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Stephanie Kelton Thinks the Conventional Wisdom Is Changing

Stephanie Kelton, professor of public policy and economics at Stony Brook University, speaks during the Context Summits Leadership Day in Miami, Florida, on January 30, 2019. (Scott McIntyre / Bloomberg via Getty Images)

In an interview with Jacobin, economist Stephanie Kelton argues that we’re seeing a paradigm shift away from free-market dogmas and austerity.

The last few years have seen major public investment packages passed in the United States, price controls imposed in Germany, and rhetorical attacks on trickle-down economics from mainstream circles. Could the neoliberal dogmas of austerity, suspicion of full employment, and trust in the market finally be eroding?

The answer depends on the context. But the relative weakness of neoliberal ideology represents a huge opportunity for the Left — that is, if we do our homework and craft effective policy.

Few know this better than Stephanie Kelton, former economic adviser to Bernie Sanders and a leading proponent of modern monetary theory, the controversial philosophy (including on the Left) that governments that control their own currency should pay little mind to deficits and can spend well into the red. Kelton spoke with Lukas Scholle for Jacobin about economic austerity, Bernie Sanders, and what kind of policy frameworks can help the Left realize its goal of empowering the working class.

Lukas Scholle: Some argue there has been a major shift in economic policy in recent years. In the US and Europe, respectively, we’ve witnessed a series of spending programs and price controls. Are these the beginnings of a paradigm shift?

Stephanie Kelton: I think yes has to be the answer, with the differences in the policy response to the pandemic and the way the US fiscal authority, the federal government through Congress, stayed in the game this time versus the financial crisis of 2008, where you essentially got one major fiscal package that seemed like a lot of money to some. After that, the debt crisis in the EU scared US lawmakers and led Barack Obama and the Democrats to pull back when clearly the economy needed further support. As a result, we essentially had a lost decade. We had ten years or so of very sluggish economic recovery, millions of people experiencing hardship, losing jobs and homes, and the rest of it.

Lukas Scholle: What changed?

Stephanie Kelton: First, the [Donald] Trump administration launched a much bigger fiscal response, not once, but twice. Then President [Joe] Biden introduced a third major fiscal package — we’re talking about roughly $5 trillion in the form of three pieces of legislation. And he didn’t stop there, right? We ended up with something called the CHIPS and Science Act and the bipartisan infrastructure bill, and then the so-called Inflation Reduction Act, which is the biggest climate legislation that we’ve ever had in the United States. Trillions and trillions and trillions of dollars, and not just for the pandemic itself, but to make those kinds of inward investments in the economy. We had ten years or so of very sluggish economic recovery, millions of people experiencing hardship, losing jobs and homes and the rest of it.

We did things very differently, including a full-throated embrace of the spending power of the state, not getting sidetracked by worries over the fiscal impacts. I think the proof is there: we had the shortest recession in US history. It lasted just two months. We lifted almost 40 percent of all the kids in this country out of poverty. We have had the strongest recovery among G7 nations, and real wages are growing fastest for those at the bottom, people without college degrees.

Lukas Scholle: You are one of the most prominent voices for MMT, which puts a different lens on the money system, fiscal capacities, and inflation. Has MMT influenced policymaking in the US?

Stephanie Kelton: MMT had been making inroads before the pandemic in terms of the number of lawmakers who were starting to ask whether they had gotten some big things wrong over the years. I was in meetings in Washington, DC, in February of 2020 with very high-level members of both the House and the Senate. This was leading up to the November 2020 election. So I’m sitting there, and they’re talking about the Trump administration’s massive tax cuts, how they increase the deficit and the national debt, adding some $2 trillion to deficits with total disregard for the fiscal impacts.

This is what Republicans always do when they have power. They don’t care about debt and deficits. They focus like a laser on passing their agenda. So they got their huge tax cuts passed. This is what Republicans always do when they have power. They don’t care about debt and deficits. They focus like a laser on passing their agenda.

Democrats fall for this story every time. When they get into power, they try to tighten the purse strings and say, “We’re going to be good stewards of ‘taxpayer money’ and try to avoid running deficits” and all that. Meanwhile, the Republicans never do that. They just use the deficit to pass their agenda.

Democrats had me come in and they said, “Listen, we think we’ve been misled about the risks of deficits. We don’t think that these things are the bogeyman that we’ve long been told, that it’s the road to ruin.” MMT had caused them to rethink these things.

Lukas Scholle: But was this just a response to COVID?

Stephanie Kelton: COVID became the catalyst, a very clear example of the power that always rested with the federal government. If they deem something to be urgent, they always have the power to act, to intervene, and do what needs to be done. I got a text message from the chairman of the House Budget Committee, where Biden’s big $1.9 trillion package came from: “I don’t know that I would have had the courage to push through a piece of legislation of this size if it hadn’t been for reading your book and changing my views.”

Lukas Scholle: So, this paradigm shift is still ongoing?

Stephanie Kelton: I just walked into my office after listening to Senator Mitt Romney and Senator Joe Manchin, a Republican and a Democrat, unveil a proposal to establish a fiscal commission to come up with “bipartisan solutions” to our debt and deficit problems. The two of them have decided to work together to build support within their caucuses for tackling what they perceive to be a debt and deficit problem.

They’re squarely focused on what they call “entitlement programs,” Social Security and Medicare. They want to cut these programs, and the justification is that we’re in real trouble in terms of our nation’s finances. We can’t afford to pay the bills, and programs like Medicare and Social Security, which are a big part of the federal budget, are simply unsustainable.

The question is, how much support will they find in the Republican and Democratic caucuses? Clearly, President Biden does not have an appetite for cutting programs like this. Even former president Donald Trump said he didn’t want to touch Social Security and Medicare. But that conversation is definitely back, and we’ll see how much traction they get.

Lukas Scholle: We’re already facing that situation in the EU and Germany, where European and national fiscal rules have kicked back in.

Stephanie Kelton: The countries that signed on to the Eurozone abandoned their sovereign currencies and adopted what is effectively a foreign currency from the perspective of each individual nation-state. They are users of currency, no longer issuers of their own sovereign currencies, which is a big and important distinction from the United States or Japan, Canada, Australia. All of these countries operate with their own sovereign currencies.

Greece, Italy, Germany, France, and the rest — they are users of the euro. That became very clear after the financial crisis when the Eurozone countries saw their deficits widening and there was a need to borrow on financial markets. The markets said, “We’ll lend to you, but clearly there’s a lot of risk involved in terms of the likelihood of repayment. You might default because you don’t issue your own currency.”

So, interest rates went very high, and they stayed elevated for a lengthy period of time before [then European Central Bank president] Mario Draghi finally said those three little words that held the whole project together: “Whatever it takes.” The moment that it became clear that you had the full backstopping of the ECB [European Central Bank] — the currency issuer — then the yields came down and the debt crisis abated. The countries that signed on to the Eurozone abandoned their sovereign currencies and adopted what is effectively a foreign currency.

When COVID happened, you started to see that pressure on yields, meaning interest rates on some government bonds, started to increase. And [ECB president] Christine Lagarde said, it’s not the job of the ECB to manage spreads. My heart just immediately sank. I thought, are you kidding me? Are you really going to let this happen again?

It wasn’t very long at all before she walked that statement back and the ECB did exactly what it needed to do, which was to manage spreads, anchor those interest rates so that countries like Italy and Spain could spend whatever they deemed necessary to deal with the crisis. So the question I kept asking was, when do they withdraw that backstop? When they do, you’re going to have this push to austerity. And that’s exactly what you’ve seen.

But it’s a policy choice, right? It is clearly a policy choice on the part of the currency issuer to withdraw that support and place these nations back in a situation where there is little room for them to maneuver.

Lukas Scholle: But aren’t interest rates also policy choices? Where exactly is the paradigm shift here?

Stephanie Kelton: Interest rates on government liabilities — bank reserves and government bonds — are either announced and explicitly set by the central bank or substantially influenced by monetary policy. The Bank of Japan exerts more overt influence on, say, the ten-year rate than the Federal Reserve does, but it is a policy choice in both cases.

We advise against using the overnight interest rate as the primary tool to manage inflationary pressures in MMT, but we didn’t succeed in convincing many central banks to avoid doing that. As a result, you’ve got the ECB, the Federal Reserve, the Bank of England, the Reserve Bank of Australia, and the Bank of Canada all raising rates. I think we can at least point to one central bank that appears to have broken from the old paradigm and gotten it right.

But the Bank of Japan has resisted following suit. They are running their own very separate and distinct monetary policy from the rest of the major world central banks, and they keep explaining that raising interest rates isn’t going to help fight inflation that was caused by supply shocks. You have to wait them out or use other tools. And inflation has come crashing down in Japan, just like it has in the US, Europe, etc.

So, I think we can at least point to one central bank that appears to have broken from the old paradigm and gotten it right.

Lukas Scholle: Alongside your academic work, you also advised Bernie Sanders on economic policy during his two presidential campaigns. What advice did you give him?

Stephanie Kelton: The first thing I remember him asking me was, “What would you do if you were me? And I immediately said, “Second Bill of Rights.” And he said, “Talk to me about that.”

We started talking about Franklin D. Roosevelt’s second bill of economic rights, which he introduced in his final term. Everyone should have the right to a job at a decent wage. Everybody should have a right to health care, to housing, to a secure retirement, to an education. So, I said to Senator Sanders, “This is the unfinished business of the Democratic Party.”

Later, he gave the big speech at George Washington University in Washington, DC, on democratic socialism, and in that speech, which I helped to draft, he invoked Franklin D. Roosevelt and the Second Bill of Rights.

Lukas Scholle: Do you consider yourself a democratic socialist?

Stephanie Kelton: Bernie always says it’s about trying to build an economy that works for working people. That’s my framework: How do you change what’s clearly broken? How is the economy failing to support the people that it is meant to serve? The first thing I remember him asking me was, “What would you do if you were me? And I immediately said, ‘Second Bill of Rights.’

We really have it backward. You’re filing bankruptcy because of medical debt. That’s wrong. Everyone should have health care as a right. You’re drowning in student loan debt. That’s wrong. Everyone should be able to go to public college and university. We should correct that. Our seniors should not be living in poverty.

Lukas Scholle: You tweeted recently: “As every self-proclaimed socialist knows, there can be no economic program to lift up the masses until you secure a permission slip from Mr Market.”

Stephanie Kelton: Because I hear this from self-proclaimed socialists all the time: “I want programs of the kind that Franklin D. Roosevelt described, but I want to pay for them so as to be fiscally responsible.” This was me being a little bit cheeky and saying, “You know, it’s like as long as the market will let me do these things because I’m afraid of the market.”

They’ll often point to things like what happened in the UK with Liz Truss, where the Bank of England didn’t step in quickly to back the bond market, and say, “You see, this is what happens when you try to do something.” Mr Market wags his finger and says no, no, no.” Interest rates go up and you say, “Oh, well, I guess I have to abandon my agenda because the bond market won’t lend me the money to do it.”

This is my way of trying to say, “No. You commit to your agenda and the market serves us. We don’t scale back our ambitions out of concern or fear.” Too many people are reluctant to try to break out of the conventional framework around financing and debt.

Lukas Scholle: How can these sorts of policy proposals help to strengthen the working class?

Stephanie Kelton: There is the idea of a job guarantee, that there’s essentially a public option in the labor market. It’s a standing offer available to anybody who wants to work in the program at the stated wage and benefit package. You could say it’s a safety net for the unemployed, but it’s more than that.

It says to the rest of the producers in the economy, this is a wage and benefit package that you have to at least match in order to attract and retain workers. They can always walk away from a job that they don’t like in the private sector into this public option that is available where workers are treated with respect, where their time is respected. That’s very empowering to the working population, and, because it institutionalizes a tight labor market, it would tend to increase the labor share.

Why don’t we get at the root of the problem? Why is everything rising to the top in the first place? How are they ending up with so much of the wealth and income? Why don’t we get at the root of the problem? Why is everything rising to the top in the first place?

There’s a narrative that you hear all the time in the US, and I think around the world, that the problem with the rich is that they don’t pay their fair share. If they would only pay their fair share of taxes, we could afford to spend on all these programs that we want to spend on as progressives. I think that framing is problematic. I suggest that we shift from saying the problem with the rich is that they don’t pay their fair share, to recognizing that the problem is that the system has been designed to allow a relatively small group to keep taking more than their fair share.

How are they doing it? Government-granted patent monopolies and other protections, failure to enforce antitrust laws, a federal minimum wage that has been stuck at $7.25/hr since 2009, a tax code that is written by and for the wealthy that is riddled with giveaways and loopholes, trade laws that tilt the gains from labor to capital. So, labor, trade, tax, antitrust — tackle those things and get at the sources of the mechanisms that allow the income and wealth to end up so unequally distributed. That for me is pre-distribution — go at those things.

Taxes are part of it, but it’s not meaningfully altering the distribution if you play around with a wealth tax and the people at the top continue to pull further and further away from everyone else. If what you’re proposing doesn’t get at the root of the problem, then I find it difficult to get enthusiastic about that sort of policy.

Stephanie Kelton
Stephanie Kelton
  Stephanie Kelton is a professor of economics and public policy at Stony Brook University. She served as chief economist on the US Senate Budget Committee (Democratic staff) in 2015 and as a senior economic adviser to Bernie Sanders’s 2016 and 2020 presidential campaigns.
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