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Episode 16 – Bond Markets in a Modern Money Economy with Brian Romanchuk
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Steve’s guest is Brian Romanchuk, founder of the blog bondeconomics.com., He is known for, among other things, his detailed technical rebuttals to critics of Modern Monetary Theory. Brian became interested in MMT because, as a data analyst in the bond market, it was the first macroeconomic theory that made sense. It actually matched what he saw, on a daily basis, in the real world.
After a look at the history of post-Keynesian thought, Steve asks him to delve into the nuts and bolts of bonds. Those familiar with MMT understand the role of Treasury bonds, but Brian gives us an overview of other types of public and private bonds. Along the way, he compares US state and Canadian provincial governments & municipalities, and their relative power over the local economies.
And we can’t talk with a Canadian without discussing single-payer health care. Brian shares his thoughts on the economic impact of removing private insurers from the equation.
Brian Romanchuk was a fixed income quantitative analyst in Quebec.
His writings can be found on: www.BondEconomics.com
Macro N Cheese – Episode 16
Bond Markets in a Modern Money Economy with Brian Romanchuk
May 18, 2019
Brian Romanchuk [intro/music] (00:03):
If the central government pays for everything, what’s to stop local politicians from building giant baseball stadiums named after themselves.
Brian Romanchuk [intro/music] (00:13):
Look at the Green New Deal. You want to eliminate carbon usage. That is a big change in our view, as big a change as what was going on in World War II. Some MMTers say maybe we shouldn’t be using interest rates to regulate the economy so we can get rid of bonds. If that happens, well, I guess I’ll need a new domain name.
Geoff Ginter [intro/music] (00:39):
Now let’s see if we can avoid the apocalypse all together. Here’s another episode of Macro N Cheese with your host, Steve Grumbine.
Steve Grumbine (01:34):
All right everybody. This is Steve with Macro N Cheese, and I have brought my guest, Brian Romanchuk of Bond Economics. My perception of Brian before I let him introduce himself here momentarily. Brian is the deepest, wonkiest writer I have ever read when it comes to the background, the theoretical framework of Modern Monetary Theory and just economics and macro as a whole.
I’ve witnessed Brian dress down people in a way that I would have never imagined could be a dress down, but it is the most technically precise description of a given scenario. And so I had to ask Brian to come join us because most of the time we deal in the political economy.
We are definitely talking MMT, but we oftentimes stray into the programmatic, what is possible within the political environment kind of scenario. Brian deals in the theoretical. So with that, Brian, did I give you justice there? I mean, how would you describe yourself? Tell us about yourself.
Romanchuk (02:37):
Hi there. I think that’s a fair description in my background. I was originally an engineer, but I moved into control systems theory, which is a branch of applied mathematics. And I did a doctorate in that and I was interested in the theory end of things. And I drifted out of academia and ended up working in finance. And starting in 2013, I sort of struck off on my own as a consultant.
And I’m writing on economics.com as well as I have a few short books out. They’re not three hundred thousand word tomes. They’re more like extended reports and I’ve produced a few of those. And I worked in fixed income. And so we were interested in what happens with yield curves, what happens with inflation, but it was technical.
I mean, if you’re in the bond market, you’re not advocating policies, you’re seeing what the policies do. And I came in with no economics background. And so I had to learn on the job. And well I picked up a lot with Hyman Minsky, but the myths (7 Deadly Innocent Frauds) Warren Mosler by his firm, and I really got into MMT and that helped clarify things.
I mean, most of it, what I was interested in was similar to things that I knew, but I never thought about carefully. And there was no other source that explained it properly. I’d figured things out on my own, just looking at data and said, “Okay, yeah, this fits what I already know.” And that’s why I was attracted to it.
Grumbine (04:15):
It’s just amazing. I read some of the description. You you’ve jumped into the foray here recently, obviously with MMT exploding onto the scene. We’ve got, you know, illuminaries like our luminaries, I should say, want to call them Illuminati. These luminaries like Paul Krugman who have come out of the woodworks and Jared Bernstein and a host. I mean, everybody who was somebody, Larry Summers, you name it, coming out, taking a pot shot at the new kids on the block who aren’t so new actually.
And they repeatedly misrepresent the academic, theoretical framework or just the basic premises of Modern Monetary Theory. And you basically said, “Hey man, I, you know, let me take a crack at this.” And you masterfully dress these folks down. Can you explain largely what you believe MMT is and what the pushback from the mainstream is? Why is this framework getting so much hate, so to speak?
Romanchuk (05:16):
I mean, one thing to keep in mind. I’m coming this as a theoretician. MMT fits within post-Keynesian economics, which was pushed basically out of the Ivy league Universities’ top journals by the mainstream neoclassical. And the post-Keynesians may be hard to work with, but I’m ex-academic and the treatments, the way they wrote them out of history is disconcerting.
I mean, it’s, that’s not the way academia is supposed to work. So the issue with the post- Keynesians is that they did agree with the mainstream. They didn’t agree themselves. And so there’s a lot of factions within post-Keynesian economics, and it was hard to sort of pick up what’s going on.
And there’s been attempts like Marc Lavoie, professor, wrote textbook on post-Keynesian economics trying to say, “Yes, there is a common strand.” But what MMT did was, “We’re going to create a single, coherent view hacked out of post-Keynesian economics, and it’s developed, but it fits in within that framework.”
And for me, my difficulty with MMT is how do I distinguish what’s MMT versus post-Keynesians’ thought? And because I’m a little bit more familiar with the post-Keynesian textbooks. You know, for me, I don’t really care. I mean MMT is a branch of post-Keynesian economics. I’m not too worried where we draw that line, but unfortunately academic politics means, in essence, people worry about where you draw these lines.
And so there’s a lot of arguing, but when it’s versus the mainstream, the post-Keynesians have developed like a completely parallel worldview, basically a rejection of most of what neoclassical economists use theoretically.
And you know, the reason for the pushback by at least some, Krugman for example, is that obviously if you look at the post-Keynesians, the post-Keynesians will say everything that Paul Krugman has written is wrong. Well, he’s not going to be happy with it. You can’t gloss that over. I mean, so obviously there’s going to be resistance. And in his case, I mean, look, he deliberately misrepresenting.
He’s saying things are not in there as a way of minimizing the theory. Just say, look, they say deficits don’t matter. You know, he just makes stuff up and attacks that. And he figures he has huge following and he just feels he can get away with that. And, you know, people are getting the Krugman definition of MMT so they get a distorted view.
I mean, it’s a strategy, but I don’t see how that makes sense in the world of the internet and there’s people like me, and then there’s also neoclassicals not everyone in the mainstream – this is not a huge group think. I mean, they can all say, “Hey, that’s crazy.” You know, and there’s some people saying, “Hey, you know, these are just obvious mischaracterizations,” so it’s not clear that that strategy would work.
You know, so that’s basically how I would view what’s going on. I mean, it’s the simplest way is to listen and make it go away. By pretending it’s something and not make it look bad so nobody’s interested, but you know, it’s the thing is that you can only live off misrepresenting something completely so far before the truth catches up to you.
Grumbine (08:55):
But, you know, as somebody who’s been following this for about 10 years, I’m not the theoretician that you are, but I’m beyond riveted by the implications of what an understanding of macroeconomics. I love what Bill Mitchell has done with his new textbook, and they didn’t call it MMT.
They call it “Macroeconomics” because it is the only coherent macroeconomic strategy end to end that really involves both the legal aspects of what is a debt and understanding the historical context of money creation, and then the relationship with the state.
And then on top of it, integrating those things that you did talk about from post-Keynesian economics, but would also add in get your take on this. You know, I know Bill Mitchell comes from the Kalecki school of economics. He found his origins largely in Michał Kalecki, and that was where full employment really came from in his mind.
I know there’s some push over there from the Minsky side and I . . . obviously functional finance with Abba Lerner. And then of course, Lord Keynes himself. Can you kind of talk about maybe your perspective in, you’ve been doing this a long time, too. I’ve read your stuff for a long time.
Obviously you’ve experienced the ebbs and flows of the focus points on MMT. It seems like this Green New Deal stuff, the global perspective coming from Australia, and then you obviously in the US and the UK with GIMMS Institute (The Gower Initiative for Modern Money Studies), there’s a whole new flavor here that’s kicking in and it’s bringing out the same, you know, catcalls. I mean, Krugman has been at this before. This isn’t his first trip down “Beat Up MMT Lane.”
Romanchuk (10:47):
And he’s repeated the same tactic he did last time. Misrepresenting “budgets don’t matter.”
Grumbine (10:53):
Exactly. So what is your take? Kalecki is considered a fair economist to quote. You figure Minsky is a fair economist to quote. You figure Abba Lerner is a fair economist quote. All these economists that we generate some of the backdrop for, not all of it, because MMT has its own revelations and its own epiphanies that come from its further learnings.
But when you look over there at physics, for example, and Einstein, and then you’ve got, you know, our friend, the guy in the wheelchair just passed.
Romanchuk (11:28):
Oh, a Hawking, Stephen Hawking.
Grumbine (11:30):
Yes. Stephen Hawking. So you’ve got Hawking and Einstein and Einstein developed the theory of relativity. But what Hawking did was took Einstein’s theory and put it on steroids. He developed further understandings that Einstein never had a clue he had unraveled.
And so you think to yourself, maybe MMT has taken these initial understandings and taken them to new places or to logical conclusions. I don’t know. But what is your take on that evolution from these economists that had these thoughts previously and the synthesis that MMT brings to the table?
Romanchuk (12:09):
Yeah. I mean like my sort of theoretical background, I came in from a Minsky viewpoint. I mean, he was the first economist that books that I could pick up and they say this made sense. It matched what I saw in the markets cause I came in working with data, what’s happening in the bond market. Like the finance textbooks are fine.
I mean, that’s where it is based off, like how you price things, which is . . . I was a quantitative analyst that part of it . . . yeah . . . no complaints with finance. The issue was economics. You pick up an Economics 101 text. I look at it and say, “This doesn’t resemble what I’m doing.” Krugman loves IS-LM model, but there’s no time axis.
I mean, okay, there’s some new IS-LM that has time, but the classic one he’s referring to, there’s no time axis. And like I’m interested in time series analysis. What use is this model? I just ignore it. And so Minsky was well associated with markets. He’s studied the evolution of markets and how that impacts policy. And so that clicked.
And you know, for me, MMT extends Minsky while Wray was his student, but Minsky himself, he was just a restatement of Keynes using slightly more modernized language. The issue with Keynes is he died too young. He was a brilliant writer, but it was very hard to follow what he meant.
I read “The General Theory” (The General Theory of Employment, Interest and Money) on a train and I basically came up with my own, okay, this is what he really meant. And it may or may not match the thousand other takes on what Keynes really meant. But that’s the thing. It wasn’t a simple mathematical model. It was complex.
And to a certain extent, the post-Keynesians had been sort of debating what Keynes really meant, and you come up with different interpretations. Like Kalecki was contemporary. He developed independently of Keynes, but it’s similar. I mean, the . . . in terms of, if you did like a basic model, if you’re doing simple models, they’re close enough.
Economists really like their models and make a big deal about small differences between the models. Whereas I’m, you know, coming in from the outside, they look close enough that you’re not too worried about the distinction.
So obviously Kalecki had different emphasis in his work, but certainly on the political economy side, but from a theory side, you can say it’s, I would be very hard to say that the thrust of what they wanted to do were radically different. The problem with all of them had, they didn’t really have the proper mathematical framework. I mean, this is the problem the post-Keynesians had.
And so did the mainstream is the, the mathematical modeling techniques they are using weren’t very clean and it was clumsy. The neoclassicals went off with DS Dynamics to cast in general like Liberty Models, which are complex, but they have their own problems, but they at least made a little bit more sense.
They sort of was a logic to them, but the post-Keynesians have moved towards the stock flow, consistent models. And I think you’ve got a cleaner modeling framework that you could start putting it all together and giving a cleaner story.
So basically I think it’s taking the old writers and just taking what they wanted to do, and then put it into a, you know, a cleaner system to say, “Ha, this is what they really meant.” And see for mathematics engineering you do that all the time. If you have a theorem, you’ll just say, “Oh, this is this guy’s theorem.” And you’ll prove it using completely different notation, completely different proof.
You don’t care. Well, you don’t actually say, just say you, you give precedence, you say you name it after him, but you’re going to rederive it as clean as possible. And you don’t actually go back and look in what they wrote in their original paper.
And you say, look, you just do it with modern terminology and you don’t worry about that. So to certain extent, my complaint with the post-Keynesians is that they spent too much time digging through things and not just saying, “Look, we’ll just rewrite it.” The mainstream, conversely, they do sort of bury the past. So they have a little bit of an advantage.
I mean, they ignore everything that post-Keynesian say. They ignore everything they said in the fifties. It does mean that everything seems magically new and they keep reinventing the wheel. But the thing is, is to certain extent, they do have cleaner looking textbooks.
Grumbine (17:20):
Right. Well, let’s hope Bill Mitchell nails it out of the park. I got to see the draft a long time ago and I didn’t read it in its fullness because it just didn’t have time. But as I went through it, it was really phenomenal. I don’t know how the man puts so many words together.
If you look at how much he blogs and then you read the “Reclaiming the State” book which is just absolutely phenomenal. And then add in this textbook with Martin Watts and Randy Wray just gotta be scratching your head, but then again, they’ve been at this for almost a decade.
Romanchuk (17:55):
Yeah. I waited for that textbook and I didn’t write much in the way of MMT primers cause I was waiting for that textbook. Basically, I wanted someone to do a survey. It was easier for me to do a primer on post- Keynesian concepts cause I had a textbook to work from because I’m not going to go through a hundred papers and try and do my own survey paper. I don’t have that kind of time.
I want to be selective. And I want to rely on someone else to do the survey because I don’t want to be in a positioned to say MMT says this and it gets smacked down by someone saying, no, actually that’s wrong. So I’ve generally avoided saying MMT says X and I’ve been waiting for this textbook.
And unfortunately for me, I’ve waited, you know, the textbook has been slow. I could have worked with other ones or other books, but they’re more advanced and that’s where I’m assuming my audience is. And so that content was more in this new textbook.
Grumbine (18:57):
Gotcha. So, all right. So I want to take a step back for a minute. Obviously you write the blog Bond Economics and your focus is largely on the bond markets and so forth. Explain to the audience, if you will, MMT says bonds are irrelevant. That we don’t need them. That we could go with zero interest rate policy forever. Mosler’s come out and said it. Kelton has said it.
I think pretty much every MMT theorist said that bonds are a relic of yesteryear, but they’re a safe investment. Retirement accounts have them. And then of course you see the wealthy buying these treasuries and they serve as somewhat of a basic income, a secure investment, so forth.
What is the role of bonds to actually financing government? Which I know from an MMT perspective, we would say they don’t, they can’t, it’s impossible, but what is the role of bonds to a functioning economy? What is the upside? What is the downside and what is their role in the macro world?
Romanchuk (20:02):
Well, the MMT argument, which really clicked is that bonds are there to keep interest rates from going to zero, but that’s basically it. If you didn’t issue bonds and you don’t default, you just say, “Let’s have a government and we don’t issue bonds.” Everything would be base money, reserves, reserves and banks, and most likely. And if they don’t pay interest on those reserves, interest rate goes to zero.
However, governments want to use interest rates to regulate the economy, but it’s not just the overnight rate, they need the whole yield curve. And so they issue bonds, push up yields across the curve. And in Canada, for example, most of the mortgages, or almost all, are sort of a five year term – and maybe that shifted slightly, basically your five-year fixed. And after that you renegotiate the interest rate.
And so to regulate the mortgage market, you need a five year government bond pushing up the yield on five-year mortgages because otherwise if there wasn’t a five-year government bond, if it was all zero, those mortgages, because the risk is being backstopped by the taxpayer, they would be trading around 0%. So there’s no way of slowing down housing market for example.
And so that’s it. That’s really why they’re there from a macro stabilization point of view. It’s just the way, “Hey, we want interest rates to be non-zero.” I mean some MMTers, okay, they say, no, maybe we shouldn’t be using interest rates to regulate the economy, and so we can get rid of bonds. And if that happens, well, I guess I’ll need a new domain name.
I always joke about that, but if it’s only one country, I can target the other countries, but it’s a debate — whether you need non-zero interest rates. The issue that I’ve seen and the MMTers are aware of this, is that our policy, I mean, since the 1980s, we’ve pushed everyone into self-directed retirement plans of various sorts. I mean, might be direct contribution; you don’t have a defined benefit pension.
I mean the very, very few of those left, they’re just legacy funds. So people are managing their own retirement. And we have a huge group of people who are on the edge of retirement. Well, they need risk-free assets to fund their retirement expenses, and that’s it. So, I mean, this is a policy framework that’s been in place for decades.
And the problem with locking interest rates at zero, if inflation is positive, you’re saying, “Hey, you’re locked in at negative real rate, have fun eating cat food.” And that’s the issues that you have this huge wave of retirement money sitting there, and people were pushing these things. So you need to think about, okay, how do we compensate for that? So that’s a big issue.
I believe the MMTers have discussed this, but it’s not a completely cost free. If you were back in 1950, maybe it would be different when you had a younger population. But right now, when you know, good portion of the population are on retired, or on the verge of retirement. I mean it’s not a minor issue that you can just sweep away.
Intermission (23:47):
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Grumbine (24:37):
So I think one of the things that comes to mind about bonds. As a person that lives near the Pennsylvania state capitol. I know that you’re in Canada. I’m not sure the relationship here, but I imagine currency issuer currency, currency user, kind of the same, wherever you go.
But in the United States here, Pennsylvania has been largely struggling with a major budget deficit as a currency user in this currency issue, currency user relationship. And the state of Pennsylvania in particular, the city of Harrisburg where the capital is, it’s a rundown city.
It’s an old city that the primary employers are the state, couple healthcare facilities, some pseudo non-government offices like Pennsylvania Higher Education, which manages the student debt. There’s not very many employers. Basically the city was in bankruptcy. And you think to yourself, what are the ways that these states and local municipalities and cities are able to manage during downturns?
And this is where I’ve seen a role of bonds. I’d like to see, you know, block grants. I’d like to see the states rid themselves of unfunded mandates and force that onto the currency issuer. But is this not a role of bonds as well? I know we talked about retirement, but states have to have a balanced budget.
Only one state in the entire country have a balanced budget amendment because states themselves cannot generate their own currency, at least US dollar currency. Is that another role of bonds in terms of financing state and local government?
Romanchuk (26:22):
Yeah. That was the problem with my book. I said “Understanding Government Finance,” because I wanted a snappier title, but there’s a big gulf between the central government, like the US Treasury and the state and local. The Canadian system is a bit unusual internationally because what we have courtesy of the way the constitution works is that most of the welfare state is actually implemented at the provincial level.
And so we have big provincial governments. I mean, they have big bond issuing programs. They’re very sophisticated issuers and there’s no such thing as a balanced budget amendment. They have big deficits. They, in a sense, you know, they’re big and comparable to a lot of central governments out there, but the are currency users and they’re subject to default.
There was one default in modern Canadian History and that was Alberta but during the depression. Otherwise they’re very big. The question is will the central government bail them out? There’s a moral hazard issue.
But whereas in the United States, they’re much smaller, they’re limited in scope, and they do default cause like the Canadian cities, there was a default, I think, in the fifties, but basically the provincial governments have a lot more control over municipalities in Canada.
In the United States, the municipalities are much stronger constitutionally and they can get themselves in more trouble. In Canada, the provinces act like the grownups in the room and they force the cities to stay in line. So to certain extent, the management is much more professional cause it’s more centralized, but yes, I mean that has to be done through bond issuance. They can’t issue money.
And so yeah, the provincial bond market is big. It’s a big thing for retirees, but then you have the corporate sector also has to issue bonds. So even if the central government gets rid of bond issuance, the bond market will still exist.
Grumbine (28:35):
Right. So looking at again, I hate to make this so US centric, but it begs the question because we are so screwed here in the US. In Flint, Michigan, up there right near the Canadian border, you’ve got pipes that have completely rusted out. The water is undrinkable. It’s practically poison.
Obviously the capital flight, if you will, because we haven’t used our sovereign fiat currency to offset the capital flight, has left Detroit and that whole area a waste land, like a third world nation that has been bombed by like Hiroshima – it looks like if you go into some of the worst sections of it. And you go down there to Puerto Rico, another US territory ravaged by a hurricane and still not fully back on its feet.
These groups have had bonds and so forth, but the vultures have come through, picked apart their history, picked apart their art, picked apart their pieces, just like any other Wall Street story, going back to Gordon Gekko, peeling apart the airline. This is happening all over the place. And it’s completely about the race to the bottom.
When you look at Kansas, for example, where they literally eliminated taxes all together practically and let all the services in the entire community dry up. And now they are really, really suffering for that. You can see the businesses flee these high tax areas in the US and they go to the low tax sweetheart area.
I see it with Amazon recently an Washington D.C. and New York City booted them out basically, but all across the US you can see this, dare I say, sectoral balances approach to non-sovereign entities, where you can see the groups that have the business are thriving; and the groups that don’t have the business are left with destitution and urban blight.
This is another key area that I feel MMT has a really strong voice for, but it hasn’t used it. But I think this plays into the role of bonds. I think it plays into the role of fiscal policy at the federal level. And I think it definitely marries into the concept of currency user, currency issuer, to explain the concepts that are going on in these impoverished states.
What is your take on Puerto Rico and Flint, Michigan, and so forth? Because these, in my opinion, are the keys right now to understand that this is an opportunity to show the difference between Greece and, you know, the US or whatever. This is a really big deal, but what is your theoretical take?
Romanchuk (31:23):
Yeah, I mean, this is where I have to plead ignorance. See something with the situation you described, it’s very difficult to imagine happening in Canada, outside of you could point to the situation reserves, but there’s 10 provinces. They’re relatively large. Something like Flint, the provincial government, because there’s areas around Detroit, I believe, they’re doing well.
Basically people flee the inner city and they moved to burbs. There was a little bit of an effect like that in Canada, but the thing is, is that provincial level doesn’t allow that flight to the burbs to get too far. Things are more homogenized. And the other thing is Canadians are fairly ornery politically. What you see at the provincial level is new parties pop up routinely and they wipe out governing parties.
It’s very typical for a party to be in government province for 20 straight years, go into an election and lose every single seat. Basically they’ll completely wipe out incompetent governance and new party springs up and it can swing left. It can swing right. And so basically things here aren’t allowed to get that far in most cases.
I mean, there’s areas of poverty – yes. But very big ones, you know, that affect big cities, not really. It’s a very different political environment. And I don’t understand the American system. I think the difference is that the American municipalities are much stronger constitutionally. And so the fixes for coordination have to be done at a higher level of government and they don’t have that authority.
And I’m not going to tell people you gotta change your constitution, but that’s sort of the subtext. I mean, the federal government could fix these issues. The question is, do they have a legal right? And I am not the person to ask on that, that’s very simply it.
Grumbine (33:38):
Yeah. In the US they’ve got the battle. And this goes back to the Civil War and before the 10th amendment, which is state’s rights basically, and that the 14th amendment, which is the equal protection, and that battle went on. We got to see it in spades during the ACA battle when the American Affordable Care Act was passed.
The idea here is if I take away these legal aspects and differences between Canada and the US at a more generic level, if you will, you do have a hesitancy of the government to take care of these issues and more of a push to markets, which would be neoliberalism at its finest to settle these problems. And obviously, as neoliberalism dictates, they’re looking for a profit motive.
So they walk into the disaster torn Puerto Rico and find ways to profit from their disaster. And they go up to Flint, Michigan, find ways to profit on the poverty of the disaster. And this is a moralization to some extent, in the sense of should we allow this pain and suffering, but when you think about what economics is as a whole, and economics is about efficiency.
And, you know, MMT talks about full employment being the pinnacle of an efficient economy, at least in terms of, you know, that should be the base. It should be the starting point. And you look at these areas and they’re ravaged. So it’s obvious from an MMT perspective that they’re not being very efficient. They’re not being very inclusive.
They’re not achieving what they could achieve in terms of a full employment economy. And by extension only the few prosper, and that’s the vultures coming in to pick it apart. They would consider that part of the business cycle, you know, but from a standpoint of currency issuers and currency users, you would expect, or at least I would expect within the United States that we would take an interest in how we can fix these problems.
And I believe that MMT provides a lens from which to take different actions that are being taken today to address these very serious concerns. That’s me on my soap box, but I believe there’s merit there.
Romanchuk (36:06):
Yeah, basically though, if you’re a city, a sub sovereign, you never want bondholders dictating what you have to do. It’s a pretty good rule of thumb. If the bond holders are dictating what you’re doing, whether you’re a business, you’re not in a good position, you want freedom of action. And, you know, you can only do that basically by being a good credit.
You’re a good credit, it’s not really your problem. Or you can be a really big borrower and then take down the system, in which case you push around creditors. But that’s the thing is that it comes down to the government. They have no choice, a sub sovereign, you know, they’re like a corporation. They have to follow the rules that everyone else has to follow, and it’s their policy decisions.
And really the only natural way to break that, yes, the central government can go in and fix things and take more of a load; but there is the question of say moral hazard. If the central government pays for everything, you know, what’s to stop local politicians from building giant baseball stadiums named after themselves, et cetera. If you say you’re picking up all the bills, well, where’s the discipline.
So to a certain extent, it’s a political discipline and the markets show up, but it depends where you draw the line – what level of government does what, and each country is different on that front.
Grumbine (37:39):
Okay. So let me ask you this in kind of like in a wrap up here. We’ve talked a little bit about the bond role at the local and state and municipal and provincial level, but we’ve talked about it at the macro level. And we’ve talked about the criticisms of some of these individuals that have recently waded into the debate about MMT and it’s place for, you know, we didn’t say it, but let’s be fair.
It’s largely focused on this concept of a Green New Deal. How would you assess? And this is kind of like my bow tie here. How would you assess the fiscal space available to a sovereign issuing nation? Wherever it be – UK, Russia, China, Australia, Canada, US. How would you assess the fiscal elasticity or the space available? People oftentimes talk about the real resources being the constraint.
And that’s a bit nebulous. It’s hard to wrap your eyes and ears and mind around, but what would be a good indicator that we’ve hit our wall, that we’re at max capacity, that there is no more fiscal space to be had right now. How do you assess the amount of room we have to spend?
Romanchuk (39:01):
I generally look at the post 1990 datasets because that’s when things changed as Bill Mitchell described, that’s when the reforms hit the labor market, we’ve had this low inflation machine. In that entire era, no one has come close to hitting fiscal limits – it’s the reality. Your big deficits in the financial crisis, but that was just the automatic stabilizers.
I mean, with the collapse and the activity, you know, the stimulus packages were just nothing compared to the draw down, and they could have thrown way more at the economy without hitting real capacity limits during the worst of the crisis. So the issue, if you want to do it technically, we don’t have a really good dataset.
It’s all being little nudges here, little nudges there, and we’re stuck looking at okay, is the unemployment rate really low, blah, blah, blah. And MMTers, the academics, have done a lot of work on this. I’ve done . . . I mean, I’ve done . . . I’m not to say I’m an expert in what they’ve done, but you know, I’ve looked at this as part of my day job. And ultimately what tells you you’ve made a mistake is inflation.
That’s when you’re running out of resources. But if you’re doing something big like the Green New Deal, see that’s very much a real resource issue. Like if you’re doing a tax cut, you’re not really changing the shape of the economy. Like if you look at say the Trump tax cut, you weren’t doing a radical restructuring the economy, you’re just reducing the tax rate. People can spend more.
And so, you know, the traditional analysis, conventional analysis, Hey, let’s look at the output gap, wherever it is, unemployment rate, is there an inflation risk? And you could assess that fairly easily because you weren’t changing things. If you look at the Green New Deal, you want to eliminate carbon usage. That is a big change.
And you can argue as big a change as what was going on in World War II. You’re simultaneously building a renewable sector and destroying the carbon using sectors. And destroying is the word. I mean, you’re wiping out a segment of the economy. If your objective is to meet the Green New Deal objective to eliminate carbon usage, that’s a big change.
And for that, you actually have to look the engineering of it – that’s not an easy thing. I’m sort of in the peak oil camp and, you know, with a concern about the trends in energy production, it’s not an easy thing to do, but you have to figure out is this possible from an engineering perspective. And you don’t care what the dollar amounts are. You’re just looking, “Can we make the shift?
Is there enough renewable energy?” And then you can say, “Well, how do we get rid of this carbon usage? What do we do? Do we just do a carbon tax and wipe them out?” And then once you know how you’re actually implementing this, and right now the proposal is just a proposal to look at it. You’ve got to say, “What are we trying to do?”
And then once you figured that out, you’re gonna have to say, “Well, what are the inflationary implications?” And that’s because you’re going to be hitting some sectors with a lot of activity. It’s not like just tax cut going out to everyone or where everyone was rich. It’s, you’re giving a lot of money to some sectors, and it’s going to very hard. We’ll find out the hard way if the policy is implemented.
I mean, you could go in with plans, but I think the philosopher, Mike Tyson said, “Everyone has a plan until they’re punched in the face.” It’s going to be, what happens? What do you think is going to happen when you do this huge engineering change? And they’re huge. My feeling is, is that if you’re going to do it, you’re probably doing a carbon tax. And that’s it.
You do a carbon tax to get rid of the carbon users and you spend on it from a back of the envelope point of view, I wouldn’t be shocked if they were very similar magnitude. I mean, but you’d have to see the numbers. You have to see what are we doing. How big is this program? If the program is planting a few hundred trees, well, obviously it’s not a big deal, but you know, you got to know what you’re doing.
And then you have to look at that and you have to look the size of what you’re doing relative to the economy. And so there’s been nothing attempted like that in the era that I’ve looked at, there’s nothing like it. You have to go back to World War II. That’d be the only thing that’s comparable to the scope of the Green New Deal cause it’s a restructuring of the economy.
Grumbine (43:53):
I spoke with Warren Mosler a little while back. And Warren made some very astute points, points that I don’t have the wherewithal to refute, not that I would, but he made some comments. He said, “You know, getting the mobilization for a Green New Deal is going to put us up to, and maybe even beyond full employment.” And he talked about having to raid the FIRE sector for labor.
And we even addressed the fact that it may even require immigrants who have been chastised and beaten down over the years here in the States to even fulfill many of these roles. And the idea of actually getting to full employment is not out of the question. This is like a legitimate, wow, do we have any slack in the employment ranks at all?
Because to do this is going to take a full, like you said, World War II level mobilization. Then he said something very interesting that I wanted to get your technical perspective. We are talking obviously, you know, Medicare for All or universal health care is a very important thing that we’re talking about as well.
And it’s not necessarily a part of a Green New Deal, but it is part of this larger FDR Second Bill of Rights kind of push that’s going along in parallel with this. And he said something profound. And he said, “Medicare for All looks to have a deflationary bias to it.” And he said, “And it may actually require a tax cut.”
And we’d started talking about the real resources of . . . you have enough doctors, do you have enough phlebotomists? Do you have enough surgeons and so forth? Can you talk about what this whole concept of deflation is and what it might mean to an economy as you’re trying to make macro adjustments?
Romanchuk (45:54):
I mean that’s another one, and that’s interesting. I think you’re going to have to divide the short run from the long run. I mean, it depends like for the Medicare for All. So we have basically a single payer here. It was implemented in the 1950s when the medical sector was much smaller.
And so I’m not sure if there’s any parallels you can draw, but the real resources in the form of doctors and nurses, hospitals, largely exists. The question is, you know, okay, to what extent they’re under your government control. It’s in Canada, hospitals are government run. There are private clinics, like there’s some private elements to the system, but they can directly control costs of what doctors and nurses get paid.
With the US system, I don’t know how that would work, but if we put that question aside, the other thing is, while the insurance industry, it’s no longer really needed. If you went to a Canadian system, there are healthcare plans, but they’re very minor. They’re very incidental.
Like for example, if you want to get a blood test, you can either stand in line and wait at 7:00 AM for your blood tests outside in December, because everyone shows up at the same time. And because you fast overnight, or you can go to a private clinic and pay 15 bucks for the blood test and then insurance will cover that. But there’s basically not a huge role for health insurance.
So, well, that’s an industry that basically disappears off the face of the earth. That’s a deflationary shock in the short term. But in the long term, people or corporations are no longer paying those healthcare premiums. Healthcare premiums are effectively a tax. You can think of them as a tax going to the health insurance paying for it.
So that is like a tax cut. So in the long run, I think, yes, eventually once you get the deflation shock out of the way, all else equal, taxes would probably go up; but it’s probably less because if costs are controlled, it would be less than what you did as the reduction in premiums – but you don’t, that’s the thing – is that in the real world, you know, taxes should set at a macro basis.
So it’s very hard to say this tax is paying this. Then that’s the thing – what’s the pay for – the MMT is, you want to get away from that thinking.
Grumbine (48:23):
Yes.
Romanchuk (48:23):
But realistically, I mean it’s not a free lunch. The healthcare in the steady state, you know, you’re going to be spending money on it, which you weren’t spending on before. Presumably this thing, I mean, it may be the tax. Maybe there’s the deductibles or something like that, that are coming in like a payroll tax. And that depends on the program, but there would be a short versus a long-term perspective.
Grumbine (48:49):
So, Brian, I want to thank you very much for spending this hour with us. This was amazing. I hope you’ll come back and join us again.
Romanchuk (48:56):
Sure.
Grumbine (48:56):
I absolutely love hearing you talk to me. This is just . . . I’d love to dive into Canada as well. We have a following out there. It would be great to be able to provide some good content as we address the Canadian economy as well.
Romanchuk (49:13):
To be honest though. I mean, I don’t do a whole lot of economy following. That’s a full-time job and I’m more on the primer side, but unfortunately I don’t have as big a Canadian following. So I tend to write more about US data. I can take a look at the Canadian situation again, but I found the page views for Canadian content for me was much lower. So I said, “Okay, let’s talk about the US labor market.”
Grumbine (49:39):
Demand. All right, man. Well, look, thank you very much. We’re going to go ahead and end the show. Folks, thank you. We have Brian Romanchuk with us today. Thank you, sir. We’ll talk to you soon.
Romanchuk (49:47):
Okay. Thank you.
Ending Credits (49:55):
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 Brian Romanchuk, founder of the blog bondeconomics.com., He is known for, among other things, his detailed technical rebuttals to critics of Modern Monetary Theory. Brian became interested in MMT because, as a data analyst in the bond market, it was the first macroeconomic theory that made sense. It actually matched what he saw, on a daily basis, in the real world.
After a look at the history of post-Keynesian thought, Steve asks him to delve into the nuts and bolts of bonds. Those familiar with MMT understand the role of Treasury bonds, but Brian gives us an overview of other types of public and private bonds. Along the way, he compares US state and Canadian provincial governments & municipalities, and their relative power over the local economies.
And we can’t talk with a Canadian without discussing single-payer health care. Brian shares his thoughts on the economic impact of removing private insurers from the equation.
Brian Romanchuk was a fixed income quantitative analyst in Quebec.
His writings can be found on: www.BondEconomics.com
Macro N Cheese – Episode 16
Bond Markets in a Modern Money Economy with Brian Romanchuk
May 18, 2019
Brian Romanchuk [intro/music] (00:03):
If the central government pays for everything, what’s to stop local politicians from building giant baseball stadiums named after themselves.
Brian Romanchuk [intro/music] (00:13):
Look at the Green New Deal. You want to eliminate carbon usage. That is a big change in our view, as big a change as what was going on in World War II. Some MMTers say maybe we shouldn’t be using interest rates to regulate the economy so we can get rid of bonds. If that happens, well, I guess I’ll need a new domain name.
Geoff Ginter [intro/music] (00:39):
Now let’s see if we can avoid the apocalypse all together. Here’s another episode of Macro N Cheese with your host, Steve Grumbine.
Steve Grumbine (01:34):
All right everybody. This is Steve with Macro N Cheese, and I have brought my guest, Brian Romanchuk of Bond Economics. My perception of Brian before I let him introduce himself here momentarily. Brian is the deepest, wonkiest writer I have ever read when it comes to the background, the theoretical framework of Modern Monetary Theory and just economics and macro as a whole.
I’ve witnessed Brian dress down people in a way that I would have never imagined could be a dress down, but it is the most technically precise description of a given scenario. And so I had to ask Brian to come join us because most of the time we deal in the political economy.
We are definitely talking MMT, but we oftentimes stray into the programmatic, what is possible within the political environment kind of scenario. Brian deals in the theoretical. So with that, Brian, did I give you justice there? I mean, how would you describe yourself? Tell us about yourself.
Romanchuk (02:37):
Hi there. I think that’s a fair description in my background. I was originally an engineer, but I moved into control systems theory, which is a branch of applied mathematics. And I did a doctorate in that and I was interested in the theory end of things. And I drifted out of academia and ended up working in finance. And starting in 2013, I sort of struck off on my own as a consultant.
And I’m writing on economics.com as well as I have a few short books out. They’re not three hundred thousand word tomes. They’re more like extended reports and I’ve produced a few of those. And I worked in fixed income. And so we were interested in what happens with yield curves, what happens with inflation, but it was technical.
I mean, if you’re in the bond market, you’re not advocating policies, you’re seeing what the policies do. And I came in with no economics background. And so I had to learn on the job. And well I picked up a lot with Hyman Minsky, but the myths (7 Deadly Innocent Frauds) Warren Mosler by his firm, and I really got into MMT and that helped clarify things.
I mean, most of it, what I was interested in was similar to things that I knew, but I never thought about carefully. And there was no other source that explained it properly. I’d figured things out on my own, just looking at data and said, “Okay, yeah, this fits what I already know.” And that’s why I was attracted to it.
Grumbine (04:15):
It’s just amazing. I read some of the description. You you’ve jumped into the foray here recently, obviously with MMT exploding onto the scene. We’ve got, you know, illuminaries like our luminaries, I should say, want to call them Illuminati. These luminaries like Paul Krugman who have come out of the woodworks and Jared Bernstein and a host. I mean, everybody who was somebody, Larry Summers, you name it, coming out, taking a pot shot at the new kids on the block who aren’t so new actually.
And they repeatedly misrepresent the academic, theoretical framework or just the basic premises of Modern Monetary Theory. And you basically said, “Hey man, I, you know, let me take a crack at this.” And you masterfully dress these folks down. Can you explain largely what you believe MMT is and what the pushback from the mainstream is? Why is this framework getting so much hate, so to speak?
Romanchuk (05:16):
I mean, one thing to keep in mind. I’m coming this as a theoretician. MMT fits within post-Keynesian economics, which was pushed basically out of the Ivy league Universities’ top journals by the mainstream neoclassical. And the post-Keynesians may be hard to work with, but I’m ex-academic and the treatments, the way they wrote them out of history is disconcerting.
I mean, it’s, that’s not the way academia is supposed to work. So the issue with the post- Keynesians is that they did agree with the mainstream. They didn’t agree themselves. And so there’s a lot of factions within post-Keynesian economics, and it was hard to sort of pick up what’s going on.
And there’s been attempts like Marc Lavoie, professor, wrote textbook on post-Keynesian economics trying to say, “Yes, there is a common strand.” But what MMT did was, “We’re going to create a single, coherent view hacked out of post-Keynesian economics, and it’s developed, but it fits in within that framework.”
And for me, my difficulty with MMT is how do I distinguish what’s MMT versus post-Keynesians’ thought? And because I’m a little bit more familiar with the post-Keynesian textbooks. You know, for me, I don’t really care. I mean MMT is a branch of post-Keynesian economics. I’m not too worried where we draw that line, but unfortunately academic politics means, in essence, people worry about where you draw these lines.
And so there’s a lot of arguing, but when it’s versus the mainstream, the post-Keynesians have developed like a completely parallel worldview, basically a rejection of most of what neoclassical economists use theoretically.
And you know, the reason for the pushback by at least some, Krugman for example, is that obviously if you look at the post-Keynesians, the post-Keynesians will say everything that Paul Krugman has written is wrong. Well, he’s not going to be happy with it. You can’t gloss that over. I mean, so obviously there’s going to be resistance. And in his case, I mean, look, he deliberately misrepresenting.
He’s saying things are not in there as a way of minimizing the theory. Just say, look, they say deficits don’t matter. You know, he just makes stuff up and attacks that. And he figures he has huge following and he just feels he can get away with that. And, you know, people are getting the Krugman definition of MMT so they get a distorted view.
I mean, it’s a strategy, but I don’t see how that makes sense in the world of the internet and there’s people like me, and then there’s also neoclassicals not everyone in the mainstream – this is not a huge group think. I mean, they can all say, “Hey, that’s crazy.” You know, and there’s some people saying, “Hey, you know, these are just obvious mischaracterizations,” so it’s not clear that that strategy would work.
You know, so that’s basically how I would view what’s going on. I mean, it’s the simplest way is to listen and make it go away. By pretending it’s something and not make it look bad so nobody’s interested, but you know, it’s the thing is that you can only live off misrepresenting something completely so far before the truth catches up to you.
Grumbine (08:55):
But, you know, as somebody who’s been following this for about 10 years, I’m not the theoretician that you are, but I’m beyond riveted by the implications of what an understanding of macroeconomics. I love what Bill Mitchell has done with his new textbook, and they didn’t call it MMT.
They call it “Macroeconomics” because it is the only coherent macroeconomic strategy end to end that really involves both the legal aspects of what is a debt and understanding the historical context of money creation, and then the relationship with the state.
And then on top of it, integrating those things that you did talk about from post-Keynesian economics, but would also add in get your take on this. You know, I know Bill Mitchell comes from the Kalecki school of economics. He found his origins largely in Michał Kalecki, and that was where full employment really came from in his mind.
I know there’s some push over there from the Minsky side and I . . . obviously functional finance with Abba Lerner. And then of course, Lord Keynes himself. Can you kind of talk about maybe your perspective in, you’ve been doing this a long time, too. I’ve read your stuff for a long time.
Obviously you’ve experienced the ebbs and flows of the focus points on MMT. It seems like this Green New Deal stuff, the global perspective coming from Australia, and then you obviously in the US and the UK with GIMMS Institute (The Gower Initiative for Modern Money Studies), there’s a whole new flavor here that’s kicking in and it’s bringing out the same, you know, catcalls. I mean, Krugman has been at this before. This isn’t his first trip down “Beat Up MMT Lane.”
Romanchuk (10:47):
And he’s repeated the same tactic he did last time. Misrepresenting “budgets don’t matter.”
Grumbine (10:53):
Exactly. So what is your take? Kalecki is considered a fair economist to quote. You figure Minsky is a fair economist to quote. You figure Abba Lerner is a fair economist quote. All these economists that we generate some of the backdrop for, not all of it, because MMT has its own revelations and its own epiphanies that come from its further learnings.
But when you look over there at physics, for example, and Einstein, and then you’ve got, you know, our friend, the guy in the wheelchair just passed.
Romanchuk (11:28):
Oh, a Hawking, Stephen Hawking.
Grumbine (11:30):
Yes. Stephen Hawking. So you’ve got Hawking and Einstein and Einstein developed the theory of relativity. But what Hawking did was took Einstein’s theory and put it on steroids. He developed further understandings that Einstein never had a clue he had unraveled.
And so you think to yourself, maybe MMT has taken these initial understandings and taken them to new places or to logical conclusions. I don’t know. But what is your take on that evolution from these economists that had these thoughts previously and the synthesis that MMT brings to the table?
Romanchuk (12:09):
Yeah. I mean like my sort of theoretical background, I came in from a Minsky viewpoint. I mean, he was the first economist that books that I could pick up and they say this made sense. It matched what I saw in the markets cause I came in working with data, what’s happening in the bond market. Like the finance textbooks are fine.
I mean, that’s where it is based off, like how you price things, which is . . . I was a quantitative analyst that part of it . . . yeah . . . no complaints with finance. The issue was economics. You pick up an Economics 101 text. I look at it and say, “This doesn’t resemble what I’m doing.” Krugman loves IS-LM model, but there’s no time axis.
I mean, okay, there’s some new IS-LM that has time, but the classic one he’s referring to, there’s no time axis. And like I’m interested in time series analysis. What use is this model? I just ignore it. And so Minsky was well associated with markets. He’s studied the evolution of markets and how that impacts policy. And so that clicked.
And you know, for me, MMT extends Minsky while Wray was his student, but Minsky himself, he was just a restatement of Keynes using slightly more modernized language. The issue with Keynes is he died too young. He was a brilliant writer, but it was very hard to follow what he meant.
I read “The General Theory” (The General Theory of Employment, Interest and Money) on a train and I basically came up with my own, okay, this is what he really meant. And it may or may not match the thousand other takes on what Keynes really meant. But that’s the thing. It wasn’t a simple mathematical model. It was complex.
And to a certain extent, the post-Keynesians had been sort of debating what Keynes really meant, and you come up with different interpretations. Like Kalecki was contemporary. He developed independently of Keynes, but it’s similar. I mean, the . . . in terms of, if you did like a basic model, if you’re doing simple models, they’re close enough.
Economists really like their models and make a big deal about small differences between the models. Whereas I’m, you know, coming in from the outside, they look close enough that you’re not too worried about the distinction.
So obviously Kalecki had different emphasis in his work, but certainly on the political economy side, but from a theory side, you can say it’s, I would be very hard to say that the thrust of what they wanted to do were radically different. The problem with all of them had, they didn’t really have the proper mathematical framework. I mean, this is the problem the post-Keynesians had.
And so did the mainstream is the, the mathematical modeling techniques they are using weren’t very clean and it was clumsy. The neoclassicals went off with DS Dynamics to cast in general like Liberty Models, which are complex, but they have their own problems, but they at least made a little bit more sense.
They sort of was a logic to them, but the post-Keynesians have moved towards the stock flow, consistent models. And I think you’ve got a cleaner modeling framework that you could start putting it all together and giving a cleaner story.
So basically I think it’s taking the old writers and just taking what they wanted to do, and then put it into a, you know, a cleaner system to say, “Ha, this is what they really meant.” And see for mathematics engineering you do that all the time. If you have a theorem, you’ll just say, “Oh, this is this guy’s theorem.” And you’ll prove it using completely different notation, completely different proof.
You don’t care. Well, you don’t actually say, just say you, you give precedence, you say you name it after him, but you’re going to rederive it as clean as possible. And you don’t actually go back and look in what they wrote in their original paper.
And you say, look, you just do it with modern terminology and you don’t worry about that. So to certain extent, my complaint with the post-Keynesians is that they spent too much time digging through things and not just saying, “Look, we’ll just rewrite it.” The mainstream, conversely, they do sort of bury the past. So they have a little bit of an advantage.
I mean, they ignore everything that post-Keynesian say. They ignore everything they said in the fifties. It does mean that everything seems magically new and they keep reinventing the wheel. But the thing is, is to certain extent, they do have cleaner looking textbooks.
Grumbine (17:20):
Right. Well, let’s hope Bill Mitchell nails it out of the park. I got to see the draft a long time ago and I didn’t read it in its fullness because it just didn’t have time. But as I went through it, it was really phenomenal. I don’t know how the man puts so many words together.
If you look at how much he blogs and then you read the “Reclaiming the State” book which is just absolutely phenomenal. And then add in this textbook with Martin Watts and Randy Wray just gotta be scratching your head, but then again, they’ve been at this for almost a decade.
Romanchuk (17:55):
Yeah. I waited for that textbook and I didn’t write much in the way of MMT primers cause I was waiting for that textbook. Basically, I wanted someone to do a survey. It was easier for me to do a primer on post- Keynesian concepts cause I had a textbook to work from because I’m not going to go through a hundred papers and try and do my own survey paper. I don’t have that kind of time.
I want to be selective. And I want to rely on someone else to do the survey because I don’t want to be in a positioned to say MMT says this and it gets smacked down by someone saying, no, actually that’s wrong. So I’ve generally avoided saying MMT says X and I’ve been waiting for this textbook.
And unfortunately for me, I’ve waited, you know, the textbook has been slow. I could have worked with other ones or other books, but they’re more advanced and that’s where I’m assuming my audience is. And so that content was more in this new textbook.
Grumbine (18:57):
Gotcha. So, all right. So I want to take a step back for a minute. Obviously you write the blog Bond Economics and your focus is largely on the bond markets and so forth. Explain to the audience, if you will, MMT says bonds are irrelevant. That we don’t need them. That we could go with zero interest rate policy forever. Mosler’s come out and said it. Kelton has said it.
I think pretty much every MMT theorist said that bonds are a relic of yesteryear, but they’re a safe investment. Retirement accounts have them. And then of course you see the wealthy buying these treasuries and they serve as somewhat of a basic income, a secure investment, so forth.
What is the role of bonds to actually financing government? Which I know from an MMT perspective, we would say they don’t, they can’t, it’s impossible, but what is the role of bonds to a functioning economy? What is the upside? What is the downside and what is their role in the macro world?
Romanchuk (20:02):
Well, the MMT argument, which really clicked is that bonds are there to keep interest rates from going to zero, but that’s basically it. If you didn’t issue bonds and you don’t default, you just say, “Let’s have a government and we don’t issue bonds.” Everything would be base money, reserves, reserves and banks, and most likely. And if they don’t pay interest on those reserves, interest rate goes to zero.
However, governments want to use interest rates to regulate the economy, but it’s not just the overnight rate, they need the whole yield curve. And so they issue bonds, push up yields across the curve. And in Canada, for example, most of the mortgages, or almost all, are sort of a five year term – and maybe that shifted slightly, basically your five-year fixed. And after that you renegotiate the interest rate.
And so to regulate the mortgage market, you need a five year government bond pushing up the yield on five-year mortgages because otherwise if there wasn’t a five-year government bond, if it was all zero, those mortgages, because the risk is being backstopped by the taxpayer, they would be trading around 0%. So there’s no way of slowing down housing market for example.
And so that’s it. That’s really why they’re there from a macro stabilization point of view. It’s just the way, “Hey, we want interest rates to be non-zero.” I mean some MMTers, okay, they say, no, maybe we shouldn’t be using interest rates to regulate the economy, and so we can get rid of bonds. And if that happens, well, I guess I’ll need a new domain name.
I always joke about that, but if it’s only one country, I can target the other countries, but it’s a debate — whether you need non-zero interest rates. The issue that I’ve seen and the MMTers are aware of this, is that our policy, I mean, since the 1980s, we’ve pushed everyone into self-directed retirement plans of various sorts. I mean, might be direct contribution; you don’t have a defined benefit pension.
I mean the very, very few of those left, they’re just legacy funds. So people are managing their own retirement. And we have a huge group of people who are on the edge of retirement. Well, they need risk-free assets to fund their retirement expenses, and that’s it. So, I mean, this is a policy framework that’s been in place for decades.
And the problem with locking interest rates at zero, if inflation is positive, you’re saying, “Hey, you’re locked in at negative real rate, have fun eating cat food.” And that’s the issues that you have this huge wave of retirement money sitting there, and people were pushing these things. So you need to think about, okay, how do we compensate for that? So that’s a big issue.
I believe the MMTers have discussed this, but it’s not a completely cost free. If you were back in 1950, maybe it would be different when you had a younger population. But right now, when you know, good portion of the population are on retired, or on the verge of retirement. I mean it’s not a minor issue that you can just sweep away.
Intermission (23:47):
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Grumbine (24:37):
So I think one of the things that comes to mind about bonds. As a person that lives near the Pennsylvania state capitol. I know that you’re in Canada. I’m not sure the relationship here, but I imagine currency issuer currency, currency user, kind of the same, wherever you go.
But in the United States here, Pennsylvania has been largely struggling with a major budget deficit as a currency user in this currency issue, currency user relationship. And the state of Pennsylvania in particular, the city of Harrisburg where the capital is, it’s a rundown city.
It’s an old city that the primary employers are the state, couple healthcare facilities, some pseudo non-government offices like Pennsylvania Higher Education, which manages the student debt. There’s not very many employers. Basically the city was in bankruptcy. And you think to yourself, what are the ways that these states and local municipalities and cities are able to manage during downturns?
And this is where I’ve seen a role of bonds. I’d like to see, you know, block grants. I’d like to see the states rid themselves of unfunded mandates and force that onto the currency issuer. But is this not a role of bonds as well? I know we talked about retirement, but states have to have a balanced budget.
Only one state in the entire country have a balanced budget amendment because states themselves cannot generate their own currency, at least US dollar currency. Is that another role of bonds in terms of financing state and local government?
Romanchuk (26:22):
Yeah. That was the problem with my book. I said “Understanding Government Finance,” because I wanted a snappier title, but there’s a big gulf between the central government, like the US Treasury and the state and local. The Canadian system is a bit unusual internationally because what we have courtesy of the way the constitution works is that most of the welfare state is actually implemented at the provincial level.
And so we have big provincial governments. I mean, they have big bond issuing programs. They’re very sophisticated issuers and there’s no such thing as a balanced budget amendment. They have big deficits. They, in a sense, you know, they’re big and comparable to a lot of central governments out there, but the are currency users and they’re subject to default.
There was one default in modern Canadian History and that was Alberta but during the depression. Otherwise they’re very big. The question is will the central government bail them out? There’s a moral hazard issue.
But whereas in the United States, they’re much smaller, they’re limited in scope, and they do default cause like the Canadian cities, there was a default, I think, in the fifties, but basically the provincial governments have a lot more control over municipalities in Canada.
In the United States, the municipalities are much stronger constitutionally and they can get themselves in more trouble. In Canada, the provinces act like the grownups in the room and they force the cities to stay in line. So to certain extent, the management is much more professional cause it’s more centralized, but yes, I mean that has to be done through bond issuance. They can’t issue money.
And so yeah, the provincial bond market is big. It’s a big thing for retirees, but then you have the corporate sector also has to issue bonds. So even if the central government gets rid of bond issuance, the bond market will still exist.
Grumbine (28:35):
Right. So looking at again, I hate to make this so US centric, but it begs the question because we are so screwed here in the US. In Flint, Michigan, up there right near the Canadian border, you’ve got pipes that have completely rusted out. The water is undrinkable. It’s practically poison.
Obviously the capital flight, if you will, because we haven’t used our sovereign fiat currency to offset the capital flight, has left Detroit and that whole area a waste land, like a third world nation that has been bombed by like Hiroshima – it looks like if you go into some of the worst sections of it. And you go down there to Puerto Rico, another US territory ravaged by a hurricane and still not fully back on its feet.
These groups have had bonds and so forth, but the vultures have come through, picked apart their history, picked apart their art, picked apart their pieces, just like any other Wall Street story, going back to Gordon Gekko, peeling apart the airline. This is happening all over the place. And it’s completely about the race to the bottom.
When you look at Kansas, for example, where they literally eliminated taxes all together practically and let all the services in the entire community dry up. And now they are really, really suffering for that. You can see the businesses flee these high tax areas in the US and they go to the low tax sweetheart area.
I see it with Amazon recently an Washington D.C. and New York City booted them out basically, but all across the US you can see this, dare I say, sectoral balances approach to non-sovereign entities, where you can see the groups that have the business are thriving; and the groups that don’t have the business are left with destitution and urban blight.
This is another key area that I feel MMT has a really strong voice for, but it hasn’t used it. But I think this plays into the role of bonds. I think it plays into the role of fiscal policy at the federal level. And I think it definitely marries into the concept of currency user, currency issuer, to explain the concepts that are going on in these impoverished states.
What is your take on Puerto Rico and Flint, Michigan, and so forth? Because these, in my opinion, are the keys right now to understand that this is an opportunity to show the difference between Greece and, you know, the US or whatever. This is a really big deal, but what is your theoretical take?
Romanchuk (31:23):
Yeah, I mean, this is where I have to plead ignorance. See something with the situation you described, it’s very difficult to imagine happening in Canada, outside of you could point to the situation reserves, but there’s 10 provinces. They’re relatively large. Something like Flint, the provincial government, because there’s areas around Detroit, I believe, they’re doing well.
Basically people flee the inner city and they moved to burbs. There was a little bit of an effect like that in Canada, but the thing is, is that provincial level doesn’t allow that flight to the burbs to get too far. Things are more homogenized. And the other thing is Canadians are fairly ornery politically. What you see at the provincial level is new parties pop up routinely and they wipe out governing parties.
It’s very typical for a party to be in government province for 20 straight years, go into an election and lose every single seat. Basically they’ll completely wipe out incompetent governance and new party springs up and it can swing left. It can swing right. And so basically things here aren’t allowed to get that far in most cases.
I mean, there’s areas of poverty – yes. But very big ones, you know, that affect big cities, not really. It’s a very different political environment. And I don’t understand the American system. I think the difference is that the American municipalities are much stronger constitutionally. And so the fixes for coordination have to be done at a higher level of government and they don’t have that authority.
And I’m not going to tell people you gotta change your constitution, but that’s sort of the subtext. I mean, the federal government could fix these issues. The question is, do they have a legal right? And I am not the person to ask on that, that’s very simply it.
Grumbine (33:38):
Yeah. In the US they’ve got the battle. And this goes back to the Civil War and before the 10th amendment, which is state’s rights basically, and that the 14th amendment, which is the equal protection, and that battle went on. We got to see it in spades during the ACA battle when the American Affordable Care Act was passed.
The idea here is if I take away these legal aspects and differences between Canada and the US at a more generic level, if you will, you do have a hesitancy of the government to take care of these issues and more of a push to markets, which would be neoliberalism at its finest to settle these problems. And obviously, as neoliberalism dictates, they’re looking for a profit motive.
So they walk into the disaster torn Puerto Rico and find ways to profit from their disaster. And they go up to Flint, Michigan, find ways to profit on the poverty of the disaster. And this is a moralization to some extent, in the sense of should we allow this pain and suffering, but when you think about what economics is as a whole, and economics is about efficiency.
And, you know, MMT talks about full employment being the pinnacle of an efficient economy, at least in terms of, you know, that should be the base. It should be the starting point. And you look at these areas and they’re ravaged. So it’s obvious from an MMT perspective that they’re not being very efficient. They’re not being very inclusive.
They’re not achieving what they could achieve in terms of a full employment economy. And by extension only the few prosper, and that’s the vultures coming in to pick it apart. They would consider that part of the business cycle, you know, but from a standpoint of currency issuers and currency users, you would expect, or at least I would expect within the United States that we would take an interest in how we can fix these problems.
And I believe that MMT provides a lens from which to take different actions that are being taken today to address these very serious concerns. That’s me on my soap box, but I believe there’s merit there.
Romanchuk (36:06):
Yeah, basically though, if you’re a city, a sub sovereign, you never want bondholders dictating what you have to do. It’s a pretty good rule of thumb. If the bond holders are dictating what you’re doing, whether you’re a business, you’re not in a good position, you want freedom of action. And, you know, you can only do that basically by being a good credit.
You’re a good credit, it’s not really your problem. Or you can be a really big borrower and then take down the system, in which case you push around creditors. But that’s the thing is that it comes down to the government. They have no choice, a sub sovereign, you know, they’re like a corporation. They have to follow the rules that everyone else has to follow, and it’s their policy decisions.
And really the only natural way to break that, yes, the central government can go in and fix things and take more of a load; but there is the question of say moral hazard. If the central government pays for everything, you know, what’s to stop local politicians from building giant baseball stadiums named after themselves, et cetera. If you say you’re picking up all the bills, well, where’s the discipline.
So to a certain extent, it’s a political discipline and the markets show up, but it depends where you draw the line – what level of government does what, and each country is different on that front.
Grumbine (37:39):
Okay. So let me ask you this in kind of like in a wrap up here. We’ve talked a little bit about the bond role at the local and state and municipal and provincial level, but we’ve talked about it at the macro level. And we’ve talked about the criticisms of some of these individuals that have recently waded into the debate about MMT and it’s place for, you know, we didn’t say it, but let’s be fair.
It’s largely focused on this concept of a Green New Deal. How would you assess? And this is kind of like my bow tie here. How would you assess the fiscal space available to a sovereign issuing nation? Wherever it be – UK, Russia, China, Australia, Canada, US. How would you assess the fiscal elasticity or the space available? People oftentimes talk about the real resources being the constraint.
And that’s a bit nebulous. It’s hard to wrap your eyes and ears and mind around, but what would be a good indicator that we’ve hit our wall, that we’re at max capacity, that there is no more fiscal space to be had right now. How do you assess the amount of room we have to spend?
Romanchuk (39:01):
I generally look at the post 1990 datasets because that’s when things changed as Bill Mitchell described, that’s when the reforms hit the labor market, we’ve had this low inflation machine. In that entire era, no one has come close to hitting fiscal limits – it’s the reality. Your big deficits in the financial crisis, but that was just the automatic stabilizers.
I mean, with the collapse and the activity, you know, the stimulus packages were just nothing compared to the draw down, and they could have thrown way more at the economy without hitting real capacity limits during the worst of the crisis. So the issue, if you want to do it technically, we don’t have a really good dataset.
It’s all being little nudges here, little nudges there, and we’re stuck looking at okay, is the unemployment rate really low, blah, blah, blah. And MMTers, the academics, have done a lot of work on this. I’ve done . . . I mean, I’ve done . . . I’m not to say I’m an expert in what they’ve done, but you know, I’ve looked at this as part of my day job. And ultimately what tells you you’ve made a mistake is inflation.
That’s when you’re running out of resources. But if you’re doing something big like the Green New Deal, see that’s very much a real resource issue. Like if you’re doing a tax cut, you’re not really changing the shape of the economy. Like if you look at say the Trump tax cut, you weren’t doing a radical restructuring the economy, you’re just reducing the tax rate. People can spend more.
And so, you know, the traditional analysis, conventional analysis, Hey, let’s look at the output gap, wherever it is, unemployment rate, is there an inflation risk? And you could assess that fairly easily because you weren’t changing things. If you look at the Green New Deal, you want to eliminate carbon usage. That is a big change.
And you can argue as big a change as what was going on in World War II. You’re simultaneously building a renewable sector and destroying the carbon using sectors. And destroying is the word. I mean, you’re wiping out a segment of the economy. If your objective is to meet the Green New Deal objective to eliminate carbon usage, that’s a big change.
And for that, you actually have to look the engineering of it – that’s not an easy thing. I’m sort of in the peak oil camp and, you know, with a concern about the trends in energy production, it’s not an easy thing to do, but you have to figure out is this possible from an engineering perspective. And you don’t care what the dollar amounts are. You’re just looking, “Can we make the shift?
Is there enough renewable energy?” And then you can say, “Well, how do we get rid of this carbon usage? What do we do? Do we just do a carbon tax and wipe them out?” And then once you know how you’re actually implementing this, and right now the proposal is just a proposal to look at it. You’ve got to say, “What are we trying to do?”
And then once you figured that out, you’re gonna have to say, “Well, what are the inflationary implications?” And that’s because you’re going to be hitting some sectors with a lot of activity. It’s not like just tax cut going out to everyone or where everyone was rich. It’s, you’re giving a lot of money to some sectors, and it’s going to very hard. We’ll find out the hard way if the policy is implemented.
I mean, you could go in with plans, but I think the philosopher, Mike Tyson said, “Everyone has a plan until they’re punched in the face.” It’s going to be, what happens? What do you think is going to happen when you do this huge engineering change? And they’re huge. My feeling is, is that if you’re going to do it, you’re probably doing a carbon tax. And that’s it.
You do a carbon tax to get rid of the carbon users and you spend on it from a back of the envelope point of view, I wouldn’t be shocked if they were very similar magnitude. I mean, but you’d have to see the numbers. You have to see what are we doing. How big is this program? If the program is planting a few hundred trees, well, obviously it’s not a big deal, but you know, you got to know what you’re doing.
And then you have to look at that and you have to look the size of what you’re doing relative to the economy. And so there’s been nothing attempted like that in the era that I’ve looked at, there’s nothing like it. You have to go back to World War II. That’d be the only thing that’s comparable to the scope of the Green New Deal cause it’s a restructuring of the economy.
Grumbine (43:53):
I spoke with Warren Mosler a little while back. And Warren made some very astute points, points that I don’t have the wherewithal to refute, not that I would, but he made some comments. He said, “You know, getting the mobilization for a Green New Deal is going to put us up to, and maybe even beyond full employment.” And he talked about having to raid the FIRE sector for labor.
And we even addressed the fact that it may even require immigrants who have been chastised and beaten down over the years here in the States to even fulfill many of these roles. And the idea of actually getting to full employment is not out of the question. This is like a legitimate, wow, do we have any slack in the employment ranks at all?
Because to do this is going to take a full, like you said, World War II level mobilization. Then he said something very interesting that I wanted to get your technical perspective. We are talking obviously, you know, Medicare for All or universal health care is a very important thing that we’re talking about as well.
And it’s not necessarily a part of a Green New Deal, but it is part of this larger FDR Second Bill of Rights kind of push that’s going along in parallel with this. And he said something profound. And he said, “Medicare for All looks to have a deflationary bias to it.” And he said, “And it may actually require a tax cut.”
And we’d started talking about the real resources of . . . you have enough doctors, do you have enough phlebotomists? Do you have enough surgeons and so forth? Can you talk about what this whole concept of deflation is and what it might mean to an economy as you’re trying to make macro adjustments?
Romanchuk (45:54):
I mean that’s another one, and that’s interesting. I think you’re going to have to divide the short run from the long run. I mean, it depends like for the Medicare for All. So we have basically a single payer here. It was implemented in the 1950s when the medical sector was much smaller.
And so I’m not sure if there’s any parallels you can draw, but the real resources in the form of doctors and nurses, hospitals, largely exists. The question is, you know, okay, to what extent they’re under your government control. It’s in Canada, hospitals are government run. There are private clinics, like there’s some private elements to the system, but they can directly control costs of what doctors and nurses get paid.
With the US system, I don’t know how that would work, but if we put that question aside, the other thing is, while the insurance industry, it’s no longer really needed. If you went to a Canadian system, there are healthcare plans, but they’re very minor. They’re very incidental.
Like for example, if you want to get a blood test, you can either stand in line and wait at 7:00 AM for your blood tests outside in December, because everyone shows up at the same time. And because you fast overnight, or you can go to a private clinic and pay 15 bucks for the blood test and then insurance will cover that. But there’s basically not a huge role for health insurance.
So, well, that’s an industry that basically disappears off the face of the earth. That’s a deflationary shock in the short term. But in the long term, people or corporations are no longer paying those healthcare premiums. Healthcare premiums are effectively a tax. You can think of them as a tax going to the health insurance paying for it.
So that is like a tax cut. So in the long run, I think, yes, eventually once you get the deflation shock out of the way, all else equal, taxes would probably go up; but it’s probably less because if costs are controlled, it would be less than what you did as the reduction in premiums – but you don’t, that’s the thing – is that in the real world, you know, taxes should set at a macro basis.
So it’s very hard to say this tax is paying this. Then that’s the thing – what’s the pay for – the MMT is, you want to get away from that thinking.
Grumbine (48:23):
Yes.
Romanchuk (48:23):
But realistically, I mean it’s not a free lunch. The healthcare in the steady state, you know, you’re going to be spending money on it, which you weren’t spending on before. Presumably this thing, I mean, it may be the tax. Maybe there’s the deductibles or something like that, that are coming in like a payroll tax. And that depends on the program, but there would be a short versus a long-term perspective.
Grumbine (48:49):
So, Brian, I want to thank you very much for spending this hour with us. This was amazing. I hope you’ll come back and join us again.
Romanchuk (48:56):
Sure.
Grumbine (48:56):
I absolutely love hearing you talk to me. This is just . . . I’d love to dive into Canada as well. We have a following out there. It would be great to be able to provide some good content as we address the Canadian economy as well.
Romanchuk (49:13):
To be honest though. I mean, I don’t do a whole lot of economy following. That’s a full-time job and I’m more on the primer side, but unfortunately I don’t have as big a Canadian following. So I tend to write more about US data. I can take a look at the Canadian situation again, but I found the page views for Canadian content for me was much lower. So I said, “Okay, let’s talk about the US labor market.”
Grumbine (49:39):
Demand. All right, man. Well, look, thank you very much. We’re going to go ahead and end the show. Folks, thank you. We have Brian Romanchuk with us today. Thank you, sir. We’ll talk to you soon.
Romanchuk (49:47):
Okay. Thank you.
Ending Credits (49:55):
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