Written by John Furlan
Stephanie Kelton explains throughout her highly readable new book, “The Deficit Myth”, how MMT (Modern Monetary Theory) provides an incredibly useful “lens” to look at many critical economic issues, but is not a “panacea.” MMT can help with racial injustice, unemployment, Covid-19, climate change, and other challenging problems.
Please share this article – Go to very top of page, right hand side, for social media buttons.
The book was ranked #13 on the NYT hardcover nonfiction list at the end of June, the month it was published, and was the only economics book on that list. For all those who may have heard of MMT and wondered what it is all about, Kelton’s book is the best way to find out. I highly recommend it.
Don’t worry about the word “theory” in MMT, or that Kelton is a professor of economics and public policy at Stony Brook University. This is not a dry academic tome for economists.
The paradigm shift it explains might at first seem counter-intuitive, then simple, then perhaps even somewhat obvious, since Congress passed the $2.2 trillion CARES Act in late March, when it did NOT worry about deficits, which happened after Kelton’s book went to press.
Well before that, it had long since become clear, even to non-economists like myself who have no expertise in MMT whatsoever, that the dire fears and oft-made disaster predictions of deficit/debt scolds, both hawks and doves, about the U.S., Japan and China had not come to pass.
So What Is That MMT “Lens”? Monetary Sovereignty
Perhaps the most essential and initially counter-intuitive idea of the book is that a nation that has monetary sovereignty does not have to first “pay for,” via taxes or bonds, anything that its people and their elected representatives choose to spend on.
“Congress has the power of the purse. If it really wants to accomplish something, the money can always be made available.”
Does that mean there are no limits or constraints?
Kelton’s answer, repeated numerous times for emphasis is a very firm NO, but the constraints are inflation and real resources, not dollar entries on accounting ledgers at the Fed acting as the Treasury’s agent.
“At its core, MMT is about replacing an artificial (revenue) constraint with a real (inflation) constraint.”
So what is a monetary sovereign? A country like the U.S. that issues its own currency, which is not tied to something else, like gold, and whose debts are mostly denominated in its own currency.
“The US issues a freely floating fiat currency so it doesn’t need to tax or borrow before it can spend.”
From a practical political view, it may be more helpful not to focus too much on that somewhat counter-intuitive idea, per se, but rather to emphasize that such a country has far more flexibility to invest without overly worrying about deficits and debt. The U.S. is not Greece, which gave up its monetary sovereignty to the EU and ECB, with dire consequences for its citizens.
Once the U.S. exited the Bretton Woods system in 1971 – 73, it has had this flexibility, but it often doesn’t use it. Or rather, it has mainly been used by the conservative GOP to cut taxes for the wealthy and corporations and to expand the military budget.
But ironically it has not been used by liberal Democrats to pursue their agenda, in a role reversal from Reagan forward of actual, not fake, deficit hawks and doves. Kelton coined the term deficit owl to distinguish herself from both.
The single most important policy prescription that MMTers like Kelton propose is a federal job guarantee, here’s a new book on the subject. Perhaps its most important feature is that it is automatic, not discretionary, so that it doesn’t depend on the whims of a polarized, dysfunctional government.
Kelton Would Say “Fiscal Space” Has ALWAYS Been There, Unlike “Big Name” Keynesians
Kelton points out that Obama was reluctant to have a large enough stimulus package to deal with the 2007 – 09 Great Financial Crisis (GFC), and then he quickly felt that the resulting deficit from that crisis, much of which came from a decline in tax revenues, was too high, resulting, along with the GOP’s rabid obstructionism, in a weak recovery with unemployment far too high for far too long.
Partially from the book, partially from my own recollection, a few mainstream Keynesians like Christina Romer and Paul Krugman also felt the Obama stimulus should have been far larger for far longer. Other “big name” Keynesians, such as Larry Summers, Jason Furman, Olivier Blanchard, seem to have only very gradually come around to the view that there is more “fiscal space” than they had previously thought.
Kelton and her MMT co-thinkers, whom she generously cites and credits, would say that “fiscal space,” so to speak, has ALWAYS been there, subject to inflation and real resource constraints. And that
“in spite of what most economists say, there’s simply no preordained relationship between fiscal deficits and interest rates.”
Even Leading Progressives Still Haven’t “Internalized” the MMT Lens
Kelton wrote:
“Once you internalize the difference between the currency issuer and a currency user, you can begin to see, through a new lens, why so much of our political discourse is broken.”
A good example of old-style progressive thinking was this June 24 tweet from Bernie Sanders:
“We need to cut our military budget by 10 percent and invest that money in human needs.”
(My bold emphasis added.)
Kelton would presumably disagree that the military budget had to be cut in order to “invest that money,” i.e., to “pay for” spending on human needs. She may want to cut it anyway, but you don’t have to in order to “pay for” something else, the monetary sovereign nation can just spend it, and if it feels necessary, then tax it back. That is one of the key points of her book.
Sanders’ tweet reflects Kelton’s “MYTH #1: The federal government should budget like a household.” She considers that perhaps the most “pernicious” and widespread deficit myth, she goes through six of them, one per chapter.
In my opinion, it was the inability of both Sanders and Warren to succinctly explain how they would “pay for” Medicare for All, the wrong question according to Kelton’s MMT view that the government could just spend it first, during the Democratic “debates” which arguably had the biggest negative impact on their campaigns.
MMT Is “Descriptive” But MMTers Also Have “Prescriptive” Policies Too
Kelton and others often emphasize that MMT is “descriptive” of the way the system actually works, almost akin to accounting ledgers. But at the end of the book, she has two chapters on “prescriptive” things most MMTers might favor.
Kelton’s sympathies are clearly with progressives. But it seems to me that you can agree with MMT as descriptive of reality without agreeing with all of its prescriptions. E.g., on what a job guarantee might entail, again see this new book if interested in the details.
E.g., you might agree that MMT could help in the fight to alleviate climate change with a Green New Deal, but given the huge energy needs of Africa, India, Latin America, etc., do you build windmills and/or nuclear power plants? These are the types of debates that need to be happening, but aren’t.
Kelton doesn’t get down to that level of detail, that’s not the purpose of her book, but the devil is often in those details, not the accounting entries on the Fed’s computer, as she would say.
My biggest concern about MMT is whether the investments that it might make possible for D.C. politicians to make would be productive, innovative, efficient, clean, safe, and economically viable.
Paradigm Shifts Take a Long Time, Then Can Come Suddenly
Kelton wrote:
“No member of Congress is going to bring about that change. We are. It’s like my former boss, Bernie Sanders, always says,
“Change never comes from the top down. It always comes from the bottom up.””
Actually it comes from both.
E.g., FDR’s top-down programs like Social Security and the National Labor Relations Act from his “brain trust” responded to tremendous social unrest and industrial union organizing from the bottom up.
The paradigm shift to the “Age of Reagan” was very deliberately started way back in 1947 with the Mont Pelerin Society of Hayek and Friedman, through Friedman’s “Capitalism and Freedom” in 1962, Lewis Powell’s 1971 memo, Jude Wanniski’s “The Way the World Works” in 1978.
I.e., paradigm shifts can take a long time to build up to, then can come fast when conditions change enough to make them possible. MMT started in the early-mid 1990s by Warren Mosler, a bond investor, not an economist, though some of its key ideas go back to Abba Lerner’s “functional finance” in the early 1940s and other even earlier ideas.
Since U.S. fiscal policy has often been paralyzed by a polarized, dysfunctional government, the burden has been placed on monetary policy by the un-elected Fed. By inflating financial/real estate assets, which mainly benefits the top 1% and 10%, this has further greatly exacerbated the huge racial wealth gap and inequality between the top 1% and 10% and the bottom 50%.
The Fed has repeatedly overestimated the unemployment rate at potential full employment and inflation threat, which disproportionately hurts people of color and those without college degrees, who suffer from above average unemployment rates.
I posted an article on March 26 after the CARES stimulus bill was passed titled, “Stimulus Bill Historic Paradigm Shift, “We Are All MMTers Now,”” which started:
“The U.S has potentially entered the Age of Modern Monetary Theory (MMT) with the deficit-busting stimulus bill, which would follow the two previous political/economic paradigm shifts, the Age of FDR/Keynes from 1932 to 1980, and the Age of Reagan/Friedman from 1980 to 2008. It’s just that most Americans haven’t even heard of MMT yet.”
Kelton’s book is starting to change that. She has made MMT clear and accessible to the average lay person like you and me. But far more importantly, hopefully also to new policy makers come November.
Kelton was chief economist for the Democrats on the Senate Budget Committee in 2015, so she knows how the budget/deficit/debt sausage is actually made in the real world.
Further reading for wonks:
PDF of Congressional testimony by a leading MMTer, L. Randall Wray, which has the type of good charts that Kelton couldn’t include in a book for the public, e.g the sectoral balances graph on page 9 which gives the historical data for the “buckets” analogy Kelton uses in her book.
Presentation on MMT by a non-MMTer, a former ECB vice president, that Wray said “presented pretty accurately what we [MMTers] claim.”
Analysis of mainstream policy proposals to deal with current deep recession by Nathan Tankus.
An earlier version of this article appeared on Medium 28 June 2020.
.
