The Deficit Myth by Stephanie Kelton 2020  

THE DEFICT MYTH

Modern Monetary Theory and The Birth Of The People’s Economy

STEPHANIE KELTON

2020 PublicAffairs New York  ISBN 978-1-5417-3618-4

            Modern Monetary Theory (“MMT”) is macroeconomic theory primarily aimed at addressing the most common opposition to significant increases social program spending:  the annual federal fiscal deficit (3.1 trillion and 15% of GDP in 2020).

            In the initial chapters of her book Ms. Kelton attempts to dispel the most common “deficit myths” such as government borrowing diminishes the amount of money available for private lending. (In her government vs private sector “buckets” of money analogy, government borrowing to cover insufficient federal revenues can actually stimulate private investment because deficit spending puts more money into the private sector bucket.)

            However the main theme of Ms. Kelton’s book is that Congress does not have to worry about any social program spending creating fiscal deficits (including Social Security and Medicare) as long as deficit spending does not cause inflation (which degrades primarily the wealth of the 20% of “low income” and 60% of “middle class” Americans because 80% of the nation’s wealth is now owned by the 20% of Americans in the top fifth income percentile).

            According to Miss Kelton non-inflationary deficit spending should not be worrisome and can actually be beneficial to the national economy for two reasons.

            First, the federal government is a “sovereign currency issuer” and consequently has sole authority to establish the legal value of US currency (as opposed to nations such as common market countries whose currency value is wholly or partially determined by factors out of its control—e.g. the countries using the Euro as its national currency). 

            Therefore, as Ms. Kelton frequently likes to say throughout her book, the federal government does not have to budget like a household.  A household cannot print its own sovereign—i.e. universally accepted—currency to pay its “bills” but the federal government can issue as much currency as it needs to do so (again as long as it does not cause inflation.)

            Ms. Kelton further explains that non-inflationary deficit can be beneficial using a “bucket analogy”.  Whatever fiscal deficit there may be in the federal bucket between federal spending and revenues is a fiscal surplus in the private sector bucket.  In other words, federal deficit spending (at least on social programs and infrastructure) just does not disappear into thin air, but permits producers and consumers in the private sector to sell and buy products and services consumers want or need utilizing the cash infused by deficit spending.

            Consequently under Ms. Kelton’s version of MMT there is no reason the government cannot fund either necessary/desired infrastructure repairs and improvements or adequately fund Social Security and Medicare or provide for a federal job guarantee accessible to any American worker displaced by an economic or natural catastrophy.

            MMT is simplistically attractive and Ms. Kelton is adept at discussing complex appearing macroeconomic issues at a layman’s level (perhaps not surprising as she has been an economics professor for many years) and this reviewer is not an “economist” by education or profession.

            However as a student of the works of John Maynard Keynes, I believe Professor Keynes would point out at least two immense “holes” in MMT theory as presented in The Deficit Myth.

            The first concerns her arguments that non inflationary deficit spending should not be worrisome enough not to fund needed social program and infrastructure spending. 

            While Ms. Kelton acknowledges the influence of the  work of John Maynard Keynes on MMT; she appears to have overlooked one of the foundations of his work:  that there are no such things as “rational markets” or “formulas” that can govern macroeconomic planning simply because too many humans do not make economic (and all other kinds of) decisions “rationally.”

           One of Professor Keynes favorite analogies illustrating this principle was investment in the stock market.  Then (when he was writing in the 1920s and 30s) as now the vast majority of stock investors do not do their own research into which companies have the best fiscal management, long term track record, etc. The vast majority of investors buy what other investors they consider successful buy (or based upon what they hear “through the grapevine”).  Mr. Keynes would not be surprised at all by the number of “Buffetteers” in today’s stock market.

            Professor Keynes would certainly respond to Ms. Kelton’s MMT arguments concerning federal deficit spending that while it may not be the “monster” that must be slain from either a fiscal or monetary macroeconomic standpoint, the size of the deficit (and its accumulation into the “national debt” now standing at about 22 trillion dollars) does have psychological and emotional effects as impactful in macroeconomics as any fiscal or monetary policy.

            Consequently Professor Keynes would argue that there always has to be some long term plan to at least control, even better slowly reduce, over time federal fiscal deficits.  Otherwise at some point the “psychological” effect of the size of continuing federal deficits (and accumulating national debt) will be that producers, consumers and/or investors will lose “confidence” in the strength and safety of U.S. dollars resulting in all sorts of serious social and economic consequences.

            I believe Professor Keynes would also disagree with the second principle assertion of Ms. Kelton that “the monster in the house to be slain” is neither the deficit nor inflation, but in the slowly ever increasing unequal distribution of wealth in the United States.

            That is an issue Ms. Kelton refers to at several points in her book but her only apparent solution is a “federal job guarantee” at a “living wage” of “15 an hour”  to create constant full time employment for every American who wants to work.  (And that may be enough for a single worker to support themself.  However the common opinion is that a “living wage” where one person can work one full time job and support a family of up to four persons is actually somewhere around $32 an hour (approximately $67,000 a year before taxes.)

            However while a federal job guarantee may create “full employment” such a policy will not create an equal distribution of wealth in America.

            As President Lincoln so poignantly emphasized over a century and a half ago “since all capital is derived from (someone’s) labor” and “there would be no capital without labor:”  only when the vast majority of American workers have either an ownership and/or profit sharing interest in the businesses for which they generate every penny of its income will the socio-economic problem of the gross inequitable distribution of wealth finally be solved in a capitalist economy.