How many times have you heard people try to compare the government’s finances to that of a household? Many of my conservative friends say that money coming in has to equal money going out because that makes sense. It’s how a family budgets. For state and local governments – even for some foreign national governments – this analogy works. But for the U.S. federal government and any national government that issues its own currency, this analogy fails according to advocates of Modern Monetary Theory (MMT). In short, MMT is a theory of government deficit. Proponents of this philosophy tell us that thinking about the federal government’s budget acting like a household budget is wrong. In The Deficit Myth, Stephanie Kelton explains MMT by debunking six common myths about U.S. federal finances. This radical approach to government finances could change the country forever. Whether for better or worse, I’ll leave that for the experts, but The Deficit Myth convinced me that more politicians should give some MMT policies a chance.
Disclaimer: The publisher provided a free eARC of The Deficit Myth in exchange for an honest review.
TL;DR
The Deficit Myth by Stephanie Kelton explains a revolutionary finance theory in easy to understand terms. It places the focus of government finances back where it belongs…on helping citizens. Highly Recommended.
From the Publisher
The leading thinker and most visible public advocate of modern monetary theory – the freshest and most important idea about economics in decades – delivers a radically different, bold, new understanding for how to build a just and prosperous society.
Stephanie Kelton’s brilliant exploration of modern monetary theory (MMT) dramatically changes our understanding of how we can best deal with crucial issues ranging from poverty and inequality to creating jobs, expanding health care coverage, climate change, and building resilient infrastructure. Any ambitious proposal, however, inevitably runs into the buzz saw of how to find the money to pay for it, rooted in myths about deficits that are hobbling us as a country.
Kelton busts through the myths that prevent us from taking action: that the federal government should budget like a household, that deficits will harm the next generation, that deficits crowd-out private investment and undermine long-term growth, that entitlements are propelling us toward a grave fiscal crisis.
MMT, as Kelton shows, shifts the terrain from narrow budgetary questions to one of broader economic and social benefits. With its important new ways of understanding money, taxes, and the critical role of deficit spending, MMT redefines how to responsibly use our resources so that we can maximize our potential as a society. MMT gives us the power to imagine a new politics and a new economy and move from a narrative of scarcity to one of opportunity.
Review: The Deficit Myth
Stephanie Kelton addresses six myths about federal government spending in The Deficit Myth:
- The federal government should budget like a household
- Deficits are evidence of overspending
- Deficits burden the next generation
- Deficits crowd out private investments, undermining long-term growth
- Deficits make the U.S. government dependent on foreign governments
- Entitlements propel the U.S. toward long-term fiscal crises
Dr. Kelton devotes a chapter to each of these myths and explores in detail why each is false. As evidence of her arguments, she uses history, basic accounting, and her experience in government. The first, most basic part of her argument requires understanding the difference between a currency-issuer, like the federal government, and a currency-user, U.S. citizens. You see, unlike you or I, the government can print money out of thin air, or rather by typing out a command on a keyboard at the Federal Reserve.
Everyone knows this fact, but economists of most stripes think this MMT fantasy. And to be fair, it really does sound too good to be true. After all, if we can just print money, what stops the government from printing continuously? Dr. Kelton answers that in the book in detail by pointing out how economists have erred in their economic predictions. Just as she starts with myths and goes on to disprove the myths, Kelton describes the ideas of MMT’s critics and then shows the flaws in their arguments. The whole book is written in terms that I, not an economist, could easily understand.
Is It Socialism?
Is Modern Monetary Theory socialism? It depends on the policies that implement MMT. As we saw with the 2009 bailouts and the 2020 Covid-19 bailouts, Republicans will take government money and give it to corporations and rich people at every opportunity. For some reason, Republicans and conservatives don’t consider it socialism when the rich and corporations get government money; only poor people receiving government funds is socialism and therefore bad. If MMT theory got popular enough to be viable, I have no doubt that Republican politicians will use it to give money to corporations and rich people. The current, unofficial motto of the Republican party is privatize profits and make debts public, after all.
Dr. Kelton proposes a guaranteed jobs program that would send the money to the people who need it most. While some on the left want a universal basic income, I think there’s too many problems with just giving people money. I strongly believe in the dignity of work, and I think most people do as well. Unfortunately, in our current society, the dignity of work has been replaced by the fear of getting fired and of losing health insurance. A guaranteed jobs program would solve one of those problems, and a public option for health insurance solves the other. In addition, as Dr. Kelton points out, competition in the job market would cause wages to rise. Wage stagnation leads to increasing economic inequality, and a guaranteed jobs program would combat that inequality. Employers would have to increase worker pay to compete with the guaranteed job. Stores like WalMart would no longer be able to keep store clerks as part time employees who want to work full time. In this case, yes, it would be socialism. As the guaranteed jobs program would give back to the community, we’d all benefit.
But Could It Work?
Honestly? I’m not the person to answer this question. I do know that of the 42 years I’ve been on this planet, only 4 of which didn’t see the government have a deficit. If in all that time the deficit hasn’t caused a problem, why would it now? We’re told that the debt is a problem, but who do we owe that debt to? The majority of it is held by U.S. citizens. And if the debt was such a bad thing, why would banks be clambering to buy U.S. securities? In reality, we already engage in MMT; we just don’t call it that. If you want to understand the difference between the government and the rest of us, look at debt limits. When the average person approaches their credit card limits, do they simply say increase the limit and, poof, have more credit? No, they have to ask the bank. Who does congress have to ask to increase their debt limit? They ask themselves, and then they all vote on it. Congress tells congress how much money it can spend. The average person can’t do that.
Dr. Kelton makes a convincing argument that MMT could. I think her assessment is a bit rosy, though. As the chief advocate for this theory, she has to be. But, like other Bernie Sanders supporters1, she thinks that once all lower and middle class workers see how they’ll benefit, they’ll jump on board. As W.E.B. DuBois said in Black Reconstruction (page 701), “…every problem of labor advance in the South was skillfully turned by demagogues into a matter of inter-racial jealousy.” Dr. Jonathan Metzl in Dying of Whiteness showed how white people support policies that directly harm them but propagate structural racism. I just don’t see the majority of working class whites accepting MMT policies even if said policies make their lives better. A big worry will be how will ‘we’ pay for it, and though Dr. Kelton discusses how we will, then the next hurdle will be the scarcity mindset. Working and middle class whites worry about ‘those people’ getting money for nothing. How Dr. Kelton and MMT advocates rid people of the scarcity mindset is beyond me.
In the book, Dr. Kelton shows how MMT could help developing nations achieve financial security and independence from established nations. While I think this is a good thing to do, this section will definitely turn off even the curious conservative mind. In our current political climate, sending money to other nations is incredibly divisive and seen as not caring about regular Americans. If MMT policies raise the living standards of all in the U.S., then we can start to look beyond our borders. While MMT has the potential to increase the quality of lives around the world, convincing the average person in the U.S. right now to send help overseas will be a non-starter. I like Dr. Kelton’s argument, but I think it will work against her.
Conclusion
Stephanie Kelton’s The Deficit Myth switched my thinking about federal finances. I still have a lot of questions about MMT, but The Deficit Myth has me questioning what I thought I knew about federal budgeting. In a saner time, we’d be able to debate these ideas across political lines. But for now, The Deficit Myth shows that U.S. politicians care more about money matters than helping people. The Deficit Myth is a call to rethink our assumptions about government finances to put ‘we the people’ back at the center of government’s focus.
The Deficit Myth by Dr. Stephanie Kelton becomes available from Public Affairs Books on June 9th, 2020.
8.5 out of 10!
- From her website, here’s a small snippet of her impressive resume:
Professor Kelton has worked in both academia and politics. She served as chief economist on the U.S. Senate Budget Committee (Democratic staff) in 2015 and as a senior economic adviser to Bernie Sanders’ 2016 and 2020 presidential campaigns. She currently works as a Professor of Economics and Public Policy at Stony Brook University, and she holds Visiting Professorships at The New School for Social Research, the University of Ljubljana, and the University of Adelaide. POLITICO called her one of the 50 Most Influential Thinkers in 2016, Bloomberg listed her as one of the 50 people who defined 2019, and Barron’s named her one of the 100 most influential women in finance in 2020. She was previously Chair of the Department of Economics at the University of Missouri, Kansas City.