Stephanie Kelton on the Disastrous Republican Economic Agenda

"We don't have two years. You won't be able to pick up the pieces."

Stephanie Kelton.

Right this minute, Elon Musk and the Trump administration are trying to subject America to a rapid program of destructive austerity. There is no one better to discuss the economic implications of this than the economist and professor Stephanie Kelton. A former chief economist to the Senate Budget Committee and economic advisor to Bernie Sanders’ presidential campaigns, Kelton is the author of “The Deficit Myth,” the book that catapulted the ideas of Modern Monetary Theory into the mainstream.

Much of Kelton’s career has been spent on dismantling the intellectual underpinnings of the idea that the government cannot afford to help us all. I spoke to her about the Republican economic agenda, inflation, crypto, Donald Trump’s inexplicable beliefs, and what the feckless Democrats should be doing now. Our conversation, lightly edited for length and clarity, is below.

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Hamilton Nolan: What’s your basic assessment of the austerity argument being put forth by Elon Musk right now—that cutting trillions of dollars from the federal budget is a necessary or desirable thing to do?

Stephanie Kelton: He amplifies all the time that the country is going broke. He’s constantly tweeting that we’re bankrupting the nation. There could well be a self-serving motive. I don’t know to what extent he actually believes what he’s saying, or if he just sees it as a convenient narrative that most people are already primed to accept. Logically, intuitively, people think, “If you put more money out there, money will be worth less.” Sounds right. Therefore part of the reason that we experienced the high inflation, and part of the reason that even very high profile economists, former Treasury Secretaries, politicians, they’re all saying there’s a problem with budget deficits and the debt, and something has to be done. You’ve heard these warnings for decades. So, along comes a guy who says, “I’ve identified the source of the problem. The federal government’s too big, and it spends too much money. And my DOGE crew and I are going to go in and right size the federal budget.”

What’s your explanation for what caused the pandemic-era inflation? Is there an alternate narrative you think people should hear?

Kelton: There is no simple story when it comes to inflation. In the case of the pandemic and post-pandemic inflation, there were a whole lot of things that happened. A series of mostly supply shocks, the pandemic itself being the first major shock. When you shut down large parts of the economy, and you mostly aren’t producing on the service side of the economy—and 80% of spending is on services. You tell people, you can’t go to the gym, you can’t go to a coffee shop, you can’t go to a restaurant, you can’t go to a theater, and so forth and so on. People were still spending, but they couldn’t spend in the ways they otherwise would have spent.

So they tried to cram a lot of spending into the goods pipeline, because you couldn’t buy services, but you could still buy goods. People turned their spare bedrooms into home offices. They ordered furniture and computer equipment and all that stuff that has to be manufactured and shipped. A lot of that stuff is made abroad. And we all remember what happened with the ports, and ships that were backed up. So the first thing we did is clog that pipeline, and then encounter bottlenecks in the supply chain, and disruptions. And that led to some price increases. Shifts in the composition of demand. Alongside that, you had the start of the Ukraine war, with Russia invading Ukraine. Then you had energy price increases, and that led to additional supply side shocks. Food and energy prices increased.

And against this backdrop of high and rising prices, you had companies who said, “I’m raising prices in part because I’m paying higher prices—you had pressure on wages—but also because the cost of my inputs was going up. So I’m raising prices to protect my profit margins—but you know, I think I can get away with even more. I can raise prices above and beyond what’s necessary to protect my profit margins. I can actually fatten them.” So you had economists who were pointing this out, most visibly Isabella Weber, who said, “this is a form of seller’s inflation.” It got described as everything from price gouging to greedflation. But it was real. I’m not saying it explains all of it, but it certainly was a contributing factor. If you look at some of the studies that have tried to do kind of an autopsy—Where did all of this inflation come from?—they assign a non-trivial part of the story to corporations taking advantage of the inflationary environment and pushing prices even higher.

So, a lot of things. And then demand. I won’t say that the fiscal support that was provided played no role. It certainly played a role. The big argument among economists that will probably never end in my lifetime is, how much of it was due to too much fiscal support, versus all of the supply side stuff? When you look across the studies that have been done, it’s very hard to find robust studies that pin most of the inflation on fiscal excess.

Speaking of the element of inflation that was greedflation, or increasing corporate prices—isn’t it possible that the set of political policies now being enacted, including gutting the CFPB and other forms of government oversight of corporations, could make that element even worse?

Kelton: Oh, sure. You’re removing some guardrails that were in place to provide checks on the extent to which—whether it’s financial institutions or non-financial firms—could charge higher prices and gouge consumers. Everything from the FTC to the FCC to the CFPB. But also the tariffs and other policies. When people start hearing the world “inflation” creeping back into the national conversation, you’re priming the consumer to expect to see higher prices. In total, whether it’s the stuff they’re doing on the regulatory side, or the stuff they’re doing with respect to tariffs, I think you’re very right to say, “Could this be another opportunity for companies to raise prices?” Yeah.

What do you make of the tariffs? What will the economic impact be, and also, why the hell do you think Trump is doing this?

Kelton: I think he got this in his head, maybe decades ago. When I was growing up, it was Japan. I remember being in high school and hearing people say, “The Japanese are killing us. We’re all going to be speaking Japanese.” Because they were a manufacturing powerhouse. They were running these large trade surpluses. The US had gone from a trade surplus position in the 50s and 60s and early 70s, to running persistent trade deficits. And this was just seen as part of the demise of the United States of America. This other big country was beating up on us. Trump has talked like that for many, many decades when it comes to trade. Only now it’s China. Only the names have changed. He even looks at Canada, $200 billion in trade deficits, and says, “They’re killing us. We can’t subsidize them this way.”

It’s like…what are you talking about? Somehow he thinks that if you import from another country then they’re taking advantage of you. All he looks at are the dollars. He sees a trade deficit, and he sees that another country ends up with our money. What he doesn’t see, apparently, is that we end up with their stuff.

I remember watching the 2016 Republican primary debates with my son. There’s Donald Trump on stage, and he’s talking about “Mexico’s killing us, China’s killing us, Japan is killing us. We don’t win any more. All killing us on trade.” He said, “look at Japan, they send us millions of cars. We send them wheat. This is not a good trade.” My son looks at me and says, “Wait a minute, what?” They manufacture cars, we get the cars, and we export wheat, and somehow he thinks we’re being ripped off in this deal. It’s just a very strange oversight.

But there was also something [legitimate] in 2016 when he talked about trade. He would go into hollowed-out Rust Belt communities in Ohio, in Michigan, in Pennsylvania and the like. And he’d say, “Your communities are a shadow of their former selves. The good jobs are gone, aren’t they? They’ve gone to China, they’ve gone to Mexico. We had bad trade deals that have hurt American workers, and we’re going to fix that.” And that spoke to real pain in these communities, where they had suffered a loss of good-paying union jobs with security. And you had another candidate on the Democratic side, Bernie Sanders, who was talking very much along those lines when it came to trade and the impacts on working class Americans. So I don’t want to say Trump completely misses it when it comes to trade, because some of that narrative was recognizing a real byproduct of some of what’s happened.

In the Senate Budget Committee, 2015.

Ironically, the top Republican priority is the tax cut bill, which will primarily benefit the rich. What do you think the economic results of that tax cut bill would be, if they pass it?

Kelton: First, let’s remember that the last time Donald Trump was president, the signature piece of legislation, the one really big accomplishment, was tax cuts. In December of 2017, Trump signs the Tax Cuts and Jobs Act, which reduced the corporate tax rate from 35% down to 21%, made that permanent, doubled the standard deduction—which actually is a good thing for mostly lower income folks who don’t itemize and have complicated tax returns. That was actually good. And then huge tax cuts that were concentrated at the very top of the income distribution. There are estimates that some 83% of the benefits went to folks in the top 1% of the income distribution. Everybody got a little something all the way down the chain, but the people at the very top did extremely well. A huge windfall. That’s what they accomplish: They exacerbate income inequality, wealth inequality. They don’t do much to stimulate the economy. This is why people say trickle down economics doesn’t work. Because it just doesn’t trickle down. Those [rich] folks tend not to spend that money, disproportionately, back into the economy. They mostly save.

So what are they trying to do now? Extend the tax cuts, because they’re set to expire at the end of this year. But they want to go beyond, so they’re talking about reducing the corporate tax rate from 21% to 15%. More tax cuts for people at the very top. Make no mistake, the overarching goal is to enact tax cuts that once again disproportionately benefit people who are already doing extremely well.

People on the left often say that the government should tax the rich and use the money to pay for social programs. Can you explain the flaw in that thinking, which was a key theme of your book?

Kelton: The flaw is thinking that the federal government’s budget works like a household budget—that if you want to spend more, you’ve got to find the money somewhere. And, that the federal government has two options when it comes to financing its spending. This goes back to Margaret Thatcher, who would say, “The government has no money of its own. There’s only taxpayer money.” She’d say that if people want more from their government, then the government is either going to have to tax them more, or borrow their savings. And that borrowing means the government going into debt, which has its own assumed limitations and risks. So this idea that if government is going to do more, it’s going to have to come up with more money, and that relies on us, the taxpayer, to finance spending, is actually getting things quite wrong. And in fact, backwards.

Think about what happened when Covid hit. The first big piece of legislation passed in March of 2020, and it was a $2.2 trillion fiscal package called the CARES Act. Everyone knows, or should know, that Congress has the power of the purse. If you think about what happened with that piece of legislation, there was no tax increase to “pay for it.” We didn’t go to China and ask if we could borrow $2.2 trillion. They were spending more to deal with the pandemic themselves. Congress writes a piece of legislation. The piece of legislation is a set of instructions that essentially tell the government’s bank, the Federal Reserve, “we are ordering $2.2 trillion to be created and spent into existence.” That’s how all government spending works. There’s no menu of options when it comes to paying for things, where you can say “Well, we could use tax revenue to cover some of the government’s budget, we could borrow to cover the rest of it, or we could print money in the extreme and finance spending that way.”

There’s only one way to pay. The reality is that every single dollar the federal government spends is a newly created dollar. Taxes don’t pay for government spending.

It appears that the government is determined to deregulate cryptocurrency. What do you think the risks of that are? And do you think crypto has genuine value, or is it just a big bubble?

Kelton: Does it have value? I suppose the answer is yes—if by value you mean, are people willing to pay something in order to acquire cryptocurrencies? If people decide that a Bitcoin is worth paying $100,000 for, then I guess it has value in that sense of the term. Does it have value in the same way that a US dollar have value? And where does the value for an otherwise intrinsically worthless piece of paper come from? I would say that the US dollar has value, even though it’s intrinsically worthless, because the federal government requires that we remit payments in the form of taxes to the government in that unit of account—in the US dollar. There is no one standing on the other side of a Bitcoin or other cryptocurrencies saying, “This is the only unit in which you can make payments to keep yourself out of jail.”

The federal government makes and enforces its tax laws. And there’s a whole court system where, if you get in trouble with the law and you have to pay a fine or fees, those are also dollar-denominated. The US dollar has value because there’s a legal system and a legal underpinning for that. Bitcoin has “value,” as long as people want to play with it. But the moment that interest in that speculative asset disappears or dissipates, the value is ephemeral in that respect.

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A lot of people are scared right now that they are witnessing the erosion of the rule of the law in America. The consequences of what’s happening now will be, among other things, economic. What are some of your fears, as you watch this erosion of the rule of law at the federal level play out?

Kelton: Well, I don’t know how a society hangs together in the absence of the rule of law. I don’t know what a breakdown in the separation of powers, in the understanding of checks and balances—it’s all the foundation for the form of democratic governance that we’ve had for almost 250 years. Each day, we’re chipping more at that foundation. And some day, the structure becomes so weakened that it folds in on itself. There are examples around the world, and historically, what the path is that the unraveling leads us to. And it’s quite a scary one, where you have an authoritarian government.

Are you surprised that the business community is not stepping up more right now, given the fact that the erosion of the rule of law is not good for business, in the broadest sense?

Kelton: I am. I’m surprised at the silence from so many different corners—the business community, and ancillary groups. I wrote recently about the ratings agencies. I just don’t understand how a Standard and Poor’s, a Fitch, a Moody’s isn’t out there sounding the alarm, when previously, something like playing around with the debt ceiling limit led one of them, Fitch, to come in and say, “We’re downgrading US government debt”—on the grounds, in part, that there was a breakdown in governance. That Congress appeared so dysfunctional and so reckless that it was toying with the idea that maybe a default wouldn’t be such a cataclysmic event. Probably willing to do it. And Fitch came in, and that a public declaration, where an agency like that can say, “you’re moving into very dangerous territory. We want to put something on the record to acknowledge that.” If you’re gonna behave like a banana republic, and just disregard the judiciary and all of the rest of it, and clearly appear to be moving in the direction of an authoritarian regime without a rule of law, except that you think you are the law—I would expect more from the business community, more from other institutions and agencies. The silence is pretty deafening.

What advice would you give to the Democrats right now?

Kelton: They definitely appear to be floundering. Are floundering. I’m almost at a loss to find anything that looks like a battle plan to counter in any significant way what we’re facing. To sort of sit back and say “Well, the Republicans are gonna burn it all down. So we’ll count on, two years from now, getting the House back and picking up seats, and maybe then we can put forward an alternative plan.” We don’t have two years. You won’t be able to pick up the pieces. And if your message is, “We’ll pick up the pieces and assemble them the way before”—people didn’t like the way the system was structured before. That’s why, in part, Donald Trump won in the first place. You have to offer people a different vision if you want to actually win. If your message is, “Put us back in charge, and we’ll give you back the economy we had before they destroyed it,” I don’t think that’s where Democrats should be right now.

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• Related reading: The Business Community Is Extraordinarily Stupid; Crypto, as a Political Characteristic; The Land of Greater Fools.

• Stephanie Kelton’s own Substack is here. Her book “The Deficit Myth,” which anyone interested in political economics should read, can be ordered here. My own book “The Hammer,” about how the labor movement can save us from what is playing out right now, can be ordered here. You can be a part of the solution by organizing your own workplace. Contact EWOC for help.

• It is very important to make noise about the decimation of our government. February 19th will be a day of action on behalf of public service workers. You can sign up for more info here. Some people have been protesting at Tesla dealerships. You can find a list of Tesla locations here. Get creative, while there’s still time.