The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy.

• Author: Dowd, Kevin
• Position: Book review

The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy

Stephanie Kelton

New York: Public Affairs, 2020, 336 pp.

Stephanie Kelton's The Deficit Myth is quite the talk of the town. To quote Amazon's webpage:

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, crowd out private investment, and undermine long-term growth, and that entitlements are propelling us toward a grave fiscal crisis. It's an attractive vision, but it doesn't work.

I am reminded of Einstein's time at the Swiss Patent Office where he used to check applications to patent perpetual motion machines. They don't work, but the fun is working out why. The same applies to proposals to bring about prosperity that depend on loosening the monetary spigots. MMT is a perfect example.

MMT in a Nutshell

MMT is a macroeconomic school of thought in the post-Keynesian tradition. Its central tenets: fiscal deficits don't matter; monetary policy should be subordinate to fiscal policy; and the monetary authorities should be willing to issue base money to finance government spending. MMT is associated with largescale government spending, a focus on ending involuntary unemployment, and programs to alleviate poverty and fight climate change.

Kelton's book builds on earlier work by Warren Mosler and Randall Wray but has its roots in Abba Lemer's system of "functional finance," which goes back to the 1960s. She builds on Lemer primarily by adding a federal job guarantee that would eliminate involuntary unemployment and provide an automatic economic stabilizer.

MMT makes big promises. It would "build a more just economy that works for the many and not just the few" and put "people and planet first." "MMT's lens enables us to see that another land of society is possible, one in which we can afford to invest in health care, education, and resilient infrastructure. In contrast to narratives of scarcity, MMT promotes a narrative of opportunity."

But does MMT deliver? Let's see what she says.

Tax and the Government Budget Constraint

"The idea that taxes pay for what the government spends is pure fantasy," writes Kelton. Really? Let's go back to basics. The government must finance all its expenditures. In a world in which it does not issue debt and does not issue currency, and assuming away any gifts it might receive, all its expenditures must be financed by current taxation.

If the government can issue debt but not issue currency, then it can finance its expenditures by current taxation or by issuing debt. But to issue debt is to pass on the obligation to repay that debt to future taxpayers. If that debt is to be repaid, then it must be repaid out of future tax proceeds.

If the government can issue its own currency and monopolizes the issuance of currency, then it can also pay off its debt obligations as they come due by issuing additional base money ("printing money"). Does this mean that printing money allows the government to avoid the need to raise taxes? No, because printing money lowers its value against goods and services, and so operates as a tax on money holdings and other holdings of wealth that are fixed in nominal terms (such as level annuities). So, barring gifts, all government expenditures must be financed by taxation in one form or another.

Federal Job Guarantee and Minimum Wage

Kelton explains:

The federal government announces a wage (and benefit) package for anyone who is looking for work but unable to find suitable employment in the economy. Several MMT economists have recommended that the jobs be oriented around building a care economy ... the federal government would commit to funding jobs that are aimed at caring for our people, our communities, and our planet.... Since the market price of an unemployed worker is zero ... the government can create a market for these workers by setting the price it is willing to pay to hire them. Once it does, involuntary unemployment disappears. Anyone seeking paid employment has guaranteed access to a job at a rate of remuneration established by the federal government. This sounds great: involuntary unemployment eliminated and everyone willing to work gets a high federal minimum wage or more, to the extent that market wages are forced higher to compete. But hold on. If it is such a good idea, why not raise the minimum wage beyond the $15 an hour she suggests? Why not $30 an hour? Or $50? The problem is that there are a raft of jobs that are profitable to provide at existing wages but would disappear at higher wages. (1) It is not just the existing unemployed who would end up on federal payrolls but these newly unemployed too, and many of their employers. Think of the restaurant sector. That sector and others in the same position could only survive by hiking their prices: dining out would become a lot dearer. Ordering in, too. The federal government, the employer of last resort, would find itself with the problem of what to do with all these people also turning up for guaranteed jobs. The feds would have crowded out much of the labor market and wiped out the lower paid sectors of the economy.

Uncle Sam's Printing Press

"Why does the financing have to come from Uncle Sam?" asks Kelton. "Simple. He can't run out of money." Imagine that the government pays debts coming due by handing over dollar bills that it has in a chest in the basement. If it runs out of bills, then it will default the next time a payment comes due. But then imagine if it can also print money. If it runs out of bills, it can avoid default when the next payment comes due by printing more. It does not follow, however, that the government can always meet its payment obligations by printing more money.

Suppose the...