Episode 191 – Can We Make Money Work For Us? with L. Randall Wray

Macro N Cheese – Episode 191
Can We Make Money Work for Us? With L. Randall Wray
September 24, 2022

 

[00:00:05.730] – L. Randall Wray [intro/music]

Economists are very famous for saying there’s no such thing as a free lunch. Well, my argument is both of these things are not just false, they’re grossly false – that free lunches abound, and that by avoiding taking free lunches, we live way below our means.

[00:00:29.970] – L. Randall Wray [intro/music]

The US. Government doesn’t spend by issuing currency anymore. It spends by having the Fed credit bank reserves.

[00:01:35.130] – Geoff Ginter [intro/music]

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

[00:01:43.110] – Steve Grumbine

All right. And this is Steve with Macro N Cheese. I have a great podcast – I think it’ll be a great podcast – lined up with none other than Randy Wray or L. Randall Wray. And Randy is an expert on MMT. He’s a professor of economics at Bard College and a senior scholar at the Levy Economics Institute, author of many books, and the guy who wrote probably the most important one, which was the Primer to Modern Money, which you could have found in blog posts on New Economic Perspectives.

However, he has written many new books, including the one we’re about to discuss, which is “Making Money Work for Us: How MMT Can Save America”. Now, this has an American flavor, and for our international guests, you already know a lot of this stuff is very similar. So, Randy, thank you so much for joining me today, sir.

[00:02:40.610] – L. Randall Wray

Yeah, thanks for having me back.

[00:02:43.230] – Grumbine

It is genuinely a pleasure. I really appreciate the way you frame things, and I really appreciate you writing this book. I was able to read the PDF version of it, and it’s just going to be an excellent resource, especially for activists that need that next level of push. I think you did a great job of capturing the stuff most of us already knew and adding a lot of nice features specific to the United States. What caused you to decide to write this book? You’ve written so much.

[00:03:19.890] – Wray

Yeah, well, actually, it’s kind of funny, I guess. There was a period back when the New Economic Perspective’s blog was very active—I was writing a lot on there. Stephanie Kelton and I had been reading George Lakoff on framing, and so I wrote a short series of blogs on framing. And then one of the money networks—you probably remember which one, I don’t—put those together into a very small PDF book, so I had that kicking around.

And then one of my former students from Levy, Heske van Doornen, happens to be a very good artist. And so we started out with a cartoon book, and I used parts of that. But then I expanded it to go through all the main issues that you need to really understand what MMT is about. And we put that together and sent it on to Polity Press.

And the problem was that there were too many words for a cartoon book. And so I took the words and added to it knowing that there would be no pictures, just words, and I made it a little bit more rigorous than what was originally planned. And so I have put that out as a separate book and the cartoon book is waiting in the wings and will be out soon after this one. And it has very few words, so it will make similar arguments but with fewer words. It’s really designed even for public schools and also activists who don’t want to sit down and read a 160 page book.

[00:05:23.190] – Grumbine

It’s not long.

[00:05:23.190] – Wray

Yes, this is short. This is a relatively short book, but we wanted something much shorter that someone could sit down and go through in 1 hour easily with pictures that help to explain the main ideas. So anyway, this is the wordy version and then the picture version will be out later.

[00:05:41.910] – Grumbine

Well, it was incredibly good because not only does it provide some really great quotes and some really great framing. I like the way you frame things. You make them very simple. You typically don’t assume a lot of knowledge either when you make statements. They’re usually able to be put in front of someone who maybe hasn’t had a deep understanding of the stuff.

And I really appreciate that too, by the way, because there’s a lot of times, even myself included, just as an activist, where you just make a lot of assumptions and the things you say are assuming the person has prior knowledge that most don’t have, even people that have gone through economics classes in college. This is really powerful. And you start out with “what is money?”

And before I get there, I want to say your reference to Heske…she put together a great cartoon about the start of money and talked about when a sovereign king would issue money. And it’s just one of those great infographics. I think that was back when they were doing the Minskys and I think it turned economic questions. But it is one of the best little cartoons.

I had no idea she did it either until I shared it one time without attribution, because it is fantastic. I still use it to this day. You start out with “what is money?” What is money, Randy?

[00:07:01.540] – Wray

Yeah, I do start off in the typical way it’s done in economics textbooks and also the way that people think about it. Money is what money does, sort of a functional approach: oh, I can use money for this, I can use money for that, and so on. Then I say: but that doesn’t really get to the nature of money. What is money really?

And I think I add the analogy of— it’s like defining a human as something that sits on the couch and munches chips while watching a football game. That doesn’t really get to the nature. Humans do do that, but humans are more than that. So, anyway, then I go through examples. We take a coin, or if we take a green paper dollar bill in the US, a pound note in Britain…

What is that thing? Well, it is an IOU of the government. What is your bank check? Well, you’re ordering the bank to make a payment for you. It’s your IOU. Technically it’s the bank’s IOU, but you owe the bank and the bank is going to debit your account. And so we go through all the different kinds of monies that people have used back through time and they all share that characteristic.

They’re all the IOU of the issuer and they are the credit of the holder. So it’s kind of funny to think of it this way, but if you’re holding a dollar bill, the government is the debtor and you are the creditor. Most people never thought that they were the creditor of the US government, but that’s exactly what they are if they’re holding the government’s IOU.

[00:08:56.930] – Grumbine

No kidding. We didn’t get to ask them for their creditworthiness, did we. It didn’t much matter. We took their credit anyway.

[00:09:02.430] – Wray

Yes. And then we go through “why is it that we will accept it without any reservation at all?” There might be some crazy people who wouldn’t take a dollar bill, but you don’t find those people very often. So why is it that they will do that? And what is it that makes you want to hold that? And so it goes through the typical MMT point is, taxes drive money.

And then we can generalize that, too. You will accept a bank IOU—that is, bank money—because you know that the bank will accept it from you in payment to the bank. So you can repay your bank loan by using bank money. And I use Eric Tymoigne’s great example of pizza coupons to get even further. Now, no one would want to call a coupon for a free pizza “money,” but it is an IOU.

It’s the IOU of the pizza joint. You can present that and receive a pizza back. So what does the pizza joint owe you? A pizza, if you hold the coupon. And then we go through when you return an IOU to the issuer, whether that’s a dollar bill returned to the US government or a bank IOU returned to the bank, or a pizza coupon returned to Joe’s Pizza, what do they do with it?

Obviously, they throw it away, they burn it, they tear it up, they shred it. Because when your IOU has returned to you, we call that redemption, and you are no longer in debt. Joe’s Pizza no longer owes you a pizza, once you have submitted that coupon and they have given you a pizza in return.

[00:10:54.090] – Grumbine

It’s funny, I used to run Sbarro’s, the Italian eatery, and we had all these little coupons that they would give us to hand out. And I remember standing at the island in the turn lane as you come into the mall because Sbarro’s has got a mall footprint. We would have the coupons from the headquarters, and then I would go out there in a goofy outfit, because I’m flamboyant like that, and I would hand out these coupons to cars at the stoplight.

And then when they would come into the building, I would fry up a little bit of extra garlic so that they would smell garlic and they’d come naturally over to our counter. They would have those coupons in hand and they would cash those coupons in. And when we received those coupons, what are we going to do with them?

Well, in our case, the next day I went back out to the island and reused those coupons, but we didn’t have to. We could have deleted them. We could have ripped them up. We could have tossed them. It didn’t mean anything. They were there to serve a purpose. And the piece of paper wasn’t the purpose. The piece of paper was access to the thing of value, which was a reduced price on the slice of pizza, which we as the debtor, I guess, in this case, owed them $0.50 off their slice or whatever it was. Is that a similar analogy we’re talking about?

[00:12:11.410] – Wray

Yes. When the coupon comes back to you, or when a dollar bill goes back to Uncle Sam, it’s not an asset. You are no longer in debt, but you would never count that as an asset. The pizza joint could choose to reissue the coupon and then it’s in debt again. Or it can choose to toss it into the fire in the pizza oven, either one, because it is just a piece of paper when it’s sitting in the pizza joint, or if it’s sitting at the Federal Reserve Bank, it’s just paper.

So you can tear it up, you can shred it, you can put it in little baggies and give it to the people who take the tour of the Fed, which they do as a souvenir because it’s just paper. If it’s cost-effective to reissue the coupon, if it’s still in good shape, sure, you can do that; and then you’re in debt.

[00:13:04.830] – Grumbine

Within the framework, we have a federated approach to money, tiers of money of sorts. We know the federal government being the currency issuer, who that liability belongs to. That liability is theirs; they’re issuing that tax credit. However, at the state level, they don’t get to create tax credits. They need those tax credits to spend.

They are only deleted when they’ve done their job at the federal level, and that’s to receive back as a tax. Can you explain the kind of relationship between the different levels of government in the United States—the currency issuer, currency users—and how that plays out between the two?

[00:13:44.190] – Wray

Yeah. The U.S. Constitution says that only Congress can issue the currency. And so in the beginning, that was a responsibility of the U.S. Treasury that had been granted by Congress to the U.S. Treasury. In 1913, we created the Fed. So the Fed is our central bank. We’re pretty unusual. Other countries had created central banks back at the end of the 17th century, so we were a relative latecomer to central banking.

But at the time that we created the central bank, both the Treasury and the Fed issued paper notes. Eventually the treasury stopped issuing them altogether, and they’re sort of collector’s items now, and the Fed took over the sole responsibility for issuing the currency. But it only does this to accommodate the demand for currency. So the US government doesn’t spend by issuing currency anymore.

It spends by having the Fed credit bank reserves. So we could go through that in more detail later. Really, most of the federal government spending—well, all of the federal government spending now—takes the form of credits of bank reserves by the Fed. Anyway, getting back to the Constitution, so our 50 states are not allowed to issue currency.

There has been talk occasionally of issuing tax credits that could be used to pay taxes, especially in crises when states have large budget deficits. For example, when Arnold Schwarzenegger was governor of California, there was some experimentation of this. But this is pretty unusual behavior. For the most part, our states use the national currency. They are not currency issuers. They are currency users in our republican form of government.

[00:15:59.290] – Grumbine

Very good. You go into some different quotes, and you were kind enough to pass some of these on, and I just want to get them in. And we just touched on this is, anyone can create money. The problem lies in getting it accepted. Who is the one that the quote came from?

[00:16:17.410] – Wray

Well, this was Hyman Minsky’s saying. I heard him say it many times in class. I was one of his students. And what he was getting at was that anyone can issue, in the United States, a dollar-denominated IOU. You might also try to issue a Euro-denominated IOU or a pound-denominated IOU, but in the U.S. mostly you’re going to issue dollar-denominated IOUs.

The problem is to get someone to accept it, so I can write “IOU $5.” And if you will accept it, I have created a monetary IOU. In the book, I go through these examples and talk about “what is it that will make your IOUs more acceptable?” But then I conclude, probably we wouldn’t want to call Steve’s IOU “money.” We would want to call it a money-denominated IOU.

It’s going to have a pretty narrow range of circulation among your friends and your family, whereas a bank IOU, I think we want to call that money. That one is going to have very wide circulation for a couple of reasons: one is that Uncle Sam stands behind the bank’s IOUs with FDIC insurance. If the bank defaulted and for some reason refused to accept its own IOU back, Uncle Sam will make sure you get paid in some other form of money.

We also have the Fed that guarantees the liquidity of bank IOUs, which means how fast can you get cash if you decide you don’t want to hold the bank’s IOU, and with the bank, you can basically just go to the ATM machine and get cash out. And then finally, another reason why bank IOUs are widely accepted is because so many of us owe banks.

Banks are the most important financial institutions that we have in the United States, in which we hold deposits and make payments through those deposits held at banks. And so we know we have to make lots of payments to and through banks. So we’re willing to accept the bank IOUs. For example, your paycheck is going to be a bank IOU, and you’re willing to accept that. So we want to keep it pretty narrow, our definition of money, even though anybody can write “I owe you $5.”

[00:19:02.830] – Grumbine

Okay, I get it. Question: you go into talking about where money comes from, which we just talked about, but I think that there’s an abstraction above that. I’ve heard Warren [Mosler] talk about money being a tax credit. We mentioned it as a unit of account. I know you said that because of the Constitution, that Congress has authority and that we’ve passed on the money creation from the Treasury to the Federal Reserve in 1913.

But in general, though, money comes from anyone that can write an IOU. But we’re dealing with the currency being a form of law. This is a patented legal construct that the United States government owns. In other words, it can’t borrow its own IOU from someone else. It’s the creator of as many IOUs as it wants. Is that a fair statement? Can you explain that?

[00:20:00.730] – Wray

Okay, first, the main point that MMT makes is that the need to pay taxes or other obligations to the issuer of the currency ensures that there will be a demand for it. So it absolutely guarantees there will be a demand for dollars if you have to pay taxes in dollars. So that is what drives the currency. On top of that, we can add things like a system of laws and enforceable contracts and say that we will enforce debts in court, payable in U.S. Dollars that will also add an additional demand for dollars.

We often call this the “fiat money promise,” and it says right on the dollar bill, this is good for payment of all debts, public and private. So that’s the legal fiat nature of money. But not all currencies have had that, and we know that it’s not always enforced; it’s difficult to enforce payment in dollars. You can try to buy drinks on the airplane with a $5 bill and they’ll say, no, we don’t accept that here.

[Georg Friedrich] Knapp, who’s sort of the father of the state money approach, said that fiat money is just a pious hope, but taxes are a different matter altogether.That’s more than a hope. Payment of taxes in dollars is enforceable. About the borrowing your own IOU  — this would be a nonsensical operation. The accounting makes no sense.

I write some IOUs, I owe you $5, and I owe you $4, and I owe you $3. And I say, I really need to borrow. I better try to borrow my IOUs from the people I have already written IOUs to. That would be a senseless operation. If you want to go further into debt, you just write another IOU. It would make no sense for the federal government to borrow its IOUs back in order to spend more. It just issues more IOUs.

[00:22:32.110] – Grumbine

Okay, so you go into chapter three and you talk about “can we have too much money?” And I would suggest going back to the very first MMT conference in 2017. Steve Larchuk talked about a money famine. So we know that we can have not enough money. You’re asking the question, can we have too much money? And you have the sound-money gold bugs talking about the Cantillon effect. Can we have too much money?

[00:23:03.130] – Wray

Yes, we surely can. Usually our problem is that there’s too much bank money, and the usual consequence is a financial crisis. So what has happened is that banks have financed too much speculative activity that goes bad. And so the result of too much private bank money is usually a financial crisis.

I could conceive of banks financing too much real activity that is actually trying to produce too much stuff, trying to purchase too much stuff. So the banks are making loans to finance spending and production, and we get beyond the capacity of our economy to produce real output to meet those demands. I could conceive that could possibly happen.

I think it’s extremely rare. Usually they’re not financing enough of the real activity. Their problem is they finance too much financial speculation and then that leads to some kind of a financial bust. So that’s the usual consequence of banks creating too much. Could the government create too much? Yes, it can. If the government starts spending too much, especially if it’s not targeted spending, and especially if it is not spending on a fixed price – which I’ll come back to in just a second – so that it’s willing to pay whatever the price that is necessary to buy all that it wants, it could cause prices to rise, and we would call that inflation.

So in other words, the problem of too much government money creation to finance government spending is more likely to be inflation rather than financial instability. Now, what’s this fixed price/floating price idea? Let’s use the Job Guarantee, which is a favorite policy proposal of MMT. Let’s say that the government says, we’re going to pay $15 an hour, and we will hire anybody who is willing to work at $15 an hour.

That’s a fixed price. It’s very difficult to see that that could ever lead to too much spending by the government because only the unemployed are going to show up—people who are willing to work for $15 an hour. And once you’ve exhausted that supply of people willing to take jobs, you don’t spend any more. So spending on a fixed price policy is not going to be inflationary.

If, however, you said, “we’re going to hire 25 million people and we don’t care what wage we have to pay, we’re going to reach that bar,” that could be inflationary. Unless you happen to have 25 million people who are willing to work at the existing going wage, you’re probably going to cause some wage inflation, which could lead to some price inflation.

So it makes a difference what sort of a price scheme the government adopts and also what the government is trying to buy. Let’s say we’re going to do the Green New Deal and we want to transition to solar energy, and the government says, we will spare no cost. We’re going to completely convert to solar energy within the next year and a half.

You could see how that could probably lead to some inflation of the prices of various things that go into producing solar panels because we have resource constraints. So it also depends on what you are buying. If you’re targeting your spending to areas where you have excess capacity of both factory potential and also labor supply, then target where you have ample capacity, you’re not going to be inflationary. If you instead have a generalized increase in all kinds of spending, you could possibly generate some inflation pressure.

[00:27:35.830] – Grumbine

This is probably the most challenging aspect that I think MMT is hitting in public spaces is this concept of printing money. There’s too much money chasing too few goods. Mosler would tell us that that’s completely wrong. Is it really a matter of the quantity of money or the amount of spending on specific things that are exceeding the real resources underlying its purpose? In other words, it’s not about money in the economy, it’s driving inflation. Is that really the issue, or is it the actual number of dollars in circulation that has any bearing whatsoever on inflation?

[00:28:19.810] – Wray

Yeah, money cannot cause inflation.

[00:28:23.590] – Grumbine

Right.

[00:28:24.470] – Wray

I can state that unequivocally. I give an example in the book. So the government prints up a gazillion dollars, puts it on a spaceship and sends it to Mars. No inflation. So the creation of the money doesn’t cause any inflation. Then Musk flies to Mars, brings the gazillion back and starts spending like a whirling dervish — inflation. So, you blame inflation on spending, not on money.

Spending can cause inflation. When we had the first round of Covid relief checks sent out, there was no inflation. Why? Because people were very scared of the future. We had locked down, you couldn’t go out to restaurants and so on, and so what people did was they paid down bills — a lot of those were overdue bills because people had lost their wages — and then they saved the rest. There was no inflation.

The second round, Covid went on a lot longer than anyone thought that it would. We had supply chain problems all over the world. We had large parts of China in complete lockdown, and we rely a lot on consumer goods from China, and people felt more comfortable about spending the second round of checks, and given all the supply constraints, the sellers were able to raise the price—and so we got some inflation.

The problem was not the money because when people received the first round of checks, which was approximately the same amount, it caused no inflation. The second one did result in some inflation. Now, I want to emphasize this was not a demand-side problem, it was a supply-side problem with a huge collapse on the supply side when people started spending in some cases, and there was a lot of price gouging markups and profits reached record levels as sellers took advantage of the recovery of demand that was boosted by the checks. So spending can cause inflation, money cannot.

[00:30:47.110] – Grumbine

When we’re talking to a politician (or) media outlet, the frequent statement is simply “they printed money, therefore we have inflation.” We can pretty much put that one to bed right now. The issue comes down to that we spent past the productive capacity in a given area and now we have a combination of gouging and simply supply-side shortages. Because people are bidding for those scarce resources, the price goes up. It’s not an issue of the money per se, it’s an issue of a scarcity of real resources.

[00:31:25.270] – Wray

Yeah, MMT prefers targeted spending. I don’t think any MMT proponents were out there telling presidents Trump and Biden “you ought to mail checks to everybody whether they need the money or not.” It was a bad idea. Targeted spending would have been much better. We should have restored the wages of everyone who had lost their job or could not go to work.

That would have made more sense. We could have put people to work helping us to fight the pandemic. There was a lot that people could have done that would have been useful, and by targeting the spending it would have been much easier to match the resources that we have with the amount that we are spending. If you just mail out checks to everyone, you don’t have control over that.

[00:32:21.310] – Grumbine

The question that most folks have at this time: the unrivaled monopoly power of the establishment with the media; they have a narrative, and penetrating that requires far more resources than we have here. And I think that even with all the noble efforts of activists and academics that have been exposed and now radicalized to some extent with this knowledge, it’s a real challenge because everywhere you go, the wrong framing is being reinforced.

I guess the next question is the national debt, deficits, which I believe one of the quotes that you have in there is “there’s no such thing as deficit spending.” Spending happens the exact same way regardless, and that the deficit is recorded after. Can you explain that? And then we’re going to roll into balanced budgets.

[00:33:20.230] – Wray

Yeah. So everyone thinks that government faces a choice of spending tax revenue or borrowing from savers or printing up money. The safest is supposed to be “spend the tax revenue, because then the government is not going into debt and it’s not going to cause inflation because you’re giving up your income so that the government can spend.”

So we’re not really adding much net spending to the economy. So that is supposed to be the safe, sustainable way to finance government spending. “In a pinch, it might be okay for the government to borrow a bit.” So you issue some debt, like in recessions or in a health pandemic that we went through, it might be okay to borrow temporarily.

And then “you need to offset that by running a surplus, that is, spending less than your tax revenue and then pay back that debt.” Okay? And then the final one is printing money and oh, that’s the worst one by far because “that means inflation, because money causes inflation.” The reality is there is no choice. All government spending takes exactly the same form.

As I was saying before, the Fed will credit the reserves of a private bank and the private bank will credit the deposit account of the recipient of the government spending. Whether the government is buying from a contractor or making a Social Security payment to a retiree, this is the way all government spending occurs. There is no other way.

Since 1913, when we created the Fed, all government spending takes exactly that form. Taxing just reverses it. So when you pay your taxes, your deposit account in your bank is debited and your bank’s reserves are debited—where does the money go? It’s just a debit. It’s just a balance-sheet operation. It’s an electronic debit of your account. It doesn’t go anywhere.

There’s nothing for the government to spend. You can’t spend negatives. It’s just a negative subtraction from your account. When the government is spending over the course of the year, we can make a projection and say, well, we think the government is going to have a deficit of $1 trillion this year. We do not know. We will only know after the fiscal year is over.

And we tally up all of the government spending and tally up all of the tax revenue and subtract. And if we get a negative number, we say, oh, there was a deficit, the spending was greater than the tax revenue. We’ll total it up at the end of the year and in fact, we will revise that several times over the course of the next couple of years as they look more carefully at all of the accounts and tally it all up, and they will say, oh, well, we were off a bit.

It was only $800 billion. The point is that as we move through the year, on any given day, during any given week, over any given month, we don’t know what the difference between the spending and the tax revenue is. We total it up at the end of the year and we’ve adopted procedures that have been explored by MMT.

This gets more complicated, but work by people like Eric Tymoigne and Scott Fullwiler and Stephanie Bell–before she became Kelton more than 20 years ago–started this analysis to see what are the special operations that the Fed and the treasury work out to make sure that treasury checks never bounce and so on. They’re complex, but more or less it will be true that at the end of the year if we total up all the spending and the tax revenue and we find that the deficit total is a trillion dollars, there will be more or less about a trillion dollars of government bonds that will have been sold into the economy.

And all of those bonds have to be held by somebody as financial wealth. And the government’s deficit will equal the surplus of the non-government sectors, households, firms, and foreigners. And that surplus will be held in the form of the government’s debt. That $1 trillion. So what budget deficits do is they add spending into the economy, that spending gets accumulated as saving by the non-government sector in the form of the bonds that the government issues.

So the government debt is our wealth. When the government runs a deficit of a trillion and adds 1 trillion of debt into the economy, that trillion of debt is our financial wealth and it’s held in the safest form on planet Earth, which is U.S. Government bonds.

[00:39:02.270] – Intermission

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[00:39:53.490] – Grumbine

One of the other key policies, Zero Interest Rate Policy (ZIRP)–the idea of not selling bonds anymore. I’ve listened to old recordings of you talking about how the issuance of bonds is a gold standard anachronism, that doesn’t do what it once did. It doesn’t serve the purpose in that a sovereign currency issuing nation on a fiat currency no longer needs to.

I think Beardsley Ruml in 1945 said that we’re removed from the markets now, the control of the markets. Basically the bond vigilantes have no power over us anymore, is what I read that to say. And yet they do. Whether it be just because we accept them to have that power or not is another story. But talk to me about that. What is ZIRP, why does it matter? And what would that do to the framework you just laid out?

[00:40:48.270] – Wray

Okay, if we go back before the global financial crisis, the Fed was actually prohibited from paying interest on reserves. The Fed wanted to pay interest on reserves, and banks wanted the Fed to pay interest on reserves, because when banks held reserves, they got no return on it. It’s like having a savings account that gets a zero interest rate.

And we don’t have to feel too awfully sorry for the biggest banks. But in the U.S., we had 17,000 banks not long ago. We’re down to about 4,000 now. But we have lots of small banks and they would hold reserves and not earn any interest on them. And so they wanted the Fed to pay interest on reserves. Congress finally allowed the Fed to start paying interest on reserves in the global financial crisis, as sort of a prelude to doing quantitative easing, which was going to take all the bonds out of bank portfolios and substitute those with reserves.

Now, if the Fed had done that and paid zero interest on reserves, you would have banks giving up bonds that might have been paying 4% and then holding an equivalent amount in reserves that paid zero. You’re going to greatly reduce the interest earnings of banks, which means greatly reduce their profitability. And the banks were already in trouble because of the global financial crisis, because they had made all sorts of bad loans.

So, it was sort of a precondition to running quantitative easing to have the Fed start paying interest. So we do pay interest on reserves now, and those are a perfect substitute for short-term government debt. The advantage is that the Fed is directly determining what that interest rate is going to be, what interest rate it’s going to pay on reserves, and we don’t have to sell any bonds, and we never have to worry about an attack by bond vigilantes.

And the Fed can still use interest rate policy in the manner that it is using now. Which I have always opposed. Because the Fed is biased against labor. And the Fed doesn’t usually want to come right out and say it. But if you read the transcripts from their meetings, you know that they discuss this. That the way that they perceive interest rate policy working is by causing unemployment.

So what they’re trying to do now is cause unemployment in order to fight inflation. I think this is a big problem. So anyway, many people have argued that we should eliminate the bond sales, but also mandate that the Fed’s interest rate target should be zero. This is what ZIRP is, zero interest rate policy. So we get rid of the bonds, we get rid of the bond vigilantes and we prevent the Fed from doing what it’s doing right now. So we would move to zero interest rate policy and banks would just have to hold reserves that would accumulate with the government’s spending in excess of tax revenue.

[00:44:20.910] – Grumbine

Fair enough. Which brings me to this great circle, which is “balances balance.” I know the great sectoral balances graphs that we get from the St. Louis Fed where spending mirrors debt. What do you mean by balances balance?

[00:44:38.130] – Wray

Well, the strange thing is, people talk about “a government deficit is an imbalance,” a trade deficit is an imbalance. But we know at the aggregate level that the balances have to balance. That’s why we use this term “balance.” Imbalance is not possible. If I’m a creditor, you are my debtor. We must balance. Your IOU is my asset, that’s why I’m your creditor.

But your IOU is your debt. That’s why you’re the debtor. So looking at only one side of that makes no sense at all. Yeah, it has to balance. For every creditor, there has to be a debtor; for every debtor there has to be a creditor. So if Uncle Sam is a debtor, it makes no sense to say, “oh, that’s an imbalance,” because it has to be balanced, someone has to be the creditor. So anyway, that’s the idea.

The credits and debits must balance. That is looking at the debt and wealth, but it’s also true of the incomes. So you spend more than your income, that’s why you’re a debtor. I spend less than my income, that’s why I’m the creditor. I get to accumulate wealth in the form of your IOUs because I’m thrifty; I spend less than my income. And you increase your indebtedness because you’re a spendthrift— you spend more than your income. It has to balance. Now, in the case of you, you have a limited lifespan, unfortunately.

[00:46:32.310] – Grumbine

Very true.

[00:46:33.870] – Wray

And at some point I’m going to start worrying about your death and I want to be paid before you die. I don’t want you to die and then just default on all that you owe me. So when we’re talking about private debts, we have to think about eventually being repaid. I’m perfectly happy with you just to pay me interest for a long time, but I also know there is some end point out there.

So I want to be repaid at some point in time. If we think about Uncle Sam, he doesn’t have a finite lifespan. Now, no government has ever lasted forever, but we always like to pretend like our government will. So the truth is that Uncle Sam never has to repay his debts because he’s a going concern with no finite lifespan. And if Uncle Sam does die, our nation collapses.

Worrying about his debt is going to be the least of our concerns. So we have this fiction that, yeah, he’s going to go on forever and his IOUs are perfectly safe so he doesn’t have to repay those. We’re perfectly happy to hold his debts forever. And in fact, Uncle Sam only repaid his debts one time in US history. That was 1837. That was President Andrew Jackson.

And we went into our first Great Depression that year when Uncle Sam did repay all of his debts and he never did it again. We’ve had very short periods of time where Uncle Sam repaid a small part of his debts, and those were always followed by depressions too, except for Clinton’s short period of time where Uncle Sam repaid some of the debt and then we went into the global financial crisis.

So there’s a very interesting correlation there. It’s not good for us when Uncle Sam repays his debt. We hope he learned his lesson and will never try again because we don’t want another Great Depression or a global financial crisis. And there’s no reason why you should. So we can continue with Uncle Sam always increasing the outstanding quantity of debt, which means we are always increasing our outstanding financial wealth, which is claims on Uncle Sam. And this can go on forever. It’s perfectly sustainable.

[00:49:09.690] – Grumbine

Amazing. And I guess that brings me to a question you brought up, even though I don’t know that’s related, but I think it is, and that is the Federal Reserve acts at the behest of Congress. But a lot of people will say that the Federal Reserve backstops the financial corruption of the global financial crisis. And then people say it was quantitative easing that did it.

What are we talking about when we say these sorts of things? They’re said by lay people trying to make sense of a crazy world within the frame of “balances  balance” and understanding that Congress has the constitutional authority to create money. What’s the Fed’s role in this, what do they do with QE? And why does that matter to us?

[00:49:56.580] – Wray

Okay, so QE was a policy of buying massive quantities of bonds. A big part of that was buying government bonds. My argument would be that had virtually no impact whatsoever on the economy. It slightly reduced bank profitability. That’s all that it did. It substituted interest-earning reserves for interest-earning government bonds.

So, from the point of view of “did that help the economy recover? Did it help financial markets recover?” The answer is no, not at all. It’s a smoke screen. It’s the wizard of Oz with smoke and mirrors doing nothing at all. A large part of the Fed’s purchases, though, were mortgage-backed securities. And this was to try to restore the market in mortgage backed securities, which had collapsed because so many of those securities were of very questionable value and were worth zero.

Because the mortgage loans were fraudulent on the part of the lenders, not on the part of the borrowers. They were fraudulent loans. They could never be repaid, and the underlying mortgages weren’t worth anything. The homeowners defaulted on them. Now, we don’t know exactly what kinds of mortgages the Fed bought.

The Fed claimed that these were all government-insured mortgages. So, Fannie Mae, Freddie Mac, guaranteed mortgages. So that in a way, Uncle Sam was already on the hook because the mortgages are guaranteed, which means if the homeowner borrower doesn’t repay, Uncle Sam has to pay. This could be true. I’m a bit doubtful, but we don’t know the answer to that.

So it is possible that part of QE may have played some kind of a bailout role. But if the Treasury was already on the hook, you could say, okay, so the Fed bailed it out rather than the Treasury bailing it out. Big deal. What was far more important, far more questionable, and lots of it actually illegal, is that the Fed lent and purchased assets through other facilities, not quantitative easing.

There was a whole alphabet soup of special facilities that allowed the Fed to buy bad assets and to make loans to try to save insolvent fraudulent financial institutions. We did a study at the Levy Institute funded by the Ford Foundation. Andy Falkerson and Nicola Matthews did most of the work for me on this, and found that the Fed spent and lent $29 trillion through this alphabet soup.

This dwarfs all of QE, was far more directly involved in bailing out financial institutions. That’s the real scandal. It’s not the QE. It is the alphabet soup of stuff that they did. And if you want to read a more easier exposition of this, Matt Taibbi’s work on The Real Housewives of Wall Street, he looks at one of these programs in which the Fed was making non-recourse loans.

That means if the borrower couldn’t make a payment, they didn’t have to. So it’s non-recourse to the housewives of the CEOs of Wall Street banks to buy bad assets. And if the assets didn’t turn around, “don’t worry, you don’t have to repay the Fed.” This sort of stuff is what they were doing. Lots of it was illegal. By some estimates, maybe 40% of all of that activity was actually illegal, according to the Federal Reserve Act. The Fed’s not allowed to do this sort of stuff—and they got away with it.

[00:54:21.570] – Grumbine

Wow. So this is, in essence, the thing that enabled and empowered groups like Countrywide and Bear Stearns to basically get away with the looting of people’s properties during that time period. All the elite control fraud that guys like Bill Black brought out. Is that a fair statement?

[00:54:43.660] – Wray

Yes. And of course, Bill Black was my colleague at UMKC, and he was very well-known for exposing what had gone on in the savings and loan crisis and wrote the book The Best Way to Rob a Bank Is to Own One. And he pointed out in the Savings and Loan crisis, 1,000 top CEOs and so on, top management of the thrifts, went to prison.

And in the case of this fiasco, which is much, much bigger because the banks are much bigger than thrifts. We had banks that had assets of three to $4 trillion, individually, so they’re much, much bigger. And the scale of their frauds was much, much bigger than what the thrifts had done. And none of those top people went to prison. Bill and I wrote about a vice president of Bank of America who actually got convicted of fraud. She’s one of the very few, but she didn’t have to serve time.

[00:55:49.450] – Grumbine

I know that was a little off-script there, but thank you, Randy, for that. I appreciate that. So the next chapter, which we’ve kind of talked about is “life is full of trade offs.” And I hear Stephanie frequently talking about offsets, World War Two and the selling of war bonds and having to delay purchasing power by selling war bonds to extract some of the aggregate demand from the economy, since all the production was going to the war machine. Are we talking about that or something entirely different?

[00:56:22.570] – Wray

Well, economists generally think there’s all these trade-offs and we’re always making decisions. And if we decide that the government is going to spend more and that we’re going to have more public-type goods and services, that means we must have less private production and provision of private goods and services. There’s supposed to be this trade-off.

And economists are very famous for saying there’s no such thing as a free lunch. Well, my argument is both of these things are not just false, they’re grossly false, that free lunches abound and that by avoiding taking free lunches, we live way, way below our means. And that depresses the path of the growth of our economy, which means that we get even less in the future.

So what do I mean by free lunches? If you have resources, especially labor, that are unemployed, you’ve got a free lunch. You can put it to work. And by keeping people unemployed, not only are they and their families suffering a loss of wages, but society itself suffers. There are individual costs of being unemployed that go way beyond the lost wages, and there are social costs that go way beyond the lost potential output that we could have had–because unemployment has severe social and psychological consequences. So what we need to do is try to put those resources to work, and that will give a free lunch.

[00:58:16.150] – Grumbine

I know years back, J.D. Alt, who was a frequent writer over at New Economic Perspectives, wrote “the oppressive free lunch” because Paul Ryan had come out and told this tale about how a child went to school and was on the free lunch program. But it was so oppressive because he just wanted a brown paper bag sealed with a kiss and a love note from mom. And they talked about how “there are no free lunches.” This just won’t go away. This is so ingrained in the American society. Is there any appetite for doing great things? Are we really trapped in this oppressive cycle?

[00:58:56.470] – Wray

Well, it is extremely difficult. We went through this long period in which the so-called Phillips curve, which is the idea that there’s a trade-off of unemployment for inflation, was thrown in some disrepute because if you plotted the inflation rate and the unemployment rate there was no correlation between the two. The unemployment rate went up and down.

The inflation rate remained very low for a long period of time. And so we were hopeful that we’d put a stake through the heart of the Phillips curve. But now it’s come back. The inflation rate went up and it’s not too hard to identify what caused that. Things that I already talked about: supply chain disruptions, people couldn’t go to work, and price gouging, and then OPEC, and then the war in Ukraine, which disrupted energy and wheat and so on.

But the Fed is convinced that “the problem is that too many people have jobs. It became too easy to get a job, so we need to make it hard to get a job. We need to increase the unemployment rate, we need to take jobs away from people.” So it has come back. And it was the inflation scare and misunderstanding about what is causing inflation that has allowed Powell, the head of the Fed, to resurrect Volcker—and we’re going to do it again.

The problem in the early eighties also was not that unemployment was too low. In fact we had “stagflation,” which was high unemployment and high inflation at the same time. And Volcker said, “well, we can solve that problem by controlling the money supply,” which is the monetarist idea that you referred to earlier.

“It’s a money problem, too much money. So we’re going to take the money out of the economy.” They couldn’t do it. They never reduced the rate of growth of money supply. What they did is they raised the interest rate above 20%—and that was the lowest interest rate, that was the overnight bank rate. So they boosted above 20%, caused a financial crisis. That was the Savings & Loan crisis.

And eventually inflation moderated, which it would have done even without the policy, because it was driven by food and oil prices and the shelter component of the CPI [Consumer Price Index], which is exactly what is causing the inflation now—it’s largely the food and oil and shelter component, plus these anomalies that have to do with supply chains.

So it’s not a demand-side problem now, it wasn’t a demand-side problem back then, but “the way we’re going to solve inflation is by crushing demand,” by causing lots of unemployment so that people will have income that is too low to go out and buy stuff. So it is back. It’s very very troubling that after this almost two-decade period where it seemed like we had left all of that behind, it came back. No bad idea in economics really ever dies. They always come back.

[01:02:30.950] – Grumbine

Yeah, you don’t say. It would be great if somebody remembered earning the old colonial money and realized money wasn’t permanent. I think the idea that gold is money is why they can’t fathom “money is not permanent.” And so that combination seems to be hard to break free from the commodity folks to the fiat folks. Which brings us to two concepts together, chapter six and seven of your book, “The MMT Alternative Framework for Policy” and then “MMT and Policy.”

You and I have spoken about how funding programs matters and how we evaluate them. I talked to all of you MMT developers and for the most part you guys sing a similar tune. Everybody’s got a slightly different way of saying things. But talk to me about the framework for policy and then, ultimately, MMT policy.

[01:03:28.430] – Wray

Well, the framework that I’m pushing, and I think all of us agree on this, is that we can have political constraints to spending, and we see that. So we’ve been fighting over the Green New Deal and there are political constraints on what Biden was able to push through, unfortunately. We can have resource constraints, so that would limit how rapidly we could phase in a Bernie Sanders-style Green New Deal, go completely carbon neutral.

When Yeva and I started writing on this, we were aiming for 2030, but unfortunately we have wasted five years now, because we had four years of Trump, and now 2030 is not going to be possible. Anyway, there would be resource constraints on how fast we can do this—we gotta build a national electric grid and so on, it’s going to take some resources to do that, we’ve got to get off fossil fuels—and then there are technical know-how constraints.

The scientists who are developing the technology that we will need for the Green New Deal seem to believe that it’s actually technically feasible to go completely off fossil fuel and go to zero carbon. So, if we phase it in slowly enough, and we use the knowledge that we have, it looks like we can do it. So, the MMT argument is that finance cannot be a constraint if we have the know-how, if we solve the political problems, and we can find the resources, we can implement the Green New Deal.

Finance can’t possibly be a constraint because finance is keystrokes. It’s just credits and debits—and you cannot run out of those. So we should be able to do this. Align the policy makers, hold the politicians’ feet to the fire, is really all we need to do to get it through. So that’s the framework: whatever is technically feasible is financially affordable, always.

[01:05:59.450] – Grumbine

Speaking to regular people that I talk to on a daily basis, they have gotten to the point where they no longer believe that they have a safe…and whenever they try to hold politicians accountable, there is a cast of well-meaning tone police to say, “What do you want—Trump?” And it’s always punching at activists who are trying to force Congress to serve us.

There seems to be a power dynamic that folks inherently understand, and then when they hear the MMT story, they struggle, because they’re saying, “this makes all the sense in the world.” But when I marry it up with my ability to either vote for a candidate that I want, or actually supporting a candidate with a policy that I want…and so they often will discount the information.

We say the information is so important because it radicalizes us enough to understand that we’ve been denied basic services for a long time. And if ever there was an opportunity for people to rise up and force Congress to take action, it’s now. I know that you’re an economist, I know you’re not a political strategist, but I do wonder, as you’re considering these things, what might your message be to folks that are trying to make these things happen? How do we get past that as an MMT community trying to grow knowledge? What do you suggest? Any thoughts?

[01:07:31.430] – Wray

It’s not all hopeless. I know you have read and listened to Congressman Yarmuth. He gets it, absolutely. And he has made as clear a statement as any MMT person ever has. He says we can afford it because we determine how much federal money is in the system. And the federal government is not like any user of the currency. It’s not like a household or a local government or any business.

We issue our own currency. We can spend enough to meet the demands and needs of the people. The only constraints are the resource constraint and then the possibility of inflation. So we need to be careful. He understands all of this. And I think I talked about this last time, but when I met with them, when I testified, he told me that most of the Democrats on the Budget Committee—which is the committee that puts forward the budget and allocates the various spending programs to different committees—he said most of the Democrats understand this.

And he is trying to make it safe for other elected representatives to say things like this in public. AOC will say things like this in public. She’s making it safe for others to say it in public too. So I don’t think that it is hopeless. We have to remember, most politicians are not leaders, they’re followers. And it really does depend on their potential voters that they are supposed to be representing to push them to do what is right.

And the notion that we face climate catastrophe is accepted by most sane people in America. We have more insanity than probably any other rich, developed, democratic capitalist country. But outside them, this is not controversial anymore. We face catastrophe if we don’t act swiftly. And in the Senate, we have two Democrats who hold things up.

We’ll see how the next election goes. There’s some hopeful talk that things might go better than they usually do in the midterms, and possibly there could be more support for Green-New-Deal-type programs after the next election. I don’t know. I don’t do politics.

[01:10:14.030] – Grumbine

I know you don’t.

[01:10:15.620] – Wray

And I’m not a partisan person anyway, so I don’t put all my hope in one party or the other. We can continue to push, and to recognize when people like Yarmuth and AOC—and Bernie Sanders, most of the time—when they get it right, give them credit and give them support for what they’re trying to do.

[01:10:42.590] – Grumbine

Fair enough. So, MMT and policy. There is a view that MMT is purely a lens, and then we come out with the Job Guarantee. And everybody has talked about this, but this is a key thing I think people sometimes struggle with. And it’s possible that we forget that just because something is possible with an MMT lens doesn’t mean it’s politically going to happen. Talk to me about MMT and policy and the Job Guarantee.

[01:11:09.230] – Wray

Okay, well, the reason why we focus so much on saying that most of MMT is descriptive is because so many people in the media — and some politicians who talk about MMT— talk about it as if MMT is something you implement. And “oh, let’s try MMT in the health pandemic,” or “Japan tried MMT.” So we want to make it clear that we’re describing the way the sovereign governments spend.

And MMT has accurately described that while almost everyone else gets it wrong. So we’re trying to explain how governments actually spend, and what monetary policy is actually about, and the role played by central banks in financing government spending. So that’s the descriptive part. And that gets us to the point where you will recognize, “well, hold on, if that’s the way it’s all done, it’s just accounting records, then affordability is never the question.”

So that’s the first hump, and that is a very big hump to get over. Once you understand how government actually spends, you realize government cannot run out of money, so there’s not an affordability constraint. Then we move on to, “well, okay, now given that, what should the government spend on?” And our argument is that government ought to target its spending.

Don’t mail a check to everybody. Don’t implement a basic income guarantee, which is sort of like mailing a check to everybody. Let’s focus on targeted spending and let’s use a price rule, because that will establish the value of the currency, the price the government is willing to pay. And what’s the most important resource we have in the economy? It has to be human labor.

That’s our most important resource. Not just because we need the physical activity and the mental activity and the innovation and all of that of human beings—most of our work now is with our brains, not with our hands—but also because it underlies our whole social system in providing incomes to support families.

So we want to ensure that our most important resource is fully utilized up to how much work people want to do. So that leads us to the conclusion “we need full employment.” Well, how can we get full employment? It should not be controversial at all to say that it is not the business of private business to ensure we’re at full employment. The business of private business is to make a profit.

Now, we can put constraints on them and say, “you also have to pay attention to what you’re doing to the environment” and we have to respect human rights and all that stuff. Of course. We can’t just say profit maximization is your only goal, which was what Milton Friedman used to say. So we’re going to put some constraints on you, but still, we’re not going to say you ought to hire someone if it’s going to reduce your profitability.

Firms are only going to employ the number of workers they think they need to produce the amount of output they think they can sell at a profit. In other words, they only hire if they think it’s going to lead to profit. And we’ve organized our economy largely around capitalism, and that’s what it’s all about. And this system only reaches near to full employment in major expansions.

We may get close at the peak of a business cycle, a robust business cycle expansion, and then we fall away because it’s always followed by a recession. So we spend most of our time far away from full employment. That’s reality. I don’t believe this is contestable. All you have to do is look at the data. This is the way things work. So what do we do the rest of the time when we’re not at a business cycle peak?

It has to be the government. There is just no other way to maintain continuously over the course of a business cycle, something that approximates full employment. It has to be the government. The government doesn’t face an affordability constraint and it doesn’t face a profit constraint. So it’s the government’s responsibility and it can always afford it.

So that’s why we focus on the Job Guarantee to ensure we keep our most important resource fully employed. And we use a fixed price policy, the fixed wage. We say $15 an hour. We probably should be increasing that for our proposal now. Maybe it’s $20 an hour, maybe it’s $25 an hour. But we will then provide as many jobs as people want to take at that wage.

That cannot be inflationary. So this solves our potential inflation problem of too much government spending, because the government will stop spending more when people stop showing up to accept a new job. It can’t be inflationary. It will maintain the value of the currency. That’s why it’s our most important policy and why all MMT proponents accept the job guarantee.

[01:16:54.230] – Grumbine

Well stated, Randy. When does this book come out?

[01:16:59.210] – Wray

I guess… someone told me October in the UK and November in the US. I sort of jumped the gun. I didn’t realize that it wasn’t out.

[01:17:09.830] – Grumbine

November 2022 is what it says in the book. It’s 224 pages long. You can order it in advance now. I strongly recommend getting this. This is, I think, going to be important. I know it will be important for us as an activist community and we want to make sure we get it into as many hands as we can. But Randy, what else are you working on? I know you always have co-authoring with other former students. Do you have any other stuff coming out here?

[01:17:38.390] – Wray

We have several papers on inflation at the Levy Institute if anyone wants to look at our views as to what caused it. And I think Yeva and I will do another one with new information that’s coming in—and to react to what the Fed is doing. I’m going to most likely put out a third edition of the primer, which you mentioned earlier, let’s say new and improved in the sense that things have changed quite a bit in Euro-land.

So I will be redoing that part explaining the Euro and why things are not quite as bad as they were in 2015. So there have been changes there. Actually, 2012 was the first edition. 2012. It’s improved a lot since 2012. That one will probably be my next project after the Illustrated Guide to MMT comes out.

[01:18:40.090] – Grumbine

Very good. I know Dirk Ehnts had put some stuff out about how the requirements on deficits have dropped out there, that people are just able to spend now, and I’m sure there’s much more to it than that. I’ll look forward to reading your paper on it in the update, of course, when you put the book out. So, Randy, thank you so much for joining me with this today.

I really appreciate this. And we do something called RP Live or Real Progressives Live, which is semi-monthly, where we have someone come on and talk to our audience and take a little bit of Q&A from people. I would love to be able to bring you in and maybe even do a book club for this as well. If you’re interested in participating and joining us, we definitely are down for it.

[01:19:23.180] – Wray

Yeah, that sounds good.

[01:19:24.890] – Grumbine

Fantastic. With that, friends, I’m Steve Grumbine with Macro N Cheese. My guest, Randy Wray. We are out of here.

[01:19:39.090] – End Credits

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