Stephanie Kelton Interviews L. Randall Wray on Monetary Policy and the Economics of Retirement Security

By Dan Kervick

Stephanie Kelton interviews L. Randall Wray in the excellent new podcast series from New Economic Perspectives.  The initial part of their discussion deals with the Fed, the “taper” and the inadequacies of monetary policy in dealing with the problems of unemployment and aggregate demand shortfalls. They then turn to a lengthy discussion of the three legs of the stool for retirement security: pensions, private savings and Social Security. Wray makes the point that defined-benefit pension programs have become decreasingly viable as developed economies have changed demographically, and that private savings were devastated by the 2008 financial meltdown and remain at risk as the potential for further financial crises looms. That leaves Social Security, which is under political attack in Washington by the likes of Pete Peterson and his acolytes in both parties.

Wray and Kelton both clearly bring out the point that it is illusory to think that we can provide for our citizens’ future retirements simply by stashing away money, whether in private plans or public plans. What is crucial is that we intelligently invest real resources in creating the real assets that will support the whole population in the future: the young, workers and retirees alike. Focusing on monetary saving, and draining even more dollars from the economy to build up accounting balances in the Social Security trust fund, can actually damage our capacity to support future retirees by running afoul of the paradox of thrift. Excess monetary saving in the present means that we fall short of the public and private investment spending we need to carry out now to sustain and build prosperity for future generations. Wray also makes the point that  public investment is particularly important when we are dealing with the long time scales involved in making social decisions about provisioning the future.

Unfortunately, contemporary Washington seems blind to all this. It often seems to me that beltway politicians are especially prone to the mistake behavioral economists call “money illusion”: the tendency to confuse real, non-monetary values and assets with the nominal tools used to measure and manipulate those values and assets. As a result, the politicians engage in obsessive and contentious bean-counting with the Social Security trust fund as a substitute for attending to their primary duty to develop the economy and lay a strong foundation for future prosperity.

Cross-posted from Rugged Egalitarianism

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34 responses to “Stephanie Kelton Interviews L. Randall Wray on Monetary Policy and the Economics of Retirement Security

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  3. Hi Stephanie,
    Great podcast as always. You should do a cross browser check on the website though. The image is not shrinking to fit. You just want to add the the size tags to the img url instead of trying to resize it for every browser.

  4. This can be a bit confusing for the non economist. The savings and deficit thing, just to make sure… we DO want private savings correct? Of course people need to spend and firms should invest etc but overall we want the private sector to save? Because we saw what happens when it does not… It’s the government that we’d want to run deficits, but can someone enlighten me on why exactly? The three sectors balance is indeed a simple and powerful picture but guess I am curious the background to it.
    I get that individuals/households would have more money to thus save or invest, but what about corporate profits and the relation?

    • I don’t think they are arguing against private saving, just warning that there is such a thing as too much of it.

      • Oh absolutely, and I wasn’t accusing them of making that claim (I believe Wray has said many times before they private sector can’t net deficit spend, and hsouldnt take on more debt in a situation like we have) guess I’m more curious about the gov deficit-corp profit link they mentioned. Since I get why private sector debt can fuel corp profit obviously

        • I get that individuals/households would have more money to thus save or invest, but what about corporate profits and the relation?

          They are saying that reducing the money supply (reducing the deficit) reduces corporate profits, and cited a Fidelity article that warns their customers about that in a 2012 article: Threats to Corporate Profits. Wish Kelton would supply us with a copy if she has it; I can’t find it. Wray explains that it’s the Kelecki (pronounced Kalesky) profit equation.

    • It’s the government that we’d want to run deficits, but can someone enlighten me on why exactly?

      Because the only way that Net Financial Assets (NFA) can increase in the economy–this goes to the desire of people who want to save more, or net save–is when the government increases the money supply by running a deficit. Simply said, the government has to spend more to get more money into the economy. Otherwise, the economy is running like a dryer with all the available dollar bills rolling around and around: one person’s spending is another person’s saving, you’re just exchanging ownership. No new dollars are getting into the economy. You need to run a deficit to do that especially when everyone in the private sector is holding onto their dollars (saving) and not spending.

    • The three sectors balance is indeed a simple and powerful picture but guess I am curious the background to it.

      Wynne Godley, Stephanie Kelton’s PhD advisor, if I remember correctly.

  5. The two “sides” and their “solutions” to the “issue” was a brilliant part I must say.
    All the ” ” are necessary as I see more and more how wrong mainstream thought is, they don’t even have the true issue understood.
    We have a spending problem, no we have a revenue problem. Even if compromise happens we have the wrong path going forward, yikes bleak future. Hope somehow the real truth can get known.

    • We have a spending problem, no we have a revenue problem.

      I think you meant “We have a spending problem, NOT we have a revenue problem.”

      • No, it’s what they said in the podcast, one side (R) says there is a spending problem, the other side (D) says there is a revenue problem. The compromise will be a little less spending and a little more revenue, just like the last two times. Or an attempt at that, which will be largely thwarted by automatic stabilizers when the recession hits.

  6. That “sinking fund” discussion is really interesting.

  7. I have learned so much more on how US economy works on this site then reading NYT-Krugman blog or WSJ editorials. On Stephanie’s podcast she really gets to the heart of each subject she brings up. Podcast is great opportunity to hear rational discussion on current economy instead of 1 min. sound bites that come on nightly news.

    The emphasis on deficit by media and Congress really points out how clueless they are to having a vital and growing economy. At least here and on podcast you find out the US gov. is not like an individual, corp. or state gov. But news tells us that we need to tighten our belts and pay off our debts. Meanwhile this same news avoids what happens when you have austerity as your economy policy (European market results-over 4 yr period/only one qtr. of growth). So many small US businesses are looking for customers. But with flat wage growth and need to keep debts low customers are constantly looking for price reductions or bargains.

    To me the best point came in second podcast with L Randy Wray on how US has moved to far into a financial driven economy just like it did before 1930’s depression. And mistaken move after 2008 great recession by US gov. to prop up financial institutions without breaking up the big banks and reinstate regulations.

    We are heading into financial disaster. With Congress intent on bringing the gov. to a halt over Obamacare and extending US debt only after they get more cuts to budget.

    I look forward to more podcasts.

  8. Hi guys. I’d would really like some help understanding your POV.

    1. Getting rid of “interference” in the monetary system means no issuance of bonds and no interest rate by the fed?

    a. What happens to existing treasury securities?

    2. With no interference, then this implies deficits funded by new dollars, no? The gov’t then simply taxes at a rate to keep prices at a certain level?

    a. Are there special conditions that might warrant a lower or higher inflation rate? i.e. if there is a massive drought and food production decreases significantly, is decreasing the money supply warranted?

    3. How does the transition job guarantee program keep fast food et al. workers from willingly leaving their work to join the transition program? Fast food is hard work and rock bottom pay. Seemingly, the JG would pay at least this much.

    a. What is the criteria to maintain employment at JG? If not up to JG standards, is there a permanent ban? or…?

    b. Is there a limit to how long one can be on the JG?

    b. Isn’t there a chance that many not currently considered “unemployed” would seek work when the JG program is in operation?

    4. I still don’t understand how Volcker’s interest rate hike was inflationary (~W.M) and also don’t see how the inverse is necessarily true (~everyone else). Higher rates on treasury securities is just a shift in assets amongst the private sector. Something else is going on that I am missing.

    I’ve been through 7DIF twice and watch MMT presentations on YT quite often. These new podcasts are great food for my ears. With your help, I will be able to see the world through your lense.

    Thanks.

    • I’m sure the writers/more econ versed people can shed more light but you bring up a good point.
      From what I gather, a JG should be at the minimum wage and not above it (though this seems to vary amongst the writers) the idea being it won’t compete with private sector and cause workers to jump to the JG.

      You’re right it’s “lowly” work, a worker could leave for a “better” job that still pays the same but I’m guessing the theory is fast food places would feel pressure to raise wages to somewhere employees would find acceptable. A comp like Wendy’s can do this easier than mom and pop burger place in town, it is one concern I have with the JG (which overall is a brilliant idea) possible effect on small business, and fine details about what may exactly result.

      • The JG would effectively set the minimum wage, because if any private sector employer offered less than the minimum wage, workers would jump from that employer to the public sector. Once you have a JG with a floor wage, you probably don’t even need any additional minimum wage legislation.

        • I disagree. With JG, private employers and employees ought to be free to negotiate wages and terms to their mutual satisfaction. There are always many people who want part-time work, are not available to work full-time, have no need to make a living wage with benefits, and will gladly work at less than the JG compensation package. Full-time students living with parents are the most obvious ones. It is only breadwinners whose wages will have a floor set under them by JG.

    • Hi guys. I’d would really like some help understanding your POV.

      1. Getting rid of “interference” in the monetary system means no issuance of bonds and no interest rate by the fed? No.

      a. What happens to existing treasury securities? Nothing. They’re US currency. Only ~12% of US currency are dollars bills. The rest are Treas securities with different rates of maturity but 100% tradable: T-bills (mature within a year), T-notes (2-10yr), T-bonds (10-30yr.)

      2. With no interference, then this implies deficits funded by new dollars, no? Deficits funded by new dollars. The Treasury then issues securities in the same amount–according to Frank Newman–and pension funds, endowments, foreigners, your grandma (savings bonds for graduation), anyone who wants a safe place to park more than the FDIC $250,000 limit, buy them. The gov’t then simply taxes at a rate to keep prices at a certain level? No. Taxes are not for price control. Taxes regulate the private sector spending by reducing, or adding more money, to spend.

      a. Are there special conditions that might warrant a lower or higher inflation rate? i.e. if there is a massive drought and food production decreases significantly, is decreasing the money supply warranted? Absolutely not. You want to help farmers. Droughts are regional. Think 1930s Depression. Import food to help the population. Increase research in the problem, but with public money. When natural disasters happen, the federal government is supposed to help the people. Think hurricanes and tornadoes, Katrina.

      3. How does the transition job guarantee program keep fast food et al. workers from willingly leaving their work to join the transition program? It doesn’t. Fast food is hard work and rock bottom pay. Seemingly, the JG would pay at least this much. Yes, and with benefits. We are losing over $9 billion/day from the lack of output from those out of work. This will have severe consequences down the road that none of the congressional numbskulls are computing. Think of the WPA and other projects to put people back to work in the 1930s. We want this.

      a. What is the criteria to maintain employment at JG? If not up to JG standards, is there a permanent ban? or…? Same as any other company: get to work ontime, do your work, and don’t show up drunk or stoned, unless you’re working as a medical marijuana subject.

      b. Is there a limit to how long one can be on the JG? Argentina ran it for two or three years that I know of. Two million people out of a 35 million population. Wildly successful. Their annual growth soared to 9%.

      b. Isn’t there a chance that many not currently considered “unemployed” would seek work when the JG program is in operation? Sure, but so what. The govt might be offering more interesting work…therefore, increases skill set.

      4. I still don’t understand how Volcker’s interest rate hike was inflationary (~W.M) 20% for the cost of borrowing money?!? You obviously weren’t alive then. 😉 and also don’t see how the inverse is necessarily true (~everyone else). Which would you rather pay? 20% for your mortgage or 3.5%? Higher rates on treasury securities is just a shift in assets amongst the private sector. There’s no reason for rates to be higher and compete with private assets; Treasury Securities have no risk. What if everyone left their money in TS and did nothing with it? Something else is going on that I am missing. Read Frank N Newman’s book “Freedom From the National Debt”.

      • ok, so the new treasury securities will be at 0 percent interest right?

        “Taxes regulate the private sector spending by reducing, or adding more money, to spend.”
        So the idea is to keep the economy from overspending,Preventing price inflation? proactive vs reactive?

        “You obviously weren’t alive then. ;-)”
        Established 1986

        “Treasury Securities have no risk.”
        Self-imposed risk only I believe.

        Thanks for the recommendation on the book, I’m on it doggonit

        • ok, so the new treasury securities will be at 0 percent interest right?

          And short-term only, up to 3 months. Existing ones keep their current coupon.

          “Taxes regulate the private sector spending by reducing, or adding more money, to spend.”
          So the idea is to keep the economy from overspending,Preventing price inflation? proactive vs reactive?

          Hopefully. And preventing un(der)employment, too. With JG, managing the size of the JG work force. The Fed’s “dual mandate”, done by fiscal policy. Because monetary policy is ineffective at it.

          “Treasury Securities have no risk.”
          Self-imposed risk only I believe.

          No credit risk. And for short-term, no interest rate risk or term risk either. You could lose your shirt buying 30-year T-bonds today, if the Fed continues its historical cycle of raising and lowering, and you have to sell at the wrong time.

          It’s also important to note that the spreads between treasuries and other debt would not change much. 0% doesn’t mean you get a mortgage at 0%, or that businesses can borrow at 0%. Only short-term government securities would be 0%.

    • 1. Getting rid of “interference” in the monetary system means no issuance of bonds and no interest rate by the fed?

      I don’t know that MMT describes policy as “interference”. That is more an Austrian view. MMT reveals that it is not necessary to issue bonds, a monetary sovereign does not need to borrow its own currency. But there are reasons it may want to provide a risk-free savings vehicle. MMT, Mosler especially, says the natural risk-free rate of interest is 0%, so that if the government does issue bonds, the Fed should buy and sell them so as to maintain the overnight rate at 0%.

      a. What happens to existing treasury securities? Nothing.

      2. With no interference, then this implies deficits funded by new dollars, no? The gov’t then simply taxes at a rate to keep prices at a certain level?

      And unemployment (the JG workforce) at a certain size. Taxes, not spending or monetary policy, is the proper tool to control aggregate demand, which is what determines both inflation and unemployment.

      a. Are there special conditions that might warrant a lower or higher inflation rate? i.e. if there is a massive drought and food production decreases significantly, is decreasing the money supply warranted?

      No. Increases in food price due to drought is not inflation. Inflation is a continuing increase in the general price level. Measuring that is an imperfect art, but some low level of inflation is probably unavoidable in a healthy, growing economy. With rising population and limited land mass and energy sources, there is a natural increase in demand and reduction in supply of these two pervasive resources over the long term.

      3. How does the transition job guarantee program keep fast food et al. workers from willingly leaving their work to join the transition program? Fast food is hard work and rock bottom pay. Seemingly, the JG would pay at least this much.

      Most JG proponents envision total compensation in excess of minimum wage, more so in benefits (health care and child care) than cash wages. Nothing would or should prevent a fast food worker from willingly joining JG. Fast food companies will have to raise their compensation and prices if that happens, and they cannot hire enough non-breadwinners to compensate for the loss of full-time adult workers.

      a. What is the criteria to maintain employment at JG? If not up to JG standards, is there a permanent ban? or…?

      Answered above. Same as a regular job.

      b. Is there a limit to how long one can be on the JG?

      No. If that is the limit of one’s ability and ambition, no problem. JG also should allow for training and counseling for those who need it.

      b. Isn’t there a chance that many not currently considered “unemployed” would seek work when the JG program is in operation?

      I hope so. The labor participation rate is dropping alarmingly rapidly.

      4. I still don’t understand how Volcker’s interest rate hike was inflationary (~W.M) and also don’t see how the inverse is necessarily true (~everyone else). Higher rates on treasury securities is just a shift in assets amongst the private sector. Something else is going on that I am missing.

      I differ from MMT on interest rates. I think there is validity to the MMT view on its income effects, but there is also validity on investment effects, and I think that under normal circumstances for normal borrowers the raising of rates by the Fed has a larger negative effect on the economy than the positive effect of the increased private sector income. It is true that every time the Fed inverts the yield curve, recession follows. It may only be a case of correlation with other things going on, which are both the true cause of the recession and the motivation for the Fed’s action, but there is a theoretical explanation for causation that is convincing to me. Besides, the increased private sector income goes mostly to agents with a low propensity to consume, while the reduced borrowing is by agents with a high propensity to consume. It makes sense to me that less borrowing slows the economy more than the higher income speeds it up. But that’s just me.

      • “I don’t know that MMT describes policy as “interference”.”
        I’m trying to say things in Mosler terms, but might have misunderstood him slightly.

        • OK, you’re talking about him saying “the natural rate of interest is zero”. Meaning that if the Treasury didn’t issue bonds then the government deficit would have created excess reserves in our banking system, and banks would bid their overnight (risk-free) lending rate down to 0%. Since the monetarily sovereign government doesn’t need to borrow its own currency, the only purpose of issuing bonds would be to support a non-zero interest rate.

  9. QE shifts financial assets from higher yielding assets to lower yielding assets (3% T-bills to 0.25% reserves). This would seem to have the effect of reducing the federal budget deficit by reducing interest payments. Recent data from the St Louis Fed indicates a US balance of payments (trade) of -440 billion. Recent federal deficit forecasts are of 642 billion, implying an increase in net domestic private financial assets. But, how believeable are these numbers? Is there some way of adding to or subtracting from private sector net financial assets without having that change show up in the federal budget balance (outside of seigniorage)?

    • Personally, I would say the answer is “yes”. If we want to take a comprehensive sectoral picture of the entire flow of dollar-denominated funds and changes in holdings of dollar-denominated financial assets and liabilities, we need to include the entire government and look at its consolidated balance sheet: Fed + Treasury combined. When we do that, we include payments to and from the Fed that are not reflected in the federal deficit.

      The Godley-style sectoral balances picture is perfectly correct as far as it goes, but it is derived from combining the national income and product account formulas, which only reflect payments that are for “final goods and services”, with another formula for the aggregate disposition of private sector income.

    • QE shifts financial assets from higher yielding assets to lower yielding assets (3% T-bills to 0.25% reserves). This would seem to have the effect of reducing the federal budget deficit by reducing interest payments.

      The Federal Reserve is buying treasury securities on the open market. The sellers (state or local governments, businesses, households, banks) have their own reason for selling them: buy something, they think the interest rates are going to go up and want to cash in on it, they want to invest in, or build, something else. The sellers also don’t know that the Fed is going to buy them; they just want to sell. No one is coercing them to.

      The Fed pays the seller’s principal and interest to the seller’s bank account at the Fed (the sellers bank’s checking, or reserve, account). Up to the bank to get it to the seller. Now the Fed owns the treasury security, and is earning the interest that the non-government sector seller would have earned. The Fed is earning interest. That interest is returned to the Treasury at the end of the year, per the 1947 law that all Fed profits must be returned to the Treasury. Last year around $100 billion was returned to the Fed.

      Interest payments have nothing to do with the deficit. Treasury pays all ‘interest payments’ by issuing more treasury securities to cover the amount. It costs Treasury the price of printing at the Bureau of Printing and Engraving to create treasury securities. Frank N Newman explains it in his recent book. He was Deputy Secretary of the Treasury. People the world over want treasury securities for their safety and security. That’s why they sell out on auction day.

      After Treasury spends, it then issues treasury securities to balance the spending and keep the money supply even. So Congress via Treasury authorizes spending to the ABC Airport Building Co in the amount of $50 Billion and issues treasury securities in the amount of $50 billion at auction to be bought by pension funds, endowments, foreign governments and banks, family trusts, Ross Perot, grandma’s savings bond for junior, and whoever wants safety for their money in excess of the FDIC $250,000 limit.

      The deficit, on the other hand, is only the record of the amount of spending that exceeds the amount of tax revenues received.

      • I neglected to add that the Fed returned the $100 billion (2012) to Treasury removes that amount of money from the economy, driving up the value of the currency by making it more scarce.

  10. Err…Brilliant…as was Warren’s podcast.

    Get thee to Darwin Steph.

  11. THESE PODCASTS ARE EXCELLENT!

  12. Re the 3-legged stool, I don’t see why, with appropriate fiscal policy to ensure full employment, the stool must rely primarily on Social Security. Why not let SS be a safety net, as it was originally intended, and allow, even encourage, people to save as much as they will need for their own retirements? As long as the government supplies the necessary money, by budget deficits, to maintain aggregate demand at full employment levels despite the saving, the paradox of thrift is inoperative, is it not? Doesn’t the negative effect of household saving depend on the assumption that no other sector picks up the slack?

  13. financial matters

    Wray actually said that he thought Social Security was ‘fundamentally wrong-headed’ in that it relied on what Keynes called the ‘sinking funds theory’.

    As a society, just saving money doesn’t really do the trick as that money has to be able to buy something. Reflecting Keynes, Wray thinks the best method for retirement security as a nation is investing in plant and equipment and a skilled, trained and educated workforce. This produces a healthy functioning economy rather than a financialized one where there is no there there.

    He does think household savings is good for the individual household and encourages it.

    I don’t think he’s debunking social security as a safety net but just saying that it is not going to be effective if there is no productive capacity backing it up.

  14. I hadn’t checked this site since Spring ’13 and was excited to see you now have a podcast!! I am now listening through every episode. Thanks so much and keep up the good work!!