Modern Monetary Theory

EconBuff Podcast #31 with Ryan Mattson

Dr. Ryan Mattson talks with me about a controversial economic theory of macroeconomics known as Modern Monetary Theory (MMT). Dr. Mattson walks us through what the five beliefs of MMT are and evaluates the credibility of these beliefs. We discuss the implications of MMT and Dr. Mattson explains how these implications relate to the government budget, which is a favorite topic of MMT proponents. Dr. Mattson argues that regardless of your views on a Green New Deal, Federal Job Guarantee, or other large spending programs, MMT does not provide a basis for funding them. Finally, Dr. Mattson address the stability of inflation in recent decades in the presence of large government deficits, and we explore how the state of the economy impacts the role of fiscal policy and monetary policy.

Photograph: Ray Tamarra/GC Images

Transcript

Stitzel: Hello and welcome to the EconBuff Podcast. I'm your host, Lee Stitzel. With me today is Dr. Ryan Mattson. Ryan is the Research Associate at The Center for Financial Stability, and Professor of Economics at West Texas A&M. Ryan, welcome.

Mattson: Thanks, it's great to be here.

Stitzel: So Ryan our topic today is Modern Monetary Theory. So just start us off with what is Modern Monetary Theory, and maybe why are people so interested in it these days.

Mattson: Sure. So Modern Monetary Theory is generally originated from the works of Hyman Minsky, Georg Friedrich Knapp, and Abba Lerner. It's based in a certain idea of how money enters into and leaves the economic system. And it's been kind of evolved through a few more, kind of, modern papers (a more modern school) that's who has notable authors such as Stephanie Kelton, L. Randall Ray, and Pavlina Tcherneva. What MMT really is --- and that sets it apart from maybe the more mainstream economic monetary theory is --- in general what I kind of pair down to 5 specific points that they believe in. And they make these assumptions about their models and how they work. So the first one is: a government that prints its own money can't default. So The United States could continue to take on more and more debt because it can eventually monetize that debt, print more money, and then basically get rid of it through that. This has some roots in the works of Raúl Prebisch on something called import substitution industrialization, which was enacted by many emerging economies in the 50s, 60s, and 70s. The only limit --- this is the second point. The only limit to creating money is inflation. And this is actually straight out of Milton Friedman. So this is an interesting combination we have here of Keen, Prebisch, and Friedman. But so, the only limit that they have in creating this money is not in terms of default but inflation. The only penalty that will be paid is if there is higher inflation that they based on the money being used to pay off the debt. The third point --- and this is where it really starts to get distinguished. Taxes are a tool to take money out of circulation. [Taxes are] not a source of revenue. And I want to stress this part very, very clearly. In Modern Monetary Theory --- the works that I've read anyway --- taxes are not about the government bringing in revenue. Taxes are about the government taking money out of the economic system, kind of, in the same way The Federal Reserve or central bank would increase or decrease the money supply. Number four --- bonds so on the other end. Bonds are a tool to put money into that system. They're not debt per se (or not a source of debt). But they are a way to put money into a system. So if you want to stimulate the economy, [then] issue more bonds. If you want to contract the economy, [then] increase taxes. And then number five, with this point the…. Excuse me, my phone is going off.

Stitzel: No problem.

Mattson: One quick second. There we go. Number five: the crowding out within the economy. I'm going to give you some error there in case you want to cut out that. And number five: the crowding out effect is negligible. Which what crowding out then is: if the government decides to issue a lot of bonds, [then] they are now beginning to increase demand for those bonds. And then there's crowding out of private investors [who] can't invest as well. But in Modern Monetary Theory then, the crowding out is negligible. It may be positive, but you don't have to worry about it. So those are the general, kind of, five aspects of Modern Monetary Theory that go into how they make policy decisions.

Stitzel: And you'd say the first two are not particularly (I don't want to say) controversial, but their…

Mattson: Yeah.

Stitzel:…common to other types…

Mattson: Yeah.

Stitzel:…of Monetary Theory (or really Macroeconomic Theory).

Mattson: Hmm mmm.

Stitzel: And then the latter three are what distinguish them?

Mattson: Yes. Yes.

Stitzel: So go ahead.

Mattson: Well, and on that first point, you know --- the government that prints its own money cannot default. We do understand [that] yes, they certainly can. And they have that history to it. The United States may be in a uniquely privileged position, based on it being the reserve currency of the world; [and] that it could behave in this way more so than say Mexico, Argentina or Zimbabwe.

Stitzel: Yeah. So let's start by unpacking those different things.

Mattson: Hmm mmm.

Stitzel: So when my listeners hear Modern Monetary Theory, I think they have a very grandiose [idea about this topic]. And, of course, I mean, if you're not sitting down and studying these things, [then] you're always going to be some superficial nature to the way that you understand things. And so they're going to want to hear: is this really a justification for spend whatever you want? There's, you know, there's no such thing as a limit to the type of spending. And we're going to get…

Mattson: Hmm mmm.

Stitzel:…to all of that. I'd like to sort of unpack the things that you just said --- which [is] a little bit unique [in the] way that you've presented it; [and] which I really like [the way] that you've encapsulated things. So, let's go through these one by one. Give us just a sense of them. You know, we'll kind of keep it brief hopefully. Cochrane --- John Cochrane of Chicago --- the writing that he's done on this [is] fairly limited admittedly. You know, he's really focused on the first two points. The first two points that he has overlapped perfectly with yours. Maybe he read your paper. And he basically says [that] both of those first two points are true. And again, he's not writing a lot on them. So maybe he would qualify them. Walk us through that.

Mattson: Yeah.

Stitzel: Countries that print their own currencies --- they don't have to default on excessive debt. You said it slightly differently but.

Mattson: And I'm taking this statement to an extreme here to emphasize. The point is that in Modern Monetary Theory, debt doesn't matter.

Stitzel: Hmm mmm.

Mattson: Debt is not --- this is fiscal policy turned into monetary policy.

Stitzel: Yeah.

Mattson: So, that increasing of debt to say 80% of GDP, 90% of GDP, 120% of GDP doesn't matter at all. What's going to matter is the deficits, and the level of taxation, and [the level of] spending. if you want to --- like a The Federal Reserve would --- say increase the money supply, [you would do this] by buying bonds and pushing money out; [whereas] then decrease the money supply by bringing money in and selling bonds.

Stitzel: Hmm mmm.

Mattson: What Modern Monetary Theory is doing is giving that power to the federal government through fiscal policy.

Stitzel: Right.

Mattson: If they want to manipulate inflation rates and, you know, increase, or decrease those, or create monetary stimulus, then instead what they do is they would increase the deficit to push out money. You could do that two ways. This is very Keynesian. You decrease taxation at the same time as you increase your spending, [and] thus expanding your deficit. The whole big “D” debt doesn't matter. But the deficit, that level [of deficit] is what's going to matter. And that's what these two first principles provide --- is they provide a way to turn that monetary policy tool into a fiscal policy tool.

Stitzel: So let's jump right into one of the, like, glaringly obvious issues with that...

Mattson: Hmm mmm.

Stitzel:…is raising your taxes to pull money out of the system, must be accompanied with cutting the spending. You can't raise your taxes, and then turn around and spend it, and [then] take any money out of the system. Are Modern Monetary theorists ---- are they [and] do they have that understanding? And because that's what you just described, right? Raising your taxes. Cut your spending.

Mattson: Hmm mmm.

Stitzel: That actually would pull money out. You know…

Mattson: Yeah.

Stitzel:…that our listeners are going to ask: O.K., and where does that that money go? You know, but the point is that it's not in circulation. So, talk to us about that a little bit.

Mattson: So, it deals with, again, in the same way that The Federal Reserve will pull money in or push money out. In Modern Monetary Theory --- taxation is not revenue. This is not a household. You know, I don't have to get paid this amount to pay off the debts that I've incurred.

Stitzel: Hmm mmm.

Mattson: The point is that you are going to be targeting an inflation rate within an economy, or targeting an unemployment rate within an economy, using your taxation and your spending. And it's no longer about even what you do with that taxation and spending, or how it's done, or how it will be repaid. What it's about is, in that moment, [it’s about] increasing or decreasing the money supply. And this is where we get that Modern Monetary Theory aspect of it. It is a monetary focused theory that the debt does not matter. You could have low debt, or you could have high debt. That doesn't enter into the equation. What matters is the deficit spending that is pushing out of stimulus --- and maybe trying to reach a Jobs Guarantee or trying to reach a higher inflation target. Or, you know, after you've maybe made that stimulus and things are going well, then to pull money out you increase taxes, and you decrease your spending to pull that money out. Did I answer your question?

Stitzel: I don't know. I don't think. I don't think that my listeners, I don't think they're gonna, like, recognize that as Modern Monetary Theory. And that's not their fault.

Mattson: Hmm mmm.

Stitzel: Right? That's the public discourse around that. So, they're going to say: wait a minute. When I heard Modern Monetary Theory paraded around, the idea is we can just, like, spend whatever we want…

Mattson: Yeah.

Stitzel:…and there will be no repercussions --- which, you know, let's be fair to the Modern Monetary theorists. I don't think the people that you mentioned earlier that are advocates of this --- I don't think they're actually arguing that. And I could be wrong about that. I've not read everything…

Mattson: Hmm mmm.

Stitzel:…that they that they've written. And, you know, I think what it is that Modern Monetary Theory gets right is: it is about real resources, right? It's/they're one of the things that they're doing is: they're not really interested in dealing in nominal terms all the time, which I think is a good thing. And I want to get into that later, but I don't want to put the cart before the horse. So just, kind of, help us find our grounding here. First two points --- would you say those are roughly true? Or what would be your counter points there?

Mattson: First point I would say, you know, governments can certainly delay defaulting through printing of money. I don't think that they can completely avoid it, or they can't default. I think they can delay it for a time. O.K., so I'll agree with that. And absolutely, I'll agree with the Friedman point, that the only limiting part to creation of money is inflation. Yes. So those two, I think, generally a lot of people would agree on that.

Stitzel: So now, let's turn to your, sort of, distinguishing points ---3, 4, and 5. Say those again for us, so that we have them fresh in our mind.

Mattson: So taxes are a tool to take money out of circulation. Taxes are not a source of revenue. They're a monetary policy tool, or fiscal/monetary policy tool. And bonds are a tool to put money into the system.

Stitzel: O.K.

Mattson: So the government runs up debt --- not to pay for things, but to put money into the system. The government raises taxes --- not to get revenue, but to take money out of the system.

Stitzel: So evaluate that for us. That my --- I think your people who've had --- principles of macro [students are] going to recoil at that and say: that's not what I learned when I took econ 101.

Mattson: So what we usually see with fiscal policy is that we see infrastructure spending programs. And, you know, or even at a more local level, you know, you pass a bond issue, but your taxes have got to pay it back at some point. Modern Monetary Theory does not deal with this. The goal of the tax --- of whether it's an increase or a decrease --- is to either take money out of the system or push money into the system. The goal of selling bonds or buying bonds is to push money out into the system or bring money back in. These are not how we generally think about this. And in fact, the people who are advocating Modern Monetary Policy often advocate things like a Green New Deal. Which, you know, the theory behind this is, you know, you make this large infrastructure spending program that will increase productivity, and increase jobs, and increase output. And that's a good thing. But then the other side of Modern Monetary Theory is that then the/this fiscal side of things. The federal government has to also account for the inflation that that would put in. And this is where, I think, there's a lot of misunderstanding and confusion and what Modern Monetary Theory is actually suggesting. Because a Green New Deal [that is] a large infrastructure spending to the tune of --- what were the numbers? I used to have those up. And I'm sure I'm exaggerating on one of those. What was it? $50 trillion dollars over 10 years, right?

Stitzel: Hmm mmm.

Mattson: Does that…

Stitzel: Yeah.

Mattson:…sound about right?

Stitzel: $50 trillion is the number I had in front of me, but I don't have the…

Mattson: O.K.

Stitzel:…timeline there. But…

Mattson: Yeah.

Stitzel:…these days that doesn't even sound like a lot. So...

Mattson: It doesn't. It doesn’t, especially in the wake of COVID-19. But $50 trillion dollars over 10 years, let's say, with your regular orthodox Keynesian macroeconomics, you know, you would argue that would have, you know, an inflationary effect; [whereas] that then the central bank would have to accommodate for, and there may be some crowding out. That's --- you would have to accommodate for [the fact that] you're crowding up some private investment by taking out all these bonds or loans to build highways, or solar farms, or wind farms. But Modern Monetary Theory --- if you look at the paper by Dr. Pjesky and I --- has this other side to it that's not been advocated by some of the politicians who are talking about it. And that is that the federal government is beginning to dabble in The Federal Reserve's game. The federal government then has a responsibility --- and this is something that's posited by a lot of the (in this) new school of MMT thinkers that I mentioned earlier that the federal government then would still be responsible because they [need] --- [to] look at the inflation rate. Well, that would mean that after a $50 trillion dollar stimulus, taxes would have to go back up, because that's pushed that money out. And [the] recession is over, [the] depression is over. And then they still have to pull it in at some point afterwards. So any tax decrease (if we're going to go with that) --- any tax break people get on an MMT side, or government spending increase that people get on the MMT side --- has to be balanced by the inflation rate. It has to be balanced by what the federal government deems as appropriate in terms of an inflation target. And so, what Dr. Pjesky and I did is: we decided we were going to take MMT very, very seriously. We looked at all of these papers. We got these five general points. And we created a formula --- in the same way that you can describe what The Fed is doing with interest rates in their inflation targeting --- and posited that if you're going to follow MMT, you target deficits because that's the tool.

Stitzel: Yeah.

Mattson: That's the way that you push money in.

Stitzel: So are MMT advocates --- are they arguing you don't have to worry about deficits? And you're saying that's an oversight on their part? Or they're saying..

Mattson: Oh.

Stitzel:…deficits: that is what matters. The debt…

Mattson: Well…

Stitzel:…doesn't matter.

Mattson: Well, let's be clear on that. Debt doesn't matter. Deficits matter if you want to stimulate the economy.

Stitzel: O.K.

Mattson: And that is, you know, that's rooted in Keynes and the original fiscal monetary stimulus. MMT is placing an added inflation requirement on fiscal policy.

Stitzel: So, one of the questions I wanted to ask was: does MMT actually suggest that government spending doesn't need to be constrained by the need to raise taxes? But you've just described, like, removing the need for raising taxes by one step. That's to me what I'm hearing. What am I missing there?

Mattson: Well, you're missing the point of raising taxes. We're not gener[ating revenue]. When I talk about needing to raise taxes after a stimulus, for example, I don't mean to pay off debt.

Stitzel: Hmm mmm.

Mattson: What I mean is: I mean to pull money out of the economy and maintain a stable inflation rate. So deficits --- like short-term interest rates that The Fed targets --- are the targeted tool (or would be the targeted tool) to enact a Modern Monetary Theory (fiscal or monetary policy), whether or not there is that much in there. Let me put it this way: The Federal Reserve doesn't really care how much money is in the system.

Stitzel: Right.

Mattson: The Federal Reserve --- yes, they count the money supply, and this is how much money is in The United States economy. But that doesn't matter. What matters is how fast it grows, because then that affects the inflation rate. So The Federal Reserve is looking at interest rates as a way to stabilize that. Modern Monetary Theorists would say that the federal government now has to look at a way to stabilize that. That is what Modern Monetary Theory is saying.

Stitzel: So, help distinguish the yeah I think listeners are going to grasp what the difference between debt and deficit is.

Mattson: Hmm mmm.

Stitzel: Do you need to set us up with why, you know, a new Keynesian or a monetarist model would say [that] debt matters? Or what's the missing piece there to, kind of, tie these things together?

Mattson: So, I mean, yes. A traditional Keynesian would say that] we are constrained by a certain amount of debt. A government has to be credibly believed…

Stitzel: Hmm mmm.

Mattson:…that they will pay off these debts within the future. And so that, you know --- it's not a budget balancing act. But it's --- O.K., if you're gonna sustain a negative debt payment, [then] you have to at least show you can pay it back. And that is part of the credibility that the federal government provides for their debt, for their bonds, and also for their taxes. Now you can transfer this over to The Federal Reserve. Part of the whole reason of The Federal Reserve enacting certain monetary measures is to maintain their credibility. They need to be seen as transparent, as effective, and able to influence those interest rates and influence that inflation rate. So, from a Keynesian perspective, I would say, you know, do debts/does debts (big “D” debt) matter? Yes! [It matters] to the credibility of the federal government. For a Modern Monetary theorist, debt does not matter. To the credibility of the federal government. Big “D” debt doesn't matter. The deficits create that credibility by the jobs the government creates by increasing deficits, or the inflation that the federal government contains by decreasing deficits.

Stitzel: So, when you say big “D” debt, you mean the total debt, not a particular…

Mattson: Total debt. Yes.

Stitzel:…piece of debt that's been issued? Yeah.

Mattson: Hmm mmm.

Stitzel: O.K. So, when you said a moment ago, in response to does MMT suggest government need not be constrained by the need to raise taxes, you were responding from the Modern Monetary Theory perspective? Is that right?

Mattson: Yes.

Stitzel: O.K. So, if you step outside that, and evaluate that as a statement, [then] do you see problems with it? Or do you think that's true?

Mattson: I see problems with it. The problems that I see is that if, I mean, again, we have this credibility argument. If the federal government cannot maintain its spending and taxation and [also] produce the kinds of services that we expect from a federal government; [therefore] I would say from, you know, [a] Keynesian perspective, [then] you're worried about the federal government providing roads, electricity, [and] all of these things that, you know, might be public goods (or have these positive externalities that you want to increase). For Modern Monetary Theory, it doesn't necessarily have to even be public goods, so long as you get the spending, right? This is kind of that joke people have about Keynesians. You know, what's a fiscal stimulus? You go and you have someone dig a ditch and pay them for it. And then you pay them to fill it back.

Stitzel: Hmm mmm.

Mattson: In most --- O.K. that's a fun exaggeration and fun joke but I'd say --- most people who subscribe to Keynesianism and New Keynesianism understand that: O.K. well, that doesn't create or generate value as it goes on. But in a monetary, a Modern Monetary perspective, it doesn't matter what the whole does. What matters is that you've paid this person. They're going to go out and spend. Or it matters that you've, [that] you're not paying this person to do that. It's about pushing money into the economy and bringing money out. And it's…

Stitzel: So Keynesian has a problem there because…

Mattson: Hmm mmm.

Stitzel:…you know, they actually are recognizing what it is that's paying this person. If it comes from taxation…

Mattson: Hmm mmm.

Stitzel:…then it fundamentally would have been someone somewhere else in someone else's hands. So, it's directly crowded out.

Mattson: Hmm mmm.

Stitzel: And so the thing that the government is doing with it needs to be better than the alternative of what would have been done with it, right?

Mattson: Hmm mmm.

Stitzel: And so, this is where, you know, listeners to the podcast will know why I talk about resource allocation and the allocation of (and you're talking about) [the] creation of value those are two sides of the same coin.

Mattson: Yeah, so no. Crowding out doesn't matter.

Stitzel: Right. And so if you're in a situation where you're coming at it from the Keynesian model, you can, like, immediately see why…

Mattson: Hmm mmm.

Stitzel:…you get the point of the joke, right? But you're saying the Modern Monetary Theory is breaking that link by saying: well, no, actually there is no crowd out. Because this money that we're getting, it's not from taxes. Which if that would have been taxes, that [would be] revenue that came from somewhere, that would have been doing something else. [And] then yeah, we would have crowd out. But we don't have that. I think that argument's dead-on arrival. But do you want to make a point about either points of those link but especially the crowd out idea?

Mattson: I mean, I can in terms of crowding out, what you can do is certainly make an argument --- as actually I think Paul Krugman made about the 2008-2009 recession --- is that crowding out was not a big deal.

Stitzel: Hmm mmm.

Mattson: And then at the zero lower bound interest rate crowding out becomes non-significant. O.K. so that's where a MMTer could say: well, right now it should work a bit better, because we are still at a zero lower bound in terms of, you know, the value that's generated and using these bonds. You know, keep in mind you/there are some measures out there, by the way, that use short-term government bonds as a money supply measure. People use three-month treasury bonds, and repurchase agreements, [and] money market mutual funds. They use it to generate monetary service. So saying that: O.K., we're just going to borrow and that creates monetary service --- that actually is fairly in line with most monetary theory. You have debt-financed monetary service. You can measure that and generate it. The problem that a Keynesian would have is, you know, even a Keynesian (at some point) it's going to say: it's got to pay off. It's got to come back. And for a Modern Monetary theorist, it's in the same way of, you know, The Federal Reserve thinking about: I'm going to buy these 10-year treasury bonds for quantitative easing. Am I buying this because I think this? Or I'm going to buy asset-backed securities though the people consider to be toxic? Am I buying these because I expect payoff? No! I'm buying these to push money into the system. So, is the federal government increasing spending because it expects a return? No!

Stitzel: Hmm mmm.

Mattson: It's increasing its debt, because it's generating (or attempting to generate) money supply.

Stitzel: Right. So the specific case that you mentioned The Fed is doing that to try to…

Mattson: Hmm mmm.

Stitzel:…avoid a credit market freeze up. But in general, when they're doing that type of thing --- it's to put money into the system.

Mattson: Yes.

Stitzel: And, you know, we want to be careful. Because you can get to --- this is a common argument if we just, kind of, step back and look at monetary policy just really broadly, right?

Mattson: Hmm mmm.

Stitzel: So people that want to argue for, like, a gold standard, you know, they're saying: well, this makes the money supply fixed. And, you know, fiat currency has all these problems and this, that, and the other thing, right?

Mattson: Hmm mmm.

Stitzel: And, I think, one other thing that's, kind of, commonly missed --- from that side of the perspective --- is the idea that there are legitimate times to be increasing the money supply, right? So, you don't want to have deflationary pressure from your money supply at a bad time. And, you know, we point to lots of examples in history…

Mattson: Hmm mmm.

Stitzel:…where that probably happened and…

Mattson: Great Depression.

Stitzel:…Great Depression would be number one, right? And so, we say: well, so there's this reason to actually have expansionary monetary policy. Like it --- that's not…

Mattson: Hmm mmm.

Stitzel:…that's not always everywhere a bad thing, right? It's not a bad word. It needs to be done at a time, and for reasons that actually align, with what's happening in the economy. So, in this case though, we're saying, right. And when you do it in a situation where it's not called for --- the fear is in inflation. Now one of the points you said a minute ago, was Modern Monetary Theory actually does recognize that that is a potential…

Mattson: Yes.

Stitzel:…problem, right? So how do you balance the idea that they seem to go along and say: well, if you put money into the system, you're gonna get like inflationary pressures. And then you just raise taxes…

Mattson: Hmm mmm.

Stitzel:…to reduce that. I don't see what they've --- I don't see what they've achieved by switching the roles of fiscal and monetary policy there.

Mattson: Right. So, this, I mean, this is, kind of, that issue. And you want to argue: are we going to maintain a central bank that's independent with this kind of policy? Let's say we're in the position we're in with zero lower bound. And it seems like The Federal Reserve is out of ammunition, and they don't know what to do.

Stitzel: Hmm mmm.

Mattson: And then Modern Monetary policy comes in and they say: O.K., so we don't have to worry about inflation right now on that side of the equation. What we need to worry about is unemployment. We need to guarantee jobs. A lot of these papers talk about having this Jobs Guarantee and using that as the target of this fiscal monetary policy. So, let's say we ignore The Fed. Let's say The Fed is out because it's 2021, and Fed Funds rate is zero. We're pushing our reserve requirements out there. So, what we need to do is: we need to stimulate, stimulate, stimulate from a federal government side and target the unemployment rate.

Stitzel: Hmm mmm.

Mattson: And the way we do that --- which, and this part is very, very Keynesian because we're ignoring inflation now. And, you know, we don't have to worry about it. Then you cut taxes, and you increase spending, and you increase those deficits.

Stitzel: On a huge deficit.

Mattson: Yeah, on a huge, huge basis. I don't know --- $1.9 trillion, right?

Stitzel: That's a suspiciously specific number.

Mattson: Right. Right. I remember when it was $700 billion, and people were concerned.

Stitzel: Hmm mmm.

Mattson: But yeah, $1.9 trillion. That would be fiscal policy stepping in. Now, Modern Monetary Theory would then give the federal government, not just more power in this case, but more responsibility.

Stitzel: Hmm mmm.

Mattson: Because in order to sell this idea of The Green New Deal and Jobs Guarantee, they're saying: we don't have to worry about inflation right now. And Modern Monetary Theory gives us this reason for the federal government to step in in inflation targeting; because our inflation rate is lower than we want it to be. Believe it or not. I know a lot of, you know, news media lately has been reporting: O.K., inflation pressures are coming in. As of right now, CPI and the other measures of inflation are still relatively low and on target.

Stitzel: Hmm mmm.

Mattson: Only below target in some cases. So MMT would come in and say: well, let's really, really target unemployment. Let's say we take the natural rate of employment --- the non-accelerating inflation rate of unemployment. That's the lowest unemployment level you can get without triggering, say, a lot higher inflation.

Stitzel: Yeah.

Mattson: So, let’s say…

Stitzel: And not just a lot higher, but actually accelerating.

Mattson: Yeah. Yeah. So, let's say that level is what like 3.84%. Let's do round numbers. It's 4%, and we're at 7% right now. So, then what you do is: you increase your deficits and spend, spend, spend until you get that unemployment rate down here and you hit that target. Now for a typical Keynesian then, you'd say: at this point O.K., this is where we got to watchout for debt, and think about maybe we need to cut spending, or [we need to] raise taxes. For a MMT, the consideration that would be: yay, we've reached this point. And then on the other side of the equation --- here's the inflation rate. And once that inflation rate begins to go up, according to MMT, you raise taxes and cut spending. So, this is always interesting to me where they talk about The Green New Deal and 10 years of [$50] trillion dollar spending. Because if those inflation rates go up, a deficit rule that is targeting this inflation rate is going to tell you to bring your deficits down --- and having nothing to do with debt, having nothing to do with fiscal responsibility, having nothing to do with, you know, whether or not, you know, we're paying higher [or] lower taxes --- but having to do with how much money is flowing in the system, and how that's affecting the inflation rates. So MMT --- it's interesting, because it's used to argue for increased spending. But if you go into the paper that Dr. Pjesky and I wrote, and you take a look [at], let's take the Volcker, sorry I was about to call it The Volcker Recession. Excuse me. Let's take [a look at] that time period in the late 1970s early 1980s, where The Federal Reserve under Paul Volcker, increased interest rates in order to tame inflation. And if you run a MMT rule that's based on those five principles, you would find that at that exact time --- MMT would tell you to raise taxes and cut spending (which would be an extremely unpopular policy). It would be a policy that would may, you know, make a lot of people worse off, [and] make a lot of people very upset at the government. If I'm going back in time to 1979 and running for Congress or President saying: I'm going to increase your taxes. Forget not getting voted in. I might just disappear.

Stitzel: Yeah, the political economy makes that impossible…

Mattson: Yeah.

Stitzel:…at that point. What does MMT suggest you do with interest rates at that point? You're not targeting them at all. So, I guess they just do?

Mattson: Sure. Yeah.

Stitzel: They do…yeah

Mattson: You target deficits. Yeah. And that can lead to other issues with debt. I know, I know I said I'm not going to care about debt as an MMTer here. But let me take off my MMTer hat for a second. The rules for MMT ---- you don't target short-term interest rates. You target the unemployment rate, and through that, you use deficits to target use the intermediate target of deficits (in the same way The Federal Reserve targets inflation). But the intermediate is the short-term interest rate. If we have the government, you know, massively buying up a whole lot of debt, and bonds, and things like that --- or sorry, putting out a lot of debt so that they can generate this cash going into the system --- then you'd kind of expect those interest rates to start going up.

Stitzel: Yeah.

Mattson: And then.

Stitzel: But wait a minute. We were promised no crowd out. Yeah. O.K.

Mattson: We were promised no crowd out. So, let's say it's a small crowd out. Most of when Greece nearly went into bankruptcy (when they had their crisis), [the] debt to GDP ratio was what --- 70-80% [or] something like that? If you go back to The Latin American debt crisis of the 80s and the 90s, Mexico Total Debt was not that quote unquote “high.” I want to say [it was] between maybe 35%-45%-50% of GDP. The problem that Mexico and Greece had at those time periods was not the big “D” debt level, but the interest rate paid on that debt. So, if we're running a lot of deficits, --- for an MMT style unemployment balancing, then for whatever reason ---- if interest rates go up on that debt, then we're paying a lot more interest on the debt that we hold. And that's the kind of thing that leads to what Rogoff, or what Carmen Reinhardt and Kenneth Rogoff, talked about in their work in 2010 --- about currency crises and debt crises.

Stitzel: O.K. so that's really important. We have a big spending bill.

Mattson: Hmm mmm.

Stitzel: We end up in the situation. Now we have to pay. Now we have to pay interest on debt.

Mattson: Yeah.

Stitzel: And Modern Monetary Theory says: well, no problem, right?

Mattson: Print more money…

Stitzel: We just pay that with increasing the money supply. Just, The Fed can handle that, right? So they pump a bunch of money in the economy predictably, especially in that situation, you can get inflation and then just raise taxes. So I feel like we circled all the way back around to --- I feel like you're actually paying for a Green New Deal with taxes. What did I miss? What did I miss?

Mattson: Yeah.

Stitzel: Put up your MMT hat back on and tell me what I missed.

Mattson: So, oh yeah. So, with MMT then, with a Green New Deal. And, you know, we can go back to Keynesian. We can draw our aggregate demand, short-run aggregate supply, and then long-run aggregate supply, right? We're pushing the productivity out with that Green New Deal. Workers are more productive. Workers are healthier. You could argue that Medicare For All would be something like this…

Stitzel: Yeah.

Mattson:…as well because then workers are…

Stitzel: Job guaranteed.

Mattson: What?

Stitzel: Are job guaranteed.

Mattson: Yeah. Yeah. So, we're increasing productivity. And so that long-run aggregate supply curve could potentially shift out.

Stitzel: Yeah.

Mattson: And that --- if we have something like that --- then the threat of inflation is very…

Stitzel: Yes.

Mattson:…actually very, low. If that's what it actually does, because we've influenced real productivity --- which is a very difficult thing…

Stitzel: Yeah.

Mattson:…to do. If you remember from Principles of Econ --- that doesn't happen unless we're looking at, you know, severe demographic shifts…

Stitzel: Yeah.

Mattson:…baby booms, and things like that, [even] technological booms, [or] a sudden discovery of a whole lot of new resources --- you know, land, labor, capital, human capital, [and] that kind of thing. So then in that case, when long-run aggregate supply shifts out, inflation is not supposed to be a problem anymore.

Stitzel: And then, and in fact if you do that, you do want to see an increase in demand, right? What there is, kind of a weird ---- I'd be almost curious to know what you talk about this in class. I distinguish between deflationary pressures from things that are happening in the money supply and deflationary pressures like what we're talking about here. Because you…

Mattson: Hmm mmm.

Stitzel:…see the price level come down in the case for the long run (the long-run aggregate supply) actually increases; so productivity, like, the total capacity of the economy increases. I just don't see that as a bad thing at all.

Mattson: No.

Stitzel: And I'm not I know I'm not alone in that.

Mattson: Sure.

Stitzel: I know there's a lot of good economists that that argue that kind of thing. Do you see that fitting in the puzzle here at all?

Mattson: That would be the hope, right, that The Green New Deal produces this product? It generates a longer trend growth rate…

Stitzel: Yeah.

Mattson:…so that inflation is no longer a worry. And since more and more people are making more and more money, you know, of course debt and deficit doesn't matter.

Stitzel: Yeah.

Mattson: But the problem is, you know, let's say I guess, I'm now going anti-MMT suddenly. So, let's say, look at the 90s where we had the technology boom and productivity goes up. That was an incorporation of the Internet incorporation of all these different kinds of technology that increased productivity. And then we start getting into 2009 --- not just The Great Recession, but the years after it even up to today --- where The Federal Reserve is saying our long run potential GDP growth is at 1.5%. In the 90s they would have said 2-3%. Now they're saying 1.5-2%. How long is that productivity boom going to last? And then if it begins to shift back, that could be inflationary.

Stitzel: Yes.

Mattson: And that could lead to, you know, rising inflation rates, which can lead to rising interest rates, [which can] lead to rising debt issues. And then we have a Reinhart and Rogoff kind of currency collapse…

Stitzel: Yes.

Mattson:…problem.

Stitzel: So, you know, the problem with this is, I think, MMT has made the splash. It has made in political circles, because it offers this kind of free lunch. What? Who cares what Green New Deal is going to do? Who cares what a Job Guarantee is going to do?

Mattson: Hmm mmm.

Stitzel: We can have it, and we can spin, and it won't have these real effects on the economy. We just don't see that. There's no case for that.

Mattson: Hmm mmm.

Stitzel: Even when you laid it out the way that you have laid it out saying: well sure, if it increases long-run aggregate supply. If the thing actually increases long-run aggregate supply, [then] we should all be for it --- regardless of which, I don't care for if we're Keynesian or Monetarist or MMT at that point. Who cares? Anything that increases the long-run aggregate supply almost certainly has to be, you know, paying for itself.

Mattson: Hmm mmm.

Stitzel: So, you know, then you're just back to arguing, which I get. You've brought up those examples. And every time you've done that, you've said: just assume for a minute that this is/will be the result. But I think the point should be: regardless of which side you come down on that ---- MMT doesn't propose any solution then. It's just whether we think we're actually getting productivity increase from a Green New Deal or Jobs Guarantee (or I forgot the other thing you mentioned, but one of one of those huge, huge spending policies), right?

Mattson: Well, and there's an aspect to this that is not really engaged in the MMT literature that I've read.

Stitzel: Hmm mmm.

Mattson: Because it seems like it just --- no matter what, consistently speaking O.K. ---- if the LRAS curve goes back, then we need to, you know, pump it up even more, right? We need to push more and more. But a MMT policy --- (if you actually follow it), as the federal government [is] balancing inflation and balancing employment, [then] I mean ---- we've basically even [handed over] the dual mandate of The Fed to Congress and said: you need to maximize employment and stabilize prices.

Stitzel: What's The Fed doing during this by the way?

Mattson: Oh. In this case, in my analysis, I've ignored The Fed entirely.

Stitzel: Oh my.

Mattson: The Fed --- is just usually what people do is they say The Fed --- should drive interest rates down to zero…

Stitzel: O.K.

Mattson:…and just maintain a monetary policy that reaches this point, and then they stop, and the rest is taken…

Stitzel: O.K.

Mattson:…by the fiscal policy goal. So, the issue is: if we run into a stagflation, [then] the MMT prescription is not different from Paul Volcker's actions in the 1980s. And I don't think people realize this. Everyone loves to hear about the monetary policy or fiscal policy rule of: we're going to, you know, decrease taxes and do this. Everyone loves that part, right? Or we're going to, you know, make it easier for banks to lend. What people don't look at is when you explicitly, in this case, say that the federal government needs to target inflation (as Kelton and Ray and Tcherneva have done). [The problem] is you need to realize, that at some point, they're going to raise taxes and cut spending. And that could be just as large. That is the austerity measure issue. You know, when the IMF goes to a country like Mexico, or South Korea, or Argentina and they say: there's been this crisis. You need to stabilize your economy. You need to stabilize your prices. They enact what are called austerity measures. You cut government spending and you increase taxes. And those policies are very much in line with MMT. And I think that if you're going to take this seriously, if you're going to argue for a Green New Deal with MMT, then you need to accept that that same model is going to prescribe austerity measures if inflation starts up.

Stitzel: Yep. So you're. Yeah. That's so striking, because if you go with (if you got) the different model, [then] the solution just to solving inflation is due to, fairly run-of-the-mill, central bank policy just pulling money out with the money supply. So, it's striking that you talked about The Federal Reserve putting interest rates at zero and trying to keep them there. That's a real --- that's unconventional, right?

Mattson: Yeah.

Stitzel: So when we look at the, you know, the comments from somebody like John [B.] Taylor --- that you and I have discussed before on this podcast --- I think that that's its own problem, actually, at that point. But --- and you've done a good job, actually, sort of, anticipating one of the areas I would like to have turned which…

Mattson: Hmm mmm.

Stitzel:…is to talk about, you know, the actual, you know, state of the economy relative to full employment.

Mattson: Hmm mmm.

Stitzel: And I think those two things, kind of, kind of, go together. Can you talk to us a little bit about what is MMT doing when we're at full employment? What is MMT doing…

Mattson: Hmm mmm.

Stitzel:…when we have slack --- which you've talked about already a little bit. And then maybe if you see a way to weave that in there, talk about The Federal Reserve, you know, putting us at zero interest rate all the time.

Mattson: Well, let me start with that one, because that maybe shows my background, in my life experience. Because we've been so long at a Fed Funds rate equals zero.

Stitzel: Hmm mmm.

Mattson: It doesn't have to be a zero short-term interest rate. It just has to be --- The Fed stabilizes inflation as much as it can, and it's as consistent as possible. The Fed does nothing out of the ordinary. And then it leaves more extraordinary measures, or even some ordinary measures, up to the federal government and the fiscal policy. If we reach a, let's say, we reach full employment and inflation is stable, [then] well that means that the government just maintains its deficit at the same level. In the same way, The Federal Reserve ---- if they see inflation at the 2% target, and they're thinking: do we raise or lower interest rates? They say: well, we keep it where it is. We continue to target 0.25%. So if, you know, this brings up a rules versus discretion problem; because MMT is actually a very rules-based approach, if you really want to go into it. Again, Dr. Pjesky and I constructed a Taylor Rule for deficits based on MMT and decided: O.K., we'll put that up. It's very much a rules-based approach to inflation targeting. And so, let's say, we're at that deficit and…

Stitzel: Sorry. It's a rules-based approach to inflation targeting? Or deficit targeting?

Mattson: To inflation targeting.

Stitzel: O.K.

Mattson: And then through, well, inflation and unemployment targeting, I should say.

Stitzel: Hmm mmm.

Mattson: We're at full employment. Yay. Dual mandate part one --- settled. We're at stable inflation. Dual mandate part two --- stable.

Stitzel: Right.

Mattson: But I think people are still going to run into an issue, because then the federal government has now done this. Congress has done this. They felt they've done a good job. This is in our, you know, charter. This is what we do. But let's say then --- someone who wants to propose, you know, an expansion of The Green New Deal. Let's say we're worried about climate change, and we want to enact a large amount of fiscal stimulus because of climate change. Well, now the weird thing is that MMT has changed Congress to this inflation rate. Because you go to Congress [and] you say: we need $15 trillion dollars more to clean up our oceans (and having nothing to do, of course, with full employment which we already have). Well, hey, MMT is a macro rule. It's not a micro rule. It's a macroeconomic perspective on things. That means that you are going to pay an inflation cost, and you will have to convince Congress and the President to pay that inflation cost --- which as we've seen from The Federal Reserve, they're not willing to do that when they've reached their goals.

Stitzel: Yeah. so I think it's a good point to interject this, because I think inflation kind of has this weird mystique around it. And once you get outside of economic circles, right…

Mattson: Hmm mmm.

Stitzel:…of oh, just, you know ,the money is what it's worth on the front. And just don't let the value change, and just these kind of weird things. My sister sent me a video of a young lady who must have flunked her Econ 101. And she's holding up dollar bills and saying: you know, it's just paper. Just print more. Just let people eat. She's just furious, right?

Mattson: Hmm mmm.

Stitzel: And I think part of that is not understanding the critical nature of inflation, right?

Mattson: Yes.

Stitzel: And so it --- we teach this idea about prices rising, in a general rise in the price level. And, I think, many people, sort of, rightly get this idea about, you know, what that is doing to value of the way that we measure value. But there's actually more to it than that. And actually, in my graduate class, when we're focused on the rules versus discretion types of policy discussion (that you're talking about) --- one of the things that I'm really focused on teaching them is [that] the problem with inflation is uncertainty. The problem with inflation is this is a unit of measurement that we need to be stable. And so when you're talking about: oh, we're at full employment and we're going to spend $15 trillion dollars. And we're going to have a MMT approach to cleaning up the ocean or something (or whatever climate change kind of thing that that they're wanting to do), [then] the consequence isn't, well, you devalued money a little bit, right? It's actually, like, a system-wide problem with uncertainty which, you know, we could spend the rest of the time talking about the costs of that. But at the end of the day, it's going to boil down to contracting your economic activity. The opportunity cost of that $15 trillion dollars that you're spending is going to be enormous, right? I mean, just even larger than the $15 trillion dollars it is itself, if we were thinking about this like a business, right?

Mattson: So, there are two kinds of inflationary trauma that I talk about. And I use that phrase inflationary trauma, because I think it really does get down into things, I talk…

Stitzel: It's very visceral.

Mattson:…about. I think with the/what the millennials and in my generation can sympathize with is probably the kind of inflationary trauma that my great-grandmother faced when she lived through The Great Depression. And so, I'm gonna tell some fables and some stories here. So, bear with me. So, my great-grandmother was an excellent cook, [who] made great jams [and] great cookies. She was also --- she worked as a jeweler for a number of years. So, in the late 1990s, her farm in Kansas was robbed. And she'd been living at that point in town in Hutchinson and hadn't been on the farm for a while. And she must have been I'd say early to mid 80s at this point. My mother called her and said you know I'm so sorry the house was robbed. And my great-grandmother kept two things generally at that farm at this point --- jams and jewelry. And of course, they took the jewelry [and] the TV. And then O.K. But the first question from my great-grandmother (and I think she was kind of going back to the 30s) was: did they get my jams? Like, well no, Mama Steve. They didn't get your jams. They didn't touch your jams. She's like: oh, O.K. Thank goodness. Yes, the jewelry is insured. We can replace that. When she was growing up in the 20s and the 30s, with this money itself was extremely valuable as a store of value. It was very, you know, you got cash and you wanted to hold onto that. You didn't want to go out and spend that. So, you'd trade your jams with your neighbor for, I don't know, eggs.

Stitzel: Yeah.

Mattson: You'd go to that barter economy kind of thing, because the money that you held on to had disinflationary (or even a deflationary perspective) especially going through the 1930s. So she ended up, in an inefficient way, focusing non-money monetary assets.

Stitzel: Right.

Mattson: Or non-money medium of exchange assets. And this is something that stuck with her for the rest of her life, because [of her experience in] the 30s. I can't emphasize this enough, with such a traumatic and long-lasting situation. I think with the millennials --- we have that same trauma in how we look at money, because we lived through The Great Recession. We now live through The Pandemic, where holding on to that cash is suddenly much more valuable than it would have been to someone who grew up in the 80s or 90s. Take another extent of this and think of someone who lived in Mexico during the 1980s, and then again in the 1990s of inflationary periods. That person is going to, as soon as they get paid in Mexican Pesos, [they will] go to Sam's Club, go to Walmart, [or] go to any Big Box Store, and [then] immediately buy all the real goods and services they can. Because what they get on the first of that date is not going to be the same thing as it is two weeks from then. So there that's. The second kind of trauma that you can think about with, say, the German hyperinflation, the Zimbabwean hyperinflation…

Stitzel: Yep.

Mattson:…or even the moderate to high inflations of Mexico and Brazil in the 70s, 80s, and 90s. And we behave that way. We're, yeah, traumatized in someway [and] trained to behave in that way. And that deals with this, kind of, velocity of money question. I don't ---- when I get my paycheck, I hold on to it, because I'm uncertain about the future in terms of if I'm going to have a job (or if, you know, there's some kind of crisis with my house, or the water main breaks). I hold on to that money because I know that --- or at least I'm comfortable with that --- money maintaining its value.

Stitzel: Right.

Mattson: If I had an inflationary trauma the other direction, [then] I would not hold on to money. So, when we get into things like this --- where you talk about the unexpected versus the expected and these expectations --- [then] people’s psychology comes into this.

Stitzel: Right.

Mattson: And I might have gotten a little further off than I wanted to. Can you repeat your questions?

Stitzel: No. Actually, actually that's exactly what I was talking about. It's the types of problems that inflation causes. So, you address that.

Mattson: Yeah.

Stitzel: I think your comments in conjunction with mine are perfect. So, there's a couple other things that I want to talk about. One thing is [that] advocates of Modern Monetary Theory say: well, look, we've been running these huge deficits, and we've been building up all this debt, and we have all this low inflation. Like, clearly that means we have plenty of room to engage in all these other types of policies. What's your take? What's your take on that? I think there's, sort of, like one obvious answer there. But what's your take on that as, like, an argument for MMT?

Mattson: So, as an argument for MMT, you know, we what we have here then is we have the ability to do it, right? That should be what they're focusing on. Oh, we have this large debt and nothing bad has happened yet.

Stitzel: Right.

Mattson: And I can understand that. I, you know, a lot of people are, kind of, re-recalibrating. You know, what's the debt point at which an economy goes into crisis? Japan has a very large amount of debt. And people will point to Japan and say: well, they're not in a crisis, but at the same time they've stagnated.

Stitzel: Right.

Mattson: You know, the fiscal stimulus is not doing what it's supposed to be doing. What I think, and in terms of, you know, MMT and the goals of this ---- yes, we have, you know, very low inflation. And maybe we have space for more and more debt. But I'm wondering if that's what I want federal government leaders to think about and be constrained by. If we're in the middle of a pandemic, you know, I don't want Joe Biden and Donald Trump to be thinking about price levels. I want them to be thinking about jobs. I want them to be thinking about vaccines. I want them to be thinking about, you know, we have problem X that we need to throw money at. We need to get vaccines rolled out. Darn, we can't do that because inflation is, you know, too high.

Stitzel: Right.

Mattson: O.K. I don't want that to happen. I don't want them. I don't want our Congress people considering that.

Stitzel: Hmm mmm.

Mattson: If I take MMT seriously, and if I sit down and say: I'm a Modern Monetary theorist to my core, then I have to accept that. And say that our government then needs to be thinking about inflation as part of this cost. I just don't think we get what we want from MMT. And I don't think we want the federal government to be looking at that.

Stitzel: So, you were about to, before I asked this question, you were about to talk about inflation expectations.

Mattson: Hmm mmm.

Stitzel: And so that's going to take some unpacking. so I'm going to want you to kind of walk us through that.

Mattson: O.K.

Stitzel: But basically, what I want you to talk about is: inflation expectations are important for what the eventual level of inflation will be. And…

Mattson: Yes.

Stitzel:…I've talked about that…

Mattson: Yeah.

Stitzel:…in the episode where I had Andrew Keinsley on. So hopefully, the listeners are a little bit familiar with what we're talking about there. But what's important there is [that] MMT is proposing a radical shift in what people would build their expectations on. So right now --- I think, and this would have been something similar to what Keinsley would have said ---

Mattson: Hmm mmm.

Stitzel:…your inflation expectations are built off of what you think The Federal Reserve is going to do to the money supply.

Mattson: Yeah.

Stitzel: MMT is proposing your inflation expectations are going to be built on what you think the government's going to do in terms of raising taxes, or lowering taxes, and raising or lowering spending. And then simultaneously, they're going to propose that we should have giant deficits and spend all the time. Does that not create an inflation expectation and, like, an anchoring problem there?

Mattson: Yes.

Stitzel: I don't think there's a good answer to that from MMT, but maybe you can surprise me. So start us off by talking about why inflationary is, sort of, like inherently self-fulfilling, based on the expectations that people have. And then evaluate that statement that I just made, in terms of, now you're anchoring it to fiscal policy, and then you're letting fiscal policy off of the budget leash.

Mattson: Yeah. So in terms of inflation expectations, if I have the inflationary trauma, [then] I'm going to spend a lot more. That will increase the velocity, and more money is going to be circulating in the system. If I have the deflationary trauma, I'm not going to spend as much. So, any kind of monetary stimulus, I would hold on to.

Stitzel: Right. Those are...

Mattson: Yeah.

Stitzel: Let's look at those.

Mattson: Yeah.

Stitzel: That's a historical, like, experience that people would have. And I 100% think that belongs in your…

Mattson: Yes.

Stitzel:…expectations. But aren't expectations, like, also fundamentally built on what you think the specific role [is]? Like, we always think of [what] The Fed now…

Mattson: Hmm mmm.

Stitzel:…is doing and what they will do. This is why The Fed gives forward guidance, right?

Mattson: Yeah. Yeah.

Stitzel: I'm sorry, I didn't mean. Were you building…

Mattson: No, no, no.

Stitzel:…up to that? Or?

Mattson: Yeah. So, let's think about --- I get $1,200 from the federal government. I have a choice to make now. And I'm a millennial, so I look at that $1,200. And, of course, the first thing I'm gonna do is pay off debt ---- which is not going to give the stimulus that people want. If I'm expecting this, you know, inflation to happen well, you know, maybe I won't pay down my debt. Maybe I will go out and buy anew washing machine to get that, you know, real value right now as opposed to paying down my debt. So I'm self-fulfilling an issue here of the ineffectiveness of fiscal policy; because I am either going to pay it down, or I'm going to convert it into $100 bills and stick it in my closet…

Stitzel: Hmm mmm.

Mattson:…and not spend. if I expect inflationary, then I'm going to go out and spend, spend, spend as quickly as possible and that's going to further that out.

Stitzel: Hmm mmm.

Mattson: This will go down to credibility. If the federal government has credibility, that it is effective in generating that stimulus, and that inflation, and generating those jobs ---- yes. Then they can go through with forward guidance and say: we're going to pump $1.9 trillion into the economy. The economy is going to bounce back, and you guys are going to feel better. Well O.K. We pumped $1.9 trillion at the economy, and I don't expect any inflation. So honestly, I'm not going to spend more. And that is going to hobble a bit from the fiscal stimulus. We can also throw in the fact that I don't want to go out to a restaurant right now because I’m paranoid. And, you know, I [could] potentially get a disease, right? So that velocity of money argument that we have is going to be a problem. On the other hand, if I didn't worry about going to a restaurant, and if I was worried that in inflation was coming sooner, then I would say: well, forget it [because] I'm going to spend. And that could self-fulfill there. Now informing these inflation expectations --- first of all I'm a Ph.D. and I sit here, and I think about these things all day. And I form my inflation expectations by going on FRED and looking at what CPI is going to be doing. What people who, you know, are probably smarter than me are going to do is: they're going to look at the price of milk, price of steaks, [and] price of gasoline. And if they see that the government is spending a whole lot of money, and they expect that to increase the price of milk, [then] they're going to buy milk a lot sooner. They're going to spend that money a lot sooner. They're going to buy gas a lot sooner. In the same way we had the stagflation the 70s and the gas lines in the 1970s. Most people who we worry about as economists, are going to be forming their inflation expectations, not on say a specific interest rate (or say a specific, you know, an inflation expectation survey or whatever). They're going to look at their savings account. I get, I don't know, 0.02 on my savings account. Why bother even having a savings account? Convert to cash, because even if inflation were higher, it's not doing me any good in a savings deposit. I need to still buy milk. I need to still buy beef. I need to still buy mac and cheese for my kids. If people are going to be expecting [that] the federal government is going to push out a lot of stimulus, and they think that's inflationary, [then] they will behave in that way. I got my $1,200 stimulus check. I know that everyone down the street has got theirs as well. And I also know the grocery store knows this, and they're probably going to raise their prices. I mean, just because, right? The increase in demand, increasing [prices]. O.K. We can at least get that. And I'll go to the store, and I'll buy what I can before I figure the price increase comes out.

Stitzel: Hmm mmm.

Mattson: That can be inflationary, but at the same time, it could also be I get the $1,200 stimulus. And I figure: well, how long is this going to last? They're going to raise my taxes again. And the next year I'm going to have to pay a larger amount of tax. Maybe I want to hold on to this.

Stitzel: Right.

Mattson: It's really difficult to change people's inflation expectations. Paul Volcker spent two years in a recession doing it. The Central Bank of Brazil spent, you know, almost 3-4 years and a complete change over of the currency. They changed the name of the currency and everything to try and reign in inflation expectations out of Brazil in the 1980s. And that was through the power of a central bank. Central banks tend to, you know, at least within itself agree. The FOMC (The Federal Open Market Committee), who decides monetary policy, gets together. It's --- I don't know, 8-10 people and they all agree on something, and then they go out and they do it. Congress is 435 people, who then have to agree on something, send it to 100 people, who then have to agree on something.

Stitzel: Right.

Mattson: You send it to one guy who then has to sit down and say: yeah, that sounds reasonable…

Stitzel: Right.

Mattson:…and sign it. That can take months. And over those months, I'm going to be forming my expectations. 2016 --- I'm watching the election thinking: O.K. if Donald Trump is elected, that means that [or] what became The Tax Cuts and Jobs Act is going through. And I could, over a long period of time --- at least in economics over a year [or] over a year and a half --- plan for that. And my behavior changed with that expectation. With the central bank, they can do it over night and change very, very quickly with, I mean, even without me knowing (unless I'm looking at it). So when these families are making their decisions, credibility is of the utmost importance. People still link debt with credibility. And that's where MMT is, I think, overstepping a bit, because the debt problem is a credibility problem.

Stitzel: Hmm mmm.

Mattson: If I'm looking at my government and saying: you know, the debt is 200% of GDP, I'm going to start worrying that they are --- at some point, inflation or not --- going to raise taxes.

Stitzel: Yeah.

Mattson: And I think a lot of people still have that. Even if we step out of that, and I look at it and say: ah, debt is 200% of GDP. Or I look at the deficits and say: they've been spending more. At some point, I'm going to expect them to spend less.

Stitzel: Right.

Mattson: And that may be a problem.

Stitzel: So when I was doing my preparation for this episode, you know, [I] did some searching [and] some reading [from] lots of good sources out there. [I] didn't do any of that in YouTube. The next day I pull up my YouTube, and it's recommending a video on MMT. So, something scary about that. So, it's that's always an algorithm.

Mattson: The algorithm. Yeah.

Stitzel: Yeah, the algorithm. They got my information there. So, it's probably just through the browser, I guess. But it recommends this video on MMT. And like, I was like; I should probably watch this a little bit [in order to] get a sense of what mainstream people [are speaking about]. I'll never watch anything from that channel again. It's just terrible. But I couldn't get --- I don't know 3-4 minutes I was wanting to just put my eyes out. And so, I shut it off. But, you know, the idea in this kind of video is like: MMT comes along, and it's this new theory. And, you know, it's just, like, explaining all these things and economics. And it shows how we can, you know, just spend all this money --- and, you know, what you and I would call a free lunch. And, you know, just traditional economics that just stood on its head kind of thing. And it aggravates me to see, you know, there's all these people out there doing real economics. Economics is a science. It's an important field that has important things to say and to teach us. That's why I'm here on this podcast after all. And people are out there advocating MMT. And, you know, I think you've been very fair to MMT. Like, we've brought up the criticisms and what not. But I almost think there's some tone in this podcast that almost gives MMT a little bit, [or] maybe too much credit. So, we're here about an hour in. So maybe wind us out with this. Talk a little bit about how economics as a field --- your you know legitimate parts of the field --- how do they view MMT? You know, is this something that people in the field are taking seriously, sort of, like you and I have done so far? You've said you're taking MMT seriously.

Mattson: I take it very seriously.

Stitzel: Yes. I know that's a little bit a little bit tongue-in-cheek there. But talk to us about how does the field view MMT? Is this one of those viable theories that we need to contend with? And, you know, I'm going to see papers coming across my desk for review that are going to be forwarding MMT well-written out mathematical models? Or what's going to happen?

Mattson: Well, I mean, there are always going to be people who want to explore this and create different mathematical models and see what works with policy. From my reading and my analysis, the general consensus --- whether you are Paul Krugman or whether you're John Cochrane and these are two, you know, within an orthodox economics approach a New Keynesian economic [approach]. Well, [actually], I guess I can't call John Cochrane [a] New Keynesian. Sorry. Excuse me, [he is] between a New Keynesian and Real Business Cycle Approach. [But the general consensus is] they seem to agree that no, that this isn't going to work. That there are some severe issues with how it views debt, with how it views taxation, with how it views inflation, and [how it views] monetary policy and unemployment. It is however --- you know, if I can go back. You know, the articles by Lerner and Minsky are --- they're fun. I'm sorry, if you go back and you read those articles, that they are very creative, they're very insightful, they're very inventive, and they're very old. This is not a new idea. I know we've repackaged it as a new idea. And a lot of academics can, you know, push their careers by advertising a new idea. But to give you an idea of how old this kind of analysis is --- I don't even go back as far back as Smith in 1776 but --- one of my favorite proto-economists/pre-economists was Ibn Khaldun back in the 14th century. [He] has a great quote about taxation within an empire. So, at the beginning of a dynasty, taxation yields a large revenue from small assessments. You can get a lot, of you, know a lot of tax revenue from small assessments. And these programs may work great. You get a lot of return at this, kind of, start of the project. And don't get me wrong, I mean, if you spend $50 trillion dollars on a Green New Deal, and solar panels, and all this stuff, [then[ I have no doubt you're going to see a great return in the first few years. I would --- I'll go that far. At the end of the dynasty, taxation yields a small revenue from large assessments.

Stitzel: Right.

Mattson: And, you know, we start to bleed a little less from it. We start to get a little, you know, less and less from our return on investment. This idea of, you know, deficit spending is stimulus. It's not new. It's not something that has, you know, come out of the blue, and that, you know, economists don't understand this. We've been talking about this since the 1400s and further, you know, further beyond. You can get into it. You can go back to Smith if you want. You can go back to Marx, and he will discuss these issues in capital. And this is why I get, you know, he's a socialist written on my evaluations.

Stitzel: Hmm mmm.

Mattson: So, you can go back and you can see these ideas. And, you know, Keynes helps to formalize these ideas. And he helped to rationalize these ideas. And Minsky brought in a new way of looking at these ideas. But fundamentally, it's the whole point of, O.K., with: if we want to invest in something, we've got to get a return out of it. And the return for MMT is you maximize employment and stabilize inflation. As from a macro perspective, that's wonderful. I find that very appealing. However, I'm not sure that's the role that I want a federal government to play. I would like them to invest in and spend on things that, I think, I normally wouldn't see in a market economy; or generate positive externalities that I want to see more of like education, insured property rights, and yes technology, and research, and maybe even potentially clean energy. Yeah.

Stitzel: My guest today has been Ryan Mattson. Ryan, thanks for joining us on the EconBuff.

Mattson: Thank you.

Stitzel: Thank you listening to this episode of The EconBuff. You can find all previous episodes on YouTube at EconBuff Podcast. You can check out our website at econbuffpodcast.wixsite.com. You can contact us at econbuffpodcast@yahoo.com.