Best New Ideas in Money

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Speaker 1: We are very dependent on the political process and on stimulus to get us out of a recession, and it is always too little and too late. What if we thought about prevention rather than cures?

Speaker 2: Welcome to the Best New Ideas in Money, a podcast from MarketWatch. I'm Stephanie Kelton. I'm an economist and a professor of economics and public policy at Stony Brook University.

Speaker 3: And I'm Charles Passy, a reporter at MarketWatch.

Speaker 2: Each week we explore innovations and economics, finance, technology, and policy that rethink the way we live, work, spend, save, and invest.

Speaker 4: Look, folks, the idea is that we're not going to be moved into being threatened to default on the debt if we don't respond. Folks...

Speaker 3: That's President Joe Biden at his State of the Union Address on February 7th, the jeers and applause you're hearing break along partisan lines as you might expect, but the debt ceiling he's talking about. Well, that's a problem we all have to worry about.

Speaker 2: It sure is, Charles. If Congress fails to raise the debt limit in time, the government could end up defaulting on all sorts of payments because, normally, the treasury would issue more bonds to cover previously authorized spending. But if the debt ceiling isn't raised, that can't happen. In a default scenario, Moody's recently estimated the country could lose 6 million jobs and see the unemployment rate rocket to 7%. And that's not to mention the turmoil it would almost certainly cause for global financial markets.

Speaker 3: At times like these, I think to myself, "Geez, wouldn't it be easier if the economy ran itself?"

Speaker 2: Well, most economists agree that putting some parts of the federal budget on an autopilot or what are known as automatic stabilizers, would help our economy run smoother, especially when things get a little bumpy. The automatic stabilizers are like the shock absorbers in your car, but instead of a car, well, they're shock absorbers for the economy.

Speaker 3: This all started a few weeks back when we were talking about the economy, and as listeners may be aware, the Federal Reserve has been raising interest rates to curb inflation. And so I said, "What if we did an episode about, hey, is there another way to Fed?" So Stephanie, what are these automatic stabilizers, and are they another way to Fed?

Speaker 2: Okay, so the automatic stabilizers don't have anything to do with the Fed. If you think about the Federal Reserve, that's our central bank, and what the Fed does is conduct monetary policy, mostly changing interest rates. But when the Fed changes interest rates, they don't do it on an automatic basis. They don't program the computer to raise or lower interest rates at certain points in time. They actually get together as a committee and they decide whether to push interest rates higher or leave them alone, or lower them. That's discretionary monetary policy. The Fed gets to decide whether to move something. When we're talking about automatic stabilizers, we're talking about things that move on their own. And we're talking about fiscal policy, not monetary policy. So we're talking about moving things like government spending and tax revenue, but we're not talking about Congress making decisions about whether to raise spending or cut spending, or raise taxes or cut taxes. We're talking about how those things happen automatically when the economy moves into a boom or into a bust.

Speaker 3: So what exactly is an automatic stabilizer then, can you give me an example?

Speaker 2: Sure. Think of federal unemployment insurance. So when people become unemployed, if they're eligible for the program, they apply for the unemployment compensation and the federal government automatically provides some income support when you lose your job. And so it's not as if it takes a new Act of Congress in order to help people out when they become unemployed, that program is already in place. And so if the economy were to go into recession and a lot of people started losing their jobs, they would start applying for unemployment benefits and those payments would automatically go out, and then help stabilize the economy. Because you prevent people from losing all of their income, you replace a portion of it. So that's why we call it an automatic stabilizer.

Speaker 3: So Stephanie, when someone loses a job, which is a big terrible thing for that person, why does it also matter in a macro sense? I mean, why is replacing that lost income so important to the economy overall?

Speaker 2: Well, our economy runs on spending. If you think about GPD, which is the shorthand way of saying the economy. GDP is just the sum total amount of money that gets spent buying newly produced goods and services every year, and consumers do about two-thirds of all the spending. So supporting income and supporting consumer-spending is a pretty important part of the story when you're talking about safeguarding your economy.

Speaker 3: Okay, we talked about unemployment insurance is an automatic stabilizer, but unemployment, isn't that a New Deal era program that dates back to the 1930s, decidedly not a new idea. So what is the new idea here?

Speaker 2: Well, I think economists are often thinking about ways to improve the automatic stabilizers, but I remember hearing Janet Yellen when she was still chair of the Federal Reserve. It was her last speech as Fed chair, and she was talking about how she thought it would be important going forward to think about ways to strengthen the automatic stabilizers. Because she said, "Basically, you guys leave a lot of the job up to us," the Federal Reserve, "to respond, to try to manage and fine-tune the economy." And her point was that if we had stronger automatic stabilizers, so that she didn't have to actually wait for an Act of Congress when you needed some additional help supporting the economy. If you could strengthen the automatic stabilizers, it would actually make the Fed's job easier.

Speaker 3: So you could say this is another way to Fed after all.

Speaker 2: You found a loophole. All right, so to the extent that the automatic stabilizers make the Fed's job easier, yeah, you could say that.

Speaker 3: Here's another question and let's take the COVID-19 pandemic as an example. There was a lot of government spending which was intended to help people out and keep the economy running, but it was discretionary spending. These enormous pieces of legislation that had to be negotiated and passed in Congress. And the key here is that it didn't happen automatically, right? So what might have happened differently if we had stronger automatic stabilizers?

Speaker 2: I mean, if you think about where we were and what happened after the pandemic hit, there was a lot of concern that the automatic stabilizers weren't going to be strong enough to put a floor under the downturn, and that millions and millions of people could lose their jobs, and businesses could go under. You heard people talk about Great Depression 2.0. And so to try to stave all of that off, what did Congress do? Well, in a bipartisan way, Democrats and Republicans, together, pulled out the big money bazooka. There was legislation with trillions and trillions of dollars, and they sent lots of checks to millions of Americans, paid big increases in federal unemployment insurance, had payroll protection programs. The money really did flow. And in a sense, it was Congress acting in a moment of panic. Because nobody knew how bad things were going to get, and there was this belief that, well, it was better to do too much than too little. The automatic stabilizers, if they had been stronger, could have done a lot of the work and taken a lot of the guesswork out of it, right? A lot of the relief could have been better targeted, and that's one of the real benefits of the automatic stabilizers is they'll go into effect automatically, and they'll start sending those dollars right where they're needed. So maybe you don't have to aim quite as wide.

Speaker 3: Right. And some economists and politicians have argued that we spent too much on COVID relief while others have argued that we spent too little. So if we had stronger automatic stabilizers, well, I guess I'm not the economist here, so if we were to strengthen these automatic stabilizers, how might we go about it?

Speaker 2: Well, let's leave that to our first guest who has one idea about how to do just that.

Speaker 1: Hi, my name is Pavlina Tcherneva. I teach economics at Bard College, and I'm a research scholar at the Levy Economics Institute, and the author of The Case for a Job Guarantee.

Speaker 3: Tcherneva argues that government should literally hire unemployed workers, which in her view would not only create stability for those workers, but for the economy more broadly.

Speaker 1: Whatever happens to the economy, whether it is a natural disaster, whether it is a pandemic, whether it is a financial crisis or some sort of shift that comes with globalization. We know that jobs are on the chopping block as a regular occurrence. Now, that actually creates enormous instability to the economy. If people do not have stable employment, they are not able to first provide for themselves in this normal, stable way, but they also don't patronize the mom-and-pop shops in the community. It's just really our economy is built very much on our ability to spend and to participate in it. And so when people lose their jobs, there are enormous consequences.

Speaker 2: So what's the proposal, and how is it an automatic stabilizer?

Speaker 1: So the proposal is very straightforward. If there are many people or if there are any people looking for employment on any given day, can we create a program that directly employs them? And so that would be a public employment. You can think of it as a job corps, you can think of it as a public service employment, some sort of mechanism by which if somebody looks for employment and they cannot find it in the private sector, the public sector will provide the missing jobs. And why would that be an automatic stabilizer? Well, suppose that this was a permanent program like Social Security or Medicare, then that will be demand-driven. As people lose their employment in the private sector, we know what they do, they write resumes, they send them, they knock on doors, they make calls, but they strike out. What if they went to the unemployment office and they actually found employment? Now what we have is people substituting one employment opportunity for another, and the economy is faring so much better because it doesn't have to slog through the consequences of mass unemployment.

Speaker 3: Tcherneva believes that there is plenty of work in public service.

Speaker 1: So the jobs will come from the public sector, much like we did during the New Deal. We will create a program that will create public service, employment opportunities, job lists, if you will, in every job center with some basic guidelines of what the community might need. Now, often, these are small infrastructure projects, and God knows that all of our communities can benefit from a little extra upkeep, some extra infrastructure. There is just so much work to be done. We also have care projects. There are so many elderly who need help with trips to the pharmacy, with meal delivery. They're a projects that can be created by the public sector to fill that need. The way we do it today is a lot of this work is done by community groups. A lot of this work is done on volunteer basis. It's not a very good sustainable way to support those people in need. In fact, if anyone is doing that work, why shouldn't they be paid a good wage with good benefits? So I think that we can create the work, but we also have done it in the past, and perhaps we don't need to create 15 million jobs. Maybe we need to create five, and that extra boost to the economy is going to be a boost to the mom-and-pop shop and that community. There will be more customers, and so employment will then trickle into the private sector.

Speaker 2: According to Tcherneva, employment trickles into the private sector because more stable employment would lead to more steady consumer demand, and thus, employers needing more workers to meet that demand. And that's not all. A job guarantee could also result in fewer layoffs in the private sector. Why?

Speaker 1: Because they're stable demand, people have jobs and they have much more stable spending patterns than if they were to lose their job replaced with unemployment insurance, wait for the next job to come around the corner. It's just an entirely different mechanism.

Speaker 2: It's about business confidence. For Tcherneva, with a job guarantee, even when the economy slows down, employers should be able to rely on a steadier stream of revenue and profits. While it might be clear how a job guarantee would function in a downturn, what about when the economy is booming? How would a job guarantee impact inflation?

Speaker 1: Well, when an economy is growing, we see what happens. Now, firms are hiring. They're looking for new employees. Now who gets hired? Usually, the paradox of the labor market is somebody who has a job. Now imagine we had a public employment option. Folks will be transitioning much more quickly into these job openings in the private sector, and the public expenditure naturally contracts. You no longer have to pay the wages and support those folks in the public sector. They have now transitioned in the private sector. So as the private sector is growing, as profits are rising, the public contribution, the government contribution to the economy is shrinking, and that is also anti-inflationary.

Speaker 2: Meaning that the economy recovers faster, the government spends less, and it collects more revenue from workers and businesses, and that reduces the federal deficit. Tcherneva's job guarantee would be a new program and would not replace any existing stabilization programs like unemployment insurance, which leaves a big question. If we created a job guarantee, how would we pay for it?

Speaker 1: Like all federal programs, the Public Employment Program will also be paid out of the federal budget. So long as it's passed into law, there will be a budget that will be appropriated for it, and that's how it will be financed. But I think what is important in this context to recognize is that the government is paying for unemployment. There are many expenditures that are dedicated to addressing the consequences of unemployment, whether it's housing insecurity, whether it is hunger, whether it is policing, whether it is the mental health crisis. We spend a lot of financial resources to address these ills. How about going to the heart of the problem and create these savings elsewhere in the budget so people don't have to tap in these programs nearly at the same rate.

Speaker 3: Are strengthening the automatic stabilizers, and perhaps even creating a job guarantee, truly some of the best new ideas in money out there? Or are there other pieces of the puzzle that we haven't yet considered? When we're back, we're going to bring in another perspective on stabilization policy. That's after the break.

Speaker 2: Welcome back to the Best New Ideas in Money. Before the break, we talked about the economy's shock absorbers, the automatic stabilizers. We also looked at one idea for how we might strengthen them, a job guarantee.

Speaker 3: And while most economists agree that the automatic stabilizers are themselves a good idea, not everybody agrees that we necessarily ought to strengthen them, or if we do, how we ought to do it.

Speaker 5: My name is Keith Hall. I'm currently a distinguished visiting fellow at the Mercatus Center at George Mason University.

Speaker 3: The Mercatus Center is an American libertarian, free-market-oriented non-profit think tank. But Hall has had a long career in the policy world, and in fact, if you can think of a job in government, Hall has probably done it.

Speaker 5: I've been lucky enough to hold a number of jobs for the federal government. I've been the chief economist for the Council of Economic Advisers. I've been the director of the Congressional Budget Office. I've been the commissioner of the Bureau of Labor Statistics. I've worked in trade policy issues. So I've got a lot of experience with policy.

Speaker 3: Okay, so how does he sum it all up?

Speaker 5: Everything I've worked on, I would say, fall into one category. Evidence-based policy. I've been like probably most other government economists, most of what I do is shoot down bad ideas. It's not hard to come up with interesting things or ideas. Let's try this, let's try that. Try solve a problem. It's another thing to think it through and have an understanding of what the effects going to be, what are the side effects going to be, what you do to incentives. I think that's just a very important thing, to have this technical support for policymakers.

Speaker 2: We asked Hall for his perspective on stabilization policy, which to be clear, could mean fiscal or monetary policy, and could be automatic or discretionary. Stabilization policy is a broader term than what we've been talking about so far, the automatic stabilizers.

Speaker 3: Hall says, the real problem isn't that we currently don't have strong enough automatic stabilizers. It's that we've become overly reliant on discretionary fiscal policy. As a reminder, fiscal policy is what Congress does.

Speaker 5: Well, stabilization policy is perhaps one of the most important roles of government, and it's the idea is to do what you can to help maintain a healthy, sustainable growth in the economy, which then of course makes household incomes grow, employment grow.

Speaker 2: Like Tcherneva, Hall points to the role stabilization policy plays in keeping demand steady, because it's demand that keeps the economy chugging along.

Speaker 5: Really, stabilization policy is about adjusting aggregate demand, stimulating it or backing off stimulation, and that's all the short-run effect of stabilization policy.

Speaker 2: Which is why when the economy hits a big bump in the road, like the COVID-19 pandemic for example, it's important to have a policy response to support demand, be that an automatic one like the stabilizers we've been talking about, or a discretionary one, meaning an action of Congress or of the Federal Reserve. And in Hall's view, discretionary monetary policy or what the Federal Reserve does has been the most important tool over time.

Speaker 5: Things happen, and it's helpful if the government in stabilization policy tries to keep you on the path at maximum speed, dampen shocks, that sort of thing. And what's dominated stabilization policy historically has been monetary policy. The discretionary part of stabilization policy, the intentional part was conducted entirely by the Fed with monetary policy. The most important tool is interest rates. They have other tools, but more than anything else, they adjust interest rates. The federal funds rate, which affects interest rates throughout the economy. And the idea is they either lower rates to stimulate consumer spending and business spending, and it's borrowing in particular, or they raise rates to try to slow that down. What's changed is since around 2007, the Great Recession, we've now added discretionary fiscal policy. The reason discretionary fiscal policy woke up in the Great Recession was because of interest rates. Interest rates were very, very low, and there was some concern that the Federal Reserve wouldn't be able to lower interest rates enough to stimulate the economy. Problems with discretionary fiscal policy are pretty significant. One is you rack up a huge amount of debt. Second thing is the timing is very difficult on discretionary policy, and when you're talking about stabilization policy, you need to react within months and quarters, not years. So it's quite easy to try to stabilize things and miss it, where your stabilization comes too late, and importantly, it can come at the wrong time. A third thing is just pure information. It takes time to make legitimate estimates of what the economic impact's going to be of all these different things. So when legislation, ultimately, is passed, Congress and the President really don't know exactly how much stimulus they've just provided.

Speaker 3: To sum that all up, for Hall, the Federal Reserve, which uses discretionary monetary policy is, for the most part, doing just fine. The real problem according to Hall is what Congress is up to. That's discretionary fiscal policy, which not only creates a whole lot of debt, but a lot of the time doesn't even work in the way it was meant to. With the automatic stabilizers, discretion is no longer part of the story.

Speaker 5: The most important thing, RAFE, and important thing about automatic stabilizers is it involves no action. It's written into law, unemployment insurance kicks in automatically. Tax revenue collection goes down when incomes go down. That all happens automatically, and that's been relatively unchanged for decades.

Speaker 3: So, is Hall in favor of making the automatic stabilizers stronger?

Speaker 5: I think that's a reasonable thing to think about. You certainly could think about changing the stabilizers themselves so that they're stronger, they kick in stronger. But you need to be a little careful about this, right? You need to be careful that you don't overdo it. And one of the things, I think, is important, it needs to run two directions. You want automatic stabilizers that basically behave in a symmetric way, so when they kick in and provide unemployment insurance for example, at some point it comes off. And you take deficits down. They don't stay up too long over time. So thinking it through, in a sense, we've done a good job because the stabilizers seem like they work pretty well. I think regardless of what you do with stabilizers, we really need to get the discretionary fiscal policy out of the picture as soon as we can.

Speaker 2: You might be surprised, but Hall and Tcherneva, who we heard from earlier, are in agreement, at least when it comes to relying less on discretionary fiscal policy.

Speaker 1: Our automatic stabilizers are weak, and so we are very dependent on the political process and on stimulus to get us out of a recession. And it is always too little and too late. It is really shifting the thinking about public action. What if we thought about prevention rather than cures?

Speaker 3: And back to Hall, what does he think about a job guarantee?

Speaker 5: Those, I think, could clearly work if you're careful about how you construct it and what you do for the incentives. In one of our challenges has been, too many people have stayed out of the labor force the last number of years, and doing anything that ultimately reduces the incentive for people to get back into the labor force, get back into the labor market, create some long-term problems. Whatever you do with the labor market about guaranteeing jobs, you want to be sure that you keep productivity in mind with what you do and keeping people engaged with the labor force.

Speaker 3: Earlier on, we talked about whether or not we'd be better off today if we had had stronger automatic stabilizers in place when COVID struck, and there's an important money question here. If we had had stronger automatic stabilizers, would we have spent less to deal with the economic consequences of the pandemic? We asked Hall.

Speaker 5: Yes. We spent a lot more. In fact, our discretionary fiscal policy on the last two recessions dwarfed the stabilizers, way stronger than the stabilizers. We just spent trillions of dollars extra for the pandemic that was way stronger than the stabilizers helped with, and ultimately, you need to pay this. Somebody's got to pay this back. Even low interest rates don't get you out of this, and we may not have low interest rates in the future.

Speaker 3: Interest rates aside, this is all really interesting stuff, but it does leave me wondering. If we automated even more elements of our fiscal policy, would we miss discretionary policy? I mean, we do elect these politicians to represent us after all.

Speaker 2: We do. But rest assured, you're never going to eliminate discretionary policy. The idea is just to have stronger automatic stabilizers, so things might be a little bit easier for the Fed, for Congress, and ideally, for the rest of us.

Speaker 3: Hey, it's all about new ideas in money.

Speaker 2: Thanks for listening to the Best New Ideas in Money. You can subscribe to the show wherever you listen to podcasts. If you like what you heard, please leave us a rating or review. And if you have ideas for future episodes, drop us a line at bestnewideasinmoney@marketwatch.com. Thanks to Pavlina Tcherneva and Keith Hall. To learn more about the automatic stabilizers, head to marketwatch.com. I'm Stephanie Kelton.

Speaker 3: And I'm Charles Passy, the Best New Ideas in Money is a podcast for MarketWatch. The producers are Michael McDowell, Mette Lutzhoft, and Katie Ferguson. Melissa Haggerty is the executive producer. Will Stanton mixed this episode, and Tim Rostan was our newsroom editor on this episode. The Best New Ideas in Money theme was composed by Sam Retzer. Stephanie Kelton is an economist and a professor of economics and public policy at Stony Brook University, and not part of the MarketWatch Newsroom. We'll be back next week with another new idea.