What I Did Not Get to Say on NPR’s On Point This Morning

By Stephanie Kelton

This morning, I appeared on Tom Ashbrook’s radio show, along with Paul Krugman and Stan Collender.  I wish there had been more time to explore Paul Krugman’s very important point that one sector’s deficit spending becomes another sector’s surplus.  This is a core point that we make all of the time on this blog.  Cutting the deficit cuts the non-government surplus dollar-for-dollar.  So any plan to cut $4 trillion in deficit spending is a plan to reduce the non-government surplus by $4 trillion.  The ordinary American will gleefully support deficit reduction (as polling shows), but I’m confident that you’d get a very different reaction if you asked them whether they support cutting their own surplus by trillions of dollars.  Almost no one recognizes that the former implies the latter.

The point I make all the time is this: as long as the country — any country — runs a current account deficit (which the US does), the government’s deficit will need to be at least as large as the current account deficit, or the private sector will be in deficit.  Bigger government deficits mean, ceteris paribus, bigger private sector surpluses.  And deficit reduction means a reduction in the private sector surplus as shown below.  It’s hard to make this point in a compelling way without the visuals, which is why it works better on C-SPAN than on NPR.  But Krugman brought it up, and it is a point that progressives should work hard to emphasize.

I also wanted to point out, but didn’t get a chance, that the deficit is currently falling at its fastest pace since the end of WWII.  So it’s a particularly odd time for lawmakers to be stirring up (and progressives  playing into) hysteria about our “budget problem.”  The so-called problem is taking care of itself (as it typically does when the denominator in the deficit/GDP equation is rising).

And so the problem remains trying to turn attention away from the phony deficit crisis back to the real jobs crisis that is still holding America back.

The podcast will be available later today and for the next two weeks on iTunes, and the audio stream will go up soon here.


40 responses to “What I Did Not Get to Say on NPR’s On Point This Morning

  1. Pingback: The Problem is Jobs, not the Debt | Tell The Universe

  2. Congrats, Stephanie!

    My employed friend refuses to support Keynesianiasm. I say “employed” because it’s easy to not be in favor of stimulus when you have a job. Yet, I suspect the primary reason he won’t fully support Keynesianism is because he knows I do – and he knows I do not have a graduate degree, while he does. Pride is self-defeating.

  3. “…it’s a particularly odd time for lawmakers to be stirring up (and progressives playing into) hysteria about our “budget problem.”…”

    Lull the prey.

  4. I wish Krugman finally got monetary economics. He now is suspended somewhere between MMT and the mainstream. On one hand he stresses that deficits don’t push up interest rates for sovereign countries, period, then the next moment he lauds Obama’s 1.6T deficit reduction measures. I mean, it is probably good to reign in healthcare costs, but this shouldn’t be framed in terms of fighting deficits.

    • Peter,
      I read an op-ed by Krugman early last week, maybe. Where Krugman indicated that nations like the US do not face a solvency constraint, only an inflation constraint. Thus, conservatives, are wrong about the deficit and debt problem. It was the first time I ever saw him write something like that. I think the name of the article was “incredible credibility”.

    • Why is it good to reign in health care costs? Now that the US has nationalized health care put all medical personnel on the government payroll and make health care completely free for everyone, right? Since the government writes the checks to the employees what could be the problem with that? Who cares how much enpixelated money a heart surgeon makes? Pay the janitors the same. Why the palaver over “insurance”? There’s no intermediary needed if the government pays the health professionals directly. And we keep hearing how much more efficient the government is at providing that kind of service, no big CEOs profiteering at the expense of folks with shingles, catarrh or lumbago. This whole health care thing has been one big Statue of Liberty play, just entertainment and fodder for the news media. Members of Indian tribes get pretty much free medical care through PHS and they’re probably the healthiest people on the planet.

      • When did we get nationalized healthcare?

        Pretty damn funny rant though, btw.

        • “When did we get nationalized healthcare?”

          Actually we didn’t. Some of us have nationalized health insurance. Those on Medicaid for the poor and those on Medicare for the over 65’s. Everyone else is still at the mercy of the private insurance companies, who have a 20% margin for overhead and profit, plus the fact the coverage is far from complete with high deductibles, customary payments etc.

  5. So, it seems that, one by one, Krugman is accepting MMT basics. Stephanie, can you talk to him at length about these things, and get him to try to refute the ones he still doesn’t believe in? If he is changing his mind, he must be open to persuasion. You can get on C-SPAN and NPR, but he can get on ABC. If he talked MMT on ABC, it would be a giant leap for mankind.

  6. Here is a comment I made to Joe Firestone’s post ‘A counter narrative to Peterson’s’:

    From a non-expert: I read Dean Baker all the time, and I don’t agree with your characterization. To me anyway, he seems to be VERY close to a full MMT point-of-view. He is also aware and not particularly derogatory about MMT and its advocates. I have gotten him to write an e-mail response to me twice, so I would not call him inaccessible. I think you should concentrate your efforts on getting these ‘left’-designated members of the MSM to understand and adopt the concepts of MMT. Dean seems to me the closest. Krugman is probably the most influential, then Stiglitz? Paul Krugman seems to have developed an emotional resistance to MMT, and maybe that will be tough to overcome. But, can’t you get a meeting (Kelton, Mosler, someone) with someone like Dean Baker. I know Warren Mosler has talked to some of these people (he responded as such to a question) and he sounded discouraged, but I would say … don’t give up.

    I still think is is true.

    • I suggest your degree of success might well depend on whom you choose to talk to these folks … ISTM there are some considerably more persuasive than others ….

    • I agree that Dean Baker understands MMT. Here are some recent quotes from his work:

      “The deficit is the agenda of the One Percent. There is no reason that the rest of us should be concerned about budget deficits when the rest of the country is struggling with the economic disaster created by the greed and incompetence of the One Percent. This is not a statement of morality; it is a statement based on economic reality. Budget deficits can be a problem when an economy is near full employment and the deficit can be pulling resources away from private investment, thereby slowing growth. However, it is not a problem with large numbers of unemployed workers and vast amounts of excess capacity.”

      “I think that all MMTers believe that the government cannot literally spend without limits. In other words, we can push the economy to the point where inflation is a real problem. The MMT answer is to raise taxes to prevent inflation from getting out of control. Now suppose we are in the world where we have pushed the economy to the point where inflation is a problem and we decide we want the government to spend more money on some great project. At that point, it would seem that MMTers would have to agree that we need tax increases to offset the impact of government spending in boosting the economy. We don’t literally need the tax increases to pay for the spending. The Fed could simply create more money to finance the spending. However if we don’t want the spending to be inflationary, then it must be offset by a tax increase. I think the difference between the MMTers and Krugman is largely on the frequency with which they believe that the economy is up against its capacity constraints so that inflation is a real issue. I don’t want to put words in Krugman’s blog, but my guess is that he believes that the U.S. economy is typically operating near its capacity, so that the story of needing tax increases to offset spending would in general apply.”

  7. is there a link to the interview?

  8. What a skilled conductor of conversation Ashbrook is. “Joined here with Paul Krugman and Stephanie Kelton. Let’s talk to Jennie in Ohio.” That interview was unbearable.

  9. Sorry, now i am a bit confused – if gov’t deficit = private surplus, are we supposed to be happy that gov’t deficit is coming down all by itself?

    • That would happen automatically given a growing economy with constant spending/tax law. We would need to adjust those levels (preferably taxes in my opinion) if we wanted to maintain a certain savings rate or level of aggregate demand.

  10. I heard your On Point interview tonight and was so impressed! You really explain the whole situation better than anyone I’ve heard. It’s so nice to know about you!

    I haven’t read any of your writings yet, and maybe you’ve already discussed this. But if not, here’s my thought: Why isn’t there more discussion of fixing Social Security by just raising the cap on contribution? I can’t feel very sorry for anyone making over $107K for continuing to contribute to the fund. I’ve heard if we just raised the level to about $175K it would be solvent forever. Why isn’t this an easy solution? Why doesn’t anyone discuss this?

    Medicare is a completely different problem. Why isn’t there a substantial payroll contribution for Medicare like there is for Social Security? Could that be a solution to the Medicare problem? Why isn’t this being discussed? Why are reducing payments and raising the age the only solutions we hear?

    • Michael Belzer

      Medicare is paid for by two taxes on payroll, one paid by employers and one paid by employees. You are paying that tax every paycheck. Paradoxically, the problem of funding was exacerbated by the reduction in the payroll tax that the Obama Administration and Congressional Republicans agreed on two years ago. It was reasonable, since it was a stimulus, but it put more pressure on the funding mechanism.

    • Smokey,

      Reducing payments and raising the eligibility age are the usual solutions we hear because most of the people who discuss economics on television and radio do not understand monetary sovereignty. We’d all be better off if every famous pundit were to read and accept “In Defense of Deficits” by James Galbraith.

  11. I have been largely disinterested in all of the recent political and economic debates. I’ve never been much into economics really, as it’s usually over my head. However, when I heard you this evening on my way home, everything was making perfect sense and really motivated me to look at things a bit deeper. I am picking up a couple of the books you recommend on your sidebar, and hope to learn more from your posts down the road. Thanks for putting your knowledge out there for us.

  12. Michael Belzer

    Excellent articulation of smart macroeconomic policy. I am not a macroeconomist but have found myself teaching Principles of Macroeconomics, and I am always looking for good explanatory material. I plan to put links to your blog on my web site. I have realized that students who really understand micro are completely baffled by macro because they kind of work in opposite ways in their heads; the paradox of macro is the paradox of thrift.

    I believe that citizens need to understand this issue in order for the democratic process to work, so the contributions of the public intellectual in this sphere are extremely valuable. Indeed, I heard this program as I was driving home Tuesday night and it was apropos because we covered these issues in that day’s lecture on Chapter 17 of Krugman’s Principles text (“Crises and Consequences”), so I immediately referred my students to it.

  13. Michael Belzer

    Krugman’s “Macroeconomics” text book (principles course) repeatedly hammers on the point you are making, that the important thing to look at is the denominator. I would reinforce your efforts to make this point, which I believe escapes the public in part because it escapes the superficial press (almost all of them). Krugman points out that we ran our greatest deficits and created our greatest debt during WWII and grew ourselves out of it by increasing the denominator. A critical point that people MIGHT understand. Martin Wolf hammers on this point as well but he is talking to a rarefied audience.

  14. Hey Steph,

    Take it from Andy Warhol: “Don’t pay any attention to what they write about you. Just measure it in inches.”

  15. Way to Go Dr. Kelton! I was very excited to see you on C-span presenting a paper here in Washington D.C. During my studies at the University of Missouri-Kansas City(you taught me International Finance using a text book written by Paul Krugman), I became familiar with MMT, but I always wondered if these ideas will ever go mainstream. I wish I could strike a magic wand and have you on ABC this Week, Meet the Press, FoxNews Sunday, Face the Nation, State of the Union etc.
    I will be going to Capitol Hill to show any progressive lawmakers your current postings together with the graphs. Maybe they will get to know that even though “it is easier to fool people than to convince them that they have been fooled”(Mark Twain), you cannot fool all the people all the time.

  16. Hi Stephanie, I think you did a very good job, as you always do, with what you had; but Ashbrook seemed to elicit more from PK tan from you and also to listen to him longer. In addition, between the three of you, Tom, and the people who called in, you had really very little time to deliver the MMT view of things, and no opportunity to distinguish it from Paul’s views. Still, getting in NPR is a step forward. Hopefully, you’ll have other opportunities!

    • That is right Joe, but Paul Krugman is really coming around. Great for the cause as he gets on major media at will.

  17. The analysis is pretty standard stuff. The questions this argument raises in my mind are:

    1. Should the government be such a significant driver of private economic activity for an extended period of time?
    2. What distortions are introduced into the economy by having the government play such a significant role?
    3. What happens to this argument if the assumption of price stability is removed?
    4. What is the ratio of government spent versus GDP generated? Is it diminishing with larger debt loads?

  18. It’s not any kind of political priority at the moment, but it does matter that Paul Krugman, especially, continues to peddle large chunks of the neoclassical paradigm – even though the chunks he peddles are the less-obnoxious chunks. Krugman touts the Hicks IS/LM model as “Macro-101” and a near-perfect guide to the crisis. According to Bill Mitchell and also, (I think), Steve Keen, IS/LM is an obstacle to understanding the crisis. Paul Krugman still wants to keep his privileged place in the gentlemen’s club of mainstream, big-time economics. He likes the fact (evidently, since he doesn’t say otherwise) that the general public thinks his “nobel prize” has the same kind of scientific prestige as the ones for chemistry and physics. He doesn’t tell anyone that it’s awarded by a cabal of neoliberal Swedish bankers who answer to no one and can therefore use any criteria they choose. They have no connection at all with the real Nobel committee in Oslo.

    I’m all for a united front among MMT, Baker and Krugman. It is very exciting to hear Dr. Kelton along with Paul Krugman today. And since she is one of the movement’s most articulate spokespersons, we have reason to hope that positive audience responses like the ones in this column will lead to good ratings and more appearances. But the mainstream academic economists have a lot to answer for in the long run. The worst among them are not just wrong, they are dishonest and morally corrupt. I’ll go along with Krugman and name Glenn Hubbard as a good, or rather a very bad, example. Hubbard and others like him take money in exchange for their endorsement of economic ideas and policies favorable to the plutocracy. The movie “Inside Job” details his and several other top economists’ sickening records on this score. Now is not the time – we have other, much bigger, fish to fry right now – but a time will come when scores like this should be settled.

  19. @Smokey

    I don’t see anyone else answering your specific questions about Medicare and Social Security funding, so I’ll take a swing. BTW, James Galbraith is indeed an excellent source on this. But here’s the short version:

    There is no need to pre-fund retirement benefits in the first place. The U.S. is the only big country that even has a “trust fund” for these purposes. The best way to understand Social Security is as an inter-generational transfer payment. Working-age people transfer real goods and services to retirees, disabled people and victims of personal tragedies through the intermediation of benefit checks. The trust fund doesn’t add anything to the government’s ability to spend this money or cut these checks. From the beginning, the trust fund has always been a political prop for the program – FDR made it look like the payroll tax funded the checks so that conservative-minded people would accept Social Security. The reality is that one tax is just like any other tax – it functions to reduce the purchasing power of the person or entity being taxed. A government that issues its currency by fiat has no need to “save” bundles of it for any future purpose. From the point of view of the government, the exercise is meaningless.

    From the point of view of participants in the real economy, of course, it is anything but. The payroll tax reduces workers’ purchasing power, and so exerts a contractionary effect on the economy as a whole. People have less money to spend on goods and services. Companies have less money for expansion. This effect may be counteracted by lowering other taxes or by running a budget deficit. But as it is implemented today, payroll taxes are deeply regressive. High-income people and people like Mitt Romney, who make all their money from capital gains, hardly notice this tax. Its regressiveness even embarrassed Ronald Reagan, who agreed to reduce its effect on the working poor through the earned income tax credit, but this just means that the tax falls most heavily on higher-skill, better-paid workers who manage to get a bit closer to six-figure salaries.

    The real issue for retiree benefits is whether the economy is producing enough real goods and services to be able to afford to transfer them, without charge, from the workers who create them to the retirees who need them but can no longer well afford them. Policies that keep the real economy at full employment and output obviously aid this process. Policies like the ones we have now fail completely to address this. By taxing workers too much and by spending too little, the U.S. government leaves the economy chronically below full employment and chronically below its full output capacity. This is output we will never have a second chance to produce. Huge amounts of available labor remain idle even as trillions of dollars’ worth of public infrastructure continue to deteriorate.

    Medicare is not much different in principle. We need to control costs, but not by cutting benefits. Interestingly, the government’s accountants express no solvency concerns over Medicare. This is not because of trust funds or political games – it’s because the Medicare act has full-faith-and-credit language in it and Social Security doesn’t.

    In a nutshell, what we need to do in order to afford future retiree benefits is to heal the real economy and invest in real capital, both human and physical. The government should guarantee a job with a living wage and baseline health insurance to every person who wants work. Putting 24 million people to work and paying them to work will not cause inflation – there is so much unused capacity in America today that employing the unemployed can easily be paid for from the value of the goods and services they themselves produce. Investing in education, scientific research and R-and-D is another good way to ensure that America will be prosperous enough in the future that people will be able to retire with dignity and get decent health care.

    The best, most complete account of these issues may be the joint testimony of James Galbraith, Randall Wray and Warren Mosler to a government panel – the Federal Accounting Standards Advisory Board:


  20. Stephanie, I’ve been telling friends recently that I think you are one of the best people to listen to for a very comprehensible MMT education and this interview confirmed that view.

    Picking up on a suggestion that you made in the interview, I emailed my congressman and senators suggesting that any grand bargain that moves in the direction of austerity is a mistake and suggesting that they should just repeal the Budget Control Act of 2011 that established the fiscal cliff in the first place. I further suggested that the status quo is better than anything I’ve heard proposed by either party.

    Finally I sent a copy of my email to 30 friends and relatives who I’ve been tutoring in the ways of MMT just in case they also wanted to contact their congressional delegation. You ARE having an impact.

  21. If the denominator in the deficit/GDP equation increases by having extra deficits, will it not be advisable that GDP increases by having a gradual reduction in deficits by improved productivity and austerity!

  22. Good job as always Stephanie.

  23. Well, fellow readers, we can try to get the MMM out by Tweeting it and telling others about it. I blog it.

  24. “the public sector’s deficit spending becomes the private sector’s surplus.”

    But where does the private sector’s surplus end up ? Most likely in offshore tax haven banks, where it does the US real economy no good whatsoever. It is not taxed and just pumps up the stock, bond and commodity markets.

    • bubbleRefuge

      Most of it ends up in US treasury securities. Investment income should be taxed higher than labor income in a normal economy. Don’t forget the public sector’s deficit spending created jobs, and public sector real benefits such as bridges, roads, health care benefits, etc. Who really cares if wealthy people have large account balances sitting static. Its pretty irrelevant to the economy. If the money is going into commodity speculation, etc, then this activity should be regulated more heavily.

  25. What is gained by shifting debt from the private to the government sector? MMT guys act as if the government existed independently of the private sector, when, at the same time, they admit it is simply a mirror image (see chart in above post). Assuming the government does not default, any debt must be serviced (increasing debt service costs) and paid back. The private sector windfall of large fiscal deficits is simply a loan from the future. The government could inflate its debt away, but that would be a tax on the private sector. There is no free lunch – and why would there be one?

    • It hasn’t been “paid back” for 175 years. It gets rolled over. If MMT ever takes hold, government debt service costs will matter, because they occupy some of the “policy space” available for non-inflationary deficits, but if the government offers only short-term debt and keeps the interest rate at zero, which MMT also advocates, then it is not a big problem. And if the government chooses not to issue bonds, which MMT also shows is possible, then it is not a problem at all. Over 1/3 of the bonds outstanding now are owned by the government itself, and have no economic effect on anyone. They are available to resell to the private sector, if it demands additional bonds at 0% interest.