Episode 99 – A Modern Debt Jubilee with Steve Keen

Macro N Cheese – Episode 99
A Modern Debt Jubilee with Steve Keen
December 19, 2020

 

[00:00:03.370] – Steve Keen [intro/music]

I can see a huge financial crisis hitting us when we now talk about pulling out of Covid once the vaccines are fully distributed, but people are going to have accumulated effectively a year’s worth of additional financial charges without a year’s worth of income and with the level of debt we have right now, that’s a recipe for financial catastrophe. [music]

The last time we had a large government debt was during the Second World War, and that increased the debt from about 50 percent to 110 percent of GDP. So that must have really burdened the next generation. Who were this unfortunate generation? Oh, they were the baby boomers, the most spoiled generation in the history of humanity.

[00:01:35.220] – Geoff Ginter

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

[00:01:43.080] – Steve Grumbine

All right, this is Steve with Macro N Cheese. Folks, I have Steve Keen joining me again, and I’ve introduced him so many times. I’m going to skip some of the platitudes this time. But just to say that with the Covid-19 lack of response that we’ve seen in the United States in particular and in many cases around the world, but very much so in the United States, private debt has become one of the most important issues that we’re facing.

We’ve got moratoriums that are ending. We’ve got evictions that are coming. We’ve got bills that are coming through. And this crushing tsunami of private debt is so overwhelming to the average person. As we enter into this season, I could think of no one I’d rather talk to more than Steve Keen about the private debt fiasco that we’re facing. And the good news about Steve is he doesn’t come just with problems. He comes with solutions as well. And that’s what I want to talk about is solutions. So with that, let me welcome my guest, Steve Keen, thank you so much for joining me today, sir.

[00:02:45.120] – Steve Keen

What an intro mate. I’ll try to live up to it. Thank you.

[00:02:48.540] – Grumbine

Well, you are an expert in private debt, and I really enjoyed your writings. But this is such a unique situation in terms of the particulars. But the underlying problem has been going on for much longer than this Covid-19 pandemic. So can you please explain to us the current state of private debt within the Covid-19 environment?

[00:03:13.770] – Keen

Well, the starting point is why debt matters. And this is something which it’s difficult to get through to the mainstream because in their model of the economy, private debt has no significant role. What I’ve done and I’d say this is complementary to the work that MMT has done because MMT is focused on the role of government money creation. And I focus on the role of private money creation.

And the two can be integrated very powerfully and very easily as it happens. But we all realize that when the government spends money, it adds to aggregate demand. That’s part of our equation for GDP. We have GDP is equal to consumption plus investments, plus exports, minus imports, plus government spending, minus taxation. So the last term directly recognizes that net government spending, spending excessive taxation revenue adds to aggregate demand.

In the case of debt, the mainstream has fooled itself into believing that banks don’t exist, or rather banks are introduction agencies that enable the saver to meet a borrower and arrange a loan between the two where the bank is just an intermediary. And in that model, there’s no role for a bank with credit whatsoever in aggregate demand. Now, what I’ve done, empirically and analytically, is show that credit is part of aggregate demand and aggregate income.

And that is simply because when you borrow money from somebody else, you’re reducing their spending power to increase yours. When you borrow from a bank, they’re increasing their assets as a loan and increasing the liabilities as a deposit, which is adding to your spending power. And I’m writing a new book on this topic, amongst others, in which part of my proof is to show that when you look at expenditure and income between different people, the different sectors, when banks create money, the credit they create is part of aggregate demand and aggregate income.

So that means the rate of change of debt is extremely important for aggregate demand at a point in time. But if the rate of change of debt is important and you have a high rate of change of debt, you’re going to have a high level of private debt as well over time. And to give the short term perspective on that, starting in 1945 and going forward, in 1945, private debt was 36 percent of American GDP. It peaked in the financial crisis at 170 percent of GDP.

It then fell 20 percent to about 150 percent of GDP. And it has been flatlining, rising a bit for the last half decade. But that is a higher level of private debt than America had at the peak of the Great Depression. So we entered Covid, having not recovered from the effect of the financial crisis. My worry is always either during Covid or after it, there would be massive level of bankruptcies because people lost their cash flows, whether they’re workers paying rent or upper middle class people owning homes with mortgages or landlords renting out houses to the working class, the revenue will disappear.

And without the income support we’ve seen during Covid, and they haven’t been as big as they should have been in America, certainly, we’re likely to see the first ever financial crash without a boom before it. They’re calling it the crash with no boom. And that’s what I think we face.

[00:06:17.170] – Grumbine

Wow, OK. In the U.S., which I know you follow, Donald Trump and Nancy Pelosi basically fought to a stalemate. Originally, Democrats have put forward 2.2 trillion to revive the economy. That was rejected. Trump came back with a 1.8 trillion. That was rejected. Now we’re looking at 900 billion. Now that Trump has been deposed and the new Biden administration’s coming through, suddenly the Democrats are willing to play ball, but they’re only talking about payments to regular people of $300 additional for unemployment.

There’s no debt relief, really. Biden’s floated around a $10,000 student debt reduction. Then I’ve heard $50,000, which is better, but not great. Ultimately, no one’s addressing the private debt bubble and what are we going to have happen if it isn’t addressed and addressed with some serious purpose here?

 

[00:07:22.030] – Keen

Well, you have people who’ve lost their cash flow,  anybody in the entertainment sector, obviously, in transportation, in restaurants, et cetera, et cetera. They haven’t had a cash flow from their jobs through no fault of their own. And that applies both to the workers and the capitalists in this case. So if they don’t get debt relief, then they’ve got debt commitments which were based on the level of income prior to the crisis, prior to Covid.

And they were also two or three times what they should be courtesy of the private debt bubble that I mentioned, which is seen America’s debt level close to quadruple over the post-2nd World War period. They’re going to accumulate additional debt that they haven’t paid. So when we come out of the other end and all those relatively trivial support schemes disappear, people are going to find themselves with unpaid debt for the order of six months to a year of their expenses.

And they’ll be told, well, if you can’t pay the rent, you’re going to get evicted. If you can’t pay the mortgage, well, we could potentially take ownership. And in some ways, that’s the last thing banks want to do. So I can see a huge financial crisis hitting us when we now talk about pulling out of Covid once the vaccines are fully distributed. But people are going to have accumulated effectively a year’s worth of additional financial charges without a year’s worth of income and with the level of debt we have right now, that’s a recipe for a financial catastrophe.

[00:08:44.700] – Grumbine

What would be a response, in your mind that would, in effect, mitigate this? Is there any meaningful act that the federal government here in the United States, much less around the world – and I’d like to talk about the differences around the world, because I know the U.S. has got its own separate circumstances – what might a good response to this look like?

[00:09:07.380] – Keen

When this whole thing began back in about March or so, I proposed what I call “Corona Bonds,” obvious  title, of course, to provide the financial flow that people can’t meet during the shutdown, whether it’s genuine and well-managed or pathetic and badly managed as it has been in the United States. You’ve got to give them a cash flow that the market economy can’t provide while there’s a pandemic happening.

The government should have given everybody effectively enough money to cover all their financial commitments, effectively pay people the average rental, the average mortgage from a government created fund. In classic MMT-sense, that would be an increase in the deficit, which creates money. You don’t pay for it using the bonds. This is one thing which MMT is quite accurate on. When banks buy bonds, they’re buying bonds using reserves which have been created by the deficit in the first place.

We could have easily issued bonds, given people cash flow provided by the state in the circumstance where the market economy has quite legitimately collapsed. And we would have got through this okay. Now in the aftermath, what we could also do, there was a similar thing, which is the idea I put forward about a decade ago that I never thought I’d ever discuss in any practical sense.

And that’s a modern debt jubilee. And I’m actually putting out a post on my Patreon page pretty shortly as part of a book I’m writing on a new economics, where I show the accounting for a modern debt jubilee. And what happens there is we use this government’s capacity to create money to give everybody, regardless of their income level, anybody over 15, effectively, gets a cash injection from the government.

If they’re in debt, they have to pay their debt down. If they’re not in debt, then they get a cash injection, which we could use to stimulate the economy. Or we could also require that, say, 50 percent of that was used to buy newly issued corporate shares, which would be used to retire corporate debt and replace corporate debt with corporate equity.

And something of that nature would potentially reduce the debt burden from the last financial crisis and enable people to return to a normal market economy after a year in which they weren’t earning a market income. So it’s extremely feasible. It’s straightforward to do, but it almost certainly won’t happen. Or if it’s done, it’ll be piecemeal and half-assed rather than the full throttle thing we need after a serious crisis like the pandemic.

[00:11:30.560] – Grumbine

What do you suppose holds them back? Why do you suppose everything comes in piecemeal? What is the real opposition?

[00:11:38.900] – Keen

Well, a large part of it is in this title of Stephanie Kelton’s book, The Deficit Myth. There’s this belief which is promulgated by mainstream economics. If you read a text like Mankiw, for example, you’ll find a statement saying that when the government runs a deficit, it has to borrow money from the private sector. And when it borrows that money, it puts an unreasonable burden on future generations.

And that belief, I think, is the core of why we don’t use the power the government has to create the money when it’s necessary as it is right now. And that belief is fallacious. The government creates money by running a deficit, it doesn’t need to borrow in the first place to raise the money. It creates it by the deficit. When it sells the bonds, it’s simply an asset swap with the banks, if they’re swapping excess reserves for income-earning bonds, which is a deal of course they’ll accept.

You’ll never have anybody refusing to buy government bonds when the government’s effectively created the reserves with which they buy those bonds. But it’s just that belief that stops us doing what would be politically effective. And the only time we get over that and we do what’s necessary is when we face what we realize is an existential crisis. And unfortunately, America certainly hasn’t realized that Covid was an existential crisis.

You did realize that during the Second World War and the deficit in 1940 in America was 25 percent of GDP. Now, if you hadn’t run the deficit, you wouldn’t be speaking German, but Europeans would all be speaking German.

[00:13:09.090] – Grumbine

Stephanie had put out this meme a long time ago with the gold standard, and I think it’s an old cartoon of two boxers in a ring, and basically the US economy had the ball and chain of the gold standard on one side and on the other side, it had the Germans, they cut the chain and once they freed up and got rid of the gold standard, we were able to run the kind of deficits required to be able to, quote, unquote, “win that war.” I know there’s people out there would say Russia won that war. But regardless, point is, the US economy really put the slam on things by unleashing the power of fiat.

[00:13:45.300] – Keen

Yeah, and that’s what we’re not unleashing now. We’re treating it as if it’s if we use it now, it’s diminished for the future. The point is, the government – you don’t actually have, like an Egyptian collapse in your society to get invaded by the Greeks and taken over. There’s limitless power for the fiat system in terms of its capacity to create money. And when you desperately need it to create money, create demand which has been taken away by something like Covid-19, then you should use that power.

The only time governments have done it in the past is when they face a military threat like the Second World War. One thing I want to point out about this is if you look at the mainstream argument, this is all quite “Mankiw” right now. Government borrowing reduces national saving and crowds out capital accumulation. Many economists have criticized this increase in government debt as imposing an unjustifiable burden on future generations.

Now, that’s straight out of Mankiw macroeconomics textbook, and that’s the mindset that the politicians have, most journalists, and certainly most mainstream economists. And when you look back at it and say, well, OK, the last time we had a large government debt was during the Second World War, and that increased the debt from about 50 percent of GDP to 110 percent of GDP.

So that must have really burdened the next generation. Who were this unfortunate generation? Oh, they were the baby boomers, the most spoiled generation in the history of humanity. Rather than being burdened, they were liberated by it. First of all, they didn’t have to learn German. And secondly, you had an enormous level of government spending with constrained private sector spending at the same time.

Private debt fell from 140 percent of GDP to 40 percent of GDP. And they began with no constraints on themselves from the private sector side. And the government doesn’t have those problems because the government owns its own bank. So over the next 40 or so years, this impossible level of government debt of 110 percent of GDP was paid down to 30 percent before Reagan got involved, and then it started to increase.

So all you have to do is look at the Second World War and say, “what happened then?” And how do these positions of the mainstream versus the position of MMT stack up? And mainstream is a joke and the MMT argument is correct. And we should have treated Covid like we treated the Second World War.

[00:16:03.510] – Grumbine

The Federal Reserve just came out, I think it was yesterday, maybe it was the day before, and they made the point that the national debt is really not debt, it’s more like the net money supply, which I couldn’t believe I read.

[00:16:18.450] – Keen

The Fed is finally saying that. That’s good.

[00:16:21.000] – Grumbine

Yes, absolutely. This plays into some other points and I think that all that we’re talking about brings up these normal questions, questions of inflation, questions of hyperinflation, more importantly. “You’re just printing money. What about Weimar? What about Zimbabwe? What about Venezuela and Argentina?”

Can we talk just for a moment? This debt jubilee, that’s an incredible transformational act. It’s a fundamental paradigm shift because it tells you that debt can be erased. What does this do to people in terms of confidence in markets, losing confidence in the dollar, all the typical tropes that are used to suppress spending? What is that all about? [laughter] It’s a heavy one, I know, but it’s just constant.

[00:17:13.390] – Keen

It’s hyperinflation and I’ve never experienced it. So I’m not talking from personal experience here, but it’s clearly a terrifying experience in the sense that the amount of money you have is depreciating rapidly as you hold it, and therefore you simply have to go and spend it to be able to stay alive. You’re putting up your prices all the time.

And the hyperinflation is a freaky experience and it’s relatively easy to blame it on a single culprit which has happened so frequently. The government spending money = hyperinflation. Reminds me of the old South Park episode where the gardeners go about stealing underpants. And this is a positive thing for the gardeners, of course, and they have a three point plan.

Three point plan is: one, steal underpants. Two, (?) Question mark. Three, profit (!) Exclamation mark. And that is pretty much what you see here. Government deficit, (?) Question mark, hyperinflation. Now, one of these days, I have to study hyperinflation in detail. I haven’t done that. But the cases of hyperinflation have all been countries which have been bashed about either in war or by internal political conflict.

The classic examples of Zimbabwe with Mugabe, and the Germans with the Treaty of Versailles and then the repayment of that debt during the Weimar Republic days. Those are peripheral in terms of importance for the capitalist economy. Peripheral economies undergoing major cataclysms, part of which turns up in hyperinflation. But when you look at the major economies, when is the last experience of hyperinflation in a leading economy? The answer is never.

The highest inflation you had in America, I think was 17 percent during the Volcker days. And when Volcker slammed the brakes on the economy by jacking up interest rates dramatically, you had a real rate of 21 percent of inflation at one point. Then the inflation decayed away to nothing. But the fear of inflation and the fear of hyperinflation is built into the psyche of economists in that sense. And that’s what they bring up every time you say anything involving government spending: “it’s hyperinflation.”

But I’m just using an example where there was 25 percent of GDP as a deficit level during the Second World War. And what did the baby boomers experience? Hyperinflation? No, low inflation. OK? So if we constrict ourselves – and I’ve got to do this at the moment because I haven’t studied the hyperinflation cases in detail – but when you look at the major economies and look at major levels of government spending, the correlation of massive levels of government spending and hyperinflation has never occurred. But that is so visceral for economists and politicians that every time you suggest anything about government spending, it’s “what about inflation? What about hyperinflation?

[00:19:53.720] – Grumbine

And that’s I guess what I’m saying is that the structural ease of instituting a debt jubilee versus the political realities that face it, I never am somebody that wants to cave to political realities. I’m really a fighter, so I want to just keep pushing and pushing. But this is the kind of nonsense that you rightfully explain that these mainstream economists and the pundits will throw at us. So what is this concept of confidence in a state-issued dollar? Does the state really care whether Russia has confidence in the US dollar? Is that something that matters?

[00:20:32.420] – Keen

This is the classic bond vigilantes expression.

[00:20:35.270] – Grumbine

Yes. [laughs]

[00:20:35.840] – Keen

Which implies if it has too big a deficit, it’ll be impossible for the government to find buyers for its own bonds. That is the belief that is ingrained into people. And, you know, I designed a software package called Minsky.

[00:20:47.690] – Grumbine

Yes.

[00:20:49.040] – Keen

Minsky’s raison d’être was to enable us to do monetary modeling using double-entry bookkeeping. So when I apply that, I can say, well, what actually is the dynamics of a government deficit? And this is something I did first time around because most of what was in Stephanie Kelton’s  book, of course, was second nature to me. But what I hadn’t looked at was how government money is created – not in the same detail as I looked at credit money.

And my specialization has been credit money, most people know. So when I was asked about what the government role is, how does the government create money? I would answer, and I know this is wrong, that it creates money to the extent to which the central bank buys the government bonds. And you’ll find that’s the same belief you’ll find in mainstream thinkers still today. You’ll see them talking all the time about monetizing the deficit.

First of all, by law, of course, the government is required to sell bonds to the private sector, private banks, first of all, for the primary dealers and then only after they’ve been sold to the primary dealers and the primary dealers have sold them inside the financial sector can the central bank buy those bonds off the financial sector. But when you see it being described, what a central bank is doing, the expression which is being used is they are “monetizing the debt.”

And so that belief is also part of the mainstream: that if the government runs a deficit, then only to the extent that the central bank buys its bonds do we have money creation. And that is wrong, simply wrong in terms of accounting. Because when you take a look at what is involved in running a deficit, a deficit is run by putting more money into private bank accounts than you take out. Now, in that case, when you put money into private bank accounts, you’re creating money.

So the deficit itself creates the money. When you look at that creation of money, it necessarily also creates an identical amount of additional reserves. This is the double entry thing. If you put money in the liability side of the banking sector, which is what the government does when it puts money in a bank account. It’s also recorded as putting extra reserves. So the reserve accounts of the private banks of the central bank rise by precisely as much of the deficit as well.

So then look at this from the point of view of the financial sector and aggregating the whole financial sector into one entity rather than doing the separation into primary dealers and banks and nonbank financial institutions and so on. When the government offers bonds equivalent to the deficit, it has already created additional reserves equivalent to the deficit on the asset side of the banking sector’s ledger.

So when the government says we’d like to sell you some bonds now – and the bonds are running, let’s say nominal real [return] is roughly two percent – would you like to swap money that is earning zero percent for money that is earning two percent? And I don’t think banks are stupid enough to turn the offer down. So there’s no such thing as a bond vigilante because it’s like you’ve already put bullets in their guns. Of course, they’re going to fire them. So the idea that the government might find that it can’t sell the bonds would mean a government might find banks stupid enough not to take an offer of free interest.

[00:23:48.250] – Grumbine

Thank you. That was an incredibly well done explanation, Steve. So if I’m looking at debt jubilee, which is I think probably, like I said to start this, the most important thing that we could do right now, that probably won’t happen. We’ve kind of dismissed the whole bond vigilantes/what if they lose confidence kind of thing. We’ve also dismissed the hyperinflation angle.

It seems like the political will stems from neoclassical concepts that we are working day and night to overturn and change. What are some of the things that you think are giving you any hope, if any? Are you seeing movement in academia? Are you seeing movement in different schools of thought? Are we coming to a better understanding of the kind of conditions that would allow us to make such a bold leap, maybe not right now, but in the future?

[00:24:43.540] – Keen

No. I’m sorry to be depressing on that front. I don’t think we are. I think what is happening right now – and this is the typical thing the mainstream does – is they’re trying to assimilate and destroy the challenge. That’s what they did to Keynes. If you look at the IS-LM model and, of course, we have a confession by John Hicks that this is what he did in 1980-81, or ’81-82, that when Hicks presented his model of Keynes, it was actually a neoclassical model he’d built in 1935 that he’d actually built the IS-LM model before he read Keynes.

And yet IS-LM  became seen as Keynes and therefore the threat was assimilated and thereby eliminated. Now you’re seeing the same thing with MMT. Some of it’s being misunderstood, obviously, by the same . . . it’s just no different to what the mainstream has to say. So they’re assimilating you out of existence, and they’ll continue doing it, and they will probably do it even after, I’m going to suggest, because I don’t see any honesty in the mainstream, intellectual honesty.

You need a mathematical model that you can put into a paper like the American Economic Review and say, here’s the mathematics of MMT and oh, dear, it’s different to your mathematics. It contradicts you, in fact. But it’s correct and you’re wrong. And something of that nature that has to be a technical challenge to them. Otherwise, they’ll make up their own technical machinery to pretend to do MMT and sidetrack you and cause a continuation of the neoclassical paradigm.

[00:26:18.500] – Intermission

You are listening to Macro N Cheese, a podcast brought to you by Real Progressives, a nonprofit organization dedicated to teaching the masses about MMT, or Modern Monetary Theory. Please help our efforts and become a monthly donor at PayPal or Patreon, like and follow our pages on Facebook and YouTube, and follow us on Periscope, Twitter, and Instagram.

[00:27:07.520] – Grumbine

So you were working on something to work through MMT’s modeling and proving out the deficit angle. What can you tell us about that… Anything? Where are you at with that?

[00:27:18.810] – Keen

I’ve done a very simple model, which I’ll be publishing in a couple of days time. I actually got a hassle on my website right now. Have you ever seen the old message error establishing database connection?

[00:27:27.780] – Grumbine

Yes.  [laughs]

[00:27:28.420] – Keen

OK, that’s what I’m facing at the bloody moment otherwise I would have posted it  two days ago. So I’ve got to go through and see what’s gone wrong with my PHP file, the sort of thing I really enjoy doing. Yeah, it’s a simple model, which just simply takes the Godley tables and integrates government running a deficit as one possibility and the private sector lending more than it gets back in repayments as the other.

And you can then differentiate between periods when the government is running a surplus, for example, like the 1920s, and at the same time the private sector is running a massive deficit because while the government was running a surplus roughly one percent of GDP, the private sector was borrowing five percent of GDP on average within the banking sector and speculating on stocks during the 1920s. So I can then say, well, let’s see what happens if you only had one and not the other.

And if you just had the surplus, then what I can show very easily is you would have had a depressed economy, the opposite of what Coolidge believed. Coolidge, of course, believed the surplus was the reason the 20s were prosperous. No, it wasn’t. The reason it was prosperous was the huge level of private borrowing people were doing, which was partly motivated by the fact the government was actually destroying money.

So I’ve got to the stage where I can do a fairly simple exposition, saying let’s compare government running a deficit with the private sector also running a deficit. Government running a surplus, private sector borrowing money, government running a deficit, private sector deleveraging, etc., etc. So it’s an integrated model of credit in MMT.

[00:28:55.310] – Grumbine

Very, very cool, very cool. Bill Clinton is still celebrated by many here in the United States for his balanced budget and his running of a surplus. We’ve seen, I believe, pretty empirically for those who have paid attention, that it’s clear that much of that was run by not only a disruptive technology on the internet, but the other was record levels of private debt.

[00:29:19.380] – Keen

Yeah.

[00:29:20.150] – Grumbine

And when that bubble burst, it left the first initial recession that Bush walked into the door with, and then it set the stage for additional recessions and the Great Recession. I wonder if you could maybe take a moment to discuss the current situation now, based on that kind of modeling. Where are we at in terms of critical mass? I mean, are we past the event horizon, or do we have time in terms of dealing with the debt problem? Are we already in a recession… a depression?

[00:29:54.620] – Keen

I wrote a book called Can We Avoid Another Financial Crisis back in 2017, and I argued that for the countries that had a debt bubble  – America, of course, being the preeminent one – then they wouldn’t have another crisis, because to have a crisis, you have to have a boom followed by a slump.  And to have a boom, you have to have credit being a large part of aggregate demand.

And because in the aftermath of the financial crisis, the willingness of people to borrow money and the willingness of banks to lend declined dramatically. So if you look at the level of credit when you had the Great Recession, for example, then that peaked at 15 percent of GDP. That was back in 2007, it peaked at 15 percent of GDP. It then fell to minus five percent of GDP at the end of 2009.

So you had a 20 percent, almost 21 percent turnaround to the level of aggregate demand courtesy of the collapse in credit. Now, you weren’t going to get another collapse like that because you didn’t have a boom to begin with. So the maximum level of credit in the aftermath of the financial crisis was eight percent of GDP in late 2018. And that’s been declining since then, before Covid hit. So when you get out to the beginning of 2020, the level of credit was five point eight percent of GDP.

So it’s a bit like if you’re going to break your leg, it’s better to jump off a high mountain than a small hill. So eight percent of GDP is still substantial, but it’s not 15 percent of GDP. So you weren’t going to see a major turn from highly positive to highly negative. And I said, therefore, I wouldn’t expect a financial crisis again, but I would expect stagnation like Japan has been through for the last 30 years now. When Covid came along, what is happening is that people have lost their cash flow, but they’re still accumulating the debt commitments, the repayment commitments, the rental commitments.

They still face paying those. So they’re going negative now and accumulating a negative. And then after it, if they can’t fulfill that negative, there’s going to be a slump when they end up going bankrupt. So my feeling is we could have the very, very first slump with no boom. And that’s what I think we face. So we could have really stumbled on with a relatively stagnant economy, a bit like Japan has been for the last 30 years, that would have been what I expected to go forward for the next five or 10 years or so.

Now, with Covid probably in the aftermath when people think they can pull the supports away, then a cascade of bankruptcies and a financial crisis, but not as deep as 2007, 2008, but to some extent intractable because the government is now believing it hasn’t got the capacity to do anything, which, of course, is another fallacy.

[00:32:38.570] – Grumbine

I’m curious, I know that we talked about the neoclassical concepts that keep us in cages here.  Who benefits from such buffoonery? Is this complete ignorance? Is this just an innocent fraud, as Warren Mosler’s book says, or is this nefarious? I don’t understand why they would continue this other than malice. It doesn’t seem to make sense to me.

[00:33:05.740] – Keen

It does make sense to me because I’ve spent 50 years of my life surrounded by economists and I know how they think and I know what motivates them. And the crazy thing is, and this is going to sound ridiculous, but it’s true. They’re altruists. They’re altruistic anarchists. There’s some malicious people like James Buchanan. I would never accuse him of being an altruistic, but the vast majority of them believe they’re making the world a better place by explaining economic theory to us and getting us to redesign the economy so it matches a first year economic textbook.

And it is simply a mindset, and it’s the same thing as a religious mindset. They have a paradigm. The paradigm makes perfect sense to them. The paradigm told them there are ways in which they should change the economy to make it work better, which because the paradigm is as false a model of the economy as Ptolemy’s model of the solar system was. When they try to impose that on the economy, they make it break down.

And all the things they think are going to make the system work better, only work temporarily while they unleash something they ignore, which is a private debt bubble. And they’ve done that throughout the history. If you go back and look at the efficient markets hypothesis, the Modigliani-Miller thesis, et cetera, et cetera, they have all in some ways unwittingly emphasized how good it is to have as much private debt as possible. Now, that benefits the financial sector, which got much more powerful. What Marx called the “roving cavaliers of credit” have done very well out of the stupidity of neoclassical economics. But the people doing it are primarily driven by the belief they’re making the world a better place.

[00:34:40.190] – Grumbine

Interesting. You see so many of them advocating for austerity. It’s simple accounting at some level…..

[00:34:48.260] – Keen

Ah! Simple accounting! Important. They don’t do accounting. I must say on this front, I didn’t do accounting either at university. My father’s a bank manager and he was actually the guy who devised the accounting system for the Commonwealth Bank, and he was on the decimal currency board when we  went across to the dollar from the pound and wrote the procedural manual for the Commonwealth Bank. So I think I’ve absorbed it by osmosis.

We hardly ever discuss any of this, but it’s part of my overall background. But I’ve never done accounting and I taught myself double entry bookkeeping by building Minsky. Now, to do that in the first place, you’ve got to think money matters. If you go through a neoclassical education, the first thing I do is humiliate anybody who believes money matters. They teach you what they call the money illusion. There’s a couple of blogs with that title, as you’d be aware.

So they get taught early on that money doesn’t matter. And one person I quote in the book  – I end up liking some of these people – and this is a guy called Tony Yates. We’ve never met. We’ve had a bit of sparring on various occasions. He was a Bank of England banker as well. And in response to some of the comments on MMT, I’ll quote some direct tweets from Tony. And this is a brain dump. This is what a staunch, quite sincere believer in neoclassical economics thinks.

And this is, again, it tells you what the mindset is for the overall religion. “Most people who teach macro do it by leading people through simple models without money. So they understand exchange and production and trade, international and intertemporal. You can even do banks without money. Yes! And it’s better to start there. Then later, study money as it imposes itself and complicates things, giving rise to inflation, exchange rates, business cycles.  MMT might have confused the hell out of themselves by stating what fascinates the most, the funny bits of paper whizzing around you that seem to be able to swap for stuff.” Now, that’s the mindset. OK? [laughter] Now you try to tell somebody like that to do double-entry bookkeeping, what’s going to happen?

[00:36:49.170] – Grumbine

It doesn’t matter, that’s for sure.

[00:36:51.330] – Keen

Yeah, OK. So that’s why I say you want to get inside their psychology to understand where these attitudes come from. And once that attitude is there, you’re going to go blue in the face trying to explain the importance of money to them when they’ve already started from the position that money = little bits of paper that don’t matter. So why are you wasting my time?

[00:37:09.400] – Grumbine

Jiminy Christmas! This is your territory, man. How do we get into their heads? How do we pull them from the cult, so to speak? How do we deprogram them?

[00:37:20.380] – Keen

Well, you can’t. I mean, this is one thing I’ve written. You may have seen I’m putting up as I write my new book called The New Economics, a Manifesto, which Polity Press hopes to publish early next year so long as I finish it late this year. I’ve had a first one about why the manifesto, when I went and asked why is it that the economics doesn’t go through scientific revolutions?

Because if you look at how we move from the Ptolemaic version of the universe to the Copernican and eventually Newtonian vision of the universe, then there was what Thomas Kuhn described as a paradigm shift. And you had a set of anomalies building up with the Ptolemaic view. This was the calendar becoming a total mess, the types of calendars moving around quite radically over time, and that becoming a real practical problem in applying the Ptolemaic explanation for the movements of the planets and the moon and the sun to obviously accumulate errors over time.

And then along comes Copernicus and said, all this is wrong. The earth is not the center of the universe. The sun is the center of the solar system, and that’s a complete paradigm shift. Now, the thing is, did Copernicus persuade Ptolemaic astronomers they were wrong? No, they died. And this is what you get. A beautiful statement of this by Max Planck, who’s the person who developed quantum mechanics by solving what’s called the black body radiation problem. And he wrote and it’s paraphrased as science advances one funeral at a time.

But he wrote: “A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die and a new generation grows up that is familiar with it.” Now, that doesn’t happen in economics. The old generation dies, and a new generation replaces them believing the same thing. So what’s different about economics and what it fundamentally comes down to, I believe, is that a scientific truth is eternal.

It isn’t the case that the sun was the center of the universe for the last five hundred years and the earth was the center for the previous 1500. It’s always been that the sun’s at the center. Once you have an anomaly, which proves that, then the old guard still hangs on the Ptolemaic  beliefs. They refuse to let go. But the new guard comes through knowing that this thing is false. There’s an anomaly that the old theory can’t explain. And as the old professors die, the new students to replace them are ones who are trying to solve the anomaly.

And if that involves a paradigm shift, that’s what happens. Whereas in economics, the Great Depression occurs, then the Second World War, then you have Samuelson coming along and then you have Friedman and so on and so forth. The crisis that gave rise to Keynes in the first place is forgotten. And consequently, the economic truths decay over time, both in our experience and our memory, and we can’t rerun the experiment to see what would have happened if we hadn’t run a deficit in World War II.

OK, you can’t go back and check the experiment and test it again, whereas you can in science. So, the key experiment that got rid of the idea that there’s an ether through which light travels was the Michelson-Morley experiment. And that experiment, if you perform it today, you get the same results as you got 120, 140 years ago. So the timelessness of anomalies in science relative to a paradigm is not replicated in economics.

And because of that, people – you can get a breakaway group like ourselves, post-Keynesian, modern monetary theorists, even Austrians, Marxists who break over some particular element of the mainstream and its failure to capture reality. But they remain as a minor strain, whereas the neoclassical reproduce themselves because there’s something very seductive about the neoclassical vision. It is fundamentally a vision of an anarchist society, which is a meritocracy. So everybody… There’s no power concentration. There’s no leader at the top. It’s all done by an anonymous market system.

And the people get paid what they deserve, which is the way things should be, and everybody get their taste satisfied. It’s a utopian vision. And this utopia sucks in new students. So some of them see this stuff and think this is madness and go on to do sociology instead. A minority of stubborn bastards like me hang around and take them on internally. But the old generation is replaced by a new generation that shares the same belief about capitalism, and therefore we don’t achieve the scientific revolution that would make economics into a science.

[00:41:46.830] – Grumbine

Let me ask you, from the US perspective, I’m kind of up to speed on what we do here and why we do it. We are the neoliberal country of the world. We are exporting neoliberalism like crazy. And it is the paradigm by which everything operates, from our sitcoms to our cartoons to our church services, everything. But around the world, it seems like people have different lives, expectations, benefits and a different pressure, so to speak. What do you see as the key fundamental difference between the US mindset and the rest of the world? Are we beginning to really infect the rest of the world with this neoliberal….

[00:42:32.060] – Keen

You already have infected the rest of the world, but the rest of the world began from a less extreme position than America did. You’ve always had a cowboy capitalism attitude. The whole Manifest Destiny aspect of America is something which is quite uniquely American. For example, Australia never had anything like that because 90 percent of the continent is desert. You can’t go off trekking and believing you’re going to be laying in fields behind because anybody who tries that dies of thirst.

So the manifest destiny and then the American exceptionalism is very specifically an American phenomenon. And that’s been married with your tendency towards religious extremism, you’re the Taliban of Christianity and militarism as well, mixed into one. So you’ve got this evangelical approach to your idea of neoliberalism. And if you look at other countries like Germany, for example – and this is praising Germany, having had a few cheap shots at them earlier –

Germany has always had an extent to which they see a need for having unions and workers’ representatives and representatives of different interest groups in managing companies. So there’s a now out-of-date, but very, very good book by a guy called Andrew Schonfeld called Modern Capitalism. And what he did was go through the different national characteristics of different countries. And in Germany, it’s just as part of the actual structure of the corporate sector, major companies are required to have a secondary board, which I think is called the [inaudible] board. 

And this board has to have members from the trade unions and consumers and community representatives. So there are two boards for any company. And the second board, I think they’re actually reps on both in some sort of crossover. But there’s a legitimate role for trade unions and consumers and community groups in feeding into the behaviour of German corporations.

Now, if you even suggested that in America, you’d be locked up as a communist, but what’s happened over time is because American textbooks dominate economic thinking throughout the world and because economists dominate policymaking throughout the world, then you’ve had economists laboriously trying to deconstruct these non-American non-neoliberal elements of other countries.

And as we’ve done it, rather than giving us Nirvana, of course, it’s given us the horrors we’ve seen of massive inequality and the gig economy and insecurity for workers and so on. So a lot of that has happened to the rest of the world. But you are right, America is the worst place on the planet for it.

[00:44:53.870] – Grumbine

It’s very depressing. We do joke often about America’s number one export being bombs and neoliberalism. I’m watching my friends in Canada. They were able to survive this pandemic with payments and they’re doing well. They’ve got health care. Even now, medical debt is through the roof in this country. It’s outrageous. It’s completely unsustainable. And there’s no movement whatsoever. Is this the Yankee, is this the whole cowboy capitalism aspect of the US coming out or is this something more nefarious? This just feels like a whole different breed of capitalism to me.

[00:45:35.920] – Keen

Well, it’s capitalism stripped of any countervailing power, and the neoclassical vision, again, is that’s going to be a perfect Nirvana. And of course, the reality is that if workers can’t organize, the last thing the individual worker will do is ask for a pay rise because there is power. So let’s assume perfect competition. That means let’s assume Amazon doesn’t exist and then discuss the world is as if Amazon doesn’t exist and say, why aren’t workers out getting wage raises then? They can bargain, can’t they?

No, they can’t. So the power imbalance is astronomically in favor of capitalists. And the result is you don’t have a mass consumption society. But capitalism works best as a mass consumption society. There’s actually a very good argument that we wouldn’t have had the Industrial Revolution had it not been for the high wages being paid in Scotland at the time, because those high wages gave an encouragement to inventors to come up with a way of replacing labor or making labor produce more by using machines that converted the labor and the energy that they could put into, into more output.

So the spinning jenny, the very first spinning jenny enabled the worker rather than spinning one spinning wheel, to spin six spinning wheels. Now, that was only worthwhile if you could replace five workers with the spinning jenny and come out with a profit. And that was easy in Scotland because the wages were high. The same thing would not have worked in France because wages were that much lower. The spinning jenny couldn’t have been sold profitably.

So what you get out of it is that the wage pressure, the workers demanding wage raises can actually be a reason to spur the innovation that makes capitalism go forward. Whereas when you get the sort of slash and burn approach to workers’ incomes you get out of neoliberalism where there is a massive power imbalance between employers and workers and workers ended up in a gig economy where they’ve got to work two or three jobs to stay alive, in that situation, there’s no need to innovate. And you actually take away part of the pressure that makes capitalism creative.

[00:47:31.200] – Grumbine

The other thing, I guess you see that the poor are most impacted by these decisions and they really have no voice, they have no standing, they have no power. But then you see that kind of middle class wall, this absolute castle wall blocking progress because the middle class doesn’t want to lose the little teeny bit of crumbs it has, whereas the wealthy are just completely unaffected by this.

Is it going to take a massive collapse of the middle class for us to see change, for them to actually care, or do you think that there is some other fundamental trigger that we could do aside from all the boomers dying off, God forbid, and the old school economists? Is there any way of penetrating that middle class?

[00:48:20.290] – Keen

I don’t think so. Again, I’ve become rather more skeptical as I’ve got older about the potential for significant change and it seems that change only really occurs when there’s a major crisis. After the crisis, not beforehand. So anybody who warns about the crisis beforehand gets disparaged and ridiculed. And then after the crisis, holy hell, what’s happened? We’re being betrayed!

And that’s when you get the serious reactions. And I think the same thing applies this time around.  I don’t think we’ll see any real reaction until the economic system itself starts to fall over and you get the middle class being affected that way rather than being persuaded that there are better ways to run a functional economy.

[00:48:56.680] – Grumbine

Oh, man. Well, with that, Steve, that’s not a very bright picture, but it is what it is, right? I mean, this is where we’re at.

[00:49:04.060] – Keen

It is, unfortunately.

[00:49:05.920] – Grumbine

I don’t know what to do short of revolution. I know this sounds overdrawn, but I don’t even know if we have the power for revolution. What do we have to do besides just take it and die?

[00:49:17.590] – Keen

I think the main thing we’re facing, of course, is climate change. And we’ve pushed our economy well past the level where it’s sustainable on this planet. So it’s going to be in response to that, that we start to see the need for serious change, not the income distribution issues, not even private debt. So I think when that starts to strike, the question is, can we hold together enough as a society to actually be able to do anything significant with any sense of control?

And I can see some ways in which we can attempt to survive that massive decline in our economic output, which we’re going to have to experience – the whole phenomenon of degrowth – when you realize we were sold a pup by neoliberalism, but only after. It’s not just brought the economy to its knees, but brought the biosphere to its knees.

[00:50:05.370] – Grumbine

Wow, that is truly terrifying. I appreciate more than you know, your honesty. As an activist, not an economist, I feel like we’ve got to take some chances as people and really put ourself out there because there’s nothing going to happen until we act like we’re serious. And it’s terrifying, Steve. I don’t even know what more to say than that, other than I hope that people start listening to our heterodox friends. I hope that people start listening and thinking about the real possibilities and taking it upon themselves to be the change that they want to see.

[00:50:41.910] – Keen

Yeah.

[00:50:43.710] – Grumbine

Anyway, with that, Steve, thank you so much for joining me again. And folks, this is Steve Grumbine  and Steve Keen with Macro N Cheese, hoping that you’ll follow Steve Keen at ProfSteveKeen on Twitter and try and find him on Patreon. The guy’s got a great blog – he’s worth following. His Patreon material is out of this world. I am personally a subscriber, and so I highly recommend it. Steve, is there anything else that you’d like to pass on for where they can follow you?

[00:51:14.580] – Keen

And those are the two main sites, mate.  So, the Patreon site, one thing to emphasize there, most of the posts on Patreon are free. You don’t have to be a Patreon subscriber to read them. It’s only my podcast with Phil Dobbie that are reserved just for patrons. And that’s, as you might remember, patrons only.

When I asked them, do you want me to keep stuff for patrons or do you want to make it publicly available, and the overwhelming majority said publicly available. So you don’t have to support me to read the stuff on Patreon. I appreciate support, but it’s not necessary to read the arguments there. The main thing is to get an alternative analysis out there. So Patreon.com is the main spot and that’s pretty much it. That and Twitter.

[00:51:51.900] – Grumbine

All right. Again, this is Steve and Steve. Have a great day, everybody. We’re out of here.

[00:52:02.540] – End Credits

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