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The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy
A New York Times Bestseller
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.
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.
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.
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.
327 pages, Hardcover
First published June 9, 2020
About the author
Stephanie Kelton
14 books238 followersStephanie Kelton is an American economist and academic. She is currently a professor at Stony Brook University and was formerly a professor University of Missouri–Kansas City.
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April 10, 2020
We’ve wasted a century looking at government as if it were a family or a business. It isn’t. As the monopolist controlling American currency, the government doesn’t ever have to worry about running out of money. It can always fund social security and Medicare, and many other programs besides. Instead of fiscal deficits, we should be looking at the deficits in society, because we can do everything to alleviate them with our currency power and expanded deficits. This is the essence of the powerfully shocking The Deficit Myth, economist Stephanie Kelton’s book on Modern Monetary Theory.
Written without a mathematical formula or spreadsheets to bamboozle the reader, this most readable book lays out how America came to this point, and how very much more it could do for itself if it would just open its eyes to it.
Kelton is a proponent of Modern Monetarist Theory, MMT. She learned from Warren Mosler, who pieced it together over a lifetime of observations. She has been researching and speaking about it for decades, with little evidence of success.
Kelton says America does not use and does not need taxes to fund its operations. Taxes simply create demand for the sovereign currency. All Americans need dollars to pay taxes at all levels. Without that necessity, no one would care for American money. Taxes do allow governments to provision themselves without the use of force, she says. But if the government manufactures the currency, it doesn’t need the tax money to operate day to day. It just creates dollars as it goes. That’s how it works today, and taking things to the next level would create wealth and comfort for all.
Here’s the part that requires rewiring brains: Fiscal surpluses suck money out of the economy. If surpluses persist for too long, eventually the economy will hit a wall, she says. Less money circulating means slower business, and added debt for non-government entities, which they can’t pay off. In six major recessions, each was preceded by a period of balanced budgets.
If surpluses take money out of taxpayers’ hands, fiscal deficits spread the wealth outside the government to the private sector and to other countries. (Instead, current wisdom says government sending crowds out other investment.) Deficits naturally drive interest rates to zero, she says. While not an MMT economist, I learned this the hard way (is there any other) in the 2008 financial crisis. When the Fed pumped a then incredible seven trillion dollars into the economy by magically creating new dollars it handed out to banks, I reasonably figured this would dilute the currency and cause it to fall. Interest rates should therefore rise dramatically, because US money would be worth so much less. You can’t suddenly print seven trillion additional dollars without it affecting the currency, I believed.
History shows the dollar has gone only one way – up, and interest rates have gone only one way – down. This is Alice in Wonderland, unfathomable and upside down. But it’s the way things really work, not the way things are taught. Our lying eyes are all that keep us from the safety, security and prosperity that the world’s most powerful currency provides in the form of expandable deficits.
It didn’t always work this way. History demonstrates how constrained the country was under the gold standard, when money could only be issued if there was gold stored somewhere to back it. It made growth minimal, and recessions frequent. (It’s why kings of olde had to borrow from international financiers to fund their wars.) American banks used to issue their own dollars, and when they failed, the money disappeared. FDR broke away from the gold standard and Nixon killed it, freeing the Fed, which was only invented in 1913, to manipulate the dollar and interest rates as needed. The Fed was given the monopoly.
The Fed has since learned it can inflate its own balance sheet without damaging the economy, which seems to have never occurred to anyone before. Or they would have used it instead of struggling with outdated tools in every recession. Monetarists claimed to be able to manage the economy and deficits by throttling or increasing the money supply. Fed Chairman Alan Greenspan thought unfettered capitalism would allow him to sit on the sidelines and watch the economy grow controllably forever. This creeping evolution of fiscality also incorporates monopoly power over the currency, but pathetically, no government has taken advantage of that power except in crisis.
It’s not just the budget deficit, Kelton says. The trade deficit is only a negative factor if the government’s fiscal deficit is smaller than the trade deficit. Otherwise it is harmless. The business of the trade deficit shrinking the economy is a leftover from the gold standard constraints. The trade deficit not only loudly proclaims the wealth of the USA, but provides US dollars to exporting partners, raising their standard of living as well as America’s. Focusing on reducing the trade deficit is not only a waste of time, it is harmful, as tariffs hurt American exporters, importers, producers and consumers alike. It is tariffs that shrink economies, not trade deficits.
All federal spending is done the same way – the Fed credits the appropriate bank accounts. Gold is not shipped, nor are hundred dollar bills. It’s all done on a keyboard at the New York Federal Reserve. Nobody waits for taxes to be paid first. It’s the same in most countries that have their own currencies. So Japan and the UK operate the same way, and could use their currencies to boost everyone if they chose to.
Countries that are users don’t have that power. The most notable mess that creates can be seen in Europe, where euro nations cannot print their own money. Ironically, the euro itself is a solid candidate for enlarging fiscal deficits for the good of all, but the European Central Bank is totally unwilling, so the power goes unused, and all the countries suffer the austerity of trying to keep their deficits within 3% of GDP. With the coronavirus pandemic, they are desperate to spread some wealth, but they can’t. And America is afraid to do more than send a small check to everyone – one time only.
Finally in 2015, Kelton was invited to be the chief economist for Democrats on the Senate Budget Committee. She was invited, almost of course, by Bernie Sanders, one of the few who gets it. Deficit spending has the power to change government completely, and by extension, the lives of all its citizens. And all at no additional cost. It is, or should be, the privilege of being American. But Democrats are as hard a sell as Republicans.
Kelton knew she would have a hard time on the Senate Budget Committee, and she was right. Getting this message through the skulls of senators who were elected on budget slashing and deficit reduction platforms is no small task. Kelton and Mosler demonstrated the near impossibility with a Congressman.
She and Mosler called in a favor and met for an hour with a member of Congress. He squirmed uncomfortably at the facts they presented, until 45 minutes in, when the light suddenly came on. He got it. But he said he could never say it himself. He couldn’t be the voice of reason, the man with the solution, who stood out from the consensus (even if the consensus was clearly taking the country in the wrong direction). He would rather fit in and live the lie. Is there anything else voters need to know about their political parties?
Kelton says: balance the economy, not the budget. The fiscal deficit is not nearly as critical as the welfare deficit, the healthcare deficit, the education deficit, the infrastructure deficit…. Medicare for all would not bankrupt the country, it would free up trillions to be spent on other things, saving many individuals from personal bankruptcy and others from death. It would boost the economy.
There is risk in spending more freely. The biggest risk is inflation. The economy must be monitored to ensure the spending doesn’t exceed the country’s capacity to produce. That would create an inflationary spiral, cheapening the currency and causing interest rates to rise.
So leaving the spending part in the hands of the politicians is not viable. Kelton calls for an automated response, like unemployment insurance, which expands in hard times and contracts in good times, without interference from Capitol Hill. She prescribes a guaranteed federal job. Anyone who wants a job could work for the government at a livable wage, with benefits. This allows them to keep looking for other work while gainfully employed, a huge advantage. It lets the government build out infrastructure, community works, hospitals – anything that needs people power. And it keeps everyone employed. Because one of the more idiotic aspects of they way things run now is the NEED for unemployed people.
The Fed maintains there is a natural level of unemployment which varies with inflation. In order to maintain proper inflation, the Fed wants to see a certain percentage unemployed. So America has never had real full employment, because it thinks that is bad. Some Americans need to suffer if the country is to prosper, is their modus operandum. Kelton says an “automatic stabilizer” of a guaranteed federal job will do far more for the economy and keep it going right, producing at full capacity.
I was surprised she didn’t go farther and discuss a universal basic income, which has not only shown to stimulate business and lower poverty, but is also profitable to the government because all the entitlement programs would go away, with all of their applications, interviews, investigations, denials, prosecutions, appeals and bureaucracies. Maybe next book.
The USA will stay mired in the doom and gloom of the current recession only because its leaders want to, not because it has to. There should be some advantage to being an American, and not have to suffer to the same extent as countries that don’t have powerful currencies. Expanding the budget deficit costs nothing and grows the economy positively. For all the decades of crying that deficits hamstring our children, no one is suffering from the record of deficits of World War II or Vietnam or the Reagan ballooning. The truth is federal deficits are not only good, they are important tools, and yet, we fight to avoid them.
I can’t imagine a more exquisitely timed book. Just when the coronavirus pandemic has destroyed much of the economy, as unemployment soars, millions are behind on rent or mortgages, the government is fumbling around with squirts of help here and there, and mostly for giant corporations (again). Now is clearly the time for MMT to shine. A universal basic income will clearly not only not hurt the economy, it will demonstrably rev it up. A guaranteed federal job would do the same for working age Americans. Not using this no-cost advantage is criminal.
The Deficit Myth is about the most hopeful book you can read right now. The more people who understand this, the sooner America can regain its world-beating stature.
David Wineberg
Written without a mathematical formula or spreadsheets to bamboozle the reader, this most readable book lays out how America came to this point, and how very much more it could do for itself if it would just open its eyes to it.
Kelton is a proponent of Modern Monetarist Theory, MMT. She learned from Warren Mosler, who pieced it together over a lifetime of observations. She has been researching and speaking about it for decades, with little evidence of success.
Kelton says America does not use and does not need taxes to fund its operations. Taxes simply create demand for the sovereign currency. All Americans need dollars to pay taxes at all levels. Without that necessity, no one would care for American money. Taxes do allow governments to provision themselves without the use of force, she says. But if the government manufactures the currency, it doesn’t need the tax money to operate day to day. It just creates dollars as it goes. That’s how it works today, and taking things to the next level would create wealth and comfort for all.
Here’s the part that requires rewiring brains: Fiscal surpluses suck money out of the economy. If surpluses persist for too long, eventually the economy will hit a wall, she says. Less money circulating means slower business, and added debt for non-government entities, which they can’t pay off. In six major recessions, each was preceded by a period of balanced budgets.
If surpluses take money out of taxpayers’ hands, fiscal deficits spread the wealth outside the government to the private sector and to other countries. (Instead, current wisdom says government sending crowds out other investment.) Deficits naturally drive interest rates to zero, she says. While not an MMT economist, I learned this the hard way (is there any other) in the 2008 financial crisis. When the Fed pumped a then incredible seven trillion dollars into the economy by magically creating new dollars it handed out to banks, I reasonably figured this would dilute the currency and cause it to fall. Interest rates should therefore rise dramatically, because US money would be worth so much less. You can’t suddenly print seven trillion additional dollars without it affecting the currency, I believed.
History shows the dollar has gone only one way – up, and interest rates have gone only one way – down. This is Alice in Wonderland, unfathomable and upside down. But it’s the way things really work, not the way things are taught. Our lying eyes are all that keep us from the safety, security and prosperity that the world’s most powerful currency provides in the form of expandable deficits.
It didn’t always work this way. History demonstrates how constrained the country was under the gold standard, when money could only be issued if there was gold stored somewhere to back it. It made growth minimal, and recessions frequent. (It’s why kings of olde had to borrow from international financiers to fund their wars.) American banks used to issue their own dollars, and when they failed, the money disappeared. FDR broke away from the gold standard and Nixon killed it, freeing the Fed, which was only invented in 1913, to manipulate the dollar and interest rates as needed. The Fed was given the monopoly.
The Fed has since learned it can inflate its own balance sheet without damaging the economy, which seems to have never occurred to anyone before. Or they would have used it instead of struggling with outdated tools in every recession. Monetarists claimed to be able to manage the economy and deficits by throttling or increasing the money supply. Fed Chairman Alan Greenspan thought unfettered capitalism would allow him to sit on the sidelines and watch the economy grow controllably forever. This creeping evolution of fiscality also incorporates monopoly power over the currency, but pathetically, no government has taken advantage of that power except in crisis.
It’s not just the budget deficit, Kelton says. The trade deficit is only a negative factor if the government’s fiscal deficit is smaller than the trade deficit. Otherwise it is harmless. The business of the trade deficit shrinking the economy is a leftover from the gold standard constraints. The trade deficit not only loudly proclaims the wealth of the USA, but provides US dollars to exporting partners, raising their standard of living as well as America’s. Focusing on reducing the trade deficit is not only a waste of time, it is harmful, as tariffs hurt American exporters, importers, producers and consumers alike. It is tariffs that shrink economies, not trade deficits.
All federal spending is done the same way – the Fed credits the appropriate bank accounts. Gold is not shipped, nor are hundred dollar bills. It’s all done on a keyboard at the New York Federal Reserve. Nobody waits for taxes to be paid first. It’s the same in most countries that have their own currencies. So Japan and the UK operate the same way, and could use their currencies to boost everyone if they chose to.
Countries that are users don’t have that power. The most notable mess that creates can be seen in Europe, where euro nations cannot print their own money. Ironically, the euro itself is a solid candidate for enlarging fiscal deficits for the good of all, but the European Central Bank is totally unwilling, so the power goes unused, and all the countries suffer the austerity of trying to keep their deficits within 3% of GDP. With the coronavirus pandemic, they are desperate to spread some wealth, but they can’t. And America is afraid to do more than send a small check to everyone – one time only.
Finally in 2015, Kelton was invited to be the chief economist for Democrats on the Senate Budget Committee. She was invited, almost of course, by Bernie Sanders, one of the few who gets it. Deficit spending has the power to change government completely, and by extension, the lives of all its citizens. And all at no additional cost. It is, or should be, the privilege of being American. But Democrats are as hard a sell as Republicans.
Kelton knew she would have a hard time on the Senate Budget Committee, and she was right. Getting this message through the skulls of senators who were elected on budget slashing and deficit reduction platforms is no small task. Kelton and Mosler demonstrated the near impossibility with a Congressman.
She and Mosler called in a favor and met for an hour with a member of Congress. He squirmed uncomfortably at the facts they presented, until 45 minutes in, when the light suddenly came on. He got it. But he said he could never say it himself. He couldn’t be the voice of reason, the man with the solution, who stood out from the consensus (even if the consensus was clearly taking the country in the wrong direction). He would rather fit in and live the lie. Is there anything else voters need to know about their political parties?
Kelton says: balance the economy, not the budget. The fiscal deficit is not nearly as critical as the welfare deficit, the healthcare deficit, the education deficit, the infrastructure deficit…. Medicare for all would not bankrupt the country, it would free up trillions to be spent on other things, saving many individuals from personal bankruptcy and others from death. It would boost the economy.
There is risk in spending more freely. The biggest risk is inflation. The economy must be monitored to ensure the spending doesn’t exceed the country’s capacity to produce. That would create an inflationary spiral, cheapening the currency and causing interest rates to rise.
So leaving the spending part in the hands of the politicians is not viable. Kelton calls for an automated response, like unemployment insurance, which expands in hard times and contracts in good times, without interference from Capitol Hill. She prescribes a guaranteed federal job. Anyone who wants a job could work for the government at a livable wage, with benefits. This allows them to keep looking for other work while gainfully employed, a huge advantage. It lets the government build out infrastructure, community works, hospitals – anything that needs people power. And it keeps everyone employed. Because one of the more idiotic aspects of they way things run now is the NEED for unemployed people.
The Fed maintains there is a natural level of unemployment which varies with inflation. In order to maintain proper inflation, the Fed wants to see a certain percentage unemployed. So America has never had real full employment, because it thinks that is bad. Some Americans need to suffer if the country is to prosper, is their modus operandum. Kelton says an “automatic stabilizer” of a guaranteed federal job will do far more for the economy and keep it going right, producing at full capacity.
I was surprised she didn’t go farther and discuss a universal basic income, which has not only shown to stimulate business and lower poverty, but is also profitable to the government because all the entitlement programs would go away, with all of their applications, interviews, investigations, denials, prosecutions, appeals and bureaucracies. Maybe next book.
The USA will stay mired in the doom and gloom of the current recession only because its leaders want to, not because it has to. There should be some advantage to being an American, and not have to suffer to the same extent as countries that don’t have powerful currencies. Expanding the budget deficit costs nothing and grows the economy positively. For all the decades of crying that deficits hamstring our children, no one is suffering from the record of deficits of World War II or Vietnam or the Reagan ballooning. The truth is federal deficits are not only good, they are important tools, and yet, we fight to avoid them.
I can’t imagine a more exquisitely timed book. Just when the coronavirus pandemic has destroyed much of the economy, as unemployment soars, millions are behind on rent or mortgages, the government is fumbling around with squirts of help here and there, and mostly for giant corporations (again). Now is clearly the time for MMT to shine. A universal basic income will clearly not only not hurt the economy, it will demonstrably rev it up. A guaranteed federal job would do the same for working age Americans. Not using this no-cost advantage is criminal.
The Deficit Myth is about the most hopeful book you can read right now. The more people who understand this, the sooner America can regain its world-beating stature.
David Wineberg
September 30, 2020
Deficits can be used for good or evil.
Robert Skidelsky, in his enormous biography of Keynes, remarks that economics today occupies the same position as theology did in the Middle Ages—as a complex a priori logic that can be used to reach any number of contradictory conclusions. The more I read in the subject, the more I agree with him. To be taken seriously in politics means being able to use this logic. And yet, despite the seemingly scientific nature of this language, we seem hardly better able to pinpoint the nature of economic reality than the scholastics were able to count the angels.
I am exaggerating, of course. But I am a little distressed to find that, according to Stephanie Kelton, most economists and politicians—who already disagree with one another—are still fundamentally wrong about money, taxes, fiscal policy, and government debt. Here is another perspective to add to the mix: Modern Monetary Theory, or MMT.
Kelton begins the book by taking a page right out of David Graeber’s history of debt. Money was not invented, as so often supposed, to solve the problems of a barter economy. Instead, money and taxes go hand in hand. The argument goes like this: If you introduce a currency into a fully functioning credit economy (where people just keep track of what is owed to one another), then there is little reason why people would adopt it. But if you institute a tax payable only in this currency, and threaten punishment for non-payment, then suddenly everyone must find a way to acquire the new currency, and this means doing some work for the state.
In other words, governments introduced taxes, not to collect money (which it was producing anyway) but to compel work. And Kelton argues that this is still true today: that governments do not depend on taxes. She uses the example of a scorekeeper in a board game. The scorekeeper adds and subtracts points for other players, but they are never in need of points for themselves. Points are simply willed into existence whenever needed. Kelton argues that the US government (and other governments with what she calls “monetary sovereignty”) is in essentially the same position with regard to the US dollar. Since we use a fiat currency, any number of dollars can be willed into existence. Thus, the government does not depend on tax revenue, any more than a scorekeeper must subtract points from other players in order to stay afloat. In short, we do not have to worry about the deficit, since government debt is nothing like the debt you or I may owe.
Does that mean that the government can just spend infinite money? No, Kelton says: though the deficit is not a problem, inflation may be. Too much government spending may lead to too many dollars chasing too few resources, which can cause prices to rise. Does that mean that taxes are unnecessary? Also no, according to Kelton, since, apart from compelling work, taxes perform at least two important functions. First, they remove money from circulating, thus decreasing inflationary pressure; and second, they reduce inequality, which leads to a healthier society. Yet if the government cannot spend infinitely, and if we still do need to tax, then what are we doing wrong?
To answer that, Kelton next turns her attention to unemployment. Kelton notes that unemployment is built into our economy, largely via the policies of the Federal Reserve. The Fed aims for an arbitrary level of unemployment (say, 3%) which it considers the “natural” rate. Going below this natural rate would, it is feared, cause inflation to kick in, since demand would outpace supply. But this “natural” rate is little more than a guess, Kelton argues. Even when unemployment has been very low in recent years, inflation has remained low. Indeed, in this argument Kelton seems to have been prescient, since just in August the Fed decided to change its policy of lifting interest rates once employment hits a certain level, thus paving the way for more sustained employment growth.
But Kelton has a fairly dim view of the prospects of using monetary policy to govern the economy. Instead, she thinks that unemployment should be directly eliminated using a Federal Jobs Guarantee. This is the main policy proposal of the book, and Kelton spends a good deal of time selling it. The advantages are compelling. Most obviously, unemployment is bad for people and communities, so it would be highly desirable to get rid of it. And a jobs guarantee would give workers more bargaining power, since the wage floor would rise (the jobs would pay a living wage) and the threat of losing work and health insurance would be eliminated.
Still, I admit that I was not convinced. For one, even according to MMT’s own premises, the huge increase in aggregate demand—caused by increased federal spending, eliminating unemployment, and increasing wages across the board—could cause inflation. Kelton does not really address this potential pitfall.
On a more practical level, I also have trouble imagining the logistics. Kelton describes a program that can employ anyone, anywhere, in socially meaningful jobs. But there is not necessarily the right amount of meaningful work in any given location, nor do the unemployed necessarily have the skills necessary to do this work (and re-training has its limits). I think that a substantial amount of make-work is inevitable in such a scheme. Furthermore, I can hardly contemplate the enormous bureaucracy that would be needed to administer such a program. It seems there would be just as many people making jobs as people needing jobs made for them.
The job guarantee’s major policy rival, universal basic income (UBI), has none of these practical challenges (though of course it could cause inflation, too), since it is merely paid via the IRS. Admittedly, jobs do provide social and psychological benefits that an income does not. But Kelton does not discuss UBI at all, which I thought disappointing.
At this point, the reader may be forgiven for wondering what is so new about MMT. After all, Paul Krugman—an orthodox Keynesian economist critical of MMT—has been writing for years about the mistake of thinking of the federal budget like a household budget, and the desirability of federal deficits in times of recession. The difference, so far as I understand it, brings us into dangerously wonky territory. Krugman avers that when we near full employment, a large deficit may require higher interest rates in order to avoid inflation. Kelton counters that our assumptions that low interest rates boost spending, and higher interest rates constrict spending, are actually incorrect. In other words, Krugman thinks that monetary policy can partly compensate for fiscal policy, while Kelton thinks that monetary policy is not particularly useful.
I have little to add to this, other than to remark that I can never understand why these disputes—like theology—always take the form of high theoretical debates from first principles. It strikes me that the impact of monetary policy is an empirical question that could be answered with a careful look at the historical record. But what do I know?
Well, I have done my best to elucidate this sacred mystery, but I ought to evaluate the book. Like many readers, I found the writing in this book extremely grating. The tone was somewhere between a salesperson and a televangelist—promising instant enlightenment and easy solutions—which immediately put me on edge. In fairness, when Kelton is not selling MMT but explaining it, the book can be quite fascinating. But Kelton’s insistence on treating MMT as blindingly true, and its enemies as either blinkered traditionalists or deceptive politicians, was not charming or effective. And the amount of repetition could even be condescending. By the time I reached the end, I really could not stand to hear another iteration of the central tenets of MMT. I got it the first couple times.
Whatever the flaws of the book, and whether or not MMT is an accurate picture of how the economy works, it at least makes you think about how the deficit is treated in public discourse. Anyone who reads the news cannot help but notice that the swelling deficit is only invoked when we have to pay for, say, healthcare or infrastructure; but, somehow, when tax cuts to the wealthy or defense spending are on the table, nobody seems to worry. Even if the deficit presents more of a problem than Kelton believes, it is obvious that, if anything is worth going into debt for, it is programs that benefit the public, rather than bombs or yachts. I hope that followers of Keynes, MMT, Thomas Aquinas, and William of Ockham can at least agree with that.
June 24, 2020
I found this book annoying to read.
The central tenet of modern monetary theory (MMT) is that a monetarily sovereign government, like the United States and maybe a few more, creates currency and so cannot run out of it. In particular, deficits caused by spending in excess of taxation isn't inherently a problem, so long as the spending doesn't cause inflation, which isn't caused by excess currency but by a lack of real, physical resources and production to meet demand. This is definitely an interesting and very (initially) non-intuitive statement which seems like it would have far-reaching consequences.
My annoyance is that the book repeats this exact explanation maybe a hundred times over the course of the book, without (in my view) really developing it further. It feels like the book doesn't have a very high view of my intelligence and feels the need to really, really, really belabor the point.
But that's more stylistic. What about the argument itself? Do I believe that the (US) government can spend as it wishes, without even needing to tax the population at all except as an anti-inflationary tool? I can't say that I completely do. Reading the argument feels very much like looking at a mathematical proof you've spent ages on and convincing yourself that actually there's a much simpler approach which totally avoids all the work - why didn't you think of it earlier? In math, it's usually - but not always - that you did and it was wrong. So I was very disappointed to find the book not really address this: why is MMT such a non-standard idea in economics? In fact, the book regularly implies that all the non-MMT economists are a bunch of idiots who can't see what's staring them in the face, which is something I found hard to accept at face-value from a MMT book.
Partly because the book feels the need to tell you that the government is the currency-issuer and not the currency-spender every other page, it doesn't get around to elaborating in enough detail about the other things. For example, the book also proposes that the government provide guaranteed employment to all, at a federally set minimum wage (say $15/hour); when people lose a private sector job, they could get absorbed into one of these jobs, thus keeping them off of unemployment. Paying the wages won't be a problem because the government can just create the money. But how would this actually work? Won't it be colossally difficult to match people from all sorts of industries to work which they actually know how to do? If the workers are envisioned to only spend a couple months on the government job before returning to other employment, how will they have time to learn skills on the job? How will they be able to organize into unions to apply pressure for better conditions? Maybe I'm uninformed, but it seems foolish to expect any employer, including the government, to improve worker conditions with no worker pressure. In any case, there are a lot of details that it would have been interesting to see discussed, but we get none of it.
In the same way, it would have been interesting if the book explored some of the consequences of the basic thesis. For example, in my view, the argument that the rich should pay taxes because the money is needed to provide welfare services for all is rhetorically much more powerful than saying that the government could provide welfare whenever it decides to, it just hasn't yet, and we should tax the rich just as an anti-inflationary tool and also because we think inequality is bad for other reasons. It might be true; it just doesn't have the rhetorical power, because it weakens the connection between the rich and the poor as being members of the same society who must share the society's resources.
Similarly, in my view, saying the government has the awesome power to create money as it wants weakens the notion of the government as an agent of the people. In the old view where taxation is the source of government spending, there is a sense that the people work together to direct their collective energy through their taxes; one way people chip in to the collective endeavor is by paying their taxes. But if the government has the superpower of spending whatever it likes, the balance seems to shift: the government is doing various things, and we the people do not have a materially contributory role. Of course, this isn't strictly true because people can still vote and engage in democracy in other ways; but the rhetorical connection is still weakened compared to the old perspective. Or maybe some other notion can take its place: possibly, make the role of a vote and representation more fundamental than taxation ("representation without taxation!"). Whatever the alternatives may be, they have to be alternative and they have to be new, and so they need to be developed and discussed. It doesn't happen in this book.
Talking about these sort of things would have pulled the book slightly away from strict economics and into politics, where the idea that there is a right answer is even more doubtful. But the world doesn't care about those academic boundaries, and I wish the book had taken a broader view, combined with a more optimistic view of the intelligence of its readers.
(And I haven't even talked about how the book essentially ignores the question of every country out there which is not monetarily sovereign like the US or needs to have dollars on hand to pay for imports. The book devotes less than five pages to this important aspect, and in those five pages basically says that modern capitalism, World Bank, IMF, etc. have screwed over the poor countries and that sucks. Unclear how MMT will help. It felt a little ridiculous that so little energy was spent on so much of the world, especially since the introduction promised to talk about it, and also ridiculous how shallow the prescription was.)
A critique of MMT itself (not of this book, though many of the criticisms still land) by one much more knowledgeable than me is at https://jacobinmag.com/2019/02/modern..., and a primer on MMT at https://www.vox.com/future-perfect/20.... Shorter, and you'll learn most of everything you would from the book.
The central tenet of modern monetary theory (MMT) is that a monetarily sovereign government, like the United States and maybe a few more, creates currency and so cannot run out of it. In particular, deficits caused by spending in excess of taxation isn't inherently a problem, so long as the spending doesn't cause inflation, which isn't caused by excess currency but by a lack of real, physical resources and production to meet demand. This is definitely an interesting and very (initially) non-intuitive statement which seems like it would have far-reaching consequences.
My annoyance is that the book repeats this exact explanation maybe a hundred times over the course of the book, without (in my view) really developing it further. It feels like the book doesn't have a very high view of my intelligence and feels the need to really, really, really belabor the point.
But that's more stylistic. What about the argument itself? Do I believe that the (US) government can spend as it wishes, without even needing to tax the population at all except as an anti-inflationary tool? I can't say that I completely do. Reading the argument feels very much like looking at a mathematical proof you've spent ages on and convincing yourself that actually there's a much simpler approach which totally avoids all the work - why didn't you think of it earlier? In math, it's usually - but not always - that you did and it was wrong. So I was very disappointed to find the book not really address this: why is MMT such a non-standard idea in economics? In fact, the book regularly implies that all the non-MMT economists are a bunch of idiots who can't see what's staring them in the face, which is something I found hard to accept at face-value from a MMT book.
Partly because the book feels the need to tell you that the government is the currency-issuer and not the currency-spender every other page, it doesn't get around to elaborating in enough detail about the other things. For example, the book also proposes that the government provide guaranteed employment to all, at a federally set minimum wage (say $15/hour); when people lose a private sector job, they could get absorbed into one of these jobs, thus keeping them off of unemployment. Paying the wages won't be a problem because the government can just create the money. But how would this actually work? Won't it be colossally difficult to match people from all sorts of industries to work which they actually know how to do? If the workers are envisioned to only spend a couple months on the government job before returning to other employment, how will they have time to learn skills on the job? How will they be able to organize into unions to apply pressure for better conditions? Maybe I'm uninformed, but it seems foolish to expect any employer, including the government, to improve worker conditions with no worker pressure. In any case, there are a lot of details that it would have been interesting to see discussed, but we get none of it.
In the same way, it would have been interesting if the book explored some of the consequences of the basic thesis. For example, in my view, the argument that the rich should pay taxes because the money is needed to provide welfare services for all is rhetorically much more powerful than saying that the government could provide welfare whenever it decides to, it just hasn't yet, and we should tax the rich just as an anti-inflationary tool and also because we think inequality is bad for other reasons. It might be true; it just doesn't have the rhetorical power, because it weakens the connection between the rich and the poor as being members of the same society who must share the society's resources.
Similarly, in my view, saying the government has the awesome power to create money as it wants weakens the notion of the government as an agent of the people. In the old view where taxation is the source of government spending, there is a sense that the people work together to direct their collective energy through their taxes; one way people chip in to the collective endeavor is by paying their taxes. But if the government has the superpower of spending whatever it likes, the balance seems to shift: the government is doing various things, and we the people do not have a materially contributory role. Of course, this isn't strictly true because people can still vote and engage in democracy in other ways; but the rhetorical connection is still weakened compared to the old perspective. Or maybe some other notion can take its place: possibly, make the role of a vote and representation more fundamental than taxation ("representation without taxation!"). Whatever the alternatives may be, they have to be alternative and they have to be new, and so they need to be developed and discussed. It doesn't happen in this book.
Talking about these sort of things would have pulled the book slightly away from strict economics and into politics, where the idea that there is a right answer is even more doubtful. But the world doesn't care about those academic boundaries, and I wish the book had taken a broader view, combined with a more optimistic view of the intelligence of its readers.
(And I haven't even talked about how the book essentially ignores the question of every country out there which is not monetarily sovereign like the US or needs to have dollars on hand to pay for imports. The book devotes less than five pages to this important aspect, and in those five pages basically says that modern capitalism, World Bank, IMF, etc. have screwed over the poor countries and that sucks. Unclear how MMT will help. It felt a little ridiculous that so little energy was spent on so much of the world, especially since the introduction promised to talk about it, and also ridiculous how shallow the prescription was.)
A critique of MMT itself (not of this book, though many of the criticisms still land) by one much more knowledgeable than me is at https://jacobinmag.com/2019/02/modern..., and a primer on MMT at https://www.vox.com/future-perfect/20.... Shorter, and you'll learn most of everything you would from the book.
Shelved as 'not-interested'
October 23, 2020I feel comfortable rating this book "of no possible interest" (to me) based on economist John Cochrane's review at the WSJ, aptly titled "Years of Magical Thinking": https://johnhcochrane.blogspot.com/20... To clarify: I haven't read the book, and don't plan to. But Cochrane's review makes interesting reading. He wasn't impressed. And he is a professional economist, albeit a right-wing one.
Like many of you, I'd vaguely heard of Modern Monetary Theory (aka Magical MT), but payed little attention to yet another economist's pipe dream. It turns out to be worse than I thought:
"Its central proposition states that the U.S. federal government can and should freely print money to finance a massive spending agenda, with no concern about debt and deficits." Whee!
Sadly, the lack of analytical rigor in Prof. Kelton's book is, well, remarkable. "In a book about money, the inflation of the 1970s and its defeat are astonishingly absent. ... If spending can be financed by printing money, “why not eliminate taxes altogether?” Kelton "criticizes Sens. Bernie Sanders and Elizabeth Warren for claiming that they need to raise taxes to pay for spending programs. But then why raise taxes? Taxes exist to decapitate the wealthy, not to fund spending or transfers: “We should tax billionaires to rebalance the distribution of wealth and income and to protect the health of our democracy.” Hmm.
"What about all the countries that have suffered inflation, devaluation and debt crises even though they print their own currencies? To Ms. Kelton, developing nations suffer a “deficit” of “monetary sovereignty” because they “rely on imports to meet vital social needs,” which requires foreign currency. ... The problem is that “the rest of the world refuses to accept the currencies of developing countries in payment for crucial imports.”
Imagine that!
Anyway, per reviewer Cochrane, the book devolves into an "immense list of left-wing spending policies ... If you could only feel her singular empathy for the downtrodden, if you could, as she does, view the federal budget as a “moral document,” if you could just close your eyes and need it to be true as much as she does, your “Copernican moment” will arrive. Logic and evidence will no longer trouble you." Heh. FAIL.
Like many of you, I'd vaguely heard of Modern Monetary Theory (aka Magical MT), but payed little attention to yet another economist's pipe dream. It turns out to be worse than I thought:
"Its central proposition states that the U.S. federal government can and should freely print money to finance a massive spending agenda, with no concern about debt and deficits." Whee!
Sadly, the lack of analytical rigor in Prof. Kelton's book is, well, remarkable. "In a book about money, the inflation of the 1970s and its defeat are astonishingly absent. ... If spending can be financed by printing money, “why not eliminate taxes altogether?” Kelton "criticizes Sens. Bernie Sanders and Elizabeth Warren for claiming that they need to raise taxes to pay for spending programs. But then why raise taxes? Taxes exist to decapitate the wealthy, not to fund spending or transfers: “We should tax billionaires to rebalance the distribution of wealth and income and to protect the health of our democracy.” Hmm.
"What about all the countries that have suffered inflation, devaluation and debt crises even though they print their own currencies? To Ms. Kelton, developing nations suffer a “deficit” of “monetary sovereignty” because they “rely on imports to meet vital social needs,” which requires foreign currency. ... The problem is that “the rest of the world refuses to accept the currencies of developing countries in payment for crucial imports.”
Imagine that!
Anyway, per reviewer Cochrane, the book devolves into an "immense list of left-wing spending policies ... If you could only feel her singular empathy for the downtrodden, if you could, as she does, view the federal budget as a “moral document,” if you could just close your eyes and need it to be true as much as she does, your “Copernican moment” will arrive. Logic and evidence will no longer trouble you." Heh. FAIL.
June 18, 2020
I've been following Stephanie Kelton for some time and I think she's one of the smartest people around. The ideas in here are worth reading for anyone sucked into the deficit myth--the idea that we have to "balance the budget" or that the government's budget works like a household. I really appreciate how Kelton covers not just how the US budget works, but also how people on the Hill engage in "pay for" hackery when they know full well that they can just spend but that they need to show the CBO that they are balancing the budget. I also appreciate how she covers what MMT means outside of the US--which is where my only beef with MMT comes from. To me, the whole thing relies on dollar supremacy and dollar supremacy relies on empire and weaponry. She talks a bit about that, but there could be a bit more there. Still, the book does the job fully and I hope more people take heed.
July 21, 2020
(a reminder: I'm NOT rating the MMT, but the book about MMT - there's a huge difference between these two)
I have a few significant problems with "The Deficit Myth":
1. The rhetorics are purely "American style" - which means: "if you repeat something 100 times, readers will treat it as truth, if you don't, they will forget it". Honestly, it felt like the author treats readers like idiots.
2. The initial 2 (or so) chapters were successful in presenting (in a very approachable way) the basics of fiscal policies, the role of taxation & why being a currency issuer is a game-changer. This is a big pro. But ... I had the impression that all the remaining chapters were doing nothing but reiterating what was already said earlier.
3. The author has repeated the difference between household budget mgmt & national budget mgmt 1000 times, but once she had to mention the impact of issuing the currency on inflation, she was always flying through the topics & never covering it in-depth ("just look at the unemployment level and things will be OK") - it's naive, it's an oversimplification and again - it feels like she treats readers as complete morons
I had expectations that this book will provide a lot of "food for thought". I didn't assume I'd need to agree with everything - that was not the point. But I didn't expect (especially after the initial chapters) that I'll actually find this book lacking valuable content.
Disappointment. Not recommended.
I have a few significant problems with "The Deficit Myth":
1. The rhetorics are purely "American style" - which means: "if you repeat something 100 times, readers will treat it as truth, if you don't, they will forget it". Honestly, it felt like the author treats readers like idiots.
2. The initial 2 (or so) chapters were successful in presenting (in a very approachable way) the basics of fiscal policies, the role of taxation & why being a currency issuer is a game-changer. This is a big pro. But ... I had the impression that all the remaining chapters were doing nothing but reiterating what was already said earlier.
3. The author has repeated the difference between household budget mgmt & national budget mgmt 1000 times, but once she had to mention the impact of issuing the currency on inflation, she was always flying through the topics & never covering it in-depth ("just look at the unemployment level and things will be OK") - it's naive, it's an oversimplification and again - it feels like she treats readers as complete morons
I had expectations that this book will provide a lot of "food for thought". I didn't assume I'd need to agree with everything - that was not the point. But I didn't expect (especially after the initial chapters) that I'll actually find this book lacking valuable content.
Disappointment. Not recommended.
March 24, 2021
This book begins from the seemingly radical premise that as long as a government can issue its own money it need not be concerned with running deficits and can spend as much as it deems fit until inflation starts signalling the need to slow down. Modern Monetarist Theory (MMT) of which Kelton is a proponent argues that demand for national currency is created by the initial act of money issuance and a subsequent requirement imposed on citizens to pay taxes in that currency. Taxes do not fund spending, MMT theorists argue, but are more like a release valve to reduce the total money supply and thereby cool off inflation. If true, these arguments would mean that the government can and should be spending much more on improving society and that concerns about large deficits are entirely misguided. Increasing taxes to pay for such things are not even necessary, since taxes don't fund spending and the alleged dangers of money printing are vastly overblown.
I'm open to these arguments and consider them well-intentioned but I didn't find that this book really substantiated many of its points. On one hand, if inflation is the only check on spending that tells us its time to rein it in or impose new taxes, we should really know what level we consider acceptable and have safeguards to protect against the most disastrous outcome of hyperinflation. If there is a model proposing how to know that I'd like to see it but this book does not provide one. Moreoever given the fact that the U.S. is the global reserve currency and billions around the world are forced to transact and save in it its unclear what potentially unlimited money spending in the U.S. might do to other countries and possibilities are not really discussed here. The book claims that it is not advocating a free lunch, which would be dangerous, and makes compelling points that we are underspending in key areas. That said it simply did not substantiate its arguments and settled on simply repeating them again and again.
Money is not real, per se. The U.S. government can create money and does not need to budget its affairs the way a household does. That said any student of history is aware of what types of things have happened in history when governments have deemed their ability to produce money effectively unlimited and suggested that people can have the benefits of spending without the costs. I share the author's goal of a fully-funded society with shock absorbers against unemployment and other quotidian sufferings. That said there needs to be more grappling with the potential risks of such a program rather than just stating that it would be desirable and generally moving on. I'm not qualified to say that this argument is incorrect per se but simply am aware that economists disagree about core aspects of their field.
I'm open to these arguments and consider them well-intentioned but I didn't find that this book really substantiated many of its points. On one hand, if inflation is the only check on spending that tells us its time to rein it in or impose new taxes, we should really know what level we consider acceptable and have safeguards to protect against the most disastrous outcome of hyperinflation. If there is a model proposing how to know that I'd like to see it but this book does not provide one. Moreoever given the fact that the U.S. is the global reserve currency and billions around the world are forced to transact and save in it its unclear what potentially unlimited money spending in the U.S. might do to other countries and possibilities are not really discussed here. The book claims that it is not advocating a free lunch, which would be dangerous, and makes compelling points that we are underspending in key areas. That said it simply did not substantiate its arguments and settled on simply repeating them again and again.
Money is not real, per se. The U.S. government can create money and does not need to budget its affairs the way a household does. That said any student of history is aware of what types of things have happened in history when governments have deemed their ability to produce money effectively unlimited and suggested that people can have the benefits of spending without the costs. I share the author's goal of a fully-funded society with shock absorbers against unemployment and other quotidian sufferings. That said there needs to be more grappling with the potential risks of such a program rather than just stating that it would be desirable and generally moving on. I'm not qualified to say that this argument is incorrect per se but simply am aware that economists disagree about core aspects of their field.
June 8, 2020
As I made my way through The Deficit Myth, I had to stop numerous times, because it felt like my political and ideological underpinnings were being shaken at their cores. The idea that government spending should not be measured and debated in parallel with a family budget made sense to me, but I didn’t understand how. This book explains complex economics and political posturing in digestible terms
It is a book that has the potential to transform public opinion, if it is read. So, I tell you today, go and read The Deficit Myth.
It Changes Everything.
Please check out the full review on Teatime Reading
www.teatimereading.com/blog/2020/4/30...
It is a book that has the potential to transform public opinion, if it is read. So, I tell you today, go and read The Deficit Myth.
It Changes Everything.
Please check out the full review on Teatime Reading
www.teatimereading.com/blog/2020/4/30...
March 1, 2020
I'm not an economist, or even someone who is savvy about the topic of deficits. One thing I have learned over the years is that conservative politicians rail about the deficit - but only when the other side (Democrats, Liberals, etc.) hold the reins of government. Do a little research and find out for yourself which side usually runs up the deficit. The author is clearly a proponent of MMT, and she knows the subject well, making this book a must read for an introduction to the topic.
June 28, 2020
I was really looking forward to this book after having followed Professor Kelton on twitter, and after seeing the praise for this book there. However, this turned out to be even more disappointing than I could have imagined. When reading a book written by an economist, it is fair to expect the author to bring to their writing the methods usually employed by the same when publishing in journals. It is fair to expect the author to propose a model and cite its assumptions and limitations, to show how it is a better model than all others by comparing other models, to evaluate all available data, to carry out a historical analysis and to engage with prior models and theory that may be pertinent to what they bring to the table. But apparently that was too much to expect from this book.
Let me state up front what I found interesting about the book. Her statements about what MMT is – the ‘correct’ way of looking at spending and deficits by a monetary sovereign are interesting. Her anecdotal example of people preferring to abolish the national debt but not abolish US treasury’s – a statement mostly about framing – is interesting. Her reframing of public deficits as a positive – an injection of capital from the government to the rest of society – is interesting. Her arguments regarding inflation only clocking in when a society’s spending starts to outstrip its capacity are somewhat interesting. Her reasoning that a monetary sovereign can wipe its debt out with a key stroke and citing Japan as an example are definitely worth thinking about. Her assertion that taxation exists to create demand for a currency and has a positive side benefit – siphoning resources away from the wealthy was interesting. Her proposal for a federal job guarantee and ‘automatic’ stabilizers for the economy other than by monetary mechanisms piqued my curiosity, and will do the same for any reader. However, none of these are evaluated in a remotely objective or scientific way.
The author sets the stage early for a very slanted approach to this book when she begins with framing MMT as a necessity for her preferred positive outcomes (such as the Green New Deal, etc.). Suggesting these early on should already raise an eyebrow - if the monetary mechanics described are true and paint an accurate picture of reality, you would not need to peddle potential positive uses of the mechanics, the truth itself should suffice. But no the author is setting the stage for people who prefer the positive outcomes to focus away from critically examining her arguments as apparently, this theory alone would guide us to the desirable policy outcomes.
The mechanics of MMT as described (and repeated ad nauseum) are as follows – a monetary sovereign cannot run out of a currency it itself prints, that the choice of unemployment is arbitrary and that the Federal Reserve maintains a level of ‘slack’ in the economy and that the only real risk is that of inflation which can occur when a society starts exceeding its productive capacity. True, technically a monetary sovereign cannot run out of a currency it prints. But is there no limit to printing? Nope acknowledges the author. Great, then what is the limit? Just not what Fed has arbitrarily chosen because of its faulty reasoning. That is a valid starting point, but then what is a more accurate limit? We are never given an answer except a vague – 'when the slack (supposedly full employment as defined by the author) is removed'. Meanwhile, no attempt is made to thoroughly examine any relevant historical evidence (such as the Weimar republic – which is dismissed in the last few chapters without adequately demonstrating how an MMT-esque approach would not lead to a Weimar style hyperinflation).
Her other arguments also do not seem to be robust nor evaluated critically. A government can in principle ‘wipe out its debt’. But what happens the day after? If society can see a debt being wiped out by a keystroke, especially repeatedly, would it continue to treat that country’s bonds the same way? Would other countries continue to do the same? There may be merit to the argument when considering the case of the United States today, given the status of its currency but can *every monetary sovereign* get away with this? Not really. Markets and societies will respond and recalibrate with different responses to behaviors different from the status quo, an idea that the author never seems to consider. The claim that governments use taxation to create demand for currency, is another such argument. If this is true, then a state without taxes or extremely low taxes should not be able to create demand for its currency. This is never considered; we should simply take the author’s assertion at face value.
Her notion of a job guarantee as a magic fix for unemployment and other economic woes is another woefully underexamined thesis. She does not seem to consider a dynamic employer market can price in a government job guarantee, that assumptions such as 'people unemployed for long durations are unemployable whereas if they had alternative employment with a job guarantee they wouldn’t be so' seems laughably static. What are the chances that a dynamic job market starts treating people on a government job guarantee the same way it treats those unemployed for long stretches? No that is simply impossible because it would not fit her neat model. The whole notion of a federal job guarantee comes without any specifics regarding its operations and seems to not consider the possibility of government inventing ‘make work’ nor does it consider historical examples such as those of conscription (oy vey, the Road to Serfdom creeping up!). Both would ‘end chronic unemployment’ on paper but would someone truly want make work or conscription and even if they do what exactly would their net contribution to society be? No examination of this takes place, all we get is an assertion that local governments can invest more in ‘well-paying jobs’ such as care giving, etc. as they know what communities need. Is there any consideration of alternatives to a job guarantee, such as a UBI? No that does not get talked about. How about the opportunity costs of a government employment guarantee, such as the possibility of reduced entrepreneurship and risk taking? In her world view a hotelier, a banker or a coal miner losing their job would somehow fluidly transition into nursing and paramedic care simply because the government guarantees that they could do so, whilst the rest of the economy continues as is because well ... er ... ceteris-peribus, duh. The whole thesis sounds laughably bad once you start picking at it.
The rest of the book rambles on about her personal experiences with people in power who can influence or change policy before turning into what sounds like a summary of Stiglitz’ The Price of Inequality, coupled with extra chapters on climate change and a green economy. Are those interesting enough on their own? Maybe, but those are issues that have been talked about at length elsewhere. Does a thorough history of monetary and fiscal policy ever get discussed? Nope, unless you consider cherry picked examples to show where the author’s priors are confirmed in specific instances (Roosevelt’s New Deal, Kennedy’s space plans, etc.), and cases where conditions facing the economy are ignored and her political and intellectual opponents painted as devils with insidious intentions (Reagan, Thatcher, inflation and other economic issues of the 70s, 80s, etc.). The final chapter then seems to come full circle about how MMT does not come with a policy prescription, it is only an interpretation of a mechanism – which makes you wonder what the point of most of the book was.
Overall, a severe disappointment. If you want to be well informed on what MMT proposes, there are better articles (and hopefully much better books) out there.
Rating: 2
Let me state up front what I found interesting about the book. Her statements about what MMT is – the ‘correct’ way of looking at spending and deficits by a monetary sovereign are interesting. Her anecdotal example of people preferring to abolish the national debt but not abolish US treasury’s – a statement mostly about framing – is interesting. Her reframing of public deficits as a positive – an injection of capital from the government to the rest of society – is interesting. Her arguments regarding inflation only clocking in when a society’s spending starts to outstrip its capacity are somewhat interesting. Her reasoning that a monetary sovereign can wipe its debt out with a key stroke and citing Japan as an example are definitely worth thinking about. Her assertion that taxation exists to create demand for a currency and has a positive side benefit – siphoning resources away from the wealthy was interesting. Her proposal for a federal job guarantee and ‘automatic’ stabilizers for the economy other than by monetary mechanisms piqued my curiosity, and will do the same for any reader. However, none of these are evaluated in a remotely objective or scientific way.
The author sets the stage early for a very slanted approach to this book when she begins with framing MMT as a necessity for her preferred positive outcomes (such as the Green New Deal, etc.). Suggesting these early on should already raise an eyebrow - if the monetary mechanics described are true and paint an accurate picture of reality, you would not need to peddle potential positive uses of the mechanics, the truth itself should suffice. But no the author is setting the stage for people who prefer the positive outcomes to focus away from critically examining her arguments as apparently, this theory alone would guide us to the desirable policy outcomes.
The mechanics of MMT as described (and repeated ad nauseum) are as follows – a monetary sovereign cannot run out of a currency it itself prints, that the choice of unemployment is arbitrary and that the Federal Reserve maintains a level of ‘slack’ in the economy and that the only real risk is that of inflation which can occur when a society starts exceeding its productive capacity. True, technically a monetary sovereign cannot run out of a currency it prints. But is there no limit to printing? Nope acknowledges the author. Great, then what is the limit? Just not what Fed has arbitrarily chosen because of its faulty reasoning. That is a valid starting point, but then what is a more accurate limit? We are never given an answer except a vague – 'when the slack (supposedly full employment as defined by the author) is removed'. Meanwhile, no attempt is made to thoroughly examine any relevant historical evidence (such as the Weimar republic – which is dismissed in the last few chapters without adequately demonstrating how an MMT-esque approach would not lead to a Weimar style hyperinflation).
Her other arguments also do not seem to be robust nor evaluated critically. A government can in principle ‘wipe out its debt’. But what happens the day after? If society can see a debt being wiped out by a keystroke, especially repeatedly, would it continue to treat that country’s bonds the same way? Would other countries continue to do the same? There may be merit to the argument when considering the case of the United States today, given the status of its currency but can *every monetary sovereign* get away with this? Not really. Markets and societies will respond and recalibrate with different responses to behaviors different from the status quo, an idea that the author never seems to consider. The claim that governments use taxation to create demand for currency, is another such argument. If this is true, then a state without taxes or extremely low taxes should not be able to create demand for its currency. This is never considered; we should simply take the author’s assertion at face value.
Her notion of a job guarantee as a magic fix for unemployment and other economic woes is another woefully underexamined thesis. She does not seem to consider a dynamic employer market can price in a government job guarantee, that assumptions such as 'people unemployed for long durations are unemployable whereas if they had alternative employment with a job guarantee they wouldn’t be so' seems laughably static. What are the chances that a dynamic job market starts treating people on a government job guarantee the same way it treats those unemployed for long stretches? No that is simply impossible because it would not fit her neat model. The whole notion of a federal job guarantee comes without any specifics regarding its operations and seems to not consider the possibility of government inventing ‘make work’ nor does it consider historical examples such as those of conscription (oy vey, the Road to Serfdom creeping up!). Both would ‘end chronic unemployment’ on paper but would someone truly want make work or conscription and even if they do what exactly would their net contribution to society be? No examination of this takes place, all we get is an assertion that local governments can invest more in ‘well-paying jobs’ such as care giving, etc. as they know what communities need. Is there any consideration of alternatives to a job guarantee, such as a UBI? No that does not get talked about. How about the opportunity costs of a government employment guarantee, such as the possibility of reduced entrepreneurship and risk taking? In her world view a hotelier, a banker or a coal miner losing their job would somehow fluidly transition into nursing and paramedic care simply because the government guarantees that they could do so, whilst the rest of the economy continues as is because well ... er ... ceteris-peribus, duh. The whole thesis sounds laughably bad once you start picking at it.
The rest of the book rambles on about her personal experiences with people in power who can influence or change policy before turning into what sounds like a summary of Stiglitz’ The Price of Inequality, coupled with extra chapters on climate change and a green economy. Are those interesting enough on their own? Maybe, but those are issues that have been talked about at length elsewhere. Does a thorough history of monetary and fiscal policy ever get discussed? Nope, unless you consider cherry picked examples to show where the author’s priors are confirmed in specific instances (Roosevelt’s New Deal, Kennedy’s space plans, etc.), and cases where conditions facing the economy are ignored and her political and intellectual opponents painted as devils with insidious intentions (Reagan, Thatcher, inflation and other economic issues of the 70s, 80s, etc.). The final chapter then seems to come full circle about how MMT does not come with a policy prescription, it is only an interpretation of a mechanism – which makes you wonder what the point of most of the book was.
Overall, a severe disappointment. If you want to be well informed on what MMT proposes, there are better articles (and hopefully much better books) out there.
Rating: 2
January 24, 2023
Stephanie Kelton is an economist, an economics professor, and a proponent of modern monetary theory (MMT). I've been interested in MMT for a while, and I read a chapbook by Warren Mosler, often described as the originator of MMT. Mosler was persuasive, but also dense and confusing, and I reserved judgment.
What's MMT? Briefly, it is the belief that governments which issue their own currency ("fiat money") should never worry about debts and deficits, as long as the economy has the real material (people, goods, resources) it needs.
In the acknowledgments at the end of the book, Kelton thanks her editor, John Mahaney. for cutting out charts, graphs, and jargon, and constantly reminding her of her readers' interests and needs. This review is a love letter to Mahaney, because this is the book I needed. I know I'm not alone.
Using plain language, simple analogies, and clear explanations, Kelton makes an absolutely compelling case for MMT, and I can't find fault with her logic. Basically, she walks us through the facts of money, asking one crucial question: If the government creates the money, then we can only pay it back in taxes, because we only got it from the government in the first place. One of her lovely examples is the game of Monopoly: if the bank doesn't distribute money at the beginning of the game, there's no game. (She doesn't go into Monopoly's fascinating history, however.)
Kelton is a realist. She goes into the reasons we still need taxes, the reasons why it's important to manage inflation, and the limitations of MMT (doesn't apply to U.S. state and local governments, doesn't apply to countries not in control of their own currency). She patiently and clearly refutes myths, explains wrong-headed thinking, and builds her case. Toward the end of the book, she starts talking about other deficits the U.S. lives with because of our unswerving belief in federal money deficits. I'm intimately familiar with most of her statistics about education, health care, infrastructure, etc., but I find it fascinating to think of them as deficits which could be addressed with a different theory of government money.
Don't be put off by negative reviews from conservative economists: this is radical thinking indeed (though not partisan) and it's going to ruffle feathers and frighten horses. I'm thrilled that it made the NYT best-seller list, which I don't think would have happened pre-coronavirus. She mentions the coronavirus briefly in the introduction, but the book was written before the U.S. started handing out multiple trillions of dollars in "stimulus" funds, mostly to the people who need it least.
If you are at all interested in rethinking how money works, this is the book for you.
What's MMT? Briefly, it is the belief that governments which issue their own currency ("fiat money") should never worry about debts and deficits, as long as the economy has the real material (people, goods, resources) it needs.
In the acknowledgments at the end of the book, Kelton thanks her editor, John Mahaney. for cutting out charts, graphs, and jargon, and constantly reminding her of her readers' interests and needs. This review is a love letter to Mahaney, because this is the book I needed. I know I'm not alone.
Using plain language, simple analogies, and clear explanations, Kelton makes an absolutely compelling case for MMT, and I can't find fault with her logic. Basically, she walks us through the facts of money, asking one crucial question: If the government creates the money, then we can only pay it back in taxes, because we only got it from the government in the first place. One of her lovely examples is the game of Monopoly: if the bank doesn't distribute money at the beginning of the game, there's no game. (She doesn't go into Monopoly's fascinating history, however.)
Kelton is a realist. She goes into the reasons we still need taxes, the reasons why it's important to manage inflation, and the limitations of MMT (doesn't apply to U.S. state and local governments, doesn't apply to countries not in control of their own currency). She patiently and clearly refutes myths, explains wrong-headed thinking, and builds her case. Toward the end of the book, she starts talking about other deficits the U.S. lives with because of our unswerving belief in federal money deficits. I'm intimately familiar with most of her statistics about education, health care, infrastructure, etc., but I find it fascinating to think of them as deficits which could be addressed with a different theory of government money.
Don't be put off by negative reviews from conservative economists: this is radical thinking indeed (though not partisan) and it's going to ruffle feathers and frighten horses. I'm thrilled that it made the NYT best-seller list, which I don't think would have happened pre-coronavirus. She mentions the coronavirus briefly in the introduction, but the book was written before the U.S. started handing out multiple trillions of dollars in "stimulus" funds, mostly to the people who need it least.
If you are at all interested in rethinking how money works, this is the book for you.
June 13, 2020
This book is probably gonna be the Piketty of 2020!
Very easy to read, lots of good examples, simple enough language for any intelligent person to understand.
Kelton, Bernie Sanders' economic advisor, proves how all the austerity of the decades of neoliberalism, including the handling of the eurozone crisis, was unnecessary and harmful.
The state does not run out of money. Money is not the bottleneck. Deficits do not matter. Output capacity matters. What matters is inflation. And inflation can be controlled, if you tax what you want to curtail. Print and spend on green energy, tax SUVs.
A must read! This book is gonna cause a revolution in economics.
Very easy to read, lots of good examples, simple enough language for any intelligent person to understand.
Kelton, Bernie Sanders' economic advisor, proves how all the austerity of the decades of neoliberalism, including the handling of the eurozone crisis, was unnecessary and harmful.
The state does not run out of money. Money is not the bottleneck. Deficits do not matter. Output capacity matters. What matters is inflation. And inflation can be controlled, if you tax what you want to curtail. Print and spend on green energy, tax SUVs.
A must read! This book is gonna cause a revolution in economics.
November 28, 2020
If you’re going to read this book, don’t worry if you come away feeling like Gertrude Stein after she visited Oakland.
Although I was disappointed in this book, there were some good points:
First, I listened to the Audible audio book, read by Professor Kelton. She has a pleasant reading voice, even at 1.5X. I especially enjoyed when she imitated teenagers and children talking about monetary theory and macroeconomics.
Second, it was funny. Maybe not intentionally so, but it was funny. My father used to joke whenever he got a new box of checks in the mail, "I have lots of checks so I must have lots of money!" This book reminded me of my father's jokes. It was also funny when Professor Kelton talked about the time the national budget was accidentally balanced during the Clinton administration, then talked about the Great Recession. I don't think she meant to imply causality, but there you go. And the whole “yellow money/green money” thing is a hoot! "Red fish/Blue fish" redux.
Unfortunately, it wasn't all yucks and impersonations.
Here's the bottom line: Modern Monetary Theory isn't modern, nor is it monetary, nor is it a theory. More properly, it's "Keynesian Deficit Spending Fiscal Policy Hypothesizing." But I'm lazy, so let's stick to "MMT."
Although my education in economics led me to classical liberalism, I recognize that socialism and classical liberalism have in common the desire to lift the poor to the highest level of well-being possible. The problem with socialism and its idiot cousin, communism, is that both rely on the eternal benevolence of others. Socialism relies on the state's wisdom and benevolence, while communism relies on everyone involved becoming angels. (I remember my freshman Poli Sci class when this became obvious to me. I burst out laughing. Even as a callow 18 year old I knew that people weren't angels and were unlikely to become so in a million years, much less over night, after the terror of the proletarian revolution ended).
Anyway, MMT says the government can never run out of money as long as it retains the sovereignty to print its own currency. This is true.
It's also true that deficit spending, i.e., government expenditures exceeding government revenues (usually taxes), is not necessarily a bad thing.
The problem is knowing when to stop. You have to know when to stop or you catch a bad case of inflation. They didn't know when to stop in Weimar Germany. Or in Argentina. Or a few other places around the world.
More of a problem is when someone without the intellect or wisdom to understand the limitations of deficit spending gets some political power, he or she is likely to think he or she can pay for any number of colorful new deals with this unlimited supply of funds, and convince armies of even less sophisticated followers that the only reason the government doesn't take care of everyone is because it's run by mean people.
The book itself is overly repetitive and falls into the "Underpants Gnomes" trap of knowing what you want, knowing what you'll do, but not having any clear and logical plan in place to get there. (South Park: "Collect underpants", "?", "Profit." That "?" part is pretty important.)
Professor Kelton seriously overreaches after the first three chapters; she stops being an economist and becomes a politician -- a Bernie Sanders socialist politician, which is what MMT is designed to support. I won't waste any time on her politics - either you believe that stuff or you don't.
I thought this book could’ve benefited from one last, brief chapter, consisting only of the words, “Just kidding.” But no.
Although I was disappointed in this book, there were some good points:
First, I listened to the Audible audio book, read by Professor Kelton. She has a pleasant reading voice, even at 1.5X. I especially enjoyed when she imitated teenagers and children talking about monetary theory and macroeconomics.
Second, it was funny. Maybe not intentionally so, but it was funny. My father used to joke whenever he got a new box of checks in the mail, "I have lots of checks so I must have lots of money!" This book reminded me of my father's jokes. It was also funny when Professor Kelton talked about the time the national budget was accidentally balanced during the Clinton administration, then talked about the Great Recession. I don't think she meant to imply causality, but there you go. And the whole “yellow money/green money” thing is a hoot! "Red fish/Blue fish" redux.
Unfortunately, it wasn't all yucks and impersonations.
Here's the bottom line: Modern Monetary Theory isn't modern, nor is it monetary, nor is it a theory. More properly, it's "Keynesian Deficit Spending Fiscal Policy Hypothesizing." But I'm lazy, so let's stick to "MMT."
Although my education in economics led me to classical liberalism, I recognize that socialism and classical liberalism have in common the desire to lift the poor to the highest level of well-being possible. The problem with socialism and its idiot cousin, communism, is that both rely on the eternal benevolence of others. Socialism relies on the state's wisdom and benevolence, while communism relies on everyone involved becoming angels. (I remember my freshman Poli Sci class when this became obvious to me. I burst out laughing. Even as a callow 18 year old I knew that people weren't angels and were unlikely to become so in a million years, much less over night, after the terror of the proletarian revolution ended).
Anyway, MMT says the government can never run out of money as long as it retains the sovereignty to print its own currency. This is true.
It's also true that deficit spending, i.e., government expenditures exceeding government revenues (usually taxes), is not necessarily a bad thing.
The problem is knowing when to stop. You have to know when to stop or you catch a bad case of inflation. They didn't know when to stop in Weimar Germany. Or in Argentina. Or a few other places around the world.
More of a problem is when someone without the intellect or wisdom to understand the limitations of deficit spending gets some political power, he or she is likely to think he or she can pay for any number of colorful new deals with this unlimited supply of funds, and convince armies of even less sophisticated followers that the only reason the government doesn't take care of everyone is because it's run by mean people.
The book itself is overly repetitive and falls into the "Underpants Gnomes" trap of knowing what you want, knowing what you'll do, but not having any clear and logical plan in place to get there. (South Park: "Collect underpants", "?", "Profit." That "?" part is pretty important.)
Professor Kelton seriously overreaches after the first three chapters; she stops being an economist and becomes a politician -- a Bernie Sanders socialist politician, which is what MMT is designed to support. I won't waste any time on her politics - either you believe that stuff or you don't.
I thought this book could’ve benefited from one last, brief chapter, consisting only of the words, “Just kidding.” But no.
March 16, 2021
We're doing it wrong.
This eye opening work by Kelton, an economist and former democratic economic advisor, is an absolute must read. This book represents a needed paradigm shift from old-school macroeconomic think based on the outdated gold reserve concept and into Modern Monetary Theory (MMT). The fundamental concept of MMT is this: the government should not balance its books like household finances. The main difference between a household budget and the federal government, is that the government is not a currency USER it is a currency GENERATOR. The US government has sovereignty over its currency and can literally make money with the stroke of the keyboard at the treasury. Let me rephrase: the government cannot run out of money. It's impossible. With MMT focus, it becomes self-evident that the deficit is a political tool, not a financial catastrophe. The deficit, in fact, is not bad. There is not an individual cost that every American's grandchild will have to pay in the future to pay back the deficit. The deficit myth is based on false rhetoric and dishonest representations by politicians to blame the poor and revoke social programs.
Kelton makes something very clear: the government does NOT need your taxes to spend. The old concept of taxing and borrowing before spending is completely false. The government spends literally whenever it wants--it simply creates more dollars on a keyboard in the treasury. The deficit has never, ever stopped the government from expanding defense, offering bail outs or tax cuts from he rich (not a single republican gave a damn about Trump's 2017 tax cuts adding trillions to the deficit). Using the deficit is not wrong to do but it can be used in the wrong way, as in tax cuts for the mega wealthy.
Taxes exist for 4 reasons: minimize inflation, create demand for the dollar, encourage or discourage behavior, and to distribute wealth. That's it. The fed conjures money out of thin air, like a gamekeeper, to otherwise pay for things. The Fed does not need your money to pay for anything at all. The budget isn't supposed to be balanced, but the economy is. Inflation MUST be reigned in as it threatens the prosperity of everyone, and MMT keeps this as its central focus.
Kelton argues that the Fed unnecessarily uses unemployment to mitigate inflation and she states that it's totally not needed. She strongly argues for some sort of Jobs Guarantee measure when the government offers jobs at $15/hr for anyone who wants a job. This acts a pressure relate valve during recessions and keeps the public solvent. Again, she states that the Fed can simply invent dollars to fund this without raising taxes at all.
Uncle Sam does not go, hat in hand, to China to ask for money. This is what all media and politicians would have you believe. No. The Fed sells bonds to China to help regulate its own interest rates. The Fed does not borrow any other currency--rather it offers the chance for the world to invest in the incredible strength of the US dollar. The Fed could pay out all bonds with the stroke of a keyboard. Fears of China wanting to cash in the $1T bonds it has is totally ungrounded. Cashing in all those bonds could potentially cause a recession which would destroy the Chinese economy which is founded on American importing its good. There is mutual co-dependency between these two nations that will not go away for a very long time. The idea that everyone is responsible for the "debt" to China is totally preposterous.
Counter to prevailing wisdom, the deficit does not cause "crowding out" of the market. Why? Because, again, the US government is not a currency user. It does not compete with private investment, causing interest rates to rise. This is true of countries without a fiat currency (like Greece), but not with the US. The US literally issues its own currency, it doesn't borrow its own currency.
The trade deficit is not inherently bad as long as the domestic fiscal deficit is larger than the trade deficit. Why? Because a large deficit ensures that there is private solvency to continue importing goods, maintaining the trade deficit. The trade war Trump started with China was not only completely pointless (the trade deficit was never a problem) but just swapped unemployment types. A public deficit is a private surplus.
Getting out of NAFTA and TTP were probably good ideas. They only took work out of the US and concentrated wealth at the very top. In my opinion, this was literally one of the only positive things of Trump's administration. What we need is to get rid of our faux-progessvie tax scheme (it's completely regressive, that's another topic). Payroll taxes don't actually fund social security. We need to get rid of payroll taxes and consumption taxes, make healthcare universal and tax the mega rich. These are the solutions, and they will work. Will they happen?
This is a MUST READ. This book has completely changed how I think about US economics.
This eye opening work by Kelton, an economist and former democratic economic advisor, is an absolute must read. This book represents a needed paradigm shift from old-school macroeconomic think based on the outdated gold reserve concept and into Modern Monetary Theory (MMT). The fundamental concept of MMT is this: the government should not balance its books like household finances. The main difference between a household budget and the federal government, is that the government is not a currency USER it is a currency GENERATOR. The US government has sovereignty over its currency and can literally make money with the stroke of the keyboard at the treasury. Let me rephrase: the government cannot run out of money. It's impossible. With MMT focus, it becomes self-evident that the deficit is a political tool, not a financial catastrophe. The deficit, in fact, is not bad. There is not an individual cost that every American's grandchild will have to pay in the future to pay back the deficit. The deficit myth is based on false rhetoric and dishonest representations by politicians to blame the poor and revoke social programs.
Kelton makes something very clear: the government does NOT need your taxes to spend. The old concept of taxing and borrowing before spending is completely false. The government spends literally whenever it wants--it simply creates more dollars on a keyboard in the treasury. The deficit has never, ever stopped the government from expanding defense, offering bail outs or tax cuts from he rich (not a single republican gave a damn about Trump's 2017 tax cuts adding trillions to the deficit). Using the deficit is not wrong to do but it can be used in the wrong way, as in tax cuts for the mega wealthy.
Taxes exist for 4 reasons: minimize inflation, create demand for the dollar, encourage or discourage behavior, and to distribute wealth. That's it. The fed conjures money out of thin air, like a gamekeeper, to otherwise pay for things. The Fed does not need your money to pay for anything at all. The budget isn't supposed to be balanced, but the economy is. Inflation MUST be reigned in as it threatens the prosperity of everyone, and MMT keeps this as its central focus.
Kelton argues that the Fed unnecessarily uses unemployment to mitigate inflation and she states that it's totally not needed. She strongly argues for some sort of Jobs Guarantee measure when the government offers jobs at $15/hr for anyone who wants a job. This acts a pressure relate valve during recessions and keeps the public solvent. Again, she states that the Fed can simply invent dollars to fund this without raising taxes at all.
Uncle Sam does not go, hat in hand, to China to ask for money. This is what all media and politicians would have you believe. No. The Fed sells bonds to China to help regulate its own interest rates. The Fed does not borrow any other currency--rather it offers the chance for the world to invest in the incredible strength of the US dollar. The Fed could pay out all bonds with the stroke of a keyboard. Fears of China wanting to cash in the $1T bonds it has is totally ungrounded. Cashing in all those bonds could potentially cause a recession which would destroy the Chinese economy which is founded on American importing its good. There is mutual co-dependency between these two nations that will not go away for a very long time. The idea that everyone is responsible for the "debt" to China is totally preposterous.
Counter to prevailing wisdom, the deficit does not cause "crowding out" of the market. Why? Because, again, the US government is not a currency user. It does not compete with private investment, causing interest rates to rise. This is true of countries without a fiat currency (like Greece), but not with the US. The US literally issues its own currency, it doesn't borrow its own currency.
The trade deficit is not inherently bad as long as the domestic fiscal deficit is larger than the trade deficit. Why? Because a large deficit ensures that there is private solvency to continue importing goods, maintaining the trade deficit. The trade war Trump started with China was not only completely pointless (the trade deficit was never a problem) but just swapped unemployment types. A public deficit is a private surplus.
Getting out of NAFTA and TTP were probably good ideas. They only took work out of the US and concentrated wealth at the very top. In my opinion, this was literally one of the only positive things of Trump's administration. What we need is to get rid of our faux-progessvie tax scheme (it's completely regressive, that's another topic). Payroll taxes don't actually fund social security. We need to get rid of payroll taxes and consumption taxes, make healthcare universal and tax the mega rich. These are the solutions, and they will work. Will they happen?
This is a MUST READ. This book has completely changed how I think about US economics.
December 8, 2022
The general point about Keynesian economics is important, but this is an annoying book to read. The author repeats her conclusion over and over (the government can't run out of money because it prints it). This repetition doesn't make the case stronger or clearer.
The explanations of what money is NOT are good enough (it's not exchangeable for gold; it's not like a household budget). But to help the reader understand the whole concept, I think there should have been more explanation of what a fiat currency is. Why is a dollar worth anything? (Because the US government collects taxes in that form? So it's a unit of central government power, as opposed to a unit of economic value of goods and services? ) Why is a dollar worth what it's worth? Is there some rational way of determining how many dollars should be in circulation or whatever? Is it all just political fiction?
The limits on printing money apparently are connected to inflation, but there's not a great practical exploration of what that means. Prices in the US have gone up about 10 times in a regular lifetime (a new Ford cost around $2,000 in 1952, a new car now would be over $20,000). That seems like a lot. Why is it not? There's a little bit about why places that had super-high inflation are special cases not like the US today, and that helps.
The best part was when she asked all the Senators if they wanted to get rid of the deficit/debt and they all said yes, but then she asked if they wanted to get rid of Treasury bonds and they all said no. Clearly, everyone is confused about all this, so maybe it's asking too much for Kelton to make it crystal clear.
Also to consider:
Secrets of the Temple: How the Federal Reserve Runs the Country
The explanations of what money is NOT are good enough (it's not exchangeable for gold; it's not like a household budget). But to help the reader understand the whole concept, I think there should have been more explanation of what a fiat currency is. Why is a dollar worth anything? (Because the US government collects taxes in that form? So it's a unit of central government power, as opposed to a unit of economic value of goods and services? ) Why is a dollar worth what it's worth? Is there some rational way of determining how many dollars should be in circulation or whatever? Is it all just political fiction?
The limits on printing money apparently are connected to inflation, but there's not a great practical exploration of what that means. Prices in the US have gone up about 10 times in a regular lifetime (a new Ford cost around $2,000 in 1952, a new car now would be over $20,000). That seems like a lot. Why is it not? There's a little bit about why places that had super-high inflation are special cases not like the US today, and that helps.
The best part was when she asked all the Senators if they wanted to get rid of the deficit/debt and they all said yes, but then she asked if they wanted to get rid of Treasury bonds and they all said no. Clearly, everyone is confused about all this, so maybe it's asking too much for Kelton to make it crystal clear.
Also to consider:
Secrets of the Temple: How the Federal Reserve Runs the Country
Read
January 24, 2021Before beginning this work on Modern Monetary Theory (MMT), I must admit some preformed thoughts:
‘It works . . . until it doesn’t.’
That Dire Straits song ‘Money for nothing’.
Eddie Murphy in Trading Places, ‘In fact, champagne for everybody, courtesy of Billy Ray Valentine’.
My memories of Argentina’s alluring promises turned to failure – twice.
Professor Kelton does make an interesting case for expanding our thinking around the limits of federal spending and the allocation of our scarce resources for the betterment of all. Large economies that control their own fiat currencies can self-fund their spending without limit, and, if appropriately mindful in targeting spending, without inflation, so MMT goes. Recent history has helped enforce her argument; in the past three decades, the fiscal and monetary policies of Europe, Japan and the US, have created both ever increasing deficits and indebtedness combined with both ever decreasing government interest rates and rates of inflation.
Clearly, warnings for the consequences of deficit spending and ultra-accommodative monetary policies were unwarranted, at least so far. I remember Erskine Bowles offering dire predictions for our economic fate at a conference I attended a decade ago. That his warnings, and an accompanying chorus of esteemed minds, proved unfounded suggests Professor Kelton may be on to something.
Why has the Establishment been so reluctant to embrace MMT? One reason is that policy makers are generally examining the past and have failed to incorporate the frontiers associated with a new world of fiat currencies, one where the US dollar reigns supreme. The introductory economics textbooks I studied in the 1980s were conditioned on a different realm, one following decades of gold convertibility – even though by the time I studied economics, the gold standard had ended. Inflation was an important concern at that time, too. Old ways of thinking die hard. Yet, our economies are enormously complex and constantly evolving, which cautions against reductionist thinking. What if MMT causes a loss of confidence in the US dollar? What if hyperinflation emerges? We’re in uncharted territory, for we lack substantive historical data to aid our analysis. The histories of the Roman and British Empires offer no help.
Professor Kelton acknowledges the big risk to MMT is inflation. She notes that we are far below full employment and have been for several decades, which implies inflationary risks really are minimal. Congress would target spending to areas that would not provoke an inflationary response and adjust fiscal policy were inflation to arise. In making these comments, Professor Kelton ignores the money creation process associated with bank lending – the source of new money according to the standard model. Also, I don’t take much comfort in Congress’ ability to gauge inflation appropriately and respond as needed through fiscal policy; recall many of these congressfolk are the very same disgraceful persons recently reciting implausible conspiracy theories originating from sketch disinformation campaigns.
So, how do we best manage our nation’s budget? No one really knows for sure, including Professor Kelton. Should we trust her and her colleagues? Should we take a chance and roll the dice?
I say . . . go for it.
‘It works . . . until it doesn’t.’
That Dire Straits song ‘Money for nothing’.
Eddie Murphy in Trading Places, ‘In fact, champagne for everybody, courtesy of Billy Ray Valentine’.
My memories of Argentina’s alluring promises turned to failure – twice.
Professor Kelton does make an interesting case for expanding our thinking around the limits of federal spending and the allocation of our scarce resources for the betterment of all. Large economies that control their own fiat currencies can self-fund their spending without limit, and, if appropriately mindful in targeting spending, without inflation, so MMT goes. Recent history has helped enforce her argument; in the past three decades, the fiscal and monetary policies of Europe, Japan and the US, have created both ever increasing deficits and indebtedness combined with both ever decreasing government interest rates and rates of inflation.
Clearly, warnings for the consequences of deficit spending and ultra-accommodative monetary policies were unwarranted, at least so far. I remember Erskine Bowles offering dire predictions for our economic fate at a conference I attended a decade ago. That his warnings, and an accompanying chorus of esteemed minds, proved unfounded suggests Professor Kelton may be on to something.
Why has the Establishment been so reluctant to embrace MMT? One reason is that policy makers are generally examining the past and have failed to incorporate the frontiers associated with a new world of fiat currencies, one where the US dollar reigns supreme. The introductory economics textbooks I studied in the 1980s were conditioned on a different realm, one following decades of gold convertibility – even though by the time I studied economics, the gold standard had ended. Inflation was an important concern at that time, too. Old ways of thinking die hard. Yet, our economies are enormously complex and constantly evolving, which cautions against reductionist thinking. What if MMT causes a loss of confidence in the US dollar? What if hyperinflation emerges? We’re in uncharted territory, for we lack substantive historical data to aid our analysis. The histories of the Roman and British Empires offer no help.
Professor Kelton acknowledges the big risk to MMT is inflation. She notes that we are far below full employment and have been for several decades, which implies inflationary risks really are minimal. Congress would target spending to areas that would not provoke an inflationary response and adjust fiscal policy were inflation to arise. In making these comments, Professor Kelton ignores the money creation process associated with bank lending – the source of new money according to the standard model. Also, I don’t take much comfort in Congress’ ability to gauge inflation appropriately and respond as needed through fiscal policy; recall many of these congressfolk are the very same disgraceful persons recently reciting implausible conspiracy theories originating from sketch disinformation campaigns.
So, how do we best manage our nation’s budget? No one really knows for sure, including Professor Kelton. Should we trust her and her colleagues? Should we take a chance and roll the dice?
I say . . . go for it.
February 15, 2022
The ability to embrace doubt in the middle of a crisis is a sign of strength.
Voltaire’s Bastards – John Ralston Saul
If you take nothing else from this great book, you should at least be aware that what you thought you knew about the federal deficit was mostly hogwash and scare tactics with little or nothing to do with economic realities. If this book fails to convince you of the advantages of following Modern Monetary Theory (MMT) in at least some of our thinking on national spending and taxation, I encourage you to continue reading on the subject and stop believing every word out of the mouths of know-nothing newscasters and pundits.
“For a quarter century after World War II, Americans’ real hourly wages rose in tandem with increases in worker productivity. This was reflected in widely shared prosperity, and an underlying sense that hard work and personal integrity were rewarded and that you could get ahead. Then the so-called Reagan revolution of 1980 inaugurated an era of unbridled greed—lowering taxes for the wealthy, cutting regulations on corporations, and accelerating war on workers’ rights to organize and earn a livable wage. Particularly after 1980, a yawning gap has opened up between productivity and wages. Productivity continues on its steady upward trend, but wages do not—they grow modestly if at all. If the hourly pay rate had followed the same growth trend as productivity from 1973 to 2014, there would have been no rise in income inequality during that period.
Where has all that increased productivity gone? It was skimmed off at the top. Back in 1950, the average S&P 500 CEO made 20 times as much as the average worker. By 2017, the average CEO at an S&P 500 corporation was making 361 times as much as the average worker. Since 1980, the global 1 percent has captured twice as much growth as the bottom 50 percent.
This has come about as a direct result of the Reagan Revolution which lowered tax rates for the rich which enabled out current obscene level of income disparity.
Frederick Thayer, the prolific writer and professor of public and international affairs at the University of Pittsburgh, wrote in 1996, “the US has experienced six significant economic depressions,” and “each was preceded by a sustained period of budget balancing.
This addresses the bottom line in this book: debt on a national level is mostly meaningless, what matters is how we spend the money. We can either lower taxes for the rich, conduct useless and expensive wars while continually increasing our already bloated military budget every year, or we can use national spending to help the greatest number of our citizens with programs that ensure that everyone can have a decent life.
Voltaire’s Bastards – John Ralston Saul
If you take nothing else from this great book, you should at least be aware that what you thought you knew about the federal deficit was mostly hogwash and scare tactics with little or nothing to do with economic realities. If this book fails to convince you of the advantages of following Modern Monetary Theory (MMT) in at least some of our thinking on national spending and taxation, I encourage you to continue reading on the subject and stop believing every word out of the mouths of know-nothing newscasters and pundits.
“For a quarter century after World War II, Americans’ real hourly wages rose in tandem with increases in worker productivity. This was reflected in widely shared prosperity, and an underlying sense that hard work and personal integrity were rewarded and that you could get ahead. Then the so-called Reagan revolution of 1980 inaugurated an era of unbridled greed—lowering taxes for the wealthy, cutting regulations on corporations, and accelerating war on workers’ rights to organize and earn a livable wage. Particularly after 1980, a yawning gap has opened up between productivity and wages. Productivity continues on its steady upward trend, but wages do not—they grow modestly if at all. If the hourly pay rate had followed the same growth trend as productivity from 1973 to 2014, there would have been no rise in income inequality during that period.
Where has all that increased productivity gone? It was skimmed off at the top. Back in 1950, the average S&P 500 CEO made 20 times as much as the average worker. By 2017, the average CEO at an S&P 500 corporation was making 361 times as much as the average worker. Since 1980, the global 1 percent has captured twice as much growth as the bottom 50 percent.
This has come about as a direct result of the Reagan Revolution which lowered tax rates for the rich which enabled out current obscene level of income disparity.
Frederick Thayer, the prolific writer and professor of public and international affairs at the University of Pittsburgh, wrote in 1996, “the US has experienced six significant economic depressions,” and “each was preceded by a sustained period of budget balancing.
This addresses the bottom line in this book: debt on a national level is mostly meaningless, what matters is how we spend the money. We can either lower taxes for the rich, conduct useless and expensive wars while continually increasing our already bloated military budget every year, or we can use national spending to help the greatest number of our citizens with programs that ensure that everyone can have a decent life.
September 13, 2020
This is the sort of book that's capable of changing how you see everything about the way our societies work. A very well explained exploration of the myths that surround economics and the ways in which MMT seeks to refute them. I have no formal economics training whatsoever but having a little understanding of MMT under my belt, I found this to be exactly what I needed to read. We should all be listening to MMT economists instead of letting governments consign so many of us to unnecessary poverty time and time again.
#fuckThatcher as well.
#fuckThatcher as well.
July 17, 2020
My initial impression of MMT prior to this book was that it is purely magical thinking. After reading it, my thinking has changed but not necessarily in a supportive way.
Throughout the book, Kelton tries to stay grounded in reality by sticking to mantras such as "there's no such thing as a free lunch," but by doing so I think that she's just paying lip service to the antiquated thinking she's critical of. Make no mistake, despite raising some qualifiers to avoid having it sound too magical for the audience to digest, what she is describing is exactly a free lunch. However, that doesn't necessarily mean it's wrong.
MMT has already proven it can work...until it doesn't. The best evidence cited for the US is that the Federal Reserve is already doing this and has been for decades and it is here that she has a solid point. Supporters of the theory, including Kelton, argue that so long as inflation is properly managed there are no other major limitations to be concerned with and that we should just reap the benefits of fully embracing the theory.
However, this book like all other MMT supporters I've found overlooks the impact that sustained annual inflation has by instead diverting your attention to how rare hyperinflation is. What the federal reserve target rate of 2% annual inflation means over the course of 20 years is a 50% decline in the purchasing power of your savings. And since the interest rates must remain low to maintain the monetary policy, the incentive for responsible citizens is to invest savings in more risky assets. This is the situation we are now in. So although Kelton is quick to highlight the fact that Americans have no savings when making a point about the need to provide government assistance, she ignores the fact that it is monetary policies like what she's promoting that disincentivize saving in the first place.
My impression of MMT now is that it's not magical, but is simply a slowing down of the hyperinflationary process in order to attempt to create a very long-lasting boom. I'm not necessarily against such an idea, but what will be needed is a plan of action for if/when it inevitably fails, how to get it back on track, and what that would all look like. Unfortunately, failure of the plan is not something entertained at any point in this book.
My 2-star rating is primarily because the book could easily have been half its length, but it too was inflated.
Throughout the book, Kelton tries to stay grounded in reality by sticking to mantras such as "there's no such thing as a free lunch," but by doing so I think that she's just paying lip service to the antiquated thinking she's critical of. Make no mistake, despite raising some qualifiers to avoid having it sound too magical for the audience to digest, what she is describing is exactly a free lunch. However, that doesn't necessarily mean it's wrong.
MMT has already proven it can work...until it doesn't. The best evidence cited for the US is that the Federal Reserve is already doing this and has been for decades and it is here that she has a solid point. Supporters of the theory, including Kelton, argue that so long as inflation is properly managed there are no other major limitations to be concerned with and that we should just reap the benefits of fully embracing the theory.
However, this book like all other MMT supporters I've found overlooks the impact that sustained annual inflation has by instead diverting your attention to how rare hyperinflation is. What the federal reserve target rate of 2% annual inflation means over the course of 20 years is a 50% decline in the purchasing power of your savings. And since the interest rates must remain low to maintain the monetary policy, the incentive for responsible citizens is to invest savings in more risky assets. This is the situation we are now in. So although Kelton is quick to highlight the fact that Americans have no savings when making a point about the need to provide government assistance, she ignores the fact that it is monetary policies like what she's promoting that disincentivize saving in the first place.
My impression of MMT now is that it's not magical, but is simply a slowing down of the hyperinflationary process in order to attempt to create a very long-lasting boom. I'm not necessarily against such an idea, but what will be needed is a plan of action for if/when it inevitably fails, how to get it back on track, and what that would all look like. Unfortunately, failure of the plan is not something entertained at any point in this book.
My 2-star rating is primarily because the book could easily have been half its length, but it too was inflated.
October 31, 2020
The world changed hugely after this book was published and made this book somewhat superfluous. The pandemic happened and congress passed ‘The Care Act’ for dealing with the pandemic, and they magically created over one trillion dollars out of thin air. There was no talk about ‘bond fairies’, ‘paygo’, nor did anyone take seriously Republicans’ moaning ‘how are we going to pay for it?’. Nobody cared nor should they.
A sovereign state which controls their own currency can create money through fiat by touching a computer key. As long as resources, time and will exist, money can be created. The only caveat is will inflation ensue. The ‘very serious people’ who never ask how tax cuts for the rich will be paid for, or how do we pay for that war that we don’t need, or the military’s shiny new toys, or who always want to reduce social security and Medicare in a ‘grand bargain’ are playing us for fools.
This book is superfluous today. One doesn’t need a grand new theory of economics to realize that the ‘very serious people’ who believe in ‘bond fairies’ really don’t give a shit about us. This book drives home the point that the Wall Street Journal editorial page is wrong about everything and needs to be ignored. The great fault this book makes is that to be right on the facts is not as important as it is to win the political argument and there will always be simpletons like the 45% who support Donald Trump and don't give a damn about the facts nor care about you and will preach their austerity onto others but never austerity for themselves and the masses will be swayed by the argument that the government finance is equivalent to a household budget. Just as all Republicans and Trumpkins think like that, we also had President Obama lead in that false equivalency when he led an effort for a ‘grand bargain’ for no reason and said we were using are credit cards to buy Chinese goods to make them richer.
A sovereign state which controls their own currency can create money through fiat by touching a computer key. As long as resources, time and will exist, money can be created. The only caveat is will inflation ensue. The ‘very serious people’ who never ask how tax cuts for the rich will be paid for, or how do we pay for that war that we don’t need, or the military’s shiny new toys, or who always want to reduce social security and Medicare in a ‘grand bargain’ are playing us for fools.
This book is superfluous today. One doesn’t need a grand new theory of economics to realize that the ‘very serious people’ who believe in ‘bond fairies’ really don’t give a shit about us. This book drives home the point that the Wall Street Journal editorial page is wrong about everything and needs to be ignored. The great fault this book makes is that to be right on the facts is not as important as it is to win the political argument and there will always be simpletons like the 45% who support Donald Trump and don't give a damn about the facts nor care about you and will preach their austerity onto others but never austerity for themselves and the masses will be swayed by the argument that the government finance is equivalent to a household budget. Just as all Republicans and Trumpkins think like that, we also had President Obama lead in that false equivalency when he led an effort for a ‘grand bargain’ for no reason and said we were using are credit cards to buy Chinese goods to make them richer.
June 17, 2020
Important topics discussed but the style is really annoying:
-The book seems to argue that everyone is an idiot not understanding how the system works (particularly money creation and public debt).
-MMT is the solution to everything, we were just blind not to see it before.
Actually the ideas offered here are not new, MMT is just a brand created to help selling them (which is fine with me).
I think a better, shorter, more objective write-up on the topic is from Ray Dalio, and it is free to download and read:
https://economicprinciples.org/downlo...
-The book seems to argue that everyone is an idiot not understanding how the system works (particularly money creation and public debt).
-MMT is the solution to everything, we were just blind not to see it before.
Actually the ideas offered here are not new, MMT is just a brand created to help selling them (which is fine with me).
I think a better, shorter, more objective write-up on the topic is from Ray Dalio, and it is free to download and read:
https://economicprinciples.org/downlo...
August 21, 2021
Well, this book started out promising, explaining to the layman how the Federal budget operates differently than that of a business or a household budget. However, the longer I read the more my opinion of this book fell. The author’s arguments are based on Modern Monetary Theory (which isn’t modern…its been around for at least a 100 years). She takes a simple premise that governments that print their own currency can never run out of money, and then extrapolates from there to explain how deficits are meaningless and we can fund all our wildest dreams today if only we could get some brave politicians to step up and do it.
I love a good theory. For a whole year, I did nothing but study theories…on international relations, innovation, military strategy, insurgency, cyberspace, technological determinism, etc (you can see all the books from that year of study in my SAASS bookshelf). Each time I’d read a new book, I’d be blown away with how this theory explained everything. Then the next day I was assigned to read a book that was equally compelling but offered an entirely different and often contradictory explanation for how the world works. And that book that just yesterday seemed mind blowing started to seem less perfect. I get a the vibe that a lot of people picked this one up and had that initial “this is brilliant” feeling but never got a second perspective that might allow them to think critically about all the flaws that accompany this particular theory. MMT has some interesting nuggets to consider, but it is not everything this author has made it out to be (and hundreds of economists on both ends of the political spectrum seem to agree).
This book tries to be really profound but in my opinion is just restating the obvious (government can’t run out of money because it can always create more). She repeatedly mentions that this is not a free lunch or a license to print money because excess printing leads to inflation. However, the very way she frames each of these issues makes it appear like she is speaking out of both sides of her mouth. The tone throughout is generally Hey! “We can pour trillions into education, infrastructure, health care, and housing”! Followed by a quiet remember, this isn’t a free lunch, we have to avoid inflation. It just seems like a really bad case of cognitive dissonance.
What the book fails to provide, is any rational explanation for how this theory would be carried out in practice. How does the government know where that inflation line is, how does it pull back from it if the excess government spending starts to accelerate inflation, and how would her economic policies affect public perception of the full faith and credit of the US government. Individuals are smart, crowds are often panicky and stupid. It seems very plausible that this would work for a time, but over the long term the masses would lose trust in the value of a currency that operates under this print-more mindset.
Worth a read, if for no other reason than to be exposed to a new perspective, but not all its cracked up to be. 2 stars.
What follows are my notes on the book:
(Read on kindle so no page number references here)
Modern Monetary Theory (MMT) makes the issuer of fiat currency the principal mover, not the taxpayer.
According to MMT, spending and deficits are not financial constraints…as long as they don’t accelerate inflation. In other words Congress can always funds its priorities. Lack of money never stopped a war because Congress has the power of the purse to create more money.
She identifies several myths that need to be corrected:
• Myth 1: Governments should budget like businesses or households
• Myth 2: Deficits are evidence of overspending
• Myth 3: Deficits will burden the next generation.
• Myth 4: Deficits crowd out private investment.
• Myth 5: Deficits make us dependent on foreign nations.
• Myth 6: Entitlements are propelling us towards a long term fiscal crisis.
She argues that Obama’s weak response to the financial crisis (~$700B stimulus rather than $1.2-1.8 trillion that many liberal economists recommended) robbed the country of recovery. [My thoughts: I can understand this line of reasoning…my problem with her argument is that she is not only advocating deficit spending in crisis situations that require drastic action (like the 2008 Housing Bubble or COVID response). She wants to spend like this ALL THE TIME (expanding entitlements, Green New Deal spending, etc). While she tries to qualify her argument that spending is constrained by inflation, these statements are always thrown in as afterthoughts after promising we can make the money to spend on all these grand visions. HOW exactly do government bureaucrats know inflation is kicking in until it is too late? These massive spending proposals have long tails (especially entitlements) that mean once they are enacted into law they are difficult if not impossible to turn off even after inflation starts kicking in].
Government doesn’t tax then spend. They spend then tax or borrow after the fact. She argues governments don’t even NEED to tax or borrow in order to spend. They only tax to control inflation and respond to income inequality. The issuer of currency can never go broke because they can always manufacture more money [This might make sense in this theory, but lots of theories fall apart when human nature is factored in (like Communism: brilliant in theory, a disaster in real life). The idea that the US could just print whatever it needs would inevitably lead to a collapse of faith in the US dollar’s value. Fiat currencies only work because there is trust that the underlying government is behaving responsibly].
It’s not the printing of money but the spending that is the issue. Taxes are not needed for their own sake but to restrain private spending at the same time as government spending in order to avoid inflation. [ So IN PRACTICE it functions exactly like most people conceive (higher taxes and government spending must go hand in hand)].
She proposes a Federal job guarantee to soften out the boom/bust of the business cycle. [Again, I think she has failed to think this through to its logical conclusion. I love the movie “Dave” too. Great premise that we could just make sure everyone has a job. But there are ALWAYS tradeoffs and unintended consequences. I can’t even imagine the bureaucracy that would be needed to manage this and put people in made up jobs where they actually accomplish something of value. What if the people put in these jobs simply sit on their butt or do lazy work because they KNOW THEY ARE GUARANTEED A PAYING JOB. This sounds exactly like communism and would have the same negative outcomes. So take the 2008 Housing Bubble crisis for example (an example she proposes). She thinks the government could find jobs for hundreds of thousands of suddenly unemployed people paying a $15/hour government wage with benefits that are likely to exceed those of private companies. The mind-boggling logistics of this proposal aside, what if these people all just decide they’d rather have this safe bet with benefits rather than return to the private sector once the crisis has ended. The whole thing is patently absurd. In 2021 I see “now hiring” and “employees wanted” signs on nearly every single store I pass but even with millions of people out of work, few people seem to be applying.]
Stated above but again she notes that taxation is not needed to balance the budget but to rebalance the distribution of wealth. Jeff Bezos “net worth” is $110B. He can afford a 2% wealth tax. [I have zero problem with everybody paying taxes….but its not like Bezos’ money is just sitting in a bank collecting dust…the overwhelming majority of that money is invested in other projects and business ventures. I have no idea how much of Bezos’ wealth is in liquid assets so a 2% wealth tax could be entirely feasible or it could have significant implications for a lot of business ventures that employ people. It might be fine, but honestly I have no idea and I don’t think the author does either. ]
Inflation, not insolvency, is the punishment for overspending [So what?, both are really horrible.]
Greece, by adopting the Euro gave up its control. They effectively became like a US state that must operate on a balanced budget. Because they can’t print their own currency they literally could run out of money. Their borrowing costs skyrocketed as a result. [I agree, for most countries not named Germany, adopting the Euro was an extremely idiotic thing to do]
US treasuries are not a pyramid scheme because there is zero chance of default [again, while I technically agree, does it matter that the government can’t default but that I can be paid back with worthless dollars because of rampant inflation?]
The author presents some extremely oversimplified little models and invents new terms (green/yellow dollars) to explain MMT. [The models look cute, but there are thousands of economists who disagree with her arguments here (many of the arguments over my head). As someone who leans right, I naturally tend to agree with some of the arguments from conservative economists but even many prominent liberal economists like Paul Krugman have said some pretty disparaging things about MMT). To the layman like myself, most of these examples strike me as cheap tricks associated with cooking the books and money laundering that occur before many enterprises eventually collapse. Its all a little unnerving.]
Congress can just make a bigger budget (as long as it doesn’t increase inflation). [We’ll based off recent events we may already be there. As I type this in August 2021, inflation is trending higher than its been in a decade, my mutual fund is a at record highs despite any tangible evidence that the broader economy justifies this, and housing costs are at record highs. That is after all the COVID binge spending, but before the $1T infrastructure bill and the follow on $3T spending bill that is being pushed through Congress now. The problem is, even the smartest economist don’t seem convinced that this spending binge and inflation are not connected, though many are totting the company line that this inflation is only transitory.]
She notes that the Federal Reserve controls the US interest rate (so it can always keep it below economic growth rate). Unlike Argentina or Greece where they had runaway rates. [I agree in principal, though I’m not sure I understand the long term effects of such a policy.]
She notes that the last time the federal debt was paid off was during Andrew Jackson’s presidency and that didn’t end well. [Wow, this is such a lazy oversimplification. The economic panic during Van Buren’s term occurred before the modern economic apparatus (the Federal Reserve, etc) even existed (and may have been caused in part by that very reason since Jackson killed the Bank of the US). To blame it on a single cause (paid off national debt) is foolishness.]
She argues that we should call debt something else so it doesn’t have a negative connotation. [Ughh. Politicians love to control how you think by renaming things to sound more appealing or inclusive…this is straight out of the novel 1984.]
She argues that deficits don’t crowd out private sector borrowing because deficits on the government ledger are net positives on the private sector ledger. Quote “Government expenditures always lead to an increase in the supply of net financial assets.” [I don’t even know what to say here. Lets rack the debt I guess. Even her slightly longer explanation and diagrams of 2 buckets seemed really oversimplified and inconsistent with reality.]
Her 5th myth was on trade deficits. In general, trade surpluses are not an issue when we are at full employment. Since we are never at full employment she proposes her “everyone gets a job” idea again. [This seems like one of those instances when she invents a solution to fix a problem with her model, ignoring the fact that the proposed solution is completely unworkable.]
Her 6th myth addresses the sustainability of entitlement programs. She again goes back to the fact that the government can print its own money so there will always be funds to pay these entitlements as long as there are sufficient real goods and services to back it up. [Again, there is zero explanation of how the government will know in advance when inflationary pressure is kicking in and how to rein in spending and entitlements that were passed in pursuit of all these wild dreams. Yes, the government can’t default, but they can pay you in devalued currency.]
I did learn a lot in this section, specifically about how FDR set up payroll taxes for social security to build support as people felt invested, thereby making it harder to repeal. However, because of this setup, people believe the money won’t be there for them as we outspend the payroll taxes and the law as written, falling below zero automatically triggers a 20% cut in benefits. Whereas other entitlements not tied to particular tax revenue streams are not at risk because the government can just print more money.
Her 7th chapter is another attempt to spin the meaning of deficits (we don’t have budget deficits, we have deficits in education, infrastructure, etc). This is really cute, but just sidesteps the real debate by easily deflecting the short attention spans of Americans elsewhere.
I love a good theory. For a whole year, I did nothing but study theories…on international relations, innovation, military strategy, insurgency, cyberspace, technological determinism, etc (you can see all the books from that year of study in my SAASS bookshelf). Each time I’d read a new book, I’d be blown away with how this theory explained everything. Then the next day I was assigned to read a book that was equally compelling but offered an entirely different and often contradictory explanation for how the world works. And that book that just yesterday seemed mind blowing started to seem less perfect. I get a the vibe that a lot of people picked this one up and had that initial “this is brilliant” feeling but never got a second perspective that might allow them to think critically about all the flaws that accompany this particular theory. MMT has some interesting nuggets to consider, but it is not everything this author has made it out to be (and hundreds of economists on both ends of the political spectrum seem to agree).
This book tries to be really profound but in my opinion is just restating the obvious (government can’t run out of money because it can always create more). She repeatedly mentions that this is not a free lunch or a license to print money because excess printing leads to inflation. However, the very way she frames each of these issues makes it appear like she is speaking out of both sides of her mouth. The tone throughout is generally Hey! “We can pour trillions into education, infrastructure, health care, and housing”! Followed by a quiet remember, this isn’t a free lunch, we have to avoid inflation. It just seems like a really bad case of cognitive dissonance.
What the book fails to provide, is any rational explanation for how this theory would be carried out in practice. How does the government know where that inflation line is, how does it pull back from it if the excess government spending starts to accelerate inflation, and how would her economic policies affect public perception of the full faith and credit of the US government. Individuals are smart, crowds are often panicky and stupid. It seems very plausible that this would work for a time, but over the long term the masses would lose trust in the value of a currency that operates under this print-more mindset.
Worth a read, if for no other reason than to be exposed to a new perspective, but not all its cracked up to be. 2 stars.
What follows are my notes on the book:
(Read on kindle so no page number references here)
Modern Monetary Theory (MMT) makes the issuer of fiat currency the principal mover, not the taxpayer.
According to MMT, spending and deficits are not financial constraints…as long as they don’t accelerate inflation. In other words Congress can always funds its priorities. Lack of money never stopped a war because Congress has the power of the purse to create more money.
She identifies several myths that need to be corrected:
• Myth 1: Governments should budget like businesses or households
• Myth 2: Deficits are evidence of overspending
• Myth 3: Deficits will burden the next generation.
• Myth 4: Deficits crowd out private investment.
• Myth 5: Deficits make us dependent on foreign nations.
• Myth 6: Entitlements are propelling us towards a long term fiscal crisis.
She argues that Obama’s weak response to the financial crisis (~$700B stimulus rather than $1.2-1.8 trillion that many liberal economists recommended) robbed the country of recovery. [My thoughts: I can understand this line of reasoning…my problem with her argument is that she is not only advocating deficit spending in crisis situations that require drastic action (like the 2008 Housing Bubble or COVID response). She wants to spend like this ALL THE TIME (expanding entitlements, Green New Deal spending, etc). While she tries to qualify her argument that spending is constrained by inflation, these statements are always thrown in as afterthoughts after promising we can make the money to spend on all these grand visions. HOW exactly do government bureaucrats know inflation is kicking in until it is too late? These massive spending proposals have long tails (especially entitlements) that mean once they are enacted into law they are difficult if not impossible to turn off even after inflation starts kicking in].
Government doesn’t tax then spend. They spend then tax or borrow after the fact. She argues governments don’t even NEED to tax or borrow in order to spend. They only tax to control inflation and respond to income inequality. The issuer of currency can never go broke because they can always manufacture more money [This might make sense in this theory, but lots of theories fall apart when human nature is factored in (like Communism: brilliant in theory, a disaster in real life). The idea that the US could just print whatever it needs would inevitably lead to a collapse of faith in the US dollar’s value. Fiat currencies only work because there is trust that the underlying government is behaving responsibly].
It’s not the printing of money but the spending that is the issue. Taxes are not needed for their own sake but to restrain private spending at the same time as government spending in order to avoid inflation. [ So IN PRACTICE it functions exactly like most people conceive (higher taxes and government spending must go hand in hand)].
She proposes a Federal job guarantee to soften out the boom/bust of the business cycle. [Again, I think she has failed to think this through to its logical conclusion. I love the movie “Dave” too. Great premise that we could just make sure everyone has a job. But there are ALWAYS tradeoffs and unintended consequences. I can’t even imagine the bureaucracy that would be needed to manage this and put people in made up jobs where they actually accomplish something of value. What if the people put in these jobs simply sit on their butt or do lazy work because they KNOW THEY ARE GUARANTEED A PAYING JOB. This sounds exactly like communism and would have the same negative outcomes. So take the 2008 Housing Bubble crisis for example (an example she proposes). She thinks the government could find jobs for hundreds of thousands of suddenly unemployed people paying a $15/hour government wage with benefits that are likely to exceed those of private companies. The mind-boggling logistics of this proposal aside, what if these people all just decide they’d rather have this safe bet with benefits rather than return to the private sector once the crisis has ended. The whole thing is patently absurd. In 2021 I see “now hiring” and “employees wanted” signs on nearly every single store I pass but even with millions of people out of work, few people seem to be applying.]
Stated above but again she notes that taxation is not needed to balance the budget but to rebalance the distribution of wealth. Jeff Bezos “net worth” is $110B. He can afford a 2% wealth tax. [I have zero problem with everybody paying taxes….but its not like Bezos’ money is just sitting in a bank collecting dust…the overwhelming majority of that money is invested in other projects and business ventures. I have no idea how much of Bezos’ wealth is in liquid assets so a 2% wealth tax could be entirely feasible or it could have significant implications for a lot of business ventures that employ people. It might be fine, but honestly I have no idea and I don’t think the author does either. ]
Inflation, not insolvency, is the punishment for overspending [So what?, both are really horrible.]
Greece, by adopting the Euro gave up its control. They effectively became like a US state that must operate on a balanced budget. Because they can’t print their own currency they literally could run out of money. Their borrowing costs skyrocketed as a result. [I agree, for most countries not named Germany, adopting the Euro was an extremely idiotic thing to do]
US treasuries are not a pyramid scheme because there is zero chance of default [again, while I technically agree, does it matter that the government can’t default but that I can be paid back with worthless dollars because of rampant inflation?]
The author presents some extremely oversimplified little models and invents new terms (green/yellow dollars) to explain MMT. [The models look cute, but there are thousands of economists who disagree with her arguments here (many of the arguments over my head). As someone who leans right, I naturally tend to agree with some of the arguments from conservative economists but even many prominent liberal economists like Paul Krugman have said some pretty disparaging things about MMT). To the layman like myself, most of these examples strike me as cheap tricks associated with cooking the books and money laundering that occur before many enterprises eventually collapse. Its all a little unnerving.]
Congress can just make a bigger budget (as long as it doesn’t increase inflation). [We’ll based off recent events we may already be there. As I type this in August 2021, inflation is trending higher than its been in a decade, my mutual fund is a at record highs despite any tangible evidence that the broader economy justifies this, and housing costs are at record highs. That is after all the COVID binge spending, but before the $1T infrastructure bill and the follow on $3T spending bill that is being pushed through Congress now. The problem is, even the smartest economist don’t seem convinced that this spending binge and inflation are not connected, though many are totting the company line that this inflation is only transitory.]
She notes that the Federal Reserve controls the US interest rate (so it can always keep it below economic growth rate). Unlike Argentina or Greece where they had runaway rates. [I agree in principal, though I’m not sure I understand the long term effects of such a policy.]
She notes that the last time the federal debt was paid off was during Andrew Jackson’s presidency and that didn’t end well. [Wow, this is such a lazy oversimplification. The economic panic during Van Buren’s term occurred before the modern economic apparatus (the Federal Reserve, etc) even existed (and may have been caused in part by that very reason since Jackson killed the Bank of the US). To blame it on a single cause (paid off national debt) is foolishness.]
She argues that we should call debt something else so it doesn’t have a negative connotation. [Ughh. Politicians love to control how you think by renaming things to sound more appealing or inclusive…this is straight out of the novel 1984.]
She argues that deficits don’t crowd out private sector borrowing because deficits on the government ledger are net positives on the private sector ledger. Quote “Government expenditures always lead to an increase in the supply of net financial assets.” [I don’t even know what to say here. Lets rack the debt I guess. Even her slightly longer explanation and diagrams of 2 buckets seemed really oversimplified and inconsistent with reality.]
Her 5th myth was on trade deficits. In general, trade surpluses are not an issue when we are at full employment. Since we are never at full employment she proposes her “everyone gets a job” idea again. [This seems like one of those instances when she invents a solution to fix a problem with her model, ignoring the fact that the proposed solution is completely unworkable.]
Her 6th myth addresses the sustainability of entitlement programs. She again goes back to the fact that the government can print its own money so there will always be funds to pay these entitlements as long as there are sufficient real goods and services to back it up. [Again, there is zero explanation of how the government will know in advance when inflationary pressure is kicking in and how to rein in spending and entitlements that were passed in pursuit of all these wild dreams. Yes, the government can’t default, but they can pay you in devalued currency.]
I did learn a lot in this section, specifically about how FDR set up payroll taxes for social security to build support as people felt invested, thereby making it harder to repeal. However, because of this setup, people believe the money won’t be there for them as we outspend the payroll taxes and the law as written, falling below zero automatically triggers a 20% cut in benefits. Whereas other entitlements not tied to particular tax revenue streams are not at risk because the government can just print more money.
Her 7th chapter is another attempt to spin the meaning of deficits (we don’t have budget deficits, we have deficits in education, infrastructure, etc). This is really cute, but just sidesteps the real debate by easily deflecting the short attention spans of Americans elsewhere.
October 15, 2022
Yes, this is how the US economy actually works.
One of the worst kept secrets is that Americans, thanks to our collective luck of birth and other circumstance outside of our control that hold America up as the current clear hegemon, are uniquely in a position to structure our society, including our economy, which outlines how people are supposed to deal with people outside of our small societies of family, friends, work colleagues, and other close individual affinities, any way we want it--technically and practically.
Few Americans understand this and even fewer will believe the truth of their lucky circumstance if they ever find truth, whatever its form. Can't blame the average American for being sceptical--life just isn't very good relative to what it *should* be in such a blessed nation. And the ruling class is really good at advertising--at messaging. Many Americans believe they are doing better than they are, or at least they believe they could do better if they keep working hard and obey more rules. A lot try repeatedly to "make it" until finally giving up in despair.
While this book does a passable job of disclosing the secret, it's not perfect by any stretch.
After disclosing that Americans collectively have the power to radically reorder society any way the majority WANT, Kelton timidly suggests a $15 min wage.
The average American can be far more creative than that! How about, stop economically rewarding those that are exploiting the rest of us and destroying our planet??
But Kelton’s book is a good start: a fairly popular, dumbed-down-but-massively paradigm-shifting a-ha for potentially hundreds of thousands that otherwise may not bother with economic theory beyond the popular conception of economic theory or history. It’s shocking how little we tend to comprehend—or to be even remotely curious about—the system in which we live and the things we are told about it by the rulers.
There is nothing new or shocking in MMT as presented here, but I suspect it will be nevertheless new and shocking to many.
MMT is useful to a degree as a counter to politicians and others that brand every non-military spending proposal—unless it puts money directly into their and their donors’ pockets—as too expensive, but the book has critical blind spots.
Kelton writes like a breathless evangelist: the claim, “MMT solves economics AND whitens teeth!” would not be surprising to find within the 300+ pages. Bald, patently unscientific claims such as, "MMT shows" or "MMT proves" abound. To the extent I made involuntary sounds of surprise when I came upon the few times Kelton acknowledges that MMT is not the paradigm that solves everything.
Kelton nevertheless feels the need to defensively claim towards the end that "MMT is not a religion" --having proclaimed and testified of its beliefs, ceremonies, and blessings over the course of 336 pages.
Of course it is a religion, or at least an ideology, just like Keynsianism, capitalism, socialism, the Republican and Democratic parties, constitutional scholars, geneticists, psychiatrists, investment banking, and, I have it on good authority as a former one, Mormonism.
Like all of these and others, MMT requires faith in some seemingly absurd tenets, but, unlike many of the above, MMT seems to describe quite well a part of the world and a specific system (the phenomenon known as the U.S. economy).
I could have used some math around the ubiquitous “stats” to spice up the exposition and defend the fairly flippant dismissal of the destructive power of inflation. Government deficits may not matter in the way many politicians claim they do (and it's only Democrats in recent decades that pretend that deficits matter--Republicans have long-since dropped the facade in practice, if not rhetoric)—yes, there is always currency to spend—but too much liquidity destroys value and keeps us all on the treadmill of continuous, white-knuckled economic growth to keep up with prices.
The idea of guaranteed employment at $15/hr at a useless government (or corporate) job is so 2016. Why not a much simpler and non-regressive program of UBI + universal healthcare and better social security? Kelton got two of these, but why is $15/hr seen as a panacea? Sounds like depths of poverty, USA, unless it’s accompanied by more radical improvement. UBI would give everyone autonomy to pursue meaningful activity (meaningful to themselves, not to some public or private pencilneck) with their sole, precious life. It would also recognise the entropy law, where a “job guarantee” does not.
Rightly criticises Western reliance on monetary policy, which, as Galbraith noted 80 years ago, is gravely dangerous to the extent it is effective--as we are all now witnessing. Good stuff on the importance of monetary sovereignty, particularly for less-developed states—the most important problem with the Eurozone.
One of the worst kept secrets is that Americans, thanks to our collective luck of birth and other circumstance outside of our control that hold America up as the current clear hegemon, are uniquely in a position to structure our society, including our economy, which outlines how people are supposed to deal with people outside of our small societies of family, friends, work colleagues, and other close individual affinities, any way we want it--technically and practically.
Few Americans understand this and even fewer will believe the truth of their lucky circumstance if they ever find truth, whatever its form. Can't blame the average American for being sceptical--life just isn't very good relative to what it *should* be in such a blessed nation. And the ruling class is really good at advertising--at messaging. Many Americans believe they are doing better than they are, or at least they believe they could do better if they keep working hard and obey more rules. A lot try repeatedly to "make it" until finally giving up in despair.
While this book does a passable job of disclosing the secret, it's not perfect by any stretch.
After disclosing that Americans collectively have the power to radically reorder society any way the majority WANT, Kelton timidly suggests a $15 min wage.
The average American can be far more creative than that! How about, stop economically rewarding those that are exploiting the rest of us and destroying our planet??
But Kelton’s book is a good start: a fairly popular, dumbed-down-but-massively paradigm-shifting a-ha for potentially hundreds of thousands that otherwise may not bother with economic theory beyond the popular conception of economic theory or history. It’s shocking how little we tend to comprehend—or to be even remotely curious about—the system in which we live and the things we are told about it by the rulers.
There is nothing new or shocking in MMT as presented here, but I suspect it will be nevertheless new and shocking to many.
MMT is useful to a degree as a counter to politicians and others that brand every non-military spending proposal—unless it puts money directly into their and their donors’ pockets—as too expensive, but the book has critical blind spots.
Kelton writes like a breathless evangelist: the claim, “MMT solves economics AND whitens teeth!” would not be surprising to find within the 300+ pages. Bald, patently unscientific claims such as, "MMT shows" or "MMT proves" abound. To the extent I made involuntary sounds of surprise when I came upon the few times Kelton acknowledges that MMT is not the paradigm that solves everything.
Kelton nevertheless feels the need to defensively claim towards the end that "MMT is not a religion" --having proclaimed and testified of its beliefs, ceremonies, and blessings over the course of 336 pages.
Of course it is a religion, or at least an ideology, just like Keynsianism, capitalism, socialism, the Republican and Democratic parties, constitutional scholars, geneticists, psychiatrists, investment banking, and, I have it on good authority as a former one, Mormonism.
Like all of these and others, MMT requires faith in some seemingly absurd tenets, but, unlike many of the above, MMT seems to describe quite well a part of the world and a specific system (the phenomenon known as the U.S. economy).
I could have used some math around the ubiquitous “stats” to spice up the exposition and defend the fairly flippant dismissal of the destructive power of inflation. Government deficits may not matter in the way many politicians claim they do (and it's only Democrats in recent decades that pretend that deficits matter--Republicans have long-since dropped the facade in practice, if not rhetoric)—yes, there is always currency to spend—but too much liquidity destroys value and keeps us all on the treadmill of continuous, white-knuckled economic growth to keep up with prices.
The idea of guaranteed employment at $15/hr at a useless government (or corporate) job is so 2016. Why not a much simpler and non-regressive program of UBI + universal healthcare and better social security? Kelton got two of these, but why is $15/hr seen as a panacea? Sounds like depths of poverty, USA, unless it’s accompanied by more radical improvement. UBI would give everyone autonomy to pursue meaningful activity (meaningful to themselves, not to some public or private pencilneck) with their sole, precious life. It would also recognise the entropy law, where a “job guarantee” does not.
Rightly criticises Western reliance on monetary policy, which, as Galbraith noted 80 years ago, is gravely dangerous to the extent it is effective--as we are all now witnessing. Good stuff on the importance of monetary sovereignty, particularly for less-developed states—the most important problem with the Eurozone.
March 8, 2024
Booked as the definitive primer on Modern Monetary Theory (MMT), Stephanie Kelton's The Deficit Myth is mostly a mild-mannered polemic (oxymoronic but true!) about how stupid and stingy all U.S. politicians, financial leaders, "millionaires and billionaires" (read in Bernie voice) are because they won't give the greenlight for printing money to infinity and tossing it indiscriminately into the outstretched hands of Americans. Doesn't everyone know that a monetary sovereign isn't a household and thus debt is imaginary (as long as it doesn't cause inflation!)?
Okay, on a more serious note, Kelton does flesh out MMT precepts fairly clearly for her readers, which on their surface seem like a fairly persuasive, neo-Keynesian extension of some of the ideas of Milton Friedman and other monetarists. These ideas can look even more appealing like in the recent past where we saw ever massively ballooning federal debt, little to no inflation, somewhat low unemployment, yet fairly sluggish but consistent economic growth. However, that situation was somewhat unprecedented in economic history, so let's just exercise a little epistemic humility.
The real issue with The Deficit Myth is Kelton's either misrepresenting, misunderstanding, and/or ignoring the real problems and limitations to MMT. I'm not an expert in economics by any means and maybe Kelton has good rebuttals to some of my concerns, but they aren't present in her work. First, she acknowledges the very real and very dangerous threat of hyperinflation with MMT, but is blasé about how inflation would mechanistically be kept in check (it is foolish to think Congress could respond with targeted taxation to respond to hyperinflation in a manner that would completely avoid calamity). Second, she somewhat flippantly dismisses crowding out concerns by taking a myopic and somewhat arrogant perspective on private investment. Kelton pretends to know what the "common good" is and how to improve human flourishing, which to me seems like she hasn't seriously read an Austrian School thinker ever or heard of the Solyndra debacle. Third, she ignores both the practical and theoretical threat that cryptocurrency and transnational online economies pose to MMT. I know lots of people think cryptocurrency is a joke and maybe it is (I really don't know), but it seems like a phenomenon that's antithetical to MMT and exists as a hedge against slapdash monetary policy. Fourth, her unemployment/labor market ideas seem to be ignorant of behavioral economics, game theory, and human nature. If there isn't some kind of slack in the labor market, the market won't be very efficient and productivity will decline. And this list could go on and on.
Given the lack of rigor or a comprehensive, detailed approach, it is hard to take The Deficit Myth seriously. Even in the places it seems to have persuasive points, it is evidently missing something about the overall picture. So yes, U.S. federal debt is not the imminent crisis some have an incentive to make it seem, but it also isn't just an accounting feature that can be waved away by a keystroke like Kelton would like you to believe. There are harder but difficult to quantify and understand economic realities. It is unwise to be credulous about glib macroeconomic theories of any kind generally.
Okay, on a more serious note, Kelton does flesh out MMT precepts fairly clearly for her readers, which on their surface seem like a fairly persuasive, neo-Keynesian extension of some of the ideas of Milton Friedman and other monetarists. These ideas can look even more appealing like in the recent past where we saw ever massively ballooning federal debt, little to no inflation, somewhat low unemployment, yet fairly sluggish but consistent economic growth. However, that situation was somewhat unprecedented in economic history, so let's just exercise a little epistemic humility.
The real issue with The Deficit Myth is Kelton's either misrepresenting, misunderstanding, and/or ignoring the real problems and limitations to MMT. I'm not an expert in economics by any means and maybe Kelton has good rebuttals to some of my concerns, but they aren't present in her work. First, she acknowledges the very real and very dangerous threat of hyperinflation with MMT, but is blasé about how inflation would mechanistically be kept in check (it is foolish to think Congress could respond with targeted taxation to respond to hyperinflation in a manner that would completely avoid calamity). Second, she somewhat flippantly dismisses crowding out concerns by taking a myopic and somewhat arrogant perspective on private investment. Kelton pretends to know what the "common good" is and how to improve human flourishing, which to me seems like she hasn't seriously read an Austrian School thinker ever or heard of the Solyndra debacle. Third, she ignores both the practical and theoretical threat that cryptocurrency and transnational online economies pose to MMT. I know lots of people think cryptocurrency is a joke and maybe it is (I really don't know), but it seems like a phenomenon that's antithetical to MMT and exists as a hedge against slapdash monetary policy. Fourth, her unemployment/labor market ideas seem to be ignorant of behavioral economics, game theory, and human nature. If there isn't some kind of slack in the labor market, the market won't be very efficient and productivity will decline. And this list could go on and on.
Given the lack of rigor or a comprehensive, detailed approach, it is hard to take The Deficit Myth seriously. Even in the places it seems to have persuasive points, it is evidently missing something about the overall picture. So yes, U.S. federal debt is not the imminent crisis some have an incentive to make it seem, but it also isn't just an accounting feature that can be waved away by a keystroke like Kelton would like you to believe. There are harder but difficult to quantify and understand economic realities. It is unwise to be credulous about glib macroeconomic theories of any kind generally.
November 29, 2020
How does the US Federal Government raise the money it spends to run its programs, conduct its wars and pay out unemployment benefits? It taxes and borrows, right? No, says this author, that's not how it really works. Since the Federal Government issues its own fiat currency -- "prints" it, as it's usually put -- it can never run out of money, so it really doesn't need to either tax or borrow. It can just spend. For a variety of reasons including the fact that that's the way it's "always been done", it taxes and borrows anyway, except when there's a crisis. That's when it really cranks up the virtual printing presses and simply spends without benefit of bothering to pretend to raise the money. That's what much of the spending to bring the Great Recession to an end by the Obama administration (and the very tail end of the Bush administration) was all about -- pumping trillions of dollars into the banking system with emergency transfusions that were nothing more than electronic transactions at the Federal Reserve of NY. "Quantitative easing", which pumped further trillions into the economy over a period of several years up until 2013, had the same idea. The Federal Reserve did not raise these funds through either taxing or borrowing -- it simply credited all the necessary bank balances, and that was that.
This idea is the key one behind Modern Monetary Theory, of which Stephanie Kelton is a prominent exponent. She has no time for arguments that Social Security is going to run out of money unless it's cut back, or that we lack the money to rebuild our decaying national infrastructure of roads and bridges and airports, or that we can't fund some version of health insurance for all. When we need to, just print it, she says. The real limit is running out of resources -- that is, running out of additional productive capacity -- not running out of money.
An important caveat to the above is that this model only works for central governments of countries that have have their own sovereign "fiat" currencies AND have a history of paying their debts (particularly if they want to sell debt instruments to foreigners). So, this excludes the Eurozone countries that don't have their own individual currencies, but rather a shared one. It excludes places like Venezuela and Argentina and Zimbabwe that can't borrow in their own currencies because of their weak economies, high inflation and lousy credit. It excludes countries that use another country's currency, like El Salvador and Panama and Ecuador that use the US dollar. And it excludes governments that are not in charge of their country's currency, such as state/provincial and local governments.
There's another important factor, uniquely applicable to the US, that I don't recall Kelton mentioning: the special role of the US as the manager of the world's only international reserve currency. US dollars are desired by foreigners for a whole host of reasons: the sheer size of the US economy, the liquidity of the currency, the availability of massive stock and bond markets, an independent central bank (the Federal Reserve), good financial regulation (the SEC, mainly), the stability of the currency, and so on. So, given that foreigners are willing to soak up "excess" dollars, it frees the US to both run a permanent trade deficit (we always import more than we sell abroad) and to pump up the money supply at will, without worrying about the currency plummeting in value as a result.
Getting back to taxes, Kelton does NOT think that governments should stop taxing, however, for several reasons such as: One, taxes help to redistribute income and wealth to limit inequality, which she thinks is not only corrosive to democracy but is also bad for the economy, because as inequality rises, the great mass of consumers will simply have so little money to spend that the economy starts sputtering from a lack of aggregate demand. Two, taxing the population ensures that consumers don't consume so much of the economic output of the country that there are not enough resources allocated to government to carry out its functions. Three, the need to pay taxes motivates people to work more. (This is not one of her stronger arguments). Four, targeted taxes help to raise the price of products that have negative, costly side effects that are not otherwise priced into the product, such as cigarettes, fossil fuels, and alcohol -- with the increased price helping to discourage consumption of these products and offset the cost of curing the damage they cause.
The counter-argument to the "print more money whenever you run short" argument is that doing so will trigger inflation, with too many dollars chasing too few goods and services. Inflation is taken to be a bad thing for most people, especially on the grounds that it erodes buying power for those on fixed incomes or who have too little market power to keep their incomes rising at the same or faster rate as inflation.
Her answer to the inflation argument is simple: the US economy always runs with some amount of "slack", that is, some amount of unemployed human and capital resources, which of course is true. The real involuntary unemployment rate in the US is about 10% today, in these Covid times. So, she says, print money up until the point that you see inflation above some acceptable threshold such as 2%, and then ease up on the presses. But in the process, you will have brought into production a large part of not only the unemployed, but also those who are no longer counted as unemployed because they have simply given up on finding a job. The added 5-10% of production -- forever -- will largely pay for those expanded government programs AND will increase the productive capacity of the economy further by making it more efficient through creating, for example, a national transportation infrastructure that actually works well, a health insurance system that covers everybody, and an education system that is better resourced.
Embedded in the idea of managing to the optimal amount of slack in the economy is that the real hard limit on how much a country can consume is how much much it produces (ignoring the effect of trade). The combined use of goods and services by government, consumers and business investment can'be be more that the goods and services produced. Trying to consume more just results in rising prices a.k.a. inflation. So, Kelton says, worry about the country using up all its resources of productive capacity, not about accounting entries. So, for example, Social Security won't "run out of money" until the ability of the economy to produce can't keep pace with the resources required by the program, not when some magical balance in the Social Security fund runs dry.
There's more to the book than this, of course, notably the idea of a federal jobs guarantee, which is more controversial, but her core idea is the one above. Her arguments are very Keynesian, in the main, in that she is advocating that it is part of the role of government to stimulate the economy through added spending when aggregate demand is too low and therefore resources are sitting idle. The only difference -- which is a big difference -- is in saying the government doesn't necessary need to pretend that it's financing itself with a budget that pays for all these expenses through taxes or borrowing by selling bonds. Her argument also draws on the experience such as that of the FDR era in the US in the 1930's, when programs such as the Civilian Conservation Corps directly employed masses of Americans in carrying out public works projects, such as building infrastructure in parks. This theory makes sense at a high level, but whether it's a good idea to provide a guaranteed job to all who want one, at a minimum of $15/hr, by hiring job-seekers directly, or instead to do it by spending through 3rd parties such as private social service agencies and construction companies building roads/bridges and the like is highly debatable.
All in all, this is a very refreshing book, and has caused me to look through a different perspective at how we finance government and how we might therefore be able to fix our shredded safety net, infrastructure and public services. Even if you disagree with some or all of her thesis, this book will challenge you to think a lot more deeply about the role of national governments -- in the US and other country with a similarly strong sovereign currency -- and how to finance what they do.
This idea is the key one behind Modern Monetary Theory, of which Stephanie Kelton is a prominent exponent. She has no time for arguments that Social Security is going to run out of money unless it's cut back, or that we lack the money to rebuild our decaying national infrastructure of roads and bridges and airports, or that we can't fund some version of health insurance for all. When we need to, just print it, she says. The real limit is running out of resources -- that is, running out of additional productive capacity -- not running out of money.
An important caveat to the above is that this model only works for central governments of countries that have have their own sovereign "fiat" currencies AND have a history of paying their debts (particularly if they want to sell debt instruments to foreigners). So, this excludes the Eurozone countries that don't have their own individual currencies, but rather a shared one. It excludes places like Venezuela and Argentina and Zimbabwe that can't borrow in their own currencies because of their weak economies, high inflation and lousy credit. It excludes countries that use another country's currency, like El Salvador and Panama and Ecuador that use the US dollar. And it excludes governments that are not in charge of their country's currency, such as state/provincial and local governments.
There's another important factor, uniquely applicable to the US, that I don't recall Kelton mentioning: the special role of the US as the manager of the world's only international reserve currency. US dollars are desired by foreigners for a whole host of reasons: the sheer size of the US economy, the liquidity of the currency, the availability of massive stock and bond markets, an independent central bank (the Federal Reserve), good financial regulation (the SEC, mainly), the stability of the currency, and so on. So, given that foreigners are willing to soak up "excess" dollars, it frees the US to both run a permanent trade deficit (we always import more than we sell abroad) and to pump up the money supply at will, without worrying about the currency plummeting in value as a result.
Getting back to taxes, Kelton does NOT think that governments should stop taxing, however, for several reasons such as: One, taxes help to redistribute income and wealth to limit inequality, which she thinks is not only corrosive to democracy but is also bad for the economy, because as inequality rises, the great mass of consumers will simply have so little money to spend that the economy starts sputtering from a lack of aggregate demand. Two, taxing the population ensures that consumers don't consume so much of the economic output of the country that there are not enough resources allocated to government to carry out its functions. Three, the need to pay taxes motivates people to work more. (This is not one of her stronger arguments). Four, targeted taxes help to raise the price of products that have negative, costly side effects that are not otherwise priced into the product, such as cigarettes, fossil fuels, and alcohol -- with the increased price helping to discourage consumption of these products and offset the cost of curing the damage they cause.
The counter-argument to the "print more money whenever you run short" argument is that doing so will trigger inflation, with too many dollars chasing too few goods and services. Inflation is taken to be a bad thing for most people, especially on the grounds that it erodes buying power for those on fixed incomes or who have too little market power to keep their incomes rising at the same or faster rate as inflation.
Her answer to the inflation argument is simple: the US economy always runs with some amount of "slack", that is, some amount of unemployed human and capital resources, which of course is true. The real involuntary unemployment rate in the US is about 10% today, in these Covid times. So, she says, print money up until the point that you see inflation above some acceptable threshold such as 2%, and then ease up on the presses. But in the process, you will have brought into production a large part of not only the unemployed, but also those who are no longer counted as unemployed because they have simply given up on finding a job. The added 5-10% of production -- forever -- will largely pay for those expanded government programs AND will increase the productive capacity of the economy further by making it more efficient through creating, for example, a national transportation infrastructure that actually works well, a health insurance system that covers everybody, and an education system that is better resourced.
Embedded in the idea of managing to the optimal amount of slack in the economy is that the real hard limit on how much a country can consume is how much much it produces (ignoring the effect of trade). The combined use of goods and services by government, consumers and business investment can'be be more that the goods and services produced. Trying to consume more just results in rising prices a.k.a. inflation. So, Kelton says, worry about the country using up all its resources of productive capacity, not about accounting entries. So, for example, Social Security won't "run out of money" until the ability of the economy to produce can't keep pace with the resources required by the program, not when some magical balance in the Social Security fund runs dry.
There's more to the book than this, of course, notably the idea of a federal jobs guarantee, which is more controversial, but her core idea is the one above. Her arguments are very Keynesian, in the main, in that she is advocating that it is part of the role of government to stimulate the economy through added spending when aggregate demand is too low and therefore resources are sitting idle. The only difference -- which is a big difference -- is in saying the government doesn't necessary need to pretend that it's financing itself with a budget that pays for all these expenses through taxes or borrowing by selling bonds. Her argument also draws on the experience such as that of the FDR era in the US in the 1930's, when programs such as the Civilian Conservation Corps directly employed masses of Americans in carrying out public works projects, such as building infrastructure in parks. This theory makes sense at a high level, but whether it's a good idea to provide a guaranteed job to all who want one, at a minimum of $15/hr, by hiring job-seekers directly, or instead to do it by spending through 3rd parties such as private social service agencies and construction companies building roads/bridges and the like is highly debatable.
All in all, this is a very refreshing book, and has caused me to look through a different perspective at how we finance government and how we might therefore be able to fix our shredded safety net, infrastructure and public services. Even if you disagree with some or all of her thesis, this book will challenge you to think a lot more deeply about the role of national governments -- in the US and other country with a similarly strong sovereign currency -- and how to finance what they do.
June 10, 2021
I loved this book! I didn't understand it but I loved how Kelton presented information completely foreign to my brain. I will need to read this again (or 10 times) to fully understand what she is getting at but the tldr summary is that deficits are not bad, inflation is, as long as you (Sovereign country) control your own money.
Kelton walks through 5 myths associated with national defecits, all of which I pretty much believed and were a core part of how I viewed monetary policy. My brain hit a wall and I have slowly been trying to piece it back together based on this new information. Should I do an about face after being convinced by a single source? Certainly not but Kelton is convincing and I will look for more.
I am as liberal as they come but I was a bit put off by the last 25% where the arguments took a fairly leftward bent. I agree with all of them but I think it detracted from the very objective first 3/4 of the book. 4.5 stars rounded up because I do lean left and absolutely support her final conclusions.
Very happy I read this, need more.
Kelton walks through 5 myths associated with national defecits, all of which I pretty much believed and were a core part of how I viewed monetary policy. My brain hit a wall and I have slowly been trying to piece it back together based on this new information. Should I do an about face after being convinced by a single source? Certainly not but Kelton is convincing and I will look for more.
I am as liberal as they come but I was a bit put off by the last 25% where the arguments took a fairly leftward bent. I agree with all of them but I think it detracted from the very objective first 3/4 of the book. 4.5 stars rounded up because I do lean left and absolutely support her final conclusions.
Very happy I read this, need more.
February 11, 2022
Se centra principalmente en EEUU, país emisor de su propia moneda. Me habría gustado que hiciese una comparación con la eurozona donde los estados miembros son usuarios de la moneda. Aún así, un buen libro donde nos enseña que el déficit no es nada malo. Todo lo contrario.
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It focuses mainly on the US, a country that issues its own currency. I would have liked you to make a comparison with the eurozone where the member states are users of the currency. Still, a good book where it teaches us that the deficit is not a bad thing.
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It focuses mainly on the US, a country that issues its own currency. I would have liked you to make a comparison with the eurozone where the member states are users of the currency. Still, a good book where it teaches us that the deficit is not a bad thing.
April 30, 2020
Most of soc dems and leftists already know that we can run massive deficits as the US government controls the dollar and we can't go bankrupt. Give it as a present to your liberal friend who is misinformed. If your friend is a right winger, don't worry about it. They are lost cause.
August 9, 2020
Repetitive shallow political rhetoric. Whatever merits or faults Modern Monetary Theory may have, you won't learn about them in this book.
April 16, 2021
What a dangerous book. The Deficit Myth is simultaneously radicalizing and common-sense, in that it transforms the entire way you see the US government and economy by pointing out the facts that have been living right beneath our nose but that we've never appreciated. In short -- and I LOVE that the book came out right before the pandemic so we've already seen it proven right -- money printer really DO go *brrrrrrrrr*.
The book, written ever-so-helpfully by a professor and basically the prophet of Modern Monetary Theory (MMT), walks you through several of the biggest myths about the deficit and US government spending, but almost all of them revolve around the single most pivotal idea of MMT: the US government is not a currency user (like a person, household, or company), but rather a currency *issuer*. This means that money literally is no object: ever since 1974, when the US decoupled its currency from the gold standard, the US dollar has literally been a concept with no real-world grounding, so printing a trillion new dollars does not immediately send inflation soaring since there is no peg or standard to keep it grounded.
Congress has the full, unfettered power of the purse; the only thing that ever keeps the government from spending more is NOT the ability -- it never lacks the ability to print money -- but rather the political will. This is an incredibly revolutionary concept. And we've already seen it play out with countless rounds of stimulus and economic intervention that have cut poverty in half practically overnight, funded an unthinkable vaccination development and production campaign, and seen no significant threat of rising inflation throughout. Money printer go brrrrrrr.
My favorite concept was Kelton's bucket analogy, but that I will call the Continuity of Currency as a parallel to the same concept in physics: in short, because dollars in circulation can be neither created nor destroyed, a dollar of government deficit is *necessarily* a dollar of somebody else's surplus. That somebody could be a person, a corporation, or a foreign government, so in that regard, deficits matter insofar as we don't want one person or entity to hold all the surplus, but when done correctly, we should love government deficits because they literally put money in our pockets! How delightful!
MMT is a descriptive way of looking at the world; its core tenets do not prescribe policy but merely align us to the facts. That's an important note, because MMT can be used to justify wars and corporate tax cuts as much as universal healthcare and stimulus spending. But Kelton, a former economic adviser to Bernie Sanders and the Senate Budget Committee, offers probably my favorite policy proposal of the 21st century: a federal jobs guarantee. Like Social Security or Medicare, the jobs guarantee would be built into the federal budget as a mandatory expenditure and permanent program. But it would be removing a current mandatory expenditure and permanent program which would be rendered irrelevant -- unemployment insurance. Why would the US government pay people to sit idle when it could pay them to build parks and solar panels!! A jobs guarantee would eliminate involuntary unemployment, drastically reduce poverty, increase the GDP, and also grow a pool of more-skilled and ready labor for the private sector to cherry pick from, a massive improvement from a pool of ~10 million unskilled, long-term unemployed idle people today. A jobs guarantee would be no silver bullet to all the nation's woes, but no single policy would have a more positive effect on the country and the economy.
MMT's archenemy is not the deficit; it is inflation. So long as the government is not spending so many dollars that prices increase beyond wages, then no deficit is too large. What a beautiful, freeing concept.
This is an incredibly smart book, written to be accessible to not-so-smart people. You do not need an econ degree to understand it -- Lord knows, because many people with econ degrees still refuse its salvation. Understanding MMT is the only way the US can transform its economy and society radically enough to confront the crisis of climate change and finally end the scourge of poverty on our soil. I hope the gospel only spreads from here.
The book, written ever-so-helpfully by a professor and basically the prophet of Modern Monetary Theory (MMT), walks you through several of the biggest myths about the deficit and US government spending, but almost all of them revolve around the single most pivotal idea of MMT: the US government is not a currency user (like a person, household, or company), but rather a currency *issuer*. This means that money literally is no object: ever since 1974, when the US decoupled its currency from the gold standard, the US dollar has literally been a concept with no real-world grounding, so printing a trillion new dollars does not immediately send inflation soaring since there is no peg or standard to keep it grounded.
Congress has the full, unfettered power of the purse; the only thing that ever keeps the government from spending more is NOT the ability -- it never lacks the ability to print money -- but rather the political will. This is an incredibly revolutionary concept. And we've already seen it play out with countless rounds of stimulus and economic intervention that have cut poverty in half practically overnight, funded an unthinkable vaccination development and production campaign, and seen no significant threat of rising inflation throughout. Money printer go brrrrrrr.
My favorite concept was Kelton's bucket analogy, but that I will call the Continuity of Currency as a parallel to the same concept in physics: in short, because dollars in circulation can be neither created nor destroyed, a dollar of government deficit is *necessarily* a dollar of somebody else's surplus. That somebody could be a person, a corporation, or a foreign government, so in that regard, deficits matter insofar as we don't want one person or entity to hold all the surplus, but when done correctly, we should love government deficits because they literally put money in our pockets! How delightful!
MMT is a descriptive way of looking at the world; its core tenets do not prescribe policy but merely align us to the facts. That's an important note, because MMT can be used to justify wars and corporate tax cuts as much as universal healthcare and stimulus spending. But Kelton, a former economic adviser to Bernie Sanders and the Senate Budget Committee, offers probably my favorite policy proposal of the 21st century: a federal jobs guarantee. Like Social Security or Medicare, the jobs guarantee would be built into the federal budget as a mandatory expenditure and permanent program. But it would be removing a current mandatory expenditure and permanent program which would be rendered irrelevant -- unemployment insurance. Why would the US government pay people to sit idle when it could pay them to build parks and solar panels!! A jobs guarantee would eliminate involuntary unemployment, drastically reduce poverty, increase the GDP, and also grow a pool of more-skilled and ready labor for the private sector to cherry pick from, a massive improvement from a pool of ~10 million unskilled, long-term unemployed idle people today. A jobs guarantee would be no silver bullet to all the nation's woes, but no single policy would have a more positive effect on the country and the economy.
MMT's archenemy is not the deficit; it is inflation. So long as the government is not spending so many dollars that prices increase beyond wages, then no deficit is too large. What a beautiful, freeing concept.
This is an incredibly smart book, written to be accessible to not-so-smart people. You do not need an econ degree to understand it -- Lord knows, because many people with econ degrees still refuse its salvation. Understanding MMT is the only way the US can transform its economy and society radically enough to confront the crisis of climate change and finally end the scourge of poverty on our soil. I hope the gospel only spreads from here.
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