The Biggest Lie About Debt Exposed: Why U.S. Can Never Go Broke | Warren Mosler
I can tell you what will not happen. The government checks won’t bounce, they’ll all clear, it won’t drive up interest rates, only the Fed does that, and they vote on it at every meeting. And if they vote lower rates, like President Trump’s asking, the rates will go down, no matter what the deficit is.
Okay, so there won’t be a funding problem, won’t be a solvency problem, the government won’t go broke. The U.S. budget deficit hit a record high of $840 billion over the past four months. The Congressional Budget Office is now projecting that the budget deficit for 2025 will be 6.2% of GDP, more than twice the 3% level that the Treasury Secretary Scott Pescent is aiming for.
Now, organizations like the IMF have warned about rising debt levels and their potential to trigger a financial crisis, but my next guest says that this is not a major concern, potentially, and that deficits may even be a good thing for the economy. We’re going to find out why when I’m joined by Warren Mosler, who is an economist and leading advocate and proponent of modern monetary theory, and one of the founders of this movement. He helped develop it, and he was one of the first to write about it and bring it to the attention of the academic community.
He’s the author of several books, including The Seven Deadly Innocent Frauds of Economic Policy, and his contributions to economics has earned him an honorary doctorate from the Franklin University, Switzerland. He currently runs and operates Valens Company, and it’s just a great pleasure to meet you, Warren. Good to have you on the show.
Good to be here. Thank you for that introduction. By the way, offline, we’re talking about how he also was a founder of an excellent motor sports company and an automobile company, a big car fan guy.
People should look up Mosler cars. They’re beautiful cars, but that’s not the point of the discussion. We’re talking about economics, but I do want to play for you this clip by Margaret Thatcher, and I just want to get a response to this clip, Warren, because I know you have a different philosophy on economics, so I’m curious to see how you would respond to this.
Take a listen, please. Mr. President, one of the great debates of our time is about how much of your money should be spent by the state and how much you should keep to spend on your family. Let us never forget this fundamental truth.
The state has no source of money other than the money people earn themselves. If the state wishes to spend more, it can do so only by borrowing your savings or by taxing you more, and it’s no good thinking that someone else will pay. That someone else is you.
There is no such thing as public money. That is only taxpayers’ money. What is your response to that? You know, I saw that first time around, so I’m dating myself a little bit when you first said it, but I’m what you call insider in monetary operations.
I used to visit the Fed regularly. I worked on the money desk at Bankers Trust, a primary dealer, and everybody in monetary operations knows one simple fact, and that is the funds to pay taxes come from the government. They don’t come from the private sector unless they’re counterfeit, and she’s just got it backwards.
The way they say it inside the Fed is we can’t do a reserve drain without a prior reserve ad, which means that the banking sector can’t make payments to the government until after the adds that money to the banking sector by doing what they call reserve ad, which would be a repurchase agreement or spending of some sort, so the government has to spend first before anyone has the dollars to pay taxes or to buy government bonds. Now, a real-world example would be the football stadium. Nobody would ever get up there and say, you know, the football stadium has to collect the ticket first and then sell it, and that’s exactly what Prime Minister Thatcher was saying, that all the tickets they use for the game come from the people going to the game, the stadium collects the tickets first, and then they sell it.
They can’t sell tickets without collecting them first. It’s just backwards. The source is the football stadium.
They have to sell the ticket first before they can collect it. The source of dollars that can be used to pay taxes are the government and its agents, commercial banks are set up as agents of the government to do this for them. They have to spend the money first before anybody has it to pay their taxes, and that’s just simple, fundamental, and everybody’s got it wrong.
Every congressman thinks they’ve got to get the money by taxing, and what they don’t get, they have to borrow, or they can’t, or they don’t have it to spend. They don’t understand that tax requirements, tax liabilities, which are tax requirements, cause the economy to need the government’s money, and the only source for getting it is government. That enables the government to spend it.
People need it. They will sell their goods and services to get it. They will go to work for the government to get it.
The government can then pay them, then they have their money, then they pay their taxes. So they’ve got the sequence backwards. It’s been the reality of what we’ve been living with for a long time, and it’s the source of pretty much everything that’s gone wrong in the economy for the last 40, 50 years.
Correct me if I’m wrong, but I believe one of the tenets of modern monetary theory is that governments don’t need to rely on collecting taxes, which you just talked about, in order to raise money. They can just print money, correct, and that there’s no constraint on this. Let’s look at the football stadium.
You’re saying, well, they don’t have to rely on the people going to the game to get tickets. They can just print tickets and give it to them. It’s not that they can just do this.
That’s the only way to do it. The government has to spend first, either by giving you green pieces of paper or crediting your bank account, or else you don’t have the money to pay your tax. The football stadium has to sell you the ticket first, or you don’t have a ticket to go to the game.
It’s the exact same thing. There’s no difference here. Well, do you think that in this particular example, the football stadium example, if they print more tickets, the price of the tickets would change, meaning go up? Well, let’s say they announced tickets to the Super Bowl are going to be $5,000, and they print tickets in their ticket office to get ready for all the people to come by them.
Does it matter how many they print? No. Look, if the Fed printed up $100 trillion in the vault, just left it there, nobody would even know about it. It would have no effect on anything.
If it burned up, it wouldn’t mean the government just lost $100 trillion. This is just like scorekeeping. So printing money doesn’t directly lead to inflation is what you’re saying? Per se, it doesn’t do anything.
Now, spending is another matter. Spending is when you buy something, and that can drive the price up. But if you’re just sitting in a room at the Federal Reserve, and you print up dollar bills, you’re not causing anything.
They don’t go anywhere. The Federal Reserve doesn’t even do that, by the way. When the Treasury spends, what it does is it instructs the Fed to put the money in your bank account.
It’s actually your bank’s account on your behalf. And the Fed, how do they put money in a bank account? They just credit the account. It’s called crediting the account.
They just change the number. So if you had $5,000 in your account, what do you have? You have a computer screen that shows a five and three zeros, right? That’s all you have is a bank statement that says five and three zeros. And now when they want to give you another thousand, what do they do? They just change the five into a six.
They just change your score from 5,000 to 6,000. There’s nothing moving around. Nothing came from somebody paying taxes.
They didn’t hammer a gold coin in. It’s just a simple scorekeeping system. Well, what if I told you that if you overlaid the annual percent change of the M2 money supply with the annual percent change of the CPI, in other words, inflation, there’s actually been a pretty consistent relationship.
How would you explain that relationship? Yeah, absolutely. What happens is as prices go up, it actually creates what I’ll use simple language, a money shortage. So if prices doubled, now instead of going shopping with $200 in your pocket, you need $400.
Now Apple computer, instead of $200 billion in cash at their bank, they need 400 billion. The need in the economy for liquidity, for savings, for everything else goes up accordingly with the price. And if that’s not accommodated by government, the evidence is unemployment.
But with a policy to keep unemployment at about 4%, you’ll see that that money shortage will be alleviated by what is casually called printing money. But that’s not what you’re doing. They’re just spending by crediting accounts.
Well, okay. So Warren, the wealth gap has been widening. And one of the criticisms of the US economy is that the rich are getting richer while the poor are not getting richer to the same degree or magnitude.
Now, in theory, according to modern monetary theory, if inflation is not a constraint to printing money, why can’t we just print more money and give it to the poor? Well, we did that. We did stimulus checks under COVID. But why don’t we just continue to do that? Why don’t we just have a UBI or whatever? Yeah.
Okay. Well, before you get to UBI. But the reason we stopped was political will.
Congress decided they didn’t want to do that anymore. They were maybe concerned they were driving up prices. But whatever it was, it wasn’t because they didn’t have the money.
If they voted on it, it would have happened. The checks would not have bounced. Interest rates would not have changed.
We wouldn’t be on our knees at the IMF like they used to say, turn into the next Greece. In fact, nobody worries about that anymore at all. But yes, if the government spends too much, if you’re just giving money out like social security or stimulus checks, the people you give the money to become agents for the government.
You’re giving them money to spend the same as if you spent it yourself. And if you do too much of that and don’t do anything else, they can drive up prices. Absolutely.
And that is a consideration. Some people will call it a limit, but it’s a consideration because we’ve had, our consideration is that 2% inflation is the Fed’s target. Why not zero? Why not 1%? Why not 4%? It’s a political consideration.
And I say, oh, we have to do this or it’s going to cause inflation. We’ve had 2%, 3% inflation for 50 years, sometimes more. So it’s not that anything particularly bad happens, except as you spoke, and it’s critical, and it’s one of the things of my focus, the distribution of income and standard of living is an obscenity in this country, the way it’s been handled.
And so I completely agree with you that there are distributional effects of how government implements policy and what they’ve been doing. I’ve called it a crime against humanity. Okay.
So I completely agree with you that that’s been a serious problem. And you could argue it’s what brought President Trump into the White House. Okay.
Because of the way the previous administrations had handled that issue. Okay. So let’s come back to the wealth gap issue just a minute, because I am curious as to how MMT would go about solving that particular issue.
So as I mentioned at the beginning of the interview- Well, wait, let me just stop you right here. Sure. MMT is a framework to analyze the issue.
It’s not something you do to stop it. Once you understand the issue, once you understand the framework, then you can have policies, informed policies. That’s what I hope I’ll be able to show you some policies informed by a proper understanding of monetary operations.
Sure. Yeah. Yeah.
Yeah. The solutions under that framework. So the budget deficit, as I mentioned, has been rising.
Some economists argue that a rising deficit past a certain point would lead to a financial crisis. Debt service costs would become too high, unaffordable, unsustainable. Are you worried about a rising budget deficit becoming excessive right now? Okay.
So when they say that, they don’t say exactly what bad thing is going to happen. I can tell you what will not happen. The government checks won’t bounce.
They’ll all clear. It won’t drive up interest rates. Only the Fed does that, and they vote on it at every meeting.
And if they vote lower rates, like President Trump’s asking, the rates will go down, no matter what the deficit is. Okay. So there won’t be a funding problem.
There won’t be a solvency problem. The government won’t go broke. They can drive up prices under the current framework if they spend by spending money.
Now, the deficit itself is the residual. It’s an accounting residual, it’s called. It’s a number that is recorded by the accountants after the spending has already taken place.
Okay. They say, okay, last year, the government spent $7 trillion. Last year, $5 trillion.
Was paid in taxes. Therefore, that $2 trillion extra that the government paid that wasn’t used to pay taxes, that’s called the budget deficit. Okay.
It’s there, it’s sitting in accounts, it’s already been spent. It’s not like doing anything. It’s not like some kind of disease out there that’s going to bite somebody or something.
It’s an accounting residual. And it’s money that people have already decided they would rather have that money than whatever they sold to get it. Somebody sells their house, they know how much they’re going to get for it.
They’ve made a decision. I’d rather have that much money than my house, knowing about inflation, knowing about interest rates, knowing whatever they know. I’d rather have the $500,000 in my house.
I’d rather have the $600,000 in my house. Otherwise I won’t sell it. Okay.
And then deficit spending can be public or private. Government spends more than its income, its taxes, and individuals spend more than their income when they take out a mortgage to buy a house. So all government spend, all deficit spending is what sits in accounts that we call savings, is someone’s savings.
And that whoever’s holding those savings had made the decision that they’d rather have that than whatever they sold. You’ve never seen anybody says, ah, man, I got stuck with all this money. I have to sell my, they forced me to sell their house and save the money.
There is no such thing. It’s all voluntary. And so deficit itself doesn’t do anything.
That’s just a recording, the accounting record of what’s already happened. So take a listen to what Scott Postad, Treasury Secretary had to say about reducing the deficit. Let’s just listen to what he had to, well, yes, sir.
Yes, sir. We’re going to have to respond to it together. I’m with you on this one.
I want time and a half for this. Emphasize is that we are not focused on whether the Fed is going to cut, not cut. What we are focused on is lowering rates.
So we are less focused on the specific of rate cuts and how do we get the whole curve down? I mentioned that the 10-year, I believe is the important price to focus on. It’s mortgages, it’s long-term capital formation. So, and look, I think with the president’s policies of energy dominance, deregulation and non-inflationary growth, I think that the 10-year is going to naturally come down.
And then look, on top of it, what if we do get some big savings on the spending side from the Dove programs? Like, let’s think of a naive formula. Government equals spending minus taxes. For my entire career and beyond, maybe even back to pre-FDR, government equals spending minus taxes, the S, the Republicans, we like spending.
We just wanted to raise it less. The Democrats want to raise it more. Taxes, Democrats want tax increases.
We want tax cuts. What nobody’s thinking about is what if the S actually went down? What if it actually goes down because of everything we’re doing right now? All right. Well, that logically makes sense.
Just spend less money and the deficit goes down. What do you think? I’m not sure where to start with all that. Okay.
Except I wouldn’t have that guy making coffee in my office. So what’s your question? Yeah, I guess- Well, can you just evaluate what he said, your plan to reduce the deficit? I said so many thank yous all over the place. Yeah, right.
So look, what we have, because he’s got the sequence backwards, he comes up with that kind of stuff. Comes from having the Margaret Thatcher sequence in your head, which is backwards. When you have the sequence the correct way around that the money to pay taxes comes from the government, you don’t think of it that way.
And so you don’t cause the same problems in the economy that he does. But the first thing he talked about was interest rates, okay? So let me, I thought you were going to ask me about that. Do you want me to skip that part? Or do you want to- No, you can, yeah.
No, you can comment on that. Please go ahead. Okay.
So why does he want interest rates to come down? The 10-year is about 4.5%. The overnight rate’s about 4.5%. I don’t know how low he thinks it will come down if they leave the overnight rate there. A few basis points. I remember I was probably your age back in the late 1970s when mortgages were 15%.
And we had twice as many housing starts per capita than we have now. And it’s not exactly twice as many, but it’s way up there, okay? With 15 to 16% interest rate. And at the same time, Japan, I was on the phone to somebody, it’s in the 80s, I think.
No, it must have been the 90s, early 90s. And I was talking to somebody in Australia, a real estate agent. I said, how’s the housing market? He said, well, rates are 17.5%, but it’s still pretty good.
I think we put them up to 18, we’re going to kill it. And then I’m on the phone to somebody in Japan, I was trading JGBs at the time. I said, how’s the housing market? He says, well, it’s pretty sluggish.
Rates are at 3.5%. I think if we lower them to three, it’ll get going here. So look, the interest rate is not the key thing with the housing market, except in a very short term. And this guy coming up here saying that we want this policy to bring the 10-year note down quarter of a percent or something.
Why interest rates? I don’t know, but there’s a more fundamental problem with interest rates that I started pointing out when the Fed started its rate hike policy. And that is they’ve got the whole thing backwards because our public debt is so high. All right.
And what that means is when they raise rates, they’re actually making the economy stronger. When they’re lower rates, they’re actually making the economy weaker, which is exactly what’s happened for the last three years. As they raise rates, the economy got stronger, unemployment came down, and they couldn’t figure it out.
Their forecasts were wrong time and time again. Our models aren’t working, they’re broken, but the models are working. Their assumptions in the models are what’s wrong.
Okay. And so let’s take a close look at what interest rates actually do. Okay.
What happens when the Federal Reserve raises rates? The only thing that happens at the governmental level is the government pays more interest on the public debt. 36 trillion in the public debt now. Yeah.
So when they raise rates, they have to pay more on that. A lot of it’s short term, they pay more immediately. Some of it’s longer term.
When those bonds come due and they sell the new ones, then they have to pay more interest at that time, but they have to pay more interest. And what we’ve seen after they raise rates is the government interest expense go straight up. It’s gone from four or 500 billion a year to over 1.2 trillion.
It’s become the largest expense. So when the Fed decides to raise rates, the government spending to pay interest goes up dramatically now because the debt’s so high. And that is all deficit spending.
They don’t raise rates and then put a tax in place to pay for the interest. They just plain old raise rates. And so deficit spending goes up.
So if you look at today’s deficit spending of 1.8 trillion annualized, I think it was, 1.2 trillion this year is going to be interest expense. That’s like 60% of it or something is interest expense that the Federal Reserve created by raising rates. So more than half of the deficit spending today that is causing the potential inflation problem and is supporting prices and is keeping unemployment low, by the way, is the deficit spending created by the interest rate hikes.
And lowering interest rates would take away that deficit spending. So if you want to cut, if they asked me how would I cut deficit spending over the next 10 years, I’d say go to a permanent zero rate policy like we had for seven or eight years under Chairman Bernanke. I’ll cut $10 trillion in interest expense right there.
Rates go down, the government stops paying it. But you’ve never even heard that discussed as a possibility. And that’s the largest source right now of the deficit.
It’s not even being discussed. All right. So here’s the problem with it.
You say, okay, it helps the economy. It raises rate. People have an extra 1.2 trillion in spending, but it’s the most obscenely regressive public policy you can imagine.
Who gets interest? Only people who already have money. Interest is paid on bank accounts and treasury securities, people with money. If you don’t have any money, you don’t get any interest.
All right. So the Federal Reserve has decided unilaterally to fight inflation by paying out $1.2 trillion a year only to people who have money in proportion to how much they already have. And that’s how they’re fighting inflation.
It’s like, what? Who voted for this? Okay. Only the Fed. Would Congress have voted for it? Sure.
You haven’t seen them oppose that. You know, Chairman Powell just was in front of Congress. Nobody questioned, why are you paying out $1.2 trillion of annual deficit spending only to people who have money in proportion to how much they already have? How does that affect the distribution problem you’re talking about? It’s huge.
It’s the largest factor out there. It’s the low-hanging fruit to get rid of the distribution problem. And it isn’t even discussed.
You know, in either party, okay, including this great doggy agency that’s supposed to be cutting spending. It’s the low-hanging fruit and they’re completely ignoring it. You know, what’s going on here? The interest expense thing that you brought up, okay, it is kind of a problem for some people in the sense that, first of all, it’s over a trillion dollars now.
It’s exceeded the Fed spending. So do you think, Warren, at some point that expenses on interest payments will be so high that it would possibly force the government to go bankrupt in some way? Okay. So the government spends by instructing, the Treasury spends by instructing the Federal Reserve to credit the accounts.
So when interest comes due, they tell the Fed to change the number and whoever has a million dollars in Treasury securities to $1,050,000 because that’s their interest payment. And the Fed changes the number. Okay.
How can they like not be able to do that? What, are they going to get an electric shock or something if they try and change the number? You know, can you say if the score gets too high in a football game, could the stadium not be able to award the extra points? It’s not an applicable question to the monetary operations that we have, to the monetary system we have. It’s not even like remotely applicable to what’s going on. I just heard President Reagan say, if it ever got to 90 trillion, to 90 billion, we’re all doomed.
It’s 36 trillion and we’re not all doomed because they just keep crediting accounts. And you say, and that’s the only way to do it. And it’s the way it’s always been done.
Well, theoretically- They spend money by changing numbers. Why have a debt ceiling? What’s the point of a debt ceiling? It makes no sense. First, Congress authorizes a spending, which causes spending to exceed taxes.
And then they’ve decided that they can’t actually spend unless they further agree to let spending exceed taxes. You know, so they vote on the same thing twice. So the first time they vote on it and approve it, the second time they vote on it, and because a minority can hold it up, they demand all these concessions in order to get it through.
It’s complete nonsense. No other country does this. Nobody would ever do it in their own personal accounts or anything.
It’s a political theater and it’s disruptive and it shouldn’t be there. Should there be a hard debt ceiling that’s actually respected in theory? Why? I mean, I don’t see why. If Congress wants to spend more than they tax, it’s the same people who will vote on the debt ceiling.
They just do both. There’s no numerical limit. It’s up to the will of Congress.
If the Congress has the will to do one, obviously they have the will to do the other. It’s the same thing. There’s no difference.
Is there any downside to increasing the debt to GDP then? At some point, does it become problematic? Yeah, the debt ceiling and the debt to GDP, your questions are slightly different here. Okay. Now, if you were at a zero interest rate policy, where like Japan has been for 30 years, like the US and Europe were for about 10 years each, then the debt to GDP doesn’t matter because you’re not paying any interest on the excess money that’s been spent.
It’s just sitting in accounts at the Fed called treasury securities that are in zero. No matter what the debt to GDP is, that number will earn zero. However, if you go to raise rates, then you’ve got to pay interest on all that.
Then the size does make a big difference. Today, Japan is talking about raising rates. Their debt to GDP is 260%.
A lot of it’s intergovernmental. It’s probably 160 or 170 held by the public. If they raise rates, that’s going to increase their deficit spending and their pressure on the economy, the financial pressure by a lot because they’re paying it on so many trillions of yen outstanding.
If you have another country where the debt to GDP is much smaller than when you raise rates, it doesn’t make that much difference. The US used to be 35% where raising rates didn’t make that much difference. Today at 100% held by the public, 115 or 20% total, it makes a big difference.
Okay. So does it matter for government solvency? No. The only thing it matters for is how much increasing interest rates will affect deficit spending.
And if you’re going to leave rates at zero, which I’ll argue is the base case for analysis and there’s really no reason not to ever, then it doesn’t matter at all. The debt to GDP doesn’t matter for that purpose at all. Different countries obviously have different debt to GDP levels.
Yes. How would you as an economist assess whether or not any one particular country should have an optimal debt to GDP level if there is such a thing? Well, okay. So the short answer is you look at the unemployment rate.
Okay. So the government starts by the sequence, the correct sequence is not you raise tax money first and then you spend it. It’s you put a tax liability in place.
You put a tax requirement on the population. Now we use income taxes, which I’m categorically against for other reasons. But for this example, I’m just going to use a property tax so that you can follow the logic more easily.
But it works out the same if you work through an income tax as well, with an imputed tax on income that’s unreported. But anyway, so let’s say we put a property tax on everybody’s house to get the ball rolling. You now have a population that needs however many dollars that is, and it has nowhere to get them except from the government.
And so now you have a population that’s looking for work that pays in dollars or else they’re going to lose their house. And let me give you a real world example of where this happened. So when the Europeans went into Africa, they wanted people in these villages where there wasn’t any money, they weren’t monetized to work in coffee plantations, let’s say, for example.
So what they did was they put a tax on everybody’s house in this script that they just dreamed up for this purpose. And they said, okay, everybody owes a tax of so many scripts, so many, let’s call it the crown, so many crown per month. And if you don’t pay it, we’ve got the military here, we’re going to burn your house down.
And it was called the hut tax. You could look up hut taxes online and it’ll show you how it worked in colonial Africa. And so they put a tax on everybody’s hut.
And that created a population that suddenly needs these crown, are they going to get their house burned down? And so they said, well, what do we have to do to get them? They said, oh, come down to the plantation and grow coffee for us and we’ll pay you so many crown a day to grow your coffee. And people would come down to the plantation, they work all day, they get paid, then they had enough money to pay their hut tax and not have their house burned down. Okay, and that’s the sequence.
First, there’s a tax requirement that creates people looking for paid work. We call that unemployment. So what I’ve said, and it’s been a contribution to the history of thought and how you think of taxation, that the purpose of taxation in the first instance is to create unemployment.
And in fact, it’s actually the only source of unemployment when you’re under close examination. So the purpose of taxes, tax liabilities, tax requirements, we’re not talking about tax payments here, but the tax requirement is to create unemployment, people looking for paid work. Why? Why would the government create unemployment? For the further purpose of hiring those people to serve the government, in this case, on the coffee plantation.
In our case, it would be the military or the public education or the legal system or whatever. So the British, the French, they put a tax on everybody’s house that creates unemployment. Those people would show up at the plantation, they would then get paid.
Okay. And then the last step is they would pay their tax. Okay.
And that is the actual sequence. And so if people, why did they go to work in the plantation to earn crown? What could they possibly do with those crown collectively as an economy? Only one of two things. They can either pay the tax or save them, hold them.
So if they got paid 100 crown and they only had 10 crown tax bill, they’d pay 10 and they’d have the other 90. Did they want those other 90? Apparently. Why would they, you know, go sweat in a coffee plantation to earn them if they didn’t want to have them, right? So people go to work for only two possible reasons, collectively as an economy.
Okay. Money the government pays, money the French and British paid, the crown, were either used to pay taxes or they were not used to pay taxes and retain as savings of some sort. Cash in somebody’s pocket, change in a business or something like that.
Did the entire population go to work? No, only a portion of it did. And the wages were high enough so that enough could be earned so that those people could then go back and buy things from other people who didn’t want to grow coffee and everybody could pay their taxes and everybody could satisfy their savings. They always deficit spent.
People always earned at least enough to pay the tax or you’re going to get your house burned down. That would be a balanced budget. But they invariably earned more than that.
The British, the French invariably spent more crown than we needed to pay taxes because people wanted extra for savings, for a money supply in the economy, for security. The parents took them home as souvenirs. For all kinds of reasons that would happen.
Okay. And so what is the evidence that the population had enough to pay taxes and enough to satisfy their desires to save? Just they weren’t showing, you know, showing up anymore for work. There were no unemployed.
If anybody was unemployed looking for work, they could run down to the coffee farm and earn it. Okay. So this- Yeah.
So unemployment is the evidence that the government hasn’t spent enough to cover the need to pay taxes and the desire to save. Otherwise there is no unemployment. So at the macro level, unemployed in the economy always indicate that enough, there hasn’t been enough spending to cover the need to pay taxes and the desires to save.
It’s created by the government. If the total tax was 10,000 crown and they decided to spend only 9,000 crown, what would happen? There’d be unemployed, there’d be houses getting burned down. It’s like, why would they even do that? You know, why would they set up a system to do it? They set up the system for people to grow coffee, not to go burn down somebody’s house.
Create unemployed people who can’t find work. Yeah, go ahead. Let’s, let’s go back to my earlier question about the wealth gap.
So here’s, here’s what the wealth gap looks like right now. You can see it widening. How would you as an economist propose solving this problem, which is to narrow the wealth gap? Yeah.
Oh, number one, I talked rates to zero, which would eliminate 1.2 trillion of income to the people who already have money in proportion to how much they have would make a very large debt in the wealth gap to start with that. And then I there’s a very old principle in economics, you know, that Adam Smith wrote about that every economist knows about that they’ve written about. And that is that the labor market is not a fair game, as they would say.
It’s all mainstream. This is not even MMT at all. It’s elementary game theory, which everyone studies in college, who studies economics now.
And that is people have to work at the margin. People go to work because they need to eat. They need to pay their bills.
They need to live. Business only hires if they think they can make a profit off that labor. You’re not going to hire extra people for your business unless you think sales justify it and you’re going to make some money, which is fine.
That’s how capitalism works. So no, no problem there. But what that is, is a massive disparity of power.
It means even if you’re the last person looking for work, and somebody offers you a job, if you don’t take it, your family’s going to starve. Okay. And so you don’t have extra bargaining power because unemployment’s low.
You know, there is no such thing. At the individual level, you know, game theory tells us this isn’t going to, this doesn’t work. And that without some kind of support to offset this massive disparity of power, wages will gravitate towards subsistence levels, towards minimum wage in the economy.
And that’s exactly what we’ve seen ever since the early 1980s where international competition opened up, businesses lost their pricing power, unions lost their bargaining power, labor lost any semblance of support. Gradually, took about eight or 10 years, you can see in the numbers that the wage share of the economy has dropped, profits have gone up. And that’s to be expected because of this disparity of power.
So somehow you have to either say, okay, that’s how we want to run our economy, where people at the bottom get squeezed for every last dime they’ve got, or we’re going to have to offer some kind of support to not live in a world like that. Because we’ve set up a system here where people have to work to eat, business only hires if they feel like it. This is the consequence of our current institutional structure.
We either live with it or change it. And there are different ways to change it. You know, one way is using things like minimum wage and that type of thing.
And other ways are what I like to look at as a job guarantee, which is my base case for analysis, which is what the British and the French and everybody else who’s done this clean sheet of paper does, where they offered a job to anybody who showed up at the coffee plantation. And if they paid, you know, one crown an hour for working at the coffee plantation, nobody in the economy is going to pay any less than that because they can always go down there by default to get a job. So they didn’t have to have a minimum wage law by having universal access to this source of income.
And you have to work for it. They weren’t giving anything away. It was hard work.
So the money was worth something. It was worth a lot because you had to work to get it. Okay.
Then that establishes a minimum and that establishes how much real wealth is going to go to the lower income versus higher income groups. And so there it’s a long, you know, we’ve got a relatively short interview here, but there’s a lot of ways to address that issue. We also have institutional structure that is just outrageous.
So we use treasury securities that we don’t have to. The treasury could, if we had a permanent zero rate policy, the treasury could just go to all three month bills, which traded zero, the whole bond trading industry, government bond trading industry would go away because it wouldn’t be any government bonds. And then all those people would have to do something else.
And they’re making oftentimes tens of millions of dollars a year, each trading these government bonds that don’t have to exist, only exist because of government policy on interest rates, government policy on duration, other government policies that, you know, have no function in our economy. So we’ve got massive amounts of institutional structure adding to this disparity of income that can be very easily remedied, you know, over a long weekend actually. Yeah.
Okay. That’s an interesting perspective that deviates from a lot of mainstream economists. I’d love to have you all discuss this with another economist another time.
Yeah. Anytime. Anytime.
Yeah. That’d be an interesting discussion. I want to move on to the last topic of our conversation, which is Fed policy and what that’s going to do to inflation.
I heard you say on another media channel recently that you believe that a Fed rate hike may actually be stimulative for the economy, correct me if I’m wrong. I think that’s what you said. How would that work? What’s your thesis there? Well, if the Fed raises rates 1%, it ultimately adds, for example, 1% of GDP to the government deficit.
That would add about, you know, if the public debt held by the public is 28 trillion now, I think a 1% increase would ultimately add $280 billion a year to deficit spending. It would be a spending increase by the government to pay interest of 280 billion. So that has a positive effect on, you know, direct effect on income, on employment, on growth, on prices, on everything.
And you can argue that it has less of an effect of a stimulus check going to somebody in the lower income group who will spend all of it, but there is a large part of it that does get spent, I’ll argue, otherwise the economy wouldn’t be where it is now. Sure. Yeah.
And so raising rates adds to the deficit, adds to deficit spending and all the things that deficit spending does. And it does it in the most regressive way possible. And that’s what Fed policy does.
Isn’t raising rates also curtail consumer spending, thus making it the opposite of stimulative? If you look at consumer spending over the last three years, since they started raising rates, it’s been growing at an extremely high rate. And in defiance of all their forecasts for it to go down for the reasons we’ve talked about, what you’re saying is, you know, is a parroting of mainstream theory, which was developed when debt to GDP was much lower and the interest expense effect would have been very much smaller, maybe a third, than what it is now. And it would have been, you know, minimal, but now it’s a major effect.
We’re in a different world now, post COVID. What do you think would happen then if we have the opposite of a Fed rate hike, which is a Fed cut, which is what they’re kind of doing right now? Yeah. That would have a depressing effect on the economy that would have to be offset by a spending cut, by a tax cut or a spending increase.
So depending on your political persuasion, you might opt for tax cuts or an increase in public services. So that’s what would happen. We would need an offset in that direction.
Generally speaking then, let’s just finish off on the budget deficit. Generally speaking, would you be more of a proponent of cutting spending or raising taxes in order to shore up the budget deficit? Well, it’s not to shore up the budget deficit. It’s to support the kind of economy we want.
So right now, the budget deficit’s at more or less a level that’s coincident with the kind of economy we want at the macro level. The distribution’s horrible. But at the macro level, we have low unemployment, we have 3% real growth.
You know, that’s kind of where we want it. So that tells us that the budget deficit is approximately equal to savings desires at this point in time. That could change at any minute.
We might need to adjust it. But right now and for the last year, you could say it’s been roughly in line. Let’s call it neutral right now at 6% of GDP.
So I would opt for a major spending cut by cutting interest rates to zero. That’s a 1.2 trillion spending cut annually. That’s the largest spending cut in the history of the world, okay? Which nobody’s even looking at.
People want to cut spending. They’re looking to cut student loans or something. I don’t know.
They can cut 1.2 trillion. And instead, they’re cutting cancer research of 100 million to make sure we don’t get our Medicaid. Anyway, I don’t want to get too cynical here.
But so I would cut that. Now, that would mean we would have to have a spending increase somewhere to offset that or lower taxes to offset that. So if I cut interest rates to zero, we could lower taxes.
I would start with a regressive tax if I had to lower taxes. You know, I might lower FICA tax that would charge you Social Security because that’s a very regressive tax, very punishing tax for lower income groups. So I would start by eliminating that tax if the economy weakened because of the interest rate cut.
I’d wait to see how the economy does. I wouldn’t wait too long. If I saw any sign of weakness, I would start.
And I have to cut a tax. To me, that’s an obvious target. There are other regressive taxes out there that I would consider cutting as well.
But again, I’ve only got about 10 minutes here. So I’ll just leave it with a short answer. In the last couple of minutes, I’m actually going to talk about some of your other ventures.
This is a great discussion on economics. I’m just really curious because I’m a car guy, and you had a car company. What was it like running a car company? Did you enjoy being head of automotive more versus an economist? And I’ll just put a picture of a car that your company has produced.
This is the MT900, just a beautiful machine built in the 2000s. I believe George Lucas took delivery of one of those. He took the first one.
It was in Darth Vader black, and I believe he still has it. I think he had a 10 or 12-year-old son who said, dad, you got to get me that car. You got to buy that car.
So he bought that one. Yeah, I liked that. I liked the competitive aspect.
I had a bunch of guys working for me who I’d hired from… They’re working in garages, changing tires and things like that. And really top driver, a kid named Chet Phillip, who was just a circle track driver. And we went out and just conquered the world.
Our cars won the 24 Hours of Daytona in 2002 or 2003 or something like that. Then they kicked us out of the series. We won the Supercar Series, got kicked out of that.
We won the One Laugh of America Car and Driver three times, got kicked out. We won Nelson Wedge’s race, got kicked out. And in Europe, Martin Short was my… Not the comedian, but the race driver.
He took over Mosul, Europe, and he dominated in British GT and Spanish GT and got kicked out and penalized and everything else. So I enjoyed it from that. Unfortunately, I couldn’t sell enough cars to pay for it.
So it was a money loser. And after moving to St. Croix in 2003, where I wasn’t near the shop and able to do it hands-on, I lost interest in not being able to just do it one-on-one. What was the company for you? Was it a passion project or something else? It was.
I always had a car disease as a kid, but I truly thought I could make money doing it because I thought we had a car that would be attractive to people and that they’d want to buy, and it just didn’t work out that way. And sales, total sales over those years were maybe 50 or 60 cars. So there just weren’t enough buyers.
And I didn’t have the celebrity status or the connections that it took to get those cars sold. It didn’t have the… It wasn’t a Ferrari, and it wasn’t a Lamborghini, and it wasn’t a Corvette, and it wasn’t a Porsche. But it performed on equal footing, like you said, you were winning.
No, absolutely not. It was far superior. I mean, it just ran rings around.
Every place we took it, they would add weight and put restrictors on the motor, otherwise we couldn’t even run. So all the races we won were with highly restricted cars. In fact, last year, Martin’s son, Morgan, won a race with an 18-year-old car, maybe more, maybe 20 years old, against new cars.
And they were still restricting them. So it’s still the top performance car in the world. And we got banned from several series and never allowed to compete in the… Why were you banned? Because it’s marketing.
It’s kind of like professional wrestling almost, where the manufacturers don’t like the idea of a small company getting in, winning, and they’re there to sell cars and to look good. And it’s theater, and I can understand that. And they have to make money also, the racing series, and they have to have people showing up to race.
And they’re not going to do that if they allow cars like ours in there. I’m going to finish off with this. What do you think of the current direction of the car industry? I know that’s a loaded question.
There’s a lot of different subsectors within the car industry. This thing that I’m showing on the screen apparently goes here to 60 in 3.5 seconds, and Teslas go faster now. So common saying in the car community, just because it goes fast like a microwave, it doesn’t taste better than the grill.
But I don’t know. I’ll let you comment on what you think is going on. Two things.
Teslas accelerate faster because they have four-wheel drives, and mine was a two-wheel drive. And that’s all you were permitted. You were not permitted to run four-wheel drive in any kind of racing.
So if I built cars to go racing, that’s what it had to be. With four-wheel drive, it would have been the same as a Tesla because the maximum acceleration is based on tires and tire patch. And my cars are a lot lighter.
And my big advantage was to be able to build a car that was 1,000 pounds lighter than any of the competition. And with that kind of a weight advantage, there was no competition. It still isn’t.
Now, I built electric cars in the 1990s. When I built those, my cars were 2,500 pounds when electric cars were 4,500 pounds. And Teslas today are over 4,000 pounds.
So I was 2,000 pounds lighter. I could take a Tesla and build it the way I built cars. It would look the same.
And it would be at least 1,000 pounds lighter. And it would get more range and go faster if you want or do whatever, burn a lot less electricity. But when I built them then, same thing.
Nobody would buy them. And I wound up- Do you think that the future of cars is EV? I like electric cars. I have an electric truck.
It’s the best car I’ve ever owned. It’s best handling everything. And my wife has an electric seven-seater.
And they’re just phenomenal. And that is definitely the way to go. And as the battery technology improves, the gasoline cars, I don’t think anybody’s going to want them anymore.
So battery costs have already come down from like, I don’t know, $400 to $100 a kilowatt or something like that. It’s just going to keep going in that direction. So yeah, that’s the way to go.
And that’s what’s going to happen, I believe. Interesting. All right.
Warren, excellent talk. Great meeting you. Where can we learn more from you? Where can we follow your work? Okay.
At W.B. Mosler on X, used to be Twitter. Also on Blue Sky, same thing. And all my papers I’ve written, published papers, everything on this topic, media, videos, everything’s on MoslerEconomics.com. Great.
We’ll put that link down below. My very short book, it’s more like a pamphlet, The Seven Deadly Innocent Frauds. Economic policy is what’s kicked off the whole MMT revolution.
It’s gone from me and then two people, then four, then eight, then 16 to millions, including yourself. That’s free online, The Seven Deadly Innocent Frauds. You download it, it’ll take you a half hour to read it, maybe an hour.
And I highly recommend it. Yeah. Okay.
We’ll put the links down there. So check out the book, check out Warren’s other work and check out Mosler Cars. I know they’re not being sold new anymore, but I’m sure they’re still on auction.
They’re beautiful cars. Thank you very much, Warren. Good to meet you.
Okay. Thanks. Bye-bye.
