a liquidity problem.
And then we had in place ways to deal with banks that became insolvent. We would resolve them. The government would actually take them over and wind down their balance sheets and protect all the deposits; that worked. Okay. The problem was we had the rise of a kind of financial institution that escaped the regulations.
We now know what to call them. For a long time we didn’t know what to call them. We now call them ‘shadow banks’ because Paul McCulley came up with this term. When I was a student, we call them non-bank banks, which is sort of a very strange terminology because they were not legally banks, but they did a lot of the same things as banks, but with no regulation.
So anyway, in response to the rise of these shadow banks, we deregulated the banks. So essentially they could basically do anything they wanted to do just like the shadow banks. And that is what led to the global financial crisis. So what I’m saying is the goal of constraining lending, constraining what the lenders can do, wiping out excessive lending, but also preventing fraud.
The global financial crisis was caused by massive, pervasive fraud. Every single piece of the business of the biggest banks was fraud. We need to reign all of that in – that is absolutely true – but the a hundred percent reserves or full reserve banking is not going to do that because it leaves everything except these narrow banks alone.
So we’re still going to have the shadow banks and banks like Goldman Sachs will give up their bank charter in order to continue doing what they’re doing now, which is basically screwing the customers on both sides of their balance sheets. That will still continue. So you’re not actually going to rein anything in with the narrow banking, full reserve banking, positive money proposals, all of that will still exist. It just will be outside the regulated banks.
Grumbine (19:49):
Okay. So you speak of the crash. And, you know, I personally was deeply affected by that. And it actually was the catalyst for me getting involved in MMT and swinging left bound. When you talk about that, we still have a lot of people that celebrate reducing deficits, celebrate, you know, austerity thinking they’re being good liberals ironically.
And in reality, during that time period, there was a real chance to save all of us from destitution and we whiffed on it. Didn’t we? I mean, can you talk a little bit about what could have happened during that time, as opposed to what did happen?
Wray (20:31):
Yeah. Well, Obama came in in a terrible situation, the deepest recession since the great depression and the worst financial crisis by far since the 1930s. And he had to deal with that. And I was a workshop trying to come up with policies to influence him. And we got a report back from people working with him that the total size of the stimulus was going to be 800 billion. Why 800 billion?
Well, because it’s not a trillion, that was the logic. It wasn’t that 800 billion was going to be enough. It was that it’s not as scary as a trillion dollars. So 800 billion. And that was going to be split over two years. So that’s 400 billion a year for two years. And that is what we got. Okay. It helped prevent the recession from getting worse than it was, but four hundred billion wasn’t nearly enough.
It didn’t nearly make up for the decline of private sector spending. The people in the administration knew that; all of us around the table knew that, that it is going to take much more than $400 billion a year. And so you can look at graphs of the data over that period.
You can see the little blip of the stimulus, and then it disappears after two years and the economy does not recover and still has not fully recovered 10 years later because the stimulus wasn’t big enough. Obama goes on television. He says, we really would like to do more. We know the economy needs more than this, but the government has run out of money. Absolutely ridiculous. Even Bernanke was talking about key stroking.
And so his advisors had to have been there telling him that that wasn’t true, but for, I presume completely political reasons. That was it. That’s all we got. The budget deficit did go to a trillion dollars, I think it was in 2009. So in one year a trillion dollar deficit, but that was not because of a stimulus. It was because tax revenue collapsed. Tax revenue collapsed because the economy collapsed. Okay.
So the budget deficit widened much bigger than the stimulus, but it was because of the falling tax revenue, not because the government was doing anything positive. What the government did over the whole course of the Trump administration was to reduce government jobs. The government input into the recovery was basically negative and completely different from any other response to a recession in the post war period.
It was the first recovery we ever had where the government actually acted as a drag on the recovery instead of leading us out of the recession. And all of this was because of that politics. But if you look at the reaction to the banking crisis, it was completely different from the reaction to the real economy’s prices, the jobs crisis, the consumer spending crisis that we had.
For the banks, the sky, while the sky wasn’t even a limit, we could go way beyond the sky. We could go to infinity and beyond to bail out the banks. The Fed originated $29 trillion in loans to save basically only the biggest banks – 29 trillion for let’s say Wall Street and only 800 billion for the economy. Or another way of putting it 29 trillion for the one percenters and 800 billion for the 99% who got left behind.
So it’s not surprising at all that what happened was Wall Street recovered. The biggest banks recovered and the rest of the economy did not. So it just shows you the difference and what they were willing to do to save the financial system versus the real economy where most of us live, where most of us work, and so on.
I don’t want to be misleading because there’s a difference between lending 29 trillion, originating 29 trillion in loans, and actually spending 800 billion. Some of that for public infrastructure, some of it was tax relief. Some of it actually led to job creation.
So there’s a difference between lending and spending. Yes, but what I’m saying is they realize there’s no limits to the keystroke lending that we can do, but the key stroke spending has to be very limited, but this is false. There’s no reason why we couldn’t have keystroke enough spending to prevent it.
Well, I mean, it would’ve been hard to prevent the downturn because yet you would have to foresee it and all that, but you definitely could recover from the downturn – but we didn’t do it.
Grumbine (25:14):
Let me ask you a question. I’ve been trying to formulate an idea here. Ellis Winningham has put it out there. We’ve talked to neoliberalism how basically the Milton Friedman school kind of put the onus on you and I to go into debt during the low times and go ahead and pay off our debt in the high times.
 And this all kind of started in spades, uh, during the seventies and eighties, as we’ve watched income distribution grow wildly for the 1%. And, and as we watched this, I’m wondering if this was really this problem we just talked through during the collapse.
I’m wondering if this was so much a, Hey, my hands are tied. Or if this was just the furtherance of neoliberal belief system that pushes us to private debt and thus further enriches the financialization of our economy and those at the top that are interest earners. I mean, is this a fair statement or am I reaching?
Wray (26:18):
Yeah. You know, first, I just want to say that I don’t doubt their conspiracies. Okay. There are all kinds of conspiracies going on. All right. But I wouldn’t want to leave the impression that I think that there’s this tiny little group at the top who knows what they’re doing and they planned everything. And the results we got is exactly what they were aiming for. I don’t think that’s true.
Okay. I think that there are lots of conspiracies. There are lots of different groups, lots of different interest groups and so on that don’t know what they’re doing. That don’t foresee the future. And we ended up where we’ve ended up. Okay. A big part of neoliberalism is globalization; and it’s globalization of trade, it’s globalization of finance.
And it is trying to enforce local property rights on everybody else. Property rights that protect the elites in the West. So intellectual property rights, the trademarks, the innovations, the inventions to make sure that our people who own these rights get as much money as they possibly can out of the rights. So that’s what the globalization is all about.
And as a result of that globalization, in a way, our elites don’t care that much what happens to the US economy because a very large portion of their earnings come from abroad because they are now very globalized. And if we’re going to have production in the US, the costs have to decline. They have to decline to the low cost producers, let’s say, largely in Asia now.
And so there is tremendous pressure to reduce costs if you’re going to produce anything in the US. How do you reduce costs? Well, mostly it’s going to have to be wages. Wages have to decline to global standards, which are much lower than ours. And so we’ve had downward pressure on wages since the 1970s, and as a result, they are largely stagnant in real terms.
So how can you possibly sell things to Americans while you’re waiting for the Chinese income to come up? In order to increase markets there, you have to sell things to Americans while their wages are stagnant. They can’t afford to buy anymore. So what are you going to do? You’ve got to convince them to go into debt.
And so, since the seventies there’s been rising on trend indebtedness of US households as they try to make up for the lack of wage increases. So they’re pushing this combination – globalization, and we will move our production outside the US unless you guys will take lower wages.
If you do accept the lower wages, then the only way we can sell stuff to you is to get you to take on debt. So all of these things are connected in a way that led to the global financial crisis – with the rising debt, the stagnation of income and the globalization
Intermission (29:43):
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Grumbine (30:32):
I’ve been accused often of being a far right winger when I say this, but I think you’ll get a kick out of it. Warren has said let’s let them give us their goods and services for our pieces of paper. I agree wholeheartedly. And when we have that massive trade imbalance or that current deficit that we have in our trade, I think last year was 500 billion.
Obviously that leakage has to be made up or the tub shrinks. So in this case, why not accept the fact that the industrial revolution in America is over and instead focus on rebuilding our bridges, focus on building out a green infrastructure, focus on building out all of the most advanced communication systems . . . sustainability in America.
Go ahead and get ourselves a medical care taken care of, education. You name it. And we can do that in house without worrying about the cost of industrialized jobs, you know, these factory type jobs. Doesn’t it seem like a win win for everybody?
Wray (31:38):
People are much too focused on manufacturing jobs. They say all the good jobs are leaving the US. Manufacturing jobs are not good jobs. I worked in the factory. Those aren’t good jobs. The thing that was good about them was that they were unionized jobs and they paid good wages. Okay? So now we’ve got in the US I believe it is seven or 8% of our jobs are related to manufacturing.
Trump promises to bring them back. He might bring back another 2%. It’s not going to be more than that. We’re not going to get more than 10% of our population in manufacturing. The other 90% have to do something else. And right now that is what they’re doing. They are, I think somewhere around 80% of the population basically has a job that is taking care of other humans. That’s what their job is.
They’re teaching them. They’re bathing them. They’re feeding them. They’re entertaining them. They’re transporting them. They are cleaning their house. They are mowing the lawns. They’re taking care of each other. And I don’t think these are bad jobs. I’m a teacher. It’s actually a pretty good job. The problem with these jobs is that they’re low paid for the most part.
Not all of them, obviously, but they are low paid. What’s the answer? Raise the wages. And most of these jobs, as you’re implying, are not going to leave the US. You raise the wage. They’re not going to leave the US. If someone is cleaning your house, they’ve got to be here.
There are service sector jobs that can leave the US, but the majority will stay here. Construction jobs, for the most part, they’re going to stay here. Cleaning up the environment, jobs are going to be here. So the answer is to raise those wages. Some of these can be raised by the government. Some of these jobs are government jobs. Some of these can be raised by raising the minimum wage.
We should go as quickly as we can to $15 an hour plus good benefits. That will help. It not only raises those particular wages to $15 an hour, it will tend to push up all the other wages, too, because this will become the minimum. And we can talk more about it. But the employer of last resort or job guarantee is the way to make sure that the lowest paid workers in the US can get a job at $15 an hour.
If you give that in the employer of last resort, a job guarantee program, that’s going to be the lowest wage. You’re going to push up all the other ones. So that’s how you do that. And that will go a long way towards solving our problems. We can go to full employment. We can replace any jobs that are lost through moving abroad. So say the call centers all go to India if we raise the wage to $15 that’s fine.
Let’s just replace those with good paying jobs, other service sector jobs in the United States. It will also raise demand. It will reduce poverty. It will reduce necessitous borrowing. People have decent incomes where they can afford it. If you start providing healthcare benefits with the job guarantee program, Medicare For All, everyone in the job guarantee program gets Medicare.
Private sector will have to supply decent healthcare, too. So you will be increasing that. And then you will be employing far more people in the healthcare sector, which is what really matters – making sure you can provide enough healthcare to everybody as you – you have to have a lot more people employed in that sector. You have to have a lot more people employed in childcare.
You have to have a lot more people employed in eldercare, and we can do all of that. That’s where people ought to be going.
Grumbine (35:25):
This brings up a great point. One of the other things that we get hit with from the Green Party and others, is this whole nonsense about automation and how automation is getting rid of jobs. And when we talk about the federal job guarantee, the first thing they say is automation. Can we just destroy that real quickly? I mean, I know that automation does displace some older work, but this is really kind of a misnomer. Is it?
Wray (35:54):
Well, automation has been going on since Adam Smith wrote about it in the pin factory. Of course automation destroys jobs, but it’s only our lack of imagination that doesn’t replace those destroyed jobs with more, better jobs. So of course the robots are going to replace almost all manufacturing jobs.
And again, that’s the reason why Trump’s claim that we’re going to create 25 million jobs like bringing back manufacturing jobs is just crazy. China is losing far more jobs than we have lost through innovations and use of robots and machinery and so on in their own factories. So it’s not that we’re going to get any jobs back from China.
China’s shedding jobs as fast as they possibly can in manufacturing. So while it’s true, that technological progress destroys jobs. That’s absolutely true. That doesn’t mean that we can’t find things, useful things for people to do. All you have to do is walk out your door and you can see the need for useful things to be done.
And ironically Greens really ought to be behind this because one of the areas where there’s a tremendous need for workers is improving the environment, retrofitting housing to put in insulation and so on. It’s not a lack of things to do that is causing unemployment. It’s a lack of paid work, that’s causing unemployment.
Grumbine (37:28):
One of the things that I had, all that fancy distance like in the nineties as a former systems engineer, I was big on the idea of virtual teams and work flex and providing remote access to individuals who don’t need to travel back and forth to a job just to push paper from one side of the desk to the other.
How great would it be if we could insense the different businesses and through maybe even through the ELR or the federal job guarantee to provide remote work to these areas that have been decimated by flight of corporations like these Flint, Michigan’s of the world and the other rust belt states, where we could push maybe call center type work out there, or service sector work that they could do from a laptop with a phone line, et cetera.
Here’s an opportunity it’s both green, would be an effective government policy on getting people that are otherwise disadvantaged back to work. And at the same time, providing great means of pumping money back into the economy through deficit spending. It’s just an idea. I don’t know if it holds any water or not, but it seems like a win, win, win, win, win.
Wray (38:41):
Yeah, I’m sympathetic, but we have to be careful. So a lot of this virtual work and flexible work arrangements and so on are for the benefit of the employers, not for the employees. It is to put together contingent work where people have to create a bunch of part-time jobs at low pay in order to earn enough to survive. I mean, that’s basically what it’s about.
Now I know that if you’re an engineer or you’re very good at computers or something, you can earn a good living this way, but most people can not do that. So they need protection. And that really there’s only two ways that you can assure that they will get enough hours, decent pay and decent benefits.
One is through unionization and the kinds of jobs you’re talking about typically are very hard to unionize. So you need to have people working together in the same place where they can build the understanding that we need to work together.
And we have to exert our power, or the employer, to get what we need, or the alternative to that is that you have to have a job guarantee, a universal job guarantee that ensures that everybody can get as many hours as they want at decent pay with good benefits and good working conditions that will then enforce the private sector to supply something at least as good as that.
So you have to have one or the other. Without that the flexible work arrangements are just continuing the path that we’re on, which is the destruction of good paying jobs.
Grumbine (40:25):
Right now, I was referring to the job guarantee, but utilizing remote work as a means of providing people, perhaps government jobs, service sector work in terms of nonprofit, whatever, whatever shape it takes. Just the idea of providing this opportunity in areas that are otherwise lacking work. That was kind of . . .
Wray (40:48):
Yeah. Oh yeah. The job guarantee proposal from Hyman Minsky 1960s has always been that you create jobs in every community. You create them where the unemployed people are. That was sort of the ideal of the New Deal Job Creation Program, too. You find what needs to be done in your own community and you create the jobs there so that people don’t have to move.
And again, that won’t be hard. You can walk into any of these almost ghost towns in the Midwest, and you can see plenty that needs to be done. And you can employ the people who are there so that they don’t have to move to cities in order to remain employed.
Grumbine (41:31):
One of the big things that we see right now is this push for HR. I think it’s 676, which is the Medicare For All, but it’s largely founded on paying for it through taxes when our economy is really quite frankly, still very fragile. Taking money out of the economy to pay for things erroneously like this seems like a bad idea.
Would you say that it’s more important at this point to push for a bill, even if it’s very flawed in this respect? Or would you say it’s more important to fight for the fact that we get this thing in there and the economy tanks because you’re literally pulling more money out of the economy that needs to be. Well, how would you approach such a proposal?
Wray (42:13):
Yeah, this is very tough. So Roosevelt set up social security on the basis that the payroll tax pays for it. And he did that for political reasons. It wouldn’t be labeled communism. People would feel like, well, I’m paying into social security. And that is why I get my retirement benefits. So it’s not socialism. I earned this and so on and so on.
And so over the years, social security became less and less like an insurance program where you pay in premiums and then you collect later because we expanded the coverage to your spouse and to your children, if you die young and to disabled people and so on and so on. And so, so the link between what you pay in on your payroll tax and what you could expect to get out of social security was increasingly broken.
So Medicare was set up sort of the same way. Comes along a lot later. And we take a payroll tax. We supposedly set that aside and you pay over your working life. And then when you reach age 65, you get to start collecting Medicare. So it’s set up the same way. The reason was politics. There’s actually no way to transfer purchasing power across time for society as a whole.
So the idea that workers contributed in the 1960s, when the baby boomers retire, they’ve accumulated these savings, they can then use to pay the retirement. This is just completely false. It cannot be done. We always have run surpluses in these programs, in social security and Medicare, which means, as you said, you’re taking money out of the economy because the taxes are bigger than the spending. Okay?
So you’re always taking income out of the economy. You’re depressing the economy, which is a crazy way to prepare for the future. You don’t want to depress your economy in order to take care of the future retirement of baby boomers. So it’s always been a problem, but politically it’s been a very popular thing. It has really protected social security because everyone says, “But hold it. I paid in.
You can’t take away my social security because I paid in all these years.” There’s this very strong belief. The problem is that the projections, and I’m not saying I believe these because they’re overly pessimistic. The projections are, we will reach a date in which social security will run a deficit. We’re not there yet, but there is a date that is projected.
The date keeps moving at which time social security will run a deficit. Medicare already with the Medicare only going to the elderly already also will reach a deficit; and we’re very close to that time. So if you expand Medicare to the whole population that makes it a much bigger program and you don’t raise the payroll tax, then it is going to have a big deficit. That is true.
Could we just expand Medicare to the whole population without raising taxes at all? Now you and I know the government doesn’t really spend tax revenue. So on the basis of paying for the program, there’s no problem whatsoever. We can key stroke the payments to the doctors and hospitals and so on so that everybody gets medical care with no problem at all. We can do the keystrokes.
Would the extra spending to give everyone the Medicare that they need cause inflation? Well, no, because the spending actually will go down compared to the system we have now. Medicare For All would cost about half as much. Our total spending would be about half as much. Okay?
Because we have the least efficient medical system on earth where so much of the spending goes to the insurance companies, which is basically Wall Street and to the administrative costs, which are tremendous.
A huge part of that is just trying to collect on the payments that are owed because we have a very complex system in which insurers, out of pocket, and the government all have to be billed for the procedures that you had when you’re in the hospital.
So it’s very, very complicated, extremely expensive. So actually the total medical spending in the US would go down if we had Medicare For All. So it’s not going to be inflationary. Our barrier is going to be politics.
Grumbine (47:08):
Terrible.
Wray (47:08):
Because they’re gonna say, well, how are you paying for this? Say, well, actually we’re reducing the spending, but there will be far less spending by employers, far less spending by workers, more spending by the federal government. So we’re going to be switching the spending.
Grumbine (47:30):
That brings me to a technical point. How does the Fed and the Treasury work together to ensure these payments clear? What does that look like? Because this is something that keeps coming up when we talk about these sorts of things cause people are obviously convinced their tax dollars are paying for stuff. What is the real operation look like between the Fed and the Treasury?
Wray (47:56):
Yeah, it’s complicated, but it can be simplified. And so I’m going to simplify it, but the way that I’m simplifying it is not at all misleading. Okay. So what I’m saying is a simplification, but it is not dishonest at all. It’s not misleading you. If you go back to the 19th century, the way that a government would spend or go back to our colonies, um, the government actually printed paper money to make its payments.
So you just ran the printing press and you made your payments. Okay. If you go back to the colonies every time that say the colony of Virginia would pass a law authorizing the colonial government to print money, they also would pass a law to impose taxes. And the tax that they imposed would generate the amount of revenue equal to the amount of notes that they were going to issue.
Okay. So then they would print them -the notes up paper money – make their payments, and then they would collect the paper notes back in tax payment. Do you know what they did with the paper notes that they got back in tax payment?
Grumbine (49:19):
What did they do? Use them . . .
Wray (49:22):
Burned them. They burned them, okay. That makes it very clear how things work. Did the Virginia colony need the tax revenue in order to make the payments? Clearly not. They had to spend the money to make the payments. They needed the taxes to get the money back so they could burn it. Okay. So the purpose of the taxes was to remove the notes from circulation to prevent inflation.
It was not to allow them to spend the revenue because they never spent the tax revenue. They burned all the tax revenue. So that is the way that it worked in the United States really until 1913. The Fed was created in 1913. We were an unusual country because we didn’t have a central bank. Most other capitalist countries had had a central bank for up to 200 years.
We got by without one. So we create a central bank. Now, what is the Fed? The Fed was created to be the Treasury’s bank. So instead of the Treasury just printing up notes in order to spend and then receive them back and burn them. What the Treasury would do is have the Fed make their payments for them. So the Fed since 1913 makes all the Treasury payments. How do they make them?
Let’s say that you’re a contractor and you sell something to the government. The Treasury tells the Fed: please make a payment to this guy’s bank account. Okay. The Fed will credit your bank’s reserves. That’s how the Treasury spends. And then your bank credits your demand deposit, your checking account. Okay. That’s how Treasury spending occurs.
Fed credits your bank’s reserves, your bank credits your checking account. And how is this done now? It’s all keystrokes. Okay. Now, when you at the April 15, you got to pay your taxes. How do you do it? You write a check and send it to the Treasury. The Treasury then presents that to the Fed and they tell the Fed: please debit this guy’s bank’s reserves.
So the Fed debits your bank’s reserves and your bank debits your checking account. Although now we all do it electronically. We file our taxes online and it’s all keystrokes instead of paper checks. Okay? So the Treasury spends by the central bank crediting a bank reserve. The Treasury receives tax payments by debiting a bank reserve. It’s functionally equivalent to burning the paper notes.
The bank reserves are debited. Where do they go? It’s just like burning paper notes. They’re gone. It’s just a debit from a bank account. That is how the Treasury spends. Now in the real world, in the United States, that’s a little more complicated than that. We have some special banks. We have some dealer banks and so on, but nothing that I just told you is misleading.
And if we went through all of the balance sheets that are involved, when the Treasury cuts a check to the point where you pay your taxes April 15th, the end result of the balance sheet will be exactly what I just told you. There are intermediate steps that I’m leaving out to make it simpler.
Okay? But the end result is exactly what I just said. Reserves are debited and there’s tax payments. Reserves are credited when there’s government spending. That’s all there is.
Grumbine (53:15):
That was beautifully simple. I love the fact that people are, their eyes are glowing. This is a first time many of them I’ve ever heard that. Well, I really want to thank you once again for joining us. This is a really important thing. We’re trying so hard to educate the people of any persuasion because obviously economics is really not political at the macro level.
And the way that we talked about financing, simple, this is how it is done. The issue is trying to educate our public – not accept crumbs at the table when the reality is that that is our national treasure that they have there. They’re supposed to be our servant. We should be demanding that it behave as such. Thank you so much. I really appreciate it.
Wray (54:07):
Ok. Thanks for having me on again.
Grumbine (54:08):
Yes, sir. Have a great night, man. Bye. Bye.
Ending Credits (54:17):
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