One does not open an economics book with the expectation that the ideas will be world changing. But by introducing lay people to Modern Monetary Theory, Professor Stephanie Kelton’s The Deficit Myth may indeed rock our assumptions about how our economy works.
MMT is a revolutionary proposition about the nature of money, government spending, deficits and taxes. One of the most important takeaways from the book concerns deficit spending, which happens whenever the government spends more than it collects in taxes.
Traditional economics views government spending like a household. A household can’t deficit spend over the long term — it can’t spend more than it earns. With this in mind, politicians on both sides of the aisle warn of the dangers of the growing national debt, where government continues to spend far more than it takes in. These people are often called the “adults in the room.”
Kelton — who teaches at Stony Brook University, studied at Cal State Sacramento and is a former advisor to Bernie Sanders — argues it is a myth that a country with a “sovereign currency” should view itself like a household. Why? Because the government can print money, something that no household can do.
This is not to say there is no danger in government deficits. MMT agrees with traditional economics that a deficit can be too large — but it uses a very different measure of what is too large. And under this view, the US has plenty of room to deficit spend. We are like someone sitting in Ferrari who believes they are sitting in a golf cart so they only drive 10 miles per hour, and don’t take advantage of the Ferrari’s capabilities.
MMT is politically agnostic in the sense that it doesn’t matter whether the additional spending is used for “guns or butter.”
But MMT is inherently more attractive to — and popular among — the Left because one of its most important policy proposals is a Federal jobs guarantee.
The ultimate reason economists worry about deficit spending is that it can trigger inflation.
MMT argues the best way to control inflation is for the government to provide employment to anyone who wants a job and can’t find one, a program that would be federally funded but administered at the local level.
Spending on the jobs program would increase when unemployment is high, which is exactly the point in an economic cycle when the government can afford to spend more, as the risk of inflation is low when a lot of people are out of work and have less money to spend. In contrast, when unemployment is low and demand for goods and services is higher, the government spends less, which is the proper anti-inflation response in this situation.
The jobs guarantee is an elegant example of ‘killing two birds with one stone’ — a policy that tames inflation while at the same time alleviating the suffering of millions of Americans.
Currently, the Federal Reserve does take steps to stop inflation if unemployment gets too low. Traditional economists believe there is a ‘natural rate of unemployment’ and if the rate gets lower than the natural rate there will be inflation. Although no one can say exactly what the number is, it’s assumed to be about 4 to 5% .
But MMT economists believe the economy can experience full employment and that the jobs guarantee would ensure that it happens — without excess inflation. Millions of people sit home in the depressing situation of being without a job because of economic theories that direct the Fed. These people, Kelton argues, could have a job if MMT were adopted.
The ability to spend more while using a jobs guarantee to help control inflation is the most significant aspect of MMT in my view. Kelton discusses many other dimensions of the theory, though, including the nations to which MMT best applies, the reason a government should tax and why trade deficits are beneficial.
I am not an economist, and some may question whether a non-economist should review a book like this. But this book is aimed at a lay audience — those with an interest in economics but with no formal education.
MMT is a called a “heterodox” theory, so it’s out of the mainstream. Of course, it’s a relatively new idea so that is not surprising. MMT challenges some of the basic assumptions of most economists, and many — though not all — economists disagree with Kelton.
But much has been written regarding how economics can often be an inexact science, and there are strong camps who disagree on fundamental economic concepts. Sometimes economic arguments are similar to religious arguments in that contrary basic tenets make it impossible for the parties to agree.
After reading this book, I am convinced the benefits of MMT make it worth serious consideration. Gaining acceptance among economists, politicians and policy makers, and ultimately by the voting public will be difficult. Kelton’s book provides a good step in that direction.
Rob Merker received a PhD in philosophy after retiring as a real estate investor/developer. He teaches and speaks about ethical issues, and he is on the board of Bay City News Foundation. He can be reached at dr.rob.merker@gmail.com