Why Is This Happening? Debunking the deficit hysteria with Stephanie Kelton: podcast & transcript

Chris Hayes talks with economist Stephanie Kelton about politicians' bad faith use of the deficit.
Get the Think newsletter.
SUBSCRIBE
By Why Is This Happening?

Should you be worried about the federal deficit? While campaigning, President Donald Trump followed in the footsteps of his conservative predecessors by fear-mongering about the ballooning deficit — but when he got to the White House that concern all but seemed to disappear when it came to his tax cuts for the rich and increased government spending. In fact, there’s a pattern to the Republicans’ selective concern about increasing the deficit, and it all depends on who holds the power.

When you look at the behavior of people in politics, they don’t really care about the national debt as much as they like to talk about it. So what does their bad faith use of the deficit tell us about how important that number actually is? Stephanie Kelton is here to break it all down — the national deficit, the nature of money itself, federal spending, and why it’s time to stop comparing it to a household budget.

CHRIS HAYES: Let's say we pass a Green New Deal and we don't raise taxes at all. We don't like undo the Trump tax cuts. Nothing. Nothing changes in the tax rate, but we spend a trillion dollars more a year. That's enormous, right? A trillion dollar Green New Deal a year would be World War II mobilization level increase. Your point is as long as there's slack in the real capacity, there's productive investment to do with that, there will not be negative consequences from that. That is your fundamental contention.

STEPHANIE KELTON: There will not be negative inflationary consequences ...

CHRIS HAYES: Hello, and welcome to "Why Is This Happening," with me, your host, Chris Hayes. I'm about to uncork a rant. That is a real go-to rant from me. You may have heard it in other various platforms that I occupy. It concerns the thing in politics that drives me the craziest. It's not the worst thing that happens in politics, but it's the thing that just drives me the craziest, and it has to do with the way that people talk about deficits. I am driven absolutely to madness by this. I have watched my entire adult life in politics people talk about the deficit as this terrifying thing. The deficit's too high, the debt's too high, and because of that we cannot do X. What that always means isn't really “I care about the deficit or the debt.” It never means that it's a lie. It's always a lie. In fact, it's a lie that's so reliable that it's essentially a kind of linguistic substitution.

It's just an invocation of an outside authority to say like, "I don't like what you're proposing." Whatever Republican politician you want to choose, Paul Ryan who was concerned about deficits and debts, Paul Ryan doesn't care about deficits and debts, and you only need to know that by looking at his voting record. Like he voted for the Iraq War. He voted for all the defense appropriations and he voted for Medicare Part D, which was a drug prescription benefit put through by the Bush administration, unfunded. They just created out of whole cloth a new drug prescription benefit for seniors with no revenue stream and it passed by one vote in the house. The deciding vote was Paul fricking Ryan. Okay?

He'll cast that vote. Then he'll turn around two years later, and the Democrats we need a big recovery act or stimulus program because the country’s in the worst economic free fall in 70 years, and all of the economists, the macro economists, tell us that we need demand to stimulate the economy, and Paul Ryan votes against it because that blows up the deficit. Literally that means nothing. Yet people take it seriously. People will write about Paul Ryan like Paul Ryan, he's a deficit hawk, he's a deficit hawk, he worries about the deficit. He doesn't f-----g care about the deficit, and that is absolutely evident in his ... and that's true with Kevin McCarthy, it's true with Mitch McConnell. It's true of every Republican and conservative out there because I have watched during my... I was born 1979 and here's what's happened.

Ronald Reagan, small government bad, deficits bad, small government, deficit explodes, military funding explodes, and taxes are cut, bigger deficits. They leave that ultimately through George H.W. Bush, who actually does put his money where his mouth is. Infamously votes for a bill that raises taxes to close the deficit, and he is thrown out of the conservative movement, and viewed as a traitor evermore. Then Bill Clinton comes in. Now there's a democratic president. Well, now we really care about deficit and debt.

You start to see a little pattern here. We got to deal with the deficit and debt, and Bill Clinton buys it, too, because the bond markets, and interest rates, and yada, yada, and then they close the budget deficit, they get a surplus. What do you think George W. Bush does? What do you think the Republicans do when they're in power? Well, they explode the deficit and the debt. More military spending. Huge amounts on wars. Huge tax cuts. Basically, the same recipe as Reagan. Leave office with the worst financial crisis in 70 years and an exploding deficit and debt. What do Republicans do the very next day as soon as Republicans are out of power? Barrack Obama's president. A Democrat's the president. And they threaten to default on Americans’ debt obligations for the first time in the history of the country. They precipitated a huge crisis. They impose austerity that makes people miserable. Then Donald Trump is elected president and I guess you could complete the pattern here.

Wait a second, a huge tax cut for rich people and big increases to military spending and a bigger deficit? Yes, because that is what the Republican Party stands for: bigger deficits. When you look at the behavior of people in politics, no one cares about the deficit and debt, except for a small group of people. There's some folks, I think some of the advisors to Democrats over the years, actually care about it, but generally no one cares about it. They pretend to care about it and everyone pretends to believe that they care about it and scold each other about it, like it's a real thing, but no one actually acts as if what they're saying they believe. That's just maddening. Everyone walks around with these face value pronouncements and explanations for their political behavior by citing a thing that they don't actually believe. It's just unbelievable bad faith. The political conversation revolves around it, the way that we talk about politics like takes this very seriously, you can drive down the street in New York City and you can see a big debt clock, right?

It's one of these non-ideological centrist things. Because you can scold both Democrats and Republicans with: "Well, how are you gonna pay for it?" I want single payer. "Well how are you gonna pay for it?" I know. I'm aware of how a government works.

Wait a second, wait a second, wait a second, if everyone's behaving as if it doesn't really matter and we've been running huge deficits and debts in sort of waxing and waning cycles, but we always have a deficit, maybe it doesn't actually matter. Like what if the whole premise is wrong? What if it just doesn't really matter, or maybe it matters way less than we think, or maybe it matters only in tremendous extremes that we never get close to. Today's conversation is about that. Today's conversation is about a theoretical understanding of what a deficit is, what government debt is, what role it plays in our economy and what it means for what we can and can't do with public funds. It is a radical re-conception of that understanding.

It basically takes the understanding that existed before and flips it on its head. As you will hear, because of that, it's hard to make sense of. I actually, as I sit here talking in this intro, I'm not sure I actually understand it and I went through the conversation. You will hear in the conversation that I'm struggling sometimes to rise to the necessary level of conceptual sophistication or maybe it's just a batty idea and the reason I don't understand it is because it doesn't make sense. I don't think that's the case. I generally think there's a genuine insight there that is just hard because the terrain that this all takes place on, which has to do with the nature of money itself, the nature of the state with respect to money, the difference between money as a thing that is a transfer and a mode of exchange, an actual real productive economic capacity.

All these distinctions are tough ones and as you will say in this conversation I and my guest are wrestling through them. If you find yourself hitting the 15-second back button on this because you're folding the laundry, or doing the dishes, or you find yourself lost, I, too, found myself lost at different points. And, yet, I think the fundamental question here, which is are we thinking about how the government spends money and what it can spend money on all wrong is an extremely important one because here's what is about to happen, as soon as Democrats get power, particularly if there's a Democratic president and they propose a Green New Deal, or Medicare for All, or even far more expensive programs like something around college affordability or expanded child tax credit, you will immediately hear the same people who have ignored the deficit and debt suddenly be very concerned about it. There's going to be a question about whether they should be listened to.

Right now there's, underneath the political debate, an intellectual debate about what exactly we mean when we talk about the deficit. The person I talked to is a woman named Stephanie Kelton. She's a professor of economics and public policy at Stony Brook University. She's also a senior economic advisor for the Bernie Sanders campaign in 2020. She's worked for him before on the budget committee. We don't talk about the campaign at all. This is all sort of in her kind of academic capacity. She is very associated with a new theory, called Modern Monetary Theory, that basically attempts to execute a Copernican Revolution in the way we think about how the government spends money and where the money comes from. Copernican Revolutions can be one of two things. They can be actual Copernican Revolutions or they could be like total crankish-ness.

There are some people who think that she's a crank and her school of thought is a crank. There are more and more people, I think, who are at least saying, "No, there's some fundamental insight here that we should be wrestling with and operationalizing in how we talk about it." I've had her on my evening show. I've had her on previous shows. I've read her writing. She's a very sophisticated and rigorous thinker. She comes out of an economic tradition that is both real empirical and serious, but also kind of dissonant and heterodox. They are sort of self-consciously outside the mainstream of economics, but she will blow your mind a bit. She will make you rethink a lot of the fundamental ways you have been taught to think about how the government takes in money and how the government spends money and fundamentally what the relationship is between the two.

What she's talking about will be at the center of our politics, particularly as we enter the area of climate crisis and adjusting the climate crisis when huge amounts of public investments are going to be necessary and there's going to be a big debate over whether we "can afford it". What my guest today, Stephanie Kelton, says is, "Yes, we can and, in fact, that sentence doesn't even really make sense."

CHRIS HAYES: So, we're going to talk about a theory that you have become very associated with. Did you coin this term, Modern Monetary Theory?

STEPHANIE KELTON: No, I think Bill Mitchell, an Australian economist did.

CHRIS HAYES: So, Modern Monetary Theory, which sounds technical, but is, and is sort of technical. So, this conversation is going to be both kind of teasing out and then maybe kind of arguing about it a little bit, not that I am arguing with you. But, just sort of giving you the critiques of it.

But, it's fairly technical terrain but really important. And, because it's so central to our politics, I think the reason that it's like... it's really taken off. Like, people are talking about this all the time.

In fact, just as I'm sitting down with you, there is a GOP-introduced Senate resolution by Georgia Senator Sonny Perdue condemning your school of thought. Like, literally, it's a GOP resolution that's like “whereas, we have a duty as a Senate to condemn Modern Monetary Theory.” Which is wild.

STEPHANIE KELTON: Yeah, my parents are going to be so proud. It's so weird.

CHRIS HAYES: You didn't know this when you walked in-

STEPHANIE KELTON: I didn't know it.

CHRIS HAYES: I showed it to you, you thought I was making a joke.

STEPHANIE KELTON: I totally thought you were putting up a play on me. Yeah.

CHRIS HAYES: All right, so let's start. What is Modern Monetary Theory?

STEPHANIE KELTON: It's such a hard question. I can either give you like the thumbnail elevator speech, which I could do. But then, I feel like in a sense I'm betraying a whole group of people who spent, now going on like 25 years putting the literature that's behind MMT. And so, if I don't at least stop and say, "MMT is this amazing group project that started some 25 years or so ago with maybe half a dozen economists wrestling with new ideas that were brought to us by an outsider." By someone who, yeah he has an undergraduate degree in economics, but he came from the finance world and he wrote this little piece called, “Soft Currency Economics.” His name is Warren Mosler.

And, he was trying to get these ideas in front of economists and get them to engage him. You know, so let's have the conversation, this is how I see things, and you guys are saying all this other stuff. I think it's wrong. And he went to Harvard and he went to Yale and he went to Princeton and he went to MIT and he tried to go to all the, you know top departments in the country and nobody would talk to him.

CHRIS HAYES: Let me stop you there, because I'm a person who goes to public events in which people give me manila folders with their takes and their theories. Sometimes, 15 pages, sometimes 40. If you're one of those people, I love you, thank you for that. But, a lot of times they're pretty kooky.

STEPHANIE KELTON: Fair enough.

CHRIS HAYES: Like, I just-

STEPHANIE KELTON: Fair enough, and you know what?

CHRIS HAYES: Let's just say that like the guy running around with like, "I have the idea to revolutionize the way that we think about monetary theory and deficits," getting a reaction of like, "Okay, buddy," is not the craziest thing in the world, going to say.

STEPHANIE KELTON: I completely agree with you and having the word currency in it, makes it 99 times more likely that you're going to be approached by a crank.

CHRIS HAYES: Yes, because we should make this clear. For the people listening to this podcast who don't know this, there is an insane world of people who are drawn to currency questions and the Fed and gold bugs who believe in hard currency. For whatever reason, it attracts the crankiest of cranks. And, it is an entire universe you can fall into out there about people who have like really cranky views on this.

STEPHANIE KELTON: Absolutely. Yeah. So, this guy comes out of nowhere, starts mailing his thing around.

CHRIS HAYES: Right.

STEPHANIE KELTON: And, nobody wants to talk to him, I mean, right? And, for some reason-

CHRIS HAYES: That scans.

STEPHANIE KELTON: I think that, this is the craziest story. I think that it was Art Laffer who gave Warren like a few minutes a time and said, "You know who you should go talk to? You should go talk to the Post-Keynesians, I think they would listen to you."

CHRIS HAYES: Okay, now we got to stop here.

STEPHANIE KELTON: Okay.

CHRIS HAYES: Because, we got the tell people who Art Laffer is, who's important. Art Laffer is a very famous, even infamous supply-side economist who is author of what's commonly known as the Laffer Curve, which was sketched on the back of a napkin. I don't know if that's apocryphal or not.

STEPHANIE KELTON: I think it's true. I've seen it told as a thing that really did happen.

CHRIS HAYES: That really influenced and Reagan and Republicans and Grover Norquist. Do you want to explain the Laffer Curve?

STEPHANIE KELTON: Well, I mean, the idea behind the Laffer Curve is that you can cut marginal tax rates, you can lower people's taxes and end up with more money. Because, you will so incentivize the job creators and everyone will want to be excited about joining the labor market and participating and producing and hiring and so you'll get this burst of economic activity and the tax revenues will just come raining down on you.

CHRIS HAYES: Yeah, it's an extremely attractive theory if you want to cut taxes. And, it very much relates to people's critiques of MMT. So, I think it's important we're just pinning Art Laffer, right?

STEPHANIE KELTON: Yeah.

CHRIS HAYES: Because, Art Laffer says, "Hey, you Republicans, all you people. I know you want to cut taxes, it's all you think about day and night, you dream about cutting taxes. But, the binding constraint is that when you cut taxes, you create bigger deficits." But, in comes Art Laffer to be like, "No, no, no, no. You don't have to-"

STEPHANIE KELTON: Have I got a curve for you.

CHRIS HAYES: I've got this curve and if you're the right part of the curve, and let me just defend him for a moment, right, like if you had a 99 percent marginal tax rate, it is probably true, right? That cutting taxes would increase total revenue, because there would be a lot more economic activity. But, at a certain point, you just reduce the amount of revenue, which is what happened with the Reagan tax cuts.

STEPHANIE KELTON: Yeah, and it happened in the state of Kansas, where I moved to New York from, just a couple of years ago. And, it was at the urging of Art Laffer, who rolled into the state of Kansas and cashed his check for the consulting fees that he gave to the Kansas legislature and to the Brownback administration, said, "You know, if you really want to see job growth and more economic activity here, all you got to do is just cut taxes." Same advice he's been giving for 40 years or whatever.

CHRIS HAYES: So, this guy is running around — I didn't actually know this part. So, Art Laffer, who is known as basically a right-wing crank, although, incredibly influential, right? I mean-

STEPHANIE KELTON: Still clearly. Yeah, they bring him in, they wanted his advice. They want to be able to point to it and say, "This economist told us-"

CHRIS HAYES: Exactly.

STEPHANIE KELTON: "That if we follow this advice..." Yeah.

CHRIS HAYES: The philosophical and the theoretical architect of decades of tax cuts, or at least their justification. Like, don't worry, and I we saw it again with this latest round of tax cuts. People, with a straight face, Mitch McConnell, all these people being like, "No, deficits are not going to go up."

And, everyone was like, "That's bulls--t, we know they will." And, they're "No, no, no, no." And then, like of course, deficits go up. So, that's Art Laffer. So, what you're telling me is, Art Laffer, who plays this really important role in what is modern tax cut GOP orthodoxy and the ideological and theoretical justifications thereof, is the one who gives some time to this guy, what's his name? Mosler?

STEPHANIE KELTON: Warren Mosler.

CHRIS HAYES: Warren Mosler, who's like, "I got a new theory about deficits and monetary policy."

STEPHANIE KELTON: Yeah, I don't know that Art actually read Warren's work. But, maybe he read enough of it to kind of say, "If you want somebody who will listen, go try out the Post-Keynesian."

CHRIS HAYES: So, he comes to Post-Keynesian and what is the basic gist?

STEPHANIE KELTON: So, Warren shows up, he gets on these, you know these email lists where everybody kind of engages in real time, in a back and forth. So, Warren joins this listserv back in the day when those were you know really popular. And, he starts floating these ideas, and he starts saying things like, "Well, you know the reason the currency has value is because the government demands that you receive it. Uh, that you work to get it in order to sell your tax obligations. It's not the government that needs the dollars, it's the rest of you that need the dollars."

And, everybody's like, "What?"

CHRIS HAYES: Yeah, I didn't-

STEPHANIE KELTON: You know? That didn't sound right to a lot of people and he's saying, you know-

CHRIS HAYES: I didn't understand that, actually.

STEPHANIE KELTON: You didn't understand that?

CHRIS HAYES: Yeah.

STEPHANIE KELTON: Oh, okay. So-

CHRIS HAYES: Why? I'm going to stop the historical story for a second because now we're going to talk about what this things is. And, it requires a lot of like concept building. So, the first thing that we need to talk about is, what is money? Is what you're talking about, right? Or, why does money have value?

STEPHANIE KELTON: So, yeah. And, so Warren told this story, when I was a graduate student at the New School, there was a project that Warren funded. And, it was run by a member of the faculty, and there were six or so graduate students who had some support as graduate research assistants. And, we all went down to Warren's place in Florida one day to meet him, because we were studying his theories and we were working on these ideas and finding out whether we could poke holes in them, whether we could find useful things to extend the analysis, to stress test them all this sort of stuff.

And, Warren wanted to meet the group that he was helping to support. So, we all went down to Florida and we spent a couple of nights at his house. And, while we were there, we met his kids. And, he told us this story, and he said, "You know, I have these two kids, and I told them if you'll do some chores around the house, like you know make your bed, cut the grass, unload the dish washer, walk the dog, do these things and I'll give you some of my business cards. I'll give you five business cards if you make your bed. And, I'll give you 20 if you cut the grass and all this kind of stuff."

And, he said, "You know, a couple of weeks went by, and the sink, the dishes were piled up in the sink and the bedrooms were a mess and grass was knee high," and I said, "What are you guys doing? You know, I promised, I told you I'd give you cards. I'd pay you if you'd pitch in around here." And, they said, "Dad, why would we do any of this work?" And, they said, "We don't want your business cards." And, he goes, "Oh, well they don't have any value, do they? Well, what if I said, if you want to sleep in my home and swim in my pool and play, you know whatever. Then, I'm going to need 20 cards a month? That's what it's going to cost you to live here."

All of a sudden, the grass got cut, the dishes got done and all this kind of stuff. It's obviously, you know a little bit of a-

CHRIS HAYES: Yes.

STEPHANIE KELTON: Play, it's a fun, playful story.

CHRIS HAYES: Not helping my vision of the guy as a crank, but continue.

STEPHANIE KELTON: But, his point was, he's trying to get us to understand why this otherwise worthless card, this piece of paper, suddenly had value. Why were people willing to work and produce in order to get this thing, that a week-and-a-half ago, they had no interest in-

CHRIS HAYES: Right.

STEPHANIE KELTON: And now, suddenly they do. And, so that begins the story of you know the origin of value in money. Why do we take these dollars bills that have no intrinsic worth?

CHRIS HAYES: Right.

STEPHANIE KELTON: And, why do we all work so hard to get them? And, we have this idea that somehow the government is dependent on us in order to operate. That it needs our money and that we as taxpayers, are supporting this huge enterprise, this government operation.

CHRIS HAYES: Right, so we create economic value through our activities, right? And, our productivity, we produce the value, we exchange the value through the medium of exchange of value, which are greenback dollars, right? And then, the government takes a cut of that as a kind of siphoning off of that value, essentially.

STEPHANIE KELTON: Right. And, what we see happening is we see them taking a cut and we think, "Well, there it goes. And, now it's in their hands and now they have it so that now, they can spend it." And, so-

CHRIS HAYES: Right, so they take it. So, I work, and I pay my taxes and the work is economic, useful, productive stuff. And then, I write my check, or it's garnished from my wages. Now, the government has that money, right? So, it has my $20 dollars. And, the government says, "I want to repair that road, I'm going to hire a contractor to repair that road, and here's the $20 dollars that you gave me."

STEPHANIE KELTON: Right.

CHRIS HAYES: That's the way we think of it, right?

STEPHANIE KELTON: Exactly. And, Warren says, "You're getting the order of operations wrong. You should start ... Nobody can pay their taxes to the government until they first get the dollars." Right? The government cannot tax you and collect dollars from you, until they first get dollars in your hand. Where would you get the money to settle the tax obligation if the government didn't spend it or lend it into existence? And so, the spending had to come first.

And, that's the same with the business cards with Warren's kids. They couldn't pay their tax to him at the end of the month, until he paid them first, right? He's hiring them to do these useful things around the house, he gives them this intrinsically worthless little thing, it's a receipt for the work that they've done. At the end of the month, they give the ticket back, and it says, "Dad, I did everything you asked me to do."

CHRIS HAYES: Okay. So, this is hard conceptually. When you say prior the order of operations, you're not talking chronologically, because there's no timeline here. You're talking sort of conceptually?

STEPHANIE KELTON: Well, at least in the first instance, it had to be the case that the dollars got put in before they could be taken out.

CHRIS HAYES: I mean, that's true in a historical sense.

STEPHANIE KELTON: Right.

CHRIS HAYES: When you go back to like say, Civil War greenbacks, right? I mean, the first printing of soft currency, right? Which, is a currency that's not backed by any store of gold is during, if I'm not mistaken, right? Is during the Civil War and the greenbacks.

STEPHANIE KELTON: Right.

CHRIS HAYES: And, that's just the government basically putting a bunch of money into circulation.

STEPHANIE KELTON: Right, it had to come in from government. You know, the US dollar comes from the US government and can't come from anywhere else, right.

CHRIS HAYES: Yes.

STEPHANIE KELTON: They have, in a sense, the super patent on the issuance of this thing. If you and I get busted trying to create it, it's called counterfeiting. You know, we're in big trouble.

CHRIS HAYES: Yes, they have a monopoly on that, I think it's fair to say.

STEPHANIE KELTON: They have given unto themselves the exclusive right to create the US dollar. It can't come from anywhere else, it doesn't come from China. You know, we can't create it. It has to come from them.

So, we get it from them. And then, they reclaim a portion of what we get.

CHRIS HAYES: Is that true? We get it from them. I mean, get is…

STEPHANIE KELTON: Well, we're talking about the currency itself.

CHRIS HAYES: Right, the currency itself, okay, right. The value, this is, okay, this is where things get difficult and everything with monetary theory always is hard because it's a little like when you're doing really hard, high level logic work or semantic work because there's like the referent. There's like the arrow and then that thing the arrow's pointing to, right? Because, in this case, the currency is distinct from the actual value of the thing.

Like, a vase is a valuable thing in the world, like or a bucket. Right like a bucket is a valuable thing, has value because you can put water in it, and you can give it someone who wants to carry water. And, that's independent of whether you buy it in rubles or you buy it in Euros, or you buy it in dollars, right? Like, that's thing that has value. There's work that has ... you know, you create value.

Like, if I go plant a field and then I grow some stuff, then I've got some food that I could like exchange with other people. And then, there's the currency that's like marking that value. And, those are distinct things, right?

STEPHANIE KELTON: Yeah, for Warren, it would be the value of those business cards was, what did you have to do to get them?

CHRIS HAYES: Right.

STEPHANIE KELTON: How many hours of work did it take you to earn five cards?

CHRIS HAYES: Right.

STEPHANIE KELTON: And, that is in a sense, the value.

CHRIS HAYES: But, it's almost like a name, right, it's all the relationship that a name bears to a person. Right? That like, there's the thing, there's the washing of the dishes, there's the making of an iPhone, there's the crafting of a bucket, there's the hosting of a new show. Extremely valuable, extremely valuable work. And then, there's the name given to it or the currency exchange with it.

STEPHANIE KELTON: Right. So, we have a unit of account, which is the name that we give.

CHRIS HAYES: Right.

STEPHANIE KELTON: In our case, the US dollar or the Japanese Yen, or the British pound or whatever. And then, we have sometimes, a physical manifestation of that name. So, the paper currency, you have to use dollar bills.

CHRIS HAYES: Yeah, like if I reach for my wallet, right.

STEPHANIE KELTON: Yeah, so sometimes in lectures, I'll do a thing on money and I'll take out the you know, actually, here's what I do. I tell students, "So, I don't have any on me, I need a buck or two, does anybody have a dollar bill or five or something?" And, some kid will, you know, a student will say, "Oh, here," and give me their money. And, I say, "Okay, let's look at this thing. Is it intrinsically valuable?"

CHRIS HAYES: No, definitely not.

STEPHANIE KELTON: No. Yeah, we talk about what we've been talking about.

CHRIS HAYES: Sure.

STEPHANIE KELTON: And I say, "Well, what happens if I do this?," and I just rip it in half. And they do. There's a little gasp in the room 'cause it was this poor kid's coffee money or something and I just took it in half. I said, "Did I destroy money?" And they say, "No, no. You can tape it back together."

So then I rip it a second time, and then they start laughing and it's like, "Oh, she ripped your money." And then I say, "Now did I?"

CHRIS HAYES: This is a good bit.

STEPHANIE KELTON: "Now did I destroy money?" And they say, "No. You can still tape it back together." So then I just make it confetti and I just shred it, and they just start howling and laughing and everybody at that point, everyone in the room, has agreed that I have destroyed money.

And then I say, "But does it still exist somewhere? Does the Fed know I did that? We're not going to tell them, right?"

Get the think newsletter.

CHRIS HAYES: Right, right.

STEPHANIE KELTON: "I probably shouldn't have done that."

CHRIS HAYES: That's illegal.

STEPHANIE KELTON: "But is it still part of the U.S. money supply as far as-

CHRIS HAYES: Right.

STEPHANIE KELTON: And forever more it will be there, right? Because only the Federal Reserve can subtract that from the outstanding money supply.

CHRIS HAYES: Right. The point is that when you, Stephanie Kelton, get up and rip a dollar to shreds, there is not one dollar less in the American economy, right?

STEPHANIE KELTON: As far as anybody knows.

CHRIS HAYES: As far as anybody knows. It literally did nothing to the amount of money in the American economy.

STEPHANIE KELTON: Right. And your point is a good one because it gets us to start to think about is money the physical thing, and then we worry about how much of it are we, quote, "printing."

CHRIS HAYES: Right.

STEPHANIE KELTON: And then we get excited. Or increasingly, is money really like a spreadsheet entry? Should we think of it more like digits coming out of a keyboard? And that's how most of the money in the world is created today. We don't physically print it up.

CHRIS HAYES: Yeah, right.

STEPHANIE KELTON: Right? We're digitally creating this sum.

CHRIS HAYES: Yeah, the government sets the money supply.

STEPHANIE KELTON: Right. So when the government makes a payment to someone who's receiving social security benefits and they're sitting there in front of their computer hitting the refresh, refresh, refresh 'cause they want to go get medicine or whatever they've been waiting to buy, groceries and medicine, fill a prescription, and they see that their balance is $3 and they just keep hitting the refresh, and all of a sudden it's $1303 and they say, "Oh, where did I get that $1,300?"

Well, the government just made a keystroke entry and put $1,300 in your account, and that's what happened.

CHRIS HAYES: Right.

STEPHANIE KELTON: So in other words, the government spends by instructing its bank to change the numbers in someone's account upward. And when we pay taxes, the opposite happens.

CHRIS HAYES: Okay, but-

STEPHANIE KELTON: Numbers change downward.

CHRIS HAYES: Right, right. So the government is the creator of the money and that it's important when in the social security, right, they're not paying them. This is the key sort of insight here. They're not paying them in the sense that, "I've got a bank account that has this amount of money, and I've now drawn ... I got a bank account that has $1,000 because I've collected one dollar in tax revenue from 1,000 of my citizens. And now I'm going to write you a check for $20 for your social security benefit, and now I have $980 in my government bank account."

And what you're saying is that's not the way it works.

STEPHANIE KELTON: No. I'm saying it-

CHRIS HAYES: Right?

STEPHANIE KELTON: Yeah, there's a constant churning of pluses and minuses happening all day long.

CHRIS HAYES: Right.

STEPHANIE KELTON: And it's not as if the government is like the rest of us, where it has to go out and prearrange its finances.

CHRIS HAYES: Right.

STEPHANIE KELTON: In order to buy a car, we've got to go out and get money, we've got to find someone who will lend, we've got to raise the money, we have to have the money to make the down payment. The government is…

CHRIS HAYES: Just not constrained in that way.

STEPHANIE KELTON: ...debiting and crediting all day long. Well, there are some institutional self-imposed constraints, there are rules about the Treasury's account and the Fed and the balance that needs to be maintained. They don't want to allow it to close in negative territory at the end of the day.

But through the trading day, while the checks are being cleared, the Fed's job is to make sure that Treasury checks don't bounce. And the Fed is the government's fiscal agent, and they will clear any payment that's authorized by Congress. So the payments are being cleared by the Fed and payments are being made and things are all arranged very strategically behind the scenes, hand in glove with the Fed and the Treasury, making sure that this whole process works flawlessly.

CHRIS HAYES: And the process is the government receiving money and the government sending money out.

STEPHANIE KELTON: Yeah, and borrowing.

CHRIS HAYES: Right.

STEPHANIE KELTON: So that as the government spends more than it collects at any point in time, we label that deficit spending, and then it triggers a borrowing operation. I'm a little uncomfortable calling it borrowing, because when the government does it, it's not like when you and I do it. But people often call it borrowing.

CHRIS HAYES: Okay. So let's talk about two things here. So I'm sort of following you, I think. So there's all sorts of examples of organic creations of forms of currency in constrained circumstances independent of the government. There's a famous example about babysitting script in an Econ 101 textbook.

The one that I think people think about all the time is packs of cigarettes in prison, right? That's an iconic one. The pack of cigarettes has some inherent value, but even if you don't smoke it has value because it becomes a token of exchange and it's essentially the currency form in an arena with no currency, where you can imagine sardines I think have been used in this. There's all sorts of examples.

And I guess my question is there's a certain story that a certain kind of economist wants to tell about the development of currency that cuts out the government for a reason that you don't want to tell. What's going on there in that ideological tension?

STEPHANIE KELTON: Well, so the conventional story, and you really still find this in almost any economics textbook you pick up today-

CHRIS HAYES: It's the beginning of-

STEPHANIE KELTON: Yeah. When you turn to the chapter where money is first introduced, it usually begins with a story about barter exchange.

CHRIS HAYES: Yeah, right.

STEPHANIE KELTON: ... and how it sort of ... once upon a time, man conducted his affairs through the exchange of goods for goods, we bartered in a marketplace. And then we decided, "This is awfully inefficient. We should find a way around this and we should all agree to take some common thing."

CHRIS HAYES: Right.

STEPHANIE KELTON: "... so that we don't have to satisfy-

CHRIS HAYES: Simplify.

STEPHANIE KELTON: "... what's called the double coincidence of wants," right, and all that, "so we can chose beads or shells or any of these primitive things." And then over time, the story evolves, money gets more sophisticated, silver and gold, because these things have nice properties, they're durable and portable and divisible. And so-

CHRIS HAYES: And then credit.

STEPHANIE KELTON: Right, and all that kind of stuff. So without government sanctioning any of this, right?

CHRIS HAYES: Right.

STEPHANIE KELTON: It's just spontaneous.

CHRIS HAYES: Right.

STEPHANIE KELTON: This is very Austrian Manger libertarian type of story.

CHRIS HAYES: Right.

STEPHANIE KELTON: With no government interference whatsoever. Markets solve the problem of barter and invent this thing called money to solve a problem of high transaction costs.

CHRIS HAYES: Right.

STEPHANIE KELTON: Then if you actually read people who study the origins of money, like anthropologists and historians, sociologists, numismatists, people who actually do the hard work to try to learn what really happened, that is not the story that they tell. And the story that they tell is that money comes into existence along with private property, that states play a very central role in ... because it's legal. You have a ...

CHRIS HAYES: Right.

STEPHANIE KELTON: It's a system of contracts and laws.

CHRIS HAYES: Yeah.

STEPHANIE KELTON: And you can't sell what you don't have property in. And so money evolves along with-

CHRIS HAYES: In tandem with state control…

STEPHANIE KELTON: ...property and the state.

CHRIS HAYES: Right. Some power. And this is the thing you hear all the time, right? So we think about household budget is, "I make $1,000 a month and my expenses are $1,200 a month. I'm in trouble. I'm down $200 a month. And the way that I can cover that is I can get, say, a credit, right?" So I keep some credit card debt and I'm adding $200 in debt every month.

And that's bad in a household setting because presumably that's high interest, that interest is going to go up, that $200 is soon going to be $300, then next week another $200, it's $500, that's going be then $600, then $700, up and up and up. I'm paying 18 percent A.P.R. I'm screwed.

That is the moral story. It's not really a technical story. The moral story that people talk about government deficits being bad, right?

STEPHANIE KELTON: Yeah, it's an economic and a moral story, because as you said, it's going to take a bigger and bigger piece of your disposable income to service that debt over time.

CHRIS HAYES: Right.

STEPHANIE KELTON: Leaving you less and less money to care for the other needs, you know?

CHRIS HAYES: That's right.

STEPHANIE KELTON: Right.

CHRIS HAYES: Right. 'Cause my credit card bill, even if I could make that happen on a $90 minimum payment, pretty soon that minimum payment's going to be $150 and $200, and the debt's going to balloon. And then next thing you know, you're bankrupt. And this happens to people all the time. Bankruptcy's a huge problem actually.

If I understand the central insight here is that that's just a nonsense way to understand the way the government works.

STEPHANIE KELTON: Absolutely. This household analogy is just so pernicious. And it's so powerful though, because the fight-

CHRIS HAYES: Everyone uses it.

STEPHANIE KELTON: Everyone uses it, politicians-

CHRIS HAYES: Barack Obama used it.

STEPHANIE KELTON: Exactly. And it works so well with audiences because it's simple and it's self-referential. The finances that we all understand best are our own. So when someone gives you an analogy, story-tells about the dangers of borrowing and taking on too much debt and not living within your means, they use the language of getting your fiscal in order. The house, it's a household.

And so we're like you. We should behave like you. And we think, "Yeah, you should. And what's wrong with you? Why don't you?" We start getting upset at the thought of the government spending more than it takes in, living beyond its means, borrowing, burdening, putting burdens on its future by living too high on the hog today.

CHRIS HAYES: But there are aspects in which it is accurate, and these are they. The government does have income, it has revenue streams, right?

STEPHANIE KELTON: It does collect taxes and other payments to itself.

CHRIS HAYES: Right. It collects taxes and payments to itself and it also writes checks to people that have to clear. And when there is a gap between the two, it borrows by issuing treasuries, right?

STEPHANIE KELTON: Mm-hmm.

CHRIS HAYES: It sells bonds, which are called treasury bills, right?

STEPHANIE KELTON: Mm-hmm .

CHRIS HAYES: So the three main parts of that household story, which is like, "I've got some income, I've got some expenses, and I've got some debt to cover the difference." And the government's story is, "I've got some checks that are coming to me, I've got some checks that go out the door, and I've got borrowing to make up the difference called treasury bills," right?

STEPHANIE KELTON: Right.

CHRIS HAYES: So where is it...

STEPHANIE KELTON: Here's the difference.

CHRIS HAYES: Yeah. What's the next part of this?

STEPHANIE KELTON: All right. Here it comes. So let's say the government ... I'm going to put numbers to it.

CHRIS HAYES: By the way, Stephanie's already ripped up all of my money in my wallet while she's been having this conversation. I can't say it on the podcast, but I-

STEPHANIE KELTON: I'm going to put numbers to it 'cause I think it helps.

CHRIS HAYES: The floor is littered with money confetti.

STEPHANIE KELTON: Well, it took me a while to get through all the money in your wallet. That's it.

Let's say the government spends $100 into the economy but it only taxes 90 of those dollars back out.

CHRIS HAYES: Yep.

STEPHANIE KELTON: So what gets recorded in the government budget is a deficit of 10.

CHRIS HAYES: Right.

STEPHANIE KELTON: So we go, "Minus 10, government. Okay, but wait. There's another part of that story, which is we have to go, "Plus 10, not government," because if I put 100 in and I only take 90 out, then obviously I left 10 somewhere. And where I left the 10 was somewhere in the economy. So now there's 10 bucks sitting in the economy.

CHRIS HAYES: That didn't exist before.

STEPHANIE KELTON: That didn't exist before.

CHRIS HAYES: Created by deficit spending.

STEPHANIE KELTON: The government's deficit is mirrored by a surplus in some other part of the economy. So there's 10 bucks out there.

Now the government comes along by habit and custom and says, "Oh, I did this thing called deficit spending. I have to sell these treasuries now." So it holds up $10 in treasury and goes, "Does anyone want these?"

Well, the cash doesn't pay any interest and the treasury's due, so sure enough somebody happily swaps their $10 in cash for these treasuries. So now you've got $10 in treasuries instead of $10 in cash. Maybe I did this to build new infrastructure, so now you also have safer, cleaner, more reliable infrastructure and some bonds. That's a pretty good deal.

So what's different from if we're borrowing in our private capacity, if I walk into a bank and I sit down with a loan officer and I say, "I came to borrow some money," I don't slap a wad of bills down in front of the loan officer and then say, "Would you make me a loan? I'm here for a loan. I just ... there's the money. Could you now make a loan to me?"

CHRIS HAYES: Right.

STEPHANIE KELTON: But when the government borrows, it's first provisioning the dollars, it's putting them out there, and then it's allowing someone in the economy to, in a sense, trade up to an interest-bearing kind of government money.

CHRIS HAYES: So it creates the $10 in the economy through the deficit spending.

STEPHANIE KELTON: Right.

CHRIS HAYES: And then that $10 is traded back to the government for a bond, an interest-bearing T-bill.

STEPHANIE KELTON: Right.

CHRIS HAYES: Okay. I guess it just all sounds like magic to me, in an uncomfortable way. I agree with you that it's not a household, but there's some part of my brain that is rebelling against this 'cause it feels like there's some three-card Monty that's being played and I'm not following the card.

STEPHANIE KELTON: You know why? You know why? Yeah. I think it's just because we've all... this is how I reacted the first time I heard Warren quite frankly. I rebelled and I said, "Okay, this isn't right" and I insisted for weeks that it wasn't right.

And then one of my colleagues said, "If you think it's not right, you should write it up because he would want to know. And so write a paper and show where it all goes wrong."

So I dove into the manuals at Treasury and at Fed. I started talking to people who work at Treasury and Fed.

CHRIS HAYES: About how this actually mechanically works.

STEPHANIE KELTON: About how this actually mechanically works, 'cause I was-

CHRIS HAYES: Which no one ever looks at.

STEPHANIE KELTON: That's right. And I was convinced that, in this little pamphlet that Warren had circulated all those years earlier, that he had taken some shortcuts. And I thought, "It doesn't work like that. So I'm going to show why it's wrong."

So I sat down and wrote a paper that was published, and it was called "Do Taxes and Bonds Finance Government Spending?" 'Cause he was arguing they didn't and I was absolutely convinced that they did.

CHRIS HAYES: Right. Just to be clear, that's the standard story.

STEPHANIE KELTON: Yeah.

CHRIS HAYES: That taxes and bonds finance government spending, right?

STEPHANIE KELTON: Yeah.

CHRIS HAYES: That we pay our taxes and then everything over what our taxes can pay for is funded by those treasuries.

STEPHANIE KELTON: Exactly. So the order of operations there is that the government is raising the money by collecting taxes or borrowing, then it has the money, then it spends the money.

CHRIS HAYES: Right.

STEPHANIE KELTON: And so I went through six months or so to write a paper explaining to Warren all the things that he had gotten badly wrong, and I ended up with a really complicated paper that arrived at exactly the same place that Warren arrived at. And that actually is how, I guess in a sense, I came to MMT, because I didn't go willingly. I had to persuade myself through cranking this stuff out that this logic was sound.

So if it sounds too easy, I think it's because, well, we've never heard anybody say anything like this before. Most of us, this is completely turns on its head the way we understand the world of government finance. And as you said, it sounds too easy in a sense, it's too magical. So I get a bridge and a bond.

But if you ... On some level, we have to know that that's right, that when the government deficit spends to do infrastructure, we end up with infrastructure and bonds so that ... that it's like ... it has to be right.

CHRIS HAYES: Well, okay. So there's one way in which I think it has to be right, which is that the United States has existed for 200-plus years. And in the modern era particularly, it's been in deficit.

STEPHANIE KELTON: Almost my entire lifetime.

CHRIS HAYES: Yeah.

STEPHANIE KELTON: With almost no exceptions, very few.

CHRIS HAYES: Right. Okay, so the reason that there is a resolution condemning this theory by Republicans is that it would seem to say... You know, there's the very famous idea behind Milton Friedman that there's no such thing as a free lunch, right? And that fundamental, very fundamental, to modern economic theory, particularly the Chicago school, but I think generally is, economics is about constraint. Dealing with that constraint, the natural constraint, and that you can't just make something out of nothing, essentially.

STEPHANIE KELTON: Yeah.

CHRIS HAYES: And, this sounds like you're saying you can. Are you saying you can?

STEPHANIE KELTON: No, no, no. Emphatically no. It's so funny because I keep going back to a Principles of Economics textbook, chapter one, page one. Students are introduced to this idea that there is a constraint.

CHRIS HAYES: Right, it's literally the first concept.

STEPHANIE KELTON: It's literally the first concept. And you move on to things like opportunity cost and all that. But here's the way that the thing is supposed to work. And they usually give you a graph with two axes, and they put guns on one and butter on the other. And it's just meant to basically say, your society can produce defense goods or everything else, non-defense stuff. And you can combine your resources any way you want to. You can take all the labor that you have, the factories, the machines, the technology, the raw materials, put it together in different combinations. And you could have all defense and no butter, all butter and no defense, or some combination of the different things, right? And they draw a line.

Then they tell you that you're on the curve. And you're on the curve because you're using all of your resources fully. Fully utilizing all the people, all the factories and machines, all the raw... Everything is fully employed.

CHRIS HAYES: Just AR-15s and Land O'Lakes, that's all we got in our society.

STEPHANIE KELTON: Yeah. If that's the case. If your economy reaches that binding constraint, where all of the real resources are being utilized, then the only way to get more of one thing is to give up something else, right? And that's true.

The problem is that our economy, and virtually all economies, chronically operate below that curve. So we have available resources that are lying idle. They're sitting around, nobody wants them.

CHRIS HAYES: Right. This is the key conceptual thing here, right. Which is that the constraints are real, as opposed to fiscal.

STEPHANIE KELTON: Exactly. And in that-

CHRIS HAYES: And what we mean by that is, real... You can't just, the government can't create a bunch of value by just creating a lot of money if nothing gets built with it.

STEPHANIE KELTON: Right.

CHRIS HAYES: You need factories, you need roads, you need the things that actually create genuine value, economic activity. But the constraint on all this is how much real capacity there is.

STEPHANIE KELTON: Exactly.

CHRIS HAYES: Not the ledger in the Fed. That's the fundamental idea.

STEPHANIE KELTON: Exactly. MMT is trying to replace perceived revenue constraint, tax dollars, right, financing, with an inflation constraint, with a real constraint. That says, if you try to push things too far, and you try to go after resources that somebody else is already using, you're going to bid up prices, you're going to create dislocations, and problems in the economy. You're going to create an inflation problem, essentially. But if you have space, if you have unused capacity, and you can bring that capacity online, and the government can do that by offering to employ people, by giving contracts, by building infrastructure, or whatever the case is. Clear those checks, hire those resources, and push the economy to its full potential.

CHRIS HAYES: Okay, so let's try to play this out. We have an economy in which there's two major cities that are very important, and they're across a river from each other. And in this economy, the government builds a bridge and it issues some bonds. So at the end of the day, you have a bridge between these two cities and you have a bond.

So, in the MMT story, the point is like, "Great, I've got a useful thing. I got a bridge between these two cities, and I got a bond." Okay.

Now, you've got a government. Again there's only two cities in this world. And they did this. Now, you've got a new president in power, and he's like, "That worked out really well the last time. People liked it, we employed a lot of people. I'm going to build another bridge, seven feet next to that bridge, between these two cities." That's not good, right?

STEPHANIE KELTON: I should think not. Unless traffic goes one direction on one bridge and comes the other direction on-

CHRIS HAYES: Right, right. I guess at a certain point, the problem, the thing that you don't want is essentially the government not doing things that productively increase the productivity frontier of real capacity.

STEPHANIE KELTON: Definitely, yeah. Because Congress has the power of the purse, that's an awesome power, and it can't satisfy every want and desire that we have. We have real resource constraints. So, the question is, how do you get Congress to prioritize the dispensing of public money and the use of real resources? And how do you do that in a way that best serves the public purpose?

CHRIS HAYES: Right. And we should say that the story you're telling is not at all a mainstream story, although it has been moving towards the mainstream. Janet Yellen has criticized it. Larry Summers has criticized it. Jerome Powell, who's the current Fed chair, has criticized it. I'm not saying they're right. I'm just saying, so that people understand the context of this. It's not like this is a mainstream theory at this point. It is an insurgent theory that I think is making gains. Is that a fair characterization?

STEPHANIE KELTON: I think so. I don't think that much of what we've talked about so far is much of a departure from a lot of stuff they would agree with.

CHRIS HAYES: That's interesting, great.

STEPHANIE KELTON: Because we've just been talking about a lot of operations. I think that what Jerome Powell did in Senate testimony, he got a question about MMT.

CHRIS HAYES: It's become the scourge.

STEPHANIE KELTON: Yeah. The question came from a Republican senator, who said, "There's this idea out there that you can have the government, because it creates the currency, do a Green New Deal, and the Fed will pay for it, and we don't have to worry because we print our own money."

Now, he said to a Fed chair, the Fed will pay, you know what I mean? I think that what happened in that question was that they tied a big ribbon around AOC, Green New Deal, MMT, leaning hard on the Fed, making the Fed do something it doesn't already do. And that's not necessary at all. You don't have to change any current operating procedures in order to take fuller advantage of the fiscal space that we have.

CHRIS HAYES: So, what I'm hearing from you is, let's say we pass a Green New Deal. And we don't raise taxes at all. We don't undo the Trump tax cuts, nothing. Nothing changes in the tax rate. But we spend a trillion dollars more a year. Huge, I mean, enormous, right. So the full budget of the government is what, two trillion?

No, it's closer to four and a half.

CHRIS HAYES: I mean, I'm sorry, the discretionary part of it.

STEPHANIE KELTON: Oh yeah.

CHRIS HAYES: Yeah, discretionary, the stuff that you can actually appropriate is around two trillion, right. So, we're going to... 50 percent increase in that part of the budget, which is the part that Congress appropriates every year. That's enormous, right, a trillion dollar Green New Deal a year would be World War II mobilization level increase. Although short of World War II, I know, I can see the face you're making. I know World War II was bigger. I know that.

So, your point is, as long as there's slack in the real capacity, there's productive investment to do with that, there will not be negative consequences from that. That is your fundamental contention.

STEPHANIE KELTON: There will not be negative inflationary consequences as a result of that. Yeah, in fact, you might be surprised. I think you're going to be surprised when I tell you this. There's some new research, this just came out this week from a financial analyst who looked at this question of just how much space is there in the economy today. If we wanted to do increased spending without offsets, without raising taxes or carving out the money from some other part of the budget, how much more could the government safely spend in to the economy today on an annual basis?

And, he did some pretty rigorous analysis. His answer was, safely, conservatively, between five and six hundred billion. If you were willing to push the potential inflation risk and said, "Look, if we got to 5 percent, maybe we would get up to 5 percent," you could go to close to 1.4 trillion a year. Now, you could say, "Well, are we willing to risk inflation that might reach 5 percent annually in order to deal with climate in 11 years that we have left?" Some people might happily make that trade-off. But his conservative estimate is that you have between five and six hundred billion, just sitting there, non-inflationary space, waiting to be used.

CHRIS HAYES: Right. Let me sort of end on the takeaway. There's a very obvious ideological freight to all this, because it has to do... First, let me be clear that no one in politics actually cares about deficits and they pretend to. That's an important point. They pretend to for their own purposes. It's preposterous to say that this MMT thing, which is all about how deficits are bad, is being signed onto by people who obviously blew up the deficit through the tax cuts.

But there's an obvious ideological freight to this, right. I mean, you are an advisor to Bernie Sanders. You're, I think it's fair to say, on the political left. That this theory, to bring it back around to Art Laffer, like this is the liberals' and leftists' Art Laffer, right? Because Art Laffer comes in and he says to Republicans who already want to cut taxes: "Great news guys. I know you want to cut taxes for your own reasons. Here I am with your theoretical justification for why you can cut taxes and deficits won't go up." And it was BS. But it was very useful ideologically.

And I think the critique against you, in a broader sort of political sense, and against MMT, is that this is just the Laffer Curve of the left. Which is that liberals and Democrats and leftists and all these people want all this public investment for a bunch of reasons. They want to fund the Green New Deal because they genuinely believe in it, right, as a project. And there's this sort of ideological vacuum that you're filling that says like, "Go to it. You don't have to worry about raising taxes or anything like that."

STEPHANIE KELTON: So I will say, I think that MMT is both more responsible and more sophisticated in its approach to the federal budgeting process than anything we have going on today. And I really, really mean that. Because what happened with, let's use the tax cuts as an example. The Republicans come in, and they want to do, at the time, one and a half trillion, that was the number we thought, in tax cuts. And you had people saying, "You can't do that." You had people like Paul Krugman writing a column, titling it “Deficits Matter Again,” and warning that if you do stimulus of this magnitude when the economy is this close to full employment, all the bets are off, right? The old rules apply.

CHRIS HAYES: That was his argument.

STEPHANIE KELTON: The old rules apply. Interest rates are going to go up.

CHRIS HAYES: “Time to Worry About Deficits Again” was the column.

STEPHANIE KELTON: Exactly, deficits matter again. And he laid it out. He said, "All these negative things are going to happen." Well guess what? They didn't happen. And Larry Summers and Jack Lew made the same argument about the tax cuts. They said, "If the Republican do this, we're going to be living on a shoe string for decades to come. We're not going to be able to afford to do anything." Well guess what, we can still afford to do more. And MMT is about saying how much space remains in the economy in spite of the fact that we did some fiscal stimulus with the tax cuts.

And the good news is that because the tax cuts were so badly structured, because the windfall went overwhelmingly to people who were never going to turn around and spend that money into the economy, all that space is still there. So people look at what's happened to the deficit, because the number's gotten so big, now almost two trillion over 10 years. And they say, "Oh, we used up all the space." And I look at it and say, "No, no, no. There's still space because of the way that they did the fiscal stimulus," right? They didn't use up real, the real economy.

CHRIS HAYES: Meaning, there's still space out in the real economy for productive investment.

STEPHANIE KELTON: Yeah, absolutely. And so what we would like to see, what I would like to see is Congress evaluate proposed spending, not based on whether it adds to the deficit over time, but whether it carries heightened inflation risk, and whether they've dealt sufficiently with the offsets before moving forward with a vote.

So, instead of going to the Congressional Budget Office, saying "We've got this legislation, we want to do two trillion dollars of infrastructure investment. Tell us, can we do it." And the Congressional Budget Office is the scoring agency. They're there to basically give a permission slip to Congress. "Yes, you can do this, green light." Or, "No you can't, it adds too much to the deficit." And what I would prefer is to use agencies to say, "Evaluate this legislation. We want to put two trillion in over four years. We've structured these offsets. We're going to offset half of it, let's say. We got taxes or other spending cuts. Tell us, is that going to be an okay thing to do?" And then get feedback that's useful. Not just "Tell me whether it will add to the deficit." That's like the least useful piece of information you could get back.

CHRIS HAYES: One of my main takeaways here, and again, I'm not sure where I come down personally. Although, who cares about that, I'm just a podcast host. But thinking about what the money does is a key part of this, right? Like the ledger matters less. I think in your view, doesn't matter at all, actually. But "what is the money doing?" is the question to ask.

STEPHANIE KELTON: All deficits are good for someone, right.

CHRIS HAYES: That's a good way of putting it.

STEPHANIE KELTON: Go back to that example. If I put 100 in, and I only take 90 out, someone gets 10. The question is for whom and for what? Who got that 10 and what did we do? What was the deficit designed to do? Did it lift people out of poverty? Did it make people safer? Did it increase the economic security and well-being of our people? Or did it do something else? Did it widen inequality?

CHRIS HAYES: That's a great way of thinking about it. Stephanie Kelton is a Professor of Economics and Public Policy at Stony Brook University. She's also a Senior Economic Advisor for Bernie Sanders' 2020 presidential campaign. Thank you very much, that was great.

STEPHANIE KELTON: That was so fun. Thank you.

CHRIS HAYES: Once again, my great thanks to Stephanie Kelton, who you can follow on Twitter. She's on Twitter. There's also a lot of stuff she's published in others. If you Google Modern Monetary Theory, and we'll put some links up on the website, you can read a lot more and you can read some of the debates. You can read Larry Summers' column attacking Modern Monetary Theory. You can read some of the responses. It's a very fertile area of back and forth, and a really fascinating one in my humble opinion, and something that I've been sort of spending a lot of time thinking about.

You can always give us your feedback by tweeting #withpod with anything you thought about today's episode or any episode that you encounter. One of the things that I really love about this enterprise is the fact that, unlike the daily cable news show, which tends to have a kind of ephemeral nature built in, people discover this podcast at different times, and they find old podcasts, and we get emails and tweets about things that people are discovering three months, six months, eight months after we put it up, but is still relevant.

We love to hear from you whenever you're coming to the podcast. Whatever you're encountering, we love to hear feedback. You can also email withpod@gmail.com.

Related links:

"World Hyperinflations," by Steven Hanke and Nicolas Krus

"Why Is This Happening?" is presented by MSNBC and NBC News, produced by the "All In" team, and features music by Eddie Cooper. You can see more of our work, including links to things we mentioned here, by going to NBCnews.com/whyisthishappening.