The only potential risk with the national debt increasing over time is
inflation and to the extent that you don't believe the US has a long
term inflation problem you shouldn't believe that the US is facing a long term debt problem.
So I'm not looking for a recession.
I don't think there are very strong indicators that a recession is imminent. I think that the U.S.
economy continues to chug along the way that it has now for about 10
years. Growth is fairly modest but maybe it will pick up a bit in 2019. So the U.S.
economy has shown itself to be extraordinarily resilient and I don't
see reasons to be concerned that in the next year or two things are likely to turn around.
When it comes to headwinds of course anything could happen.
Maybe the Fed moves too quickly. If suddenly the Fed decides that it
wants to get more aggressive than it has previously indicated that
it's looking to get with respect to interest rates that could
certainly pose a potential risk.
You know, the Fed has indicated that it is about at the end of its rate hiking
cycle and you know if there were to be a couple of quarters let's say
in 2019 that came in really strong and they began to worry about an
acceleration in wages or something like that that led them to jump on
another rate hike or two, then I think things could potentially get very different.
I mean unexpected events can always surprise. Maybe even with emerging
markets. You know the global slowdown is a real thing it's just that for right now the U.S. continues
to look pretty strong to me.
So when I look at the Republican tax plan. Is it really a significant
stimulus or is it not?
So that's sort of the question. Right? In terms of the raw numbers, it
looks like a significant stimulus.
I think the latest estimates are that the Republican tax cuts will
add something like 1.9 trillion to deficits over the next 10 years.
But of course for the word stimulus to have much meaning the tax cuts
have to actually produce broader economic activity. They have to do something to jolt the economy.
They have to lead to higher spending more sales, more hiring, more
investment. That's what stimulus is supposed to be.
So because of the way the tax cuts were structured, they
disproportionately benefit the folks at the very top of the income
distribution who probably don't have a very high propensity to
spend. The Republican tax cuts they don't seem to be doing a lot to jolt the economy.
So they helped growth has picked up a bit.
But I don't think that I would call them a giant stimulus in spite of the price tag.
New questions about the sugar high we have seen from corporate tax cuts.
We may be seeing a kind of sugar high.
I think you get a sugar high from a tax cut.
The sugar high thing is a little puzzling to me because this was not a one off.
This was not a one year tax cut event.
This is something that's been phased in and will continue to be phased in.
And so we've got many years ahead where we're going to be feeling the effects of the Republican tax cuts.
I mean people are beginning to file taxes now for the first time under the new tax laws right.
So some people I think are going to turn out very pleasantly
surprised. Other people are gonna be very surprised in a negative way.
Especially some middle income higher middle income folks in blue
states are already discovering that they're paying more, in some cases,
much more than they were paying last year.
So on balance we're going to have to wait and see.
And this is going to be I think a pretty good test year to see how
the Republican tax cuts actually affect the broad swath of Americans.
So I don't think it's a sugar high.
I'm waiting to see how it all nets out after the end of this year and
there's a potential boost in the years ahead.
An unconventional economic theory is gaining some traction thanks to
the policy teams of Alexandria Ocasio-Cortez and Bernie Sanders.
I think the first thing that we need to do is break the mistaken idea
that taxes pay for 100% of government expenditure.
My critics say you know Bernie that's a great idea.
You're into all this free stuff.
How you're gonna pay for it?
So MMT starts with a simple observation and that is that the U.S. dollar is a simple public monopoly.
In other words, the United States currency comes from the United States government.
It can't come from anywhere else.
So what that means is that the federal government is nothing like a
household. In order for households or private businesses to be able
to spend they've got to come up with the money right.
And the federal government it can never run out of money.
It cannot face a solvency problem bills coming due that it can't afford to pay.
It never has to worry about finding the money in order to be able to spend.
So the deficit definitely matters.
So it's just that it matters in ways that we're not normally taught to understand.
Normally, I think people tend to hear deficit and think it's something
that we should strive to eliminate. That we shouldn't be running
budget deficits. That they're evidence of fiscal irresponsibility.
And the truth is the deficit can be too big.
Evidence of a deficit that's too big would be inflation but the deficit can also be too small.
It can be too small to support demand in the economy.
And evidence of a deficit that is too small is unemployment.
So if you think of the government deficit as the difference between
what the government spends into the economy and what it taxes back out.
Then, imagine a government that spends one hundred dollars into the U.S.
economy but it only taxes 90 of those dollars back out.
We label that a government deficit and we record that on the government's books.
But what we forget to do is pay attention to the fact that there's
now $10 somewhere in the economy that wouldn't have been
there otherwise that is put there by the government's deficit.
In other words, their deficits become our surpluses.
And so when we talk about red ink and the government having all of
this red ink, we have to remind ourselves that their red ink becomes
our black ink and their deficits are our surpluses.
And the question is then should you expand fiscal policy?
Should you run bigger budget deficits in order to boost growth?
So what is the objective? What is the proper policy goal?
And I think the the right policy goal is to maintain a balanced
economy where you're at full employment, your guarding against an
acceleration in inflation risk.
And economists tend to understand that the kinds of things that you
can do to boost longer term growth are investments in things like
education, infrastructure, R&D.
Those are the sorts of things that tend to accelerate productivity
growth so that longer term real GDP growth can be higher.
So there are ways in which the government can make investments today,
that increase deficits today, that produce higher growth tomorrow and
build in the extra capacity to absorb those higher deficits.
So it's impossible really to put a number. Nobody can.
How much debt is too much debt?
If you look at Japan today, you see a country where the debt to GDP
ratio is something like 240%. well above, orders of magnitude
above, where the U.S. is today or even where the U.S. is forecast to be in the future.
And so the question is how is Japan able to sustain a debt of that
size? Wouldn't it have an inflation problem?
Wouldn't it lead to rising interest rates?
Wouldn't this be destructive in some way?
And the answer to all of those questions as Japan has demonstrated now for years is simply no.
Japan's debt is close to 240% of GDP almost a quadrillion.
That's a very big number.
Yen. long term interest rates are very close to zero.
There's no inflation problem.
And so despite the size of the debt, there are no negative
consequences as a result and I think Japan teaches us a really important lesson.
If you think about what happened after World War II. When the US
national debt went in excess of 100% close to 125% of GDP.
If we were talking about it the way we talk about it today. As
burdening future generations. As posing a grave national security risk,
we would have to scratch our heads and say "wait a minute."
Do we think that our grandparents burdened the next generation with
all of those bonds that were sold during World War II? To win the war,
build the strongest middle class, produced the longest period of
peacetime prosperity, the golden age of capitalism.
All of that followed in the wake of fighting World War II, increasing
deficits, massively increasing the size of the national debt and of
course the next generation inherits those bonds.
They don't become burdens to the next generation, they become their
assets. The only potential risk with the national debt increasing
over time is inflation and to the extent that you don't believe the
U.S. has a long term inflation problem you shouldn't believe that the
US is facing a long term debt problem.
So the best defense against inflation is a good offense.
And what MMT does is to try to be I think kind of hypersensitive to the risks of inflation.
I don't see any other macro school of thought pay as careful
attention as we do to the inflation risk question.
And so what we would say is look "if you are Congress and if you are
considering a new spending bill." Instead of thinking about the ways in
which that new spending will add to the deficit or add to the debt,
you should be thinking about the ways in which that new spending has
the risk of accelerating inflation and then avoid doing that.
So instead of going to the Congressional Budget Office and saying
"we'd like to know what this bill will do to the debt and the deficit
over time?" Instead go to the Congressional Budget Office or other
government agencies and say we're considering passing this trillion
dollar investment in infrastructure.
This is our bill would you look at it and we plan to do this spending
over the course of the next five years.
Tell us if that would create problems in the real economy.
Evaluate the inflation risk and come back to us and give us some
feedback. That's the kind of responsible budgeting that I think that
I would like to see Congress begin to move towards.
So the question about "what to do if inflation becomes a problem?" is a
different one.
And I think the first thing you have to do is say what is driving the inflation.
Because to think that the inflation that is going to become important
at some future date is likely to be the result of too much aggregate spending is really hard to believe.
I mean the U.S.
economy hasn't experienced what we might call demand pull inflation for almost a century.
The types of inflation that have been important in the US have almost
always come on the cost side.
What we call "cost push inflation." They come about because of things
like oil price shocks. You might see increases in headline inflation
rates because the housing component or health care.
And so when you think about how to fight inflation if you've got
inflation resulting from energy price increases it's probably not
going to do much to have the Fed raise interest rates or even to have Congress raise taxes.
You've got to do something else that's going to work.
So I reject the idea that MMT is about using taxes to fight
inflation. That's a mischaracterization of pretty much everything we've written.
But people say it all the time.
Hillary Clinton called you the king of debt.
Well, no she didn't call me. I call myself the King of debt.
I'm the king of debt. I'm great with debt.
You know after initially worrying about the national debt. We got 18
trillion in debt. We got nothing but problems.
As a candidate, he talked about the need to possibly negotiate.
You've also renegotiated debt agreements over the years. Do you believe
that we in terms of the United States need to pay 100 cents on the
dollar or do you think there's actually ways that we could
renegotiate that debt?
Yeah, I think- look I've- I've borrowed knowing that you can pay back with discounts.
Now we're in a different situation with the country.
But I would borrow knowing that if the economy crashed, you could make a deal.
And there was a lot of backlash against those comments.
And I think he had a really important conversation with someone and
then he changed his narrative and he came out and he said let me tell
you. You don't have to negotiate with your creditors.
OK I hate to tell you but we print the money.
First of all you never have to default because you print the money. I hate to tell you.
OK.
OK I hate to tell you there's never gonna be a default
But these people are crazy.
This is the United States government.
And he just kept repeating "I hate to tell you. I hate to tell you. We print the money.There's never gonna be a default."
So I think the king of debt figured out that there's a difference
between taking on debt to finance casinos and real estate in your
personal capacity or in your capacity as a business and selling
Treasuries and having a national debt and being able to afford to
make every payment on time in perpetuity.
Well he knew what he wanted to do.
He already had an agenda laid out before the two of us even met
for the first time. He had a 12 point agenda that became sort of the bedrock for his presidential run.
And so I was useful to him where I could be.
But the big policy ideas had taken shape really before I got involved.
Bernie Sanders proposing an estate tax that would be the highest in over 50 years.
Senator Elizabeth Warren's plan to tax the super rich.
Alexandra Ocasio-Cortez is calling on America's uber wealthy to pay a bigger share in taxes.
I think it's a couple of things.
OK. I think that for some of the candidates there is a real desire to
do something on the tax side to impact distribution to say look the
concentrations of wealth and income in the U.S.
today look very much like they did in the late 1920s. That there is a
belief that somehow this is problematic for both economic reasons and
for democracy itself and that there is interest in trying to
rebalance the distribution of wealth and income in this country and
that the tax code is seen by some of these individuals as one way to go about doing that.
So I do think it's got something to do with a desire to impact
distribution. On the revenue side, this gets interesting because the
way the Congress forces itself to operate today and you know the
House has reinstated PAYGO rules recently. Which means that any new
spending has to be fully offset either by finding new revenue or by
cutting some other part of the budget.
And so if you want to do anything you have to quote unquote pay for it.
And because Democrats in particular are starting to think about really
big policy ideas really ambitious stuff the price tags tend to be very large.
And so where do you go when you need a lot of money.
It's sort of natural I think for Democrats to turn to the very
wealthy and to view them in a sense as their pay for.
You've got all the money.
So we've got to come and we've got to raise taxes. Both to deal with
the fact that you've got all the money and to get the revenue that we
need in order to write the legislation, get it to the floor, get a vote and ultimately pass it.
I just look at the field you know of people who have entered so far
and I see Democrats kind of swinging for the fences.
I think that you're seeing more ambitious policy proposals this time
than you would have seen probably if the way hadn't been paved for this kind of thing in 2016.
So there are a lot of people. Senator Booker's got a big proposal for
doing something called "Baby Bonds."
Senator Harris is talking about very big tax cuts for the middle
class. Senator Warren's talking about a Green New Deal.
Senator Sanders has talked about a job guarantee. So there's just all
kinds of big stuff out there and I think there's just going to
potentially be a lot of excitement in the Democratic Party around
some of these big ideas.
Are you working with any of the 2020 candidates on the Democratic side currently?
Yes. Mhmm.
And you'll just leave it at that.
I better because if they don't go public then I don't go public.
OK, Stephanie. Thank you so much.