The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy Hardcover – June 9, 2020

Back after the 2008 crisis, I had lost my job and was sitting around unemployed and I started to get interested in economics for the first time in my life. The reason was that for all my life to that point the broader economy had not really broken down during my lifetime. I had long considered myself a Marxist from the experience of being a worker at the point of the spear in the service economy. In food service you see the menu price and you know your price and there’s a huge discrepancy between the two.I had a sense that in the shadow of that crisis that we were bounded by only being to push at the edge of the status quo. The bailouts, both TARP and ARRA were real money that had to be paid back, so the democratic-led government in 2010 and through pressure from their political opponents, started to roll back the funding that was on offer through the state. “Austerity” was the name of the game and big debts were scary and more important than the mass of Americans who were still without jobs in the economy that had been showing “green shoots” every quarter for 18 months.I was unemployed and reading as much as I could about economics and especially the crisis. There were scores of books written by commentators and economists trying to get their hands around just what happened and why it happened. But it was not the first crisis. I eventually found myself making my way through Keynes and Minsky – with some understanding but not 100% of it. Keynes had some integrals I just skipped over and hoped that he was explaining all of them in the text. It was during this time that I came up with what I thought was a fairly novel idea that the household metaphor that politicians used was completely wrong. The government lives forever, I said, and it creates money. A worker is constrained in the money they have and the only way to get more is to work more even if the can temporarily increase their spending by borrowing they eventually have to pay it off (or pass down the debt once they die). I created an imaginary currency called “EdgarBucks” and knew my biggest problem was making sure that people accepted these “EdgarBucks”.My insight about the fallacy inherent in the household fallacy was not novel it seems. While politicians and many economists talked about spending money being the constraint, there was a then little-known school of thought who had fleshed out the idea that money is not the constraint in the economy, but real resources are that constraint. You cannot run out of money if you are a currency issuer, but you can run out of factories. It brings to mind Keynes looking at idle workers and idle factories and realizing that you can have suboptimal equilibria where resources are underutilized. But what this little-known school of thought had done was flesh out that idea, and it has a name – Modern Monetary Theory (MMT).The basics of MMT are that the real constraints are the real economy and in the book Professor Kelton works through the implications of the idea that money is more a record keeping device than some sort of fetishized commodity through simple, easy to understand metaphors. What is dangerous through the world as described through MMT is inflation and not debt, and the way to pull that back is to increase taxation. Also embedded in the structure is a call for a Job Guarantee to make sure that people have and can spend money. I personally am not for a Job Guarantee but lean more towards a Basic Income, but that is outside the realm of this review but I think within the realm of possible debates, so MMT is not strictly dogmatic.I was receptive to the ideas of MMT because I was not a slave to the old orthodoxy and especially because I thought that the old orthodoxy was in a large part to blame for not preventing and not really being able to predict the crisis of 2008, I was ready to throw it all out and find an explanation for how capitalism worked and if possible how it could be made better for people if we were going to keep putting off the eventual worker’s revolution. MMT was, and still is centered on a couple of institutions like UMKC and Bard College in the US and has a couple of figureheads like Professor Kelton but also Warren Mosler and Scott Fullwiler. Despite this, MMT punches above its weight in policy discussion because it has many passionate adherents in both the blogosphere and on Twitter. It is, to me, also inherently commonsensical as we are not constrained by the amount of a shiny rock in the vaults of the Federal Reserve in New York or in Fort Knox.I was sitting, unemployed though the summer of 2011, smart and a hard worker and ready to be put to use so I could get money to pay my rent but no one was answering my applications. It was confounding and scary and just a total failure of policy because there were tens of thousands of people like me who wanted to work. But I was reading. The biggest problem for me when I was learning more about different economic schools in terms of learning about MMT was that there was no centralized place to start learning about it. People would talk about it in blog comments and you would ask where to go for more details and they would send you a link to a pdf or a self-published book on amazon and that did not inspire a lot of confidence. If someone was asking where to start to learn about Marxism you could point them to many different publishers who had put out versions of the Manifesto but this was like if the only resource available was Marxists dot org. What “The Deficit Myth” does is not just synthesize the ideas of MMT in a simple and easy to read format, but it also formalizes the school as something to be taken seriously by readers of levels. And for that reason, it is an especially important and necessary book.

Professor Kelton’s important book shows, in a very accessible manner, some basic economic truths which have been buried in an edifice of economic theory, supported by appeals to apparently common-sense but inappropriate analogies. These truths are the core propositions of what is know as Modern Monetary Theory.The central truth that she demonstrates, is that government spending (in a country which issues its own currency) is not limited by its ability to tax or to borrow, as it is for an individual, or a household. The analogy of the Government needing to balance its books, just like any family, is deeply ingrained in political and common discourse. Anybody unconvinced of the lack of limits on government simply needs to look at the response to the Covid-19 crisis in the United States. If it had been suggested before the crisis that the Government could just mail out checks to the whole population, we would have been told that it was impossible and unaffordable. Clearly it was not impossible. It just required Congress to authorize it. There was no debate about how it would be financed, because there was no need.As a corollary to the proposition that government spending is not limited by its ability to tax or borrow, Professor Kelton argues that a deficit is not, in itself, evidence of overspending. As a professional economist, I can already hear the cries of many colleagues that this is magical thinking that implies that the government can spend whatever it wants in violation of its intertemporal budget constraint. This is not what is being suggested. The issue is whether the total of desired government spending and desired private spending exceed the productive resources of the economy. If they do exceed this limit, particularly in a relatively closed economy such as the United States, inflation will be the result. There is however, no direct relationship between inflation and the government deficit. Thus, she is not arguing that the Government can spend without limit, merely that the limit is defined by the capacity of the economy, and attempts to go beyond that limit will result in inflation.The next basic truth that Professor Kelton demonstrates is that the national debt is not a burden. It does not have to be repaid, as it is the counterpart to the net acquisition of financial assets by the private sector. Without a public deficit and a public debt, the private sector cannot collectively hold financial assets. Attempts to actively reduce the public debt through budget surpluses forces the private sector to reduce its assets or increase its borrowing, and eventually result in crises of private sector indebtedness.One of the central arguments of the book is that a political discourse which focuses on avoiding deficits kills debate on policies to address the real deficits: the good jobs deficit, the education deficit, the health deficit, the infrastructure deficit, and the climate deficit. Policies are disqualified as unaffordable or politically impossible, before they can be seriously examined. Fear of deficits and debt has been used as a means to argue against reforms which address the real deficits in society.Professor Kelton presents a coherent case that these real deficits can be addressed by public policy, and that “finance” is not the problem. Perhaps the most important proposal is the idea of an Employment Guarantee, whereby the Government guarantees a public service job (delivering useful services or building infrastructure for example), to all those who cannot find jobs in the private sector. If implemented this would mean that the private sector would be contracting not from a demotivated reserve army of unemployed with poor skills, but from a pool of employed workers. The reduction in lives wasted and opportunities lost, in addition to the increased productivity of the economy, would be enormous. Many details would need to worked out to ensure good management and governance of such a scheme, but it should not be dismissed as financially impossible.The ideas in this book are not difficult, but they do seem to go against much of what both professional economists and non-economists believe to be common-sense. In the words of Keynes, in his preface to the General Theory of Employment Interest and Money, “The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.” The irony is that many of the new ideas in this book are rooted in precisely the new ideas that Keynes was advocating. These ideas have been lost and urgently need to be recovered. For this reason, Professor Kelton’s book is so important and valuable.