In The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy, Stephanie Kelton dispels six key myths that have shaped the conventional understanding of deficits as inherently bad, instead arguing that deficits can strengthen economies and lead to faster growth. This book is a triumph, writes Professor Hans G. Despain, shifting normative grounds of government spending away from the false and unproductive idea that deficits are irresponsible and ruinous towards the productive political activity of deciding which spending programmes should be prioritised

Despain, Hans

English

In The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy, Stephanie Kelton dispels six key myths that have shaped the conventional understanding of deficits as inherently bad, instead arguing that deficits can strengthen economies and lead to faster growth. This book is a triumph, writes Hans G. Despain, shifting normative grounds of government spending away from the false and unproductive idea that deficits are irresponsible and ruinous towards the productive political activity of deciding which spending programmes should be prioritised

LSE Research Online

Book	Review:	The	Deficit	Myth:	Modern	MonetaryTheory	and	the	Birth	of	the	People’s	Economy	byStephanie	KeltonIn	The	Deficit	Myth:	Modern	Monetary	Theory	and	the	Birth	of	the	People’s	Economy,	StephanieKelton	dispels	six	key	myths	that	have	shaped	the	conventional	understanding	of	deficits	as	inherently	bad,	insteadarguing	that	deficits	can	strengthen	economies	and	lead	to	faster	growth.	This	book	is	a	triumph,	writes	Hans	G.Despain,	shifting	normative	grounds	of	government	spending	away	from	the	false	and	unproductive	idea	thatdeficits	are	irresponsible	and	ruinous	towards	the	productive	political	activity	of	deciding	which	spendingprogrammes	should	be	prioritised.The	Deficit	Myth:	Modern	Monetary	Theory	and	the	Birth	of	the	People’s	Economy.	Stephanie	Kelton.PublicAffairs.	2020.Countries	across	the	globe	have	shut	down	their	economies	in	an	effort	to	combatCOVID-19.		Massive	increases	in	government	spending	have	offered	relief	tohouseholds	and	businesses,	but	according	to	many	politicians	and	economists,	thisgovernment	spending	has	generated	‘national	debt	dilemmas.’The	United	States	and	the	United	Kingdom	are	projected	to	have	public	debt	levelssoar	above	100	per	cent	of	gross	domestic	product	(GDP).	Japan’s	public	debt	toGDP	ratio	is	expected	to	grow	above	250	per	cent.	The	IMF	anticipates	the	averagedebt-to-GDP	ratios	in	advanced	economies	will	rise	above	120	per	cent.With	debt-to-GDP	ratios	so	high,	mainstream	economists	warn	there	will	be	a	debtoverhang	post-pandemic,	which	they	proclaim	will	force	a	curtailment	of	publicspending	in	the	future	and	an	increase	in	taxes.	The	increased	taxes	will	lowerconsumption	spending	of	households	and	investment	spending	of	businesses.	Theresult	is	slower	GDP	growth	and	stagnation	in	worker’s	wages	and	salaries.Stephanie	Kelton,	in	her	new	book	The	Deficit	Myth:	Modern	Monetary	Theory	and	theBirth	of	the	People’s	Economy,	demonstrates	that	concerns	about	public	debt	overhang	are	ill-founded.	Keltonargues	that	government	spending	properly	targeted	and	government	debt	need	not	be	problematic.	Indeed,	sheargues	that	public	deficits	can	be	very	healthy	for	an	economy.		Kelton	contends	bigger	deficits	can	strengthen	aneconomy	and	lead	to	faster	growth.However,	the	conventional	wisdom	regarding	deficits	is	that	they	impede	economic	growth	and	weaken	theeconomy.	Conventional	wisdom	warns	against	using	‘deficits	to	solve	problems	[when]	we	continue	to	think	of	thedeficit	itself	as	a	problem’	(8).Currently	the	US	national	debt	is	more	than	$24	trillion,	106	per	cent	of	GDP.		However,	$6	trillion	of	the	nationaldebt	is	held	by	government	agencies	such	as	the	Social	Security	Trust	Fund.	If	it	seems	strange	the	federalgovernment	can	owe	itself	money,	well	indeed,	federal	debt	is	strange.This	strangeness	is	one	of	the	reasons	so	many	‘myths’	cloud	our	understanding	of	public	debt.		Kelton	identifiessix	primary	myths	of	public	debt.	The	first	six	chapters	of	her	book	dispel	each	primary	myth.	Chapters	Seven	andEight	explain	how	deficit	can	be	used	to	generate	a	stronger	economy	with	shared	prosperity	to	reduce	inequalityand	other	social	ills.	In	so	doing,	Kelton’s	book	achieves	two	groundbreaking	triumphs	and	has	one	major‘shortcoming’.LSE European Politics and Policy (EUROPP) Blog: Book Review: The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy byStephanie KeltonPage 1 of 3		Date originally posted: 2020-06-28Permalink: https://blogs.lse.ac.uk/europpblog/2020/06/28/book-review-the-deficit-myth-modern-monetary-theory-and-the-birth-of-the-peoples-economy-by-stephanie-kelton/Blog homepage: https://blogs.lse.ac.uk/europpblog/First,	the	shortcoming.	Kelton’s	argument	is	based	on	modern	monetary	theory	(MMT),	which	hinges	on	a	critiqueof	the	orthodox	view	of	money.		The	orthodox	view	of	money	asserts	that	the	value	of	money	is	based	historicallyon	its	link	to	precious	metals	and	especially	on	its	function	as	a	medium	of	exchange.	MMT	contends	the	value	of(modern)	money	derives	from	its	link	to	credit	(and	debt)	and	underscores	the	important	role	the	state	playsregarding	the	ontology	of	money.	George	Knapp	(1924)	called	this	‘the	state	theory	of	money’,	J.M.	Keynes	furtherdeveloped	it	in	The	Treatise	on	Money	(1930),	and	it	has	been	most	recently	promoted	by	L.	Randall	Wray	(1998)and	Warren	Mosler	(1993).Kelton	does	not	address	the	ontology	of	money	of	MMT.	This	can	be	seen	as	a	shortcoming	because	it	leaves	atheoretical	understanding	of	MMT	undeveloped.	However,	my	reading	of	Kelton	has	the	shortcoming	as	a	greatstrength,	because	it	makes	her	argument	far	more	accessible	to	a	wider	readership.	Moreover,	MMT’s	moreesoteric	theoretical	and	historical	accounts	of	money	are	available	elsewhere	(e.g.	Wray,	1998).Kelton’s	groundbreaking	triumphs	are	twofold.	The	first	is	that	Kelton	shatters	both	the	deficit	hawk	and	deficit	doveview	of	public	debt.	Deficit	hawks	constitute	the	conventional	wisdom	on	debt	and	contend	the	government	is	beingirresponsible	when	it	has	a	deficit,	and	therefore	needs	to	balance	its	budget	at	almost	any	cost.	Deficit	hawksargue	that	public	debt	is	ruinous	to	a	currency	and	the	country	itself.	Deficit	hawks	argue	a	country	should	tightenits	purse	strings	and	suffer	short-term	consequences	to	avoid	long-term	disaster.	Deficit	doves	agree,	but	contenddeficits	can	be	used	in	the	short	term	for	emergencies	and	overcoming	economic	crises.Kelton	contends	this	leaves	the	debate	stuck	in	the	faulty	idea	that	deficits	are	sinful.		According	to	Kelton,	we	needto	change	our	perspective	and	be	wiser	regarding	deficits.	Kelton	calls	herself	a	‘deficit	owl’	because	owls	have	theability	to	rotate	their	heads	nearly	360	degrees	for	better	perspectives	and	are	associated	with	wisdom	(76).The	conventional	story	contends	governments	levy	taxes	and	then	use	them	to	pay	for	government	spending.	Ifgovernment	spending	is	greater	than	tax	revenues,	the	government	must	borrow	the	rest	by	issuing	bonds	toinvestors	(21-24).	The	conventional	story	contends	government	borrowing	comes	with	huge	snares.	The	increase	indemand	from	loans	increases	interest	rates.	Government	borrowing,	via	selling	bonds,	competes	for	the	limitedamount	of	savings	so	that	private	investment	tends	to	fall,	or	gets	‘crowded-out’	(101-104),	and	GDP	slows.	Further,	deficits	make	a	country	dependent	on	overseas	investors	(81-84).Kelton	contends	the	conventional	story	is	a	series	of	myths.	To	begin	with,	Kelton	takes	on	the	myth	thatgovernments	should	be	fiscally	run	like	a	household	(Chapter	One).	This	is	false	because	the	government	isnothing	close	to	a	household	or	private	business.	The	big	difference	is	that	households	and	businesses	are	users	ofmoney,	while	governments	are	issuers	of	money	(17	–	18).Think	of	it	this	way:	if	you	were	granted	the	legal	right	and	the	ability	to	print	as	many	US	dollars	as	you	wished,would	that	change	your	debt?	The	answer,	of	course,	is	yes.	Your	debt	would	no	longer	matter,	because	you	canalways	just	print	more	money.Second,	to	view	public	deficits	as	overspending	is	a	myth	(Chapter	Two),	because	a	government	deficit	createsa	surplus	for	someone	else.	The	third	myth	is	that	deficits	burden	the	next	generation	(Chapter	Three).	It	is	falsethat	deficits	make	the	next	generation	poorer,	and	it	is	also	false	that	reducing	deficits	will	make	the	next	generationricher.	Rather,	the	historical	record	shows	high	national	debt	creates	wealth	and	increases	the	income	of	the	nextgeneration.The	fourth	myth	is	that	deficits	crowd	out	private	business	(Chapter	Four).	Kelton	argues	that	deficit	spendingproperly	targeted	stimulates,	or	‘crowds-in’,	private	business	growth.	The	fifth	myth	is	that	deficits	make	usdependent	on	overseas	nations	(Chapter	Five).		Instead	trade	deficits	should	be	understood	as	a	‘stuff’	surplus:	e.g.China	gets	US	Treasury	bonds,	and	the	US	gets	Apple	computers	and	other	‘stuff’.	The	sixth	myth	is	that	SocialSecurity	and	public	health	programmes	are	propelling	us	toward	a	fiscal	crisis	(Chapter	Six);	here,	Kelton	shows	thegovernments	can	always	meet	demographic	and	healthcare	fiscal	obligations.LSE European Politics and Policy (EUROPP) Blog: Book Review: The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy byStephanie KeltonPage 2 of 3		Date originally posted: 2020-06-28Permalink: https://blogs.lse.ac.uk/europpblog/2020/06/28/book-review-the-deficit-myth-modern-monetary-theory-and-the-birth-of-the-peoples-economy-by-stephanie-kelton/Blog homepage: https://blogs.lse.ac.uk/europpblog/The	current	surge	in	public	expenditure	given	the	sudden	economic	shutdown	is	quite	telling	and	supports	Kelton’sargument.	The	government	is	self-financing:	they	do	not	necessarily	need	to	collect	taxes	or	borrow;	they	simplyneed	to	pay	the	dollars	for	the	work	activity	they	want	accomplished.	They	cannot	run	out	of	money	any	more	thana	score	keeper	of	a	football	game	can	run	out	of	points.	So	long	as	a	country	is	sovereign	in	its	currency	–	that	is,	itissues	and	controls	the	supply	of	its	currency	(for	instance,	the	UK	and	US	governments)	–	it	cannot	run	out	ofcurrency.Government	debt	does	matter,	but	we	need	to	shift	our	understanding.	Government	debt	is	nothing	like	personaldebt,	because	the	federal	government	can	issue	more	money.	Nonetheless,	it	is	not	the	imbalance	between	taxescollected	and	federal	monies	spent	that	matters.	Rather	what	matters	is	the	balance	of	real	resources	(257	–	260),to	avoid	generating	bottlenecks,	and	the	threat	of	inflation	(44-47).In	the	present	moment,	inflation	is	no	threat	whatsoever.	The	severe	lack	of	consumption	demand	from	householdsand	investment	demand	from	businesses	makes	deflation	a	greater	worry	than	inflation.	Once	the	economy	beginsto	recover,	policymakers	will	have	to	keep	their	eye	on	inflation.	Nonetheless,	for	nearly	40	years,	inflation	has	beenwell	controlled.	Partially	this	is	due	to	international	supply-chain	competition	and	the	business	models	of	bigcorporations	(Amazon,	Wal-Mart,	etc)	that	are	built	on	low	prices.	There	are	several	forces	that	will	keep	lowinflation	intact.With	no	inflation	and	no	bottlenecks,	the	government	can	address	the	true	deficits	(Chapter	Seven),	such	as	thegood	jobs	deficit,	the	healthcare	deficit,	the	education	deficit,	the	infrastructure	deficit,	the	green	climate	deficit	andthe	democracy	deficit,	with	no	fiscal	constraint.	As	such,	Kelton	contends	the	normative	side	of	MMT	should	supportbuilding	an	economy	that	is	geared	toward	people	over	profits	and	people	over	balanced	budgets	(Chapter	Eight).Kelton	produces	a	dual	shift	in	perspective.	First,	she	demonstrates	fiscal	policy	measures	outdo	monetary	policyfor	steering,	stabilising	and	managing	the	economy.	Second,	which	specific	fiscal	policy	measures	are	preferred	aremore	a	matter	of	politics	and	social	preference	than	the	science	of	economics.	As	Kelton	states,	the	normativeimplications	of	her	argument	‘can	be	used	to	defend	policies	that	are	traditionally	more	liberal	(e.g.	Medicare	for	all,free	college,	or	middle-class	tax	cuts)	or	more	conservative	(e.g.	military	spending	or	corporate	tax	cuts)’	(235).To	be	sure,	the	MMT	tradition	has	promoted	a	job	guarantee	as	the	best	fiscal	buffer	for	the	capitalist	boom-bustcycle.	Further,	they	have	emphasised	a	guaranteed	jobs	programme	should	be	built	around	public	service	anda	‘care’	economy.	However,	someone	could	fully	agree	with	Kelton’s	economics	and	disagree	with	her	suggestedpriority	of	fiscal	measures.Kelton’s	book	achieves	a	revolution	in	political	economy.	Kelton’s	first	great	achievement	leaves	the	conventionalhawk/dove	conception	of	deficits	shattered.	She	decisively	shows	there	is	no	budgetary	constraint	on	governmentspending;	instead	the	only	real	constraints	on	government	spending	are	the	limits	of	real	resources	and	the	threatof	inflation.	Kelton’s	second	great	achievement	is	to	shift	the	normative	grounds	of	government	spending	from	thefalse	and	unproductive	idea	that	federal	deficits	are	evil,	and	to	the	productive	political	activity	of	deciding	whichspending	programmes	should	be	prioritised.	Her	Copernican	achievements	furthermore	make	esoteric	debates	onmoney	accessible	to	a	wide	audience	and	wonky	‘pie-in-the-sky’	policy	debates	both	comprehensible	and	realistic.The	context	of	the	current	economic	shutdown	will	place	modern	monetary	theory	and	The	Deficit	Myth	centrestage.	Stephanie	Kelton	is	the	economist	to	carry	this	debate	forward.Please	read	our	comments	policy	before	commenting.Note:	This	article	is	provided	by	our	sister	site,	LSE	Review	of	Books.	It	gives	the	views	of	the	author,	not	theposition	of	EUROPP	–	European	Politics	and	Policy	or	the	London	School	of	Economics.	Featured	imagecredit:	kaleb	tapp	on	Unsplash	_________________________________About	the	authorHans	G.	Despain	–	Nichols	CollegeHans	G.	Despain	is	a	Professor	of	Political	Economy	at	Nichols	College.LSE European Politics and Policy (EUROPP) Blog: Book Review: The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy byStephanie KeltonPage 3 of 3		Date originally posted: 2020-06-28Permalink: https://blogs.lse.ac.uk/europpblog/2020/06/28/book-review-the-deficit-myth-modern-monetary-theory-and-the-birth-of-the-peoples-economy-by-stephanie-kelton/Blog homepage: https://blogs.lse.ac.uk/europpblog/

Book review: The Deficit Myth: modern monetary theory and the birth of the people’s economy by Stephanie Kelton

Book	Review:	The	Deficit	Myth:	Modern	MonetaryTheory	and	the	Birth	of	the	People’s	Economy	byStephanie	KeltonIn	The	Deficit	Myth:	Modern	Monetary	Theory	and	the	Birth	of	the	People’s	Economy,	Stephanie	Keltondispels	six	key	myths	that	have	shaped	the	conventional	understanding	of	deficits	as	inherently	bad,	insteadarguing	that	deficits	can	strengthen	economies	and	lead	to	faster	growth.	This	book	is	a	triumph,	writes	ProfessorHans	G.	Despain,	shifting	normative	grounds	of	government	spending	away	from	the	false	and	unproductive	ideathat	deficits	are	irresponsible	and	ruinous	towards	the	productive	political	activity	of	deciding	which	spendingprogrammes	should	be	prioritised.The	Deficit	Myth:	Modern	Monetary	Theory	and	the	Birth	of	the	People’s	Economy.	Stephanie	Kelton.PublicAffairs.	2020.Countries	across	the	globe	have	shut	down	their	economies	in	an	effort	to	combatCOVID-19.		Massive	increases	in	government	spending	have	offered	relief	tohouseholds	and	businesses,	but	according	to	many	politicians	and	economists,	thisgovernment	spending	has	generated	‘national	debt	dilemmas.’The	United	States	and	the	United	Kingdom	are	projected	to	have	public	debt	levelssoar	above	100	per	cent	of	gross	domestic	product	(GDP).	Japan’s	public	debt	toGDP	ratio	is	expected	to	grow	above	250	per	cent.	The	IMF	anticipates	the	averagedebt-to-GDP	ratios	in	advanced	economies	will	rise	above	120	per	cent.With	debt-to-GDP	ratios	so	high,	mainstream	economists	warn	there	will	be	a	debtoverhang	post-pandemic,	which	they	proclaim	will	force	a	curtailment	of	publicspending	in	the	future	and	an	increase	in	taxes.	The	increased	taxes	will	lowerconsumption	spending	of	households	and	investment	spending	of	businesses.	Theresult	is	slower	GDP	growth	and	stagnation	in	worker’s	wages	and	salaries.Stephanie	Kelton,	in	her	new	book	The	Deficit	Myth:	Modern	Monetary	Theory	and	theBirth	of	the	People’s	Economy,	demonstrates	that	concerns	about	public	debt	overhang	are	ill-founded.	Keltonargues	that	government	spending	properly	targeted	and	government	debt	need	not	be	problematic.	Indeed,	sheargues	that	public	deficits	can	be	very	healthy	for	an	economy.		Kelton	contends	bigger	deficits	can	strengthen	aneconomy	and	lead	to	faster	growth.However,	the	conventional	wisdom	regarding	deficits	is	that	they	impede	economic	growth	and	weaken	theeconomy.	Conventional	wisdom	warns	against	using	‘deficits	to	solve	problems	[when]	we	continue	to	think	of	thedeficit	itself	as	a	problem’	(8).Currently	the	US	national	debt	is	more	than	$24	trillion,	106	per	cent	of	GDP.		However,	$6	trillion	of	the	nationaldebt	is	held	by	government	agencies	such	as	the	Social	Security	Trust	Fund.	If	it	seems	strange	the	federalgovernment	can	owe	itself	money,	well	indeed,	federal	debt	is	strange.This	strangeness	is	one	of	the	reasons	so	many	‘myths’	cloud	our	understanding	of	public	debt.		Kelton	identifiessix	primary	myths	of	public	debt.	The	first	six	chapters	of	her	book	dispel	each	primary	myth.	Chapters	Seven	andEight	explain	how	deficit	can	be	used	to	generate	a	stronger	economy	with	shared	prosperity	to	reduce	inequalityand	other	social	ills.	In	so	doing,	Kelton’s	book	achieves	two	groundbreaking	triumphs	and	has	one	major‘shortcoming’.USApp – American Politics and Policy Blog: Book Review: The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy by StephanieKeltonPage 1 of 4		Date originally posted: 2020-06-28Permalink: https://blogs.lse.ac.uk/usappblog/2020/06/28/book-review-the-deficit-myth-modern-monetary-theory-and-the-birth-of-the-peoples-economy-by-stephanie-kelton/Blog homepage: https://blogs.lse.ac.uk/usappblog/First,	the	shortcoming.	Kelton’s	argument	is	based	on	modern	monetary	theory	(MMT),	which	hinges	on	a	critiqueof	the	orthodox	view	of	money.		The	orthodox	view	of	money	asserts	that	the	value	of	money	is	based	historicallyon	its	link	to	precious	metals	and	especially	on	its	function	as	a	medium	of	exchange.	MMT	contends	the	value	of(modern)	money	derives	from	its	link	to	credit	(and	debt)	and	underscores	the	important	role	the	state	playsregarding	the	ontology	of	money.	George	Knapp	(1924)	called	this	‘the	state	theory	of	money’,	J.M.	Keynes	furtherdeveloped	it	in	The	Treatise	on	Money	(1930),	and	it	has	been	most	recently	promoted	by	L.	Randall	Wray	(1998)and	Warren	Mosler	(1993).Kelton	does	not	address	the	ontology	of	money	of	MMT.	This	can	be	seen	as	a	shortcoming	because	it	leaves	atheoretical	understanding	of	MMT	undeveloped.	However,	my	reading	of	Kelton	has	the	shortcoming	as	a	greatstrength,	because	it	makes	her	argument	far	more	accessible	to	a	wider	readership.	Moreover,	MMT’s	moreesoteric	theoretical	and	historical	accounts	of	money	are	available	elsewhere	(e.g.	Wray,	1998).Kelton’s	groundbreaking	triumphs	are	twofold.	The	first	is	that	Kelton	shatters	both	the	deficit	hawk	and	deficit	doveview	of	public	debt.	Deficit	hawks	constitute	the	conventional	wisdom	on	debt	and	contend	the	government	is	beingirresponsible	when	it	has	a	deficit,	and	therefore	needs	to	balance	its	budget	at	almost	any	cost.	Deficit	hawksargue	that	public	debt	is	ruinous	to	a	currency	and	the	country	itself.	Deficit	hawks	argue	a	country	should	tightenits	purse	strings	and	suffer	short-term	consequences	to	avoid	long-term	disaster.	Deficit	doves	agree,	but	contenddeficits	can	be	used	in	the	short	term	for	emergencies	and	overcoming	economic	crises.Kelton	contends	this	leaves	the	debate	stuck	in	the	faulty	idea	that	deficits	are	sinful.		According	to	Kelton,	we	needto	change	our	perspective	and	be	wiser	regarding	deficits.	Kelton	calls	herself	a	‘deficit	owl’	because	owls	have	theability	to	rotate	their	heads	nearly	360	degrees	for	better	perspectives	and	are	associated	with	wisdom	(76).The	conventional	story	contends	governments	levy	taxes	and	then	use	them	to	pay	for	government	spending.	Ifgovernment	spending	is	greater	than	tax	revenues,	the	government	must	borrow	the	rest	by	issuing	bonds	toinvestors	(21-24).	The	conventional	story	contends	government	borrowing	comes	with	huge	snares.	The	increase	indemand	from	loans	increases	interest	rates.	Government	borrowing,	via	selling	bonds,	competes	for	the	limitedamount	of	savings	so	that	private	investment	tends	to	fall,	or	gets	‘crowded-out’	(101-104),	and	GDP	slows.	Further,	deficits	make	a	country	dependent	on	overseas	investors	(81-84).USApp – American Politics and Policy Blog: Book Review: The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy by StephanieKeltonPage 2 of 4		Date originally posted: 2020-06-28Permalink: https://blogs.lse.ac.uk/usappblog/2020/06/28/book-review-the-deficit-myth-modern-monetary-theory-and-the-birth-of-the-peoples-economy-by-stephanie-kelton/Blog homepage: https://blogs.lse.ac.uk/usappblog/Kelton	contends	the	conventional	story	is	a	series	of	myths.	To	begin	with,	Kelton	takes	on	the	myth	thatgovernments	should	be	fiscally	run	like	a	household	(Chapter	One).	This	is	false	because	the	government	isnothing	close	to	a	household	or	private	business.	The	big	difference	is	that	households	and	businesses	are	users	ofmoney,	while	governments	are	issuers	of	money	(17	–	18).Think	of	it	this	way:	if	you	were	granted	the	legal	right	and	the	ability	to	print	as	many	US	dollars	as	you	wished,would	that	change	your	debt?	The	answer,	of	course,	is	yes.	Your	debt	would	no	longer	matter,	because	you	canalways	just	print	more	money.Second,	to	view	public	deficits	as	overspending	is	a	myth	(Chapter	Two),	because	a	government	deficit	creates	asurplus	for	someone	else.	The	third	myth	is	that	deficits	burden	the	next	generation	(Chapter	Three).	It	is	false	thatdeficits	make	the	next	generation	poorer,	and	it	is	also	false	that	reducing	deficits	will	make	the	next	generationricher.	Rather,	the	historical	record	shows	high	national	debt	creates	wealth	and	increases	the	income	of	the	nextgeneration.The	fourth	myth	is	that	deficits	crowd	out	private	business	(Chapter	Four).	Kelton	argues	that	deficit	spendingproperly	targeted	stimulates,	or	‘crowds-in’,	private	business	growth.	The	fifth	myth	is	that	deficits	make	usdependent	on	overseas	nations	(Chapter	Five).		Instead	trade	deficits	should	be	understood	as	a	‘stuff’	surplus:	e.g.China	gets	US	Treasury	bonds,	and	the	US	gets	Apple	computers	and	other	‘stuff’.	The	sixth	myth	is	that	SocialSecurity	and	public	health	programmes	are	propelling	us	toward	a	fiscal	crisis	(Chapter	Six);	here,	Kelton	shows	thegovernments	can	always	meet	demographic	and	healthcare	fiscal	obligations.The	current	surge	in	public	expenditure	given	the	sudden	economic	shutdown	is	quite	telling	and	supports	Kelton’sargument.	The	government	is	self-financing:	they	do	not	necessarily	need	to	collect	taxes	or	borrow;	they	simplyneed	to	pay	the	dollars	for	the	work	activity	they	want	accomplished.	They	cannot	run	out	of	money	any	more	thana	score	keeper	of	a	football	game	can	run	out	of	points.	So	long	as	a	country	is	sovereign	in	its	currency	–	that	is,	itissues	and	controls	the	supply	of	its	currency	(for	instance,	the	UK	and	US	governments)	–	it	cannot	run	out	ofcurrency.Government	debt	does	matter,	but	we	need	to	shift	our	understanding.	Government	debt	is	nothing	like	personaldebt,	because	the	federal	government	can	issue	more	money.	Nonetheless,	it	is	not	the	imbalance	between	taxescollected	and	federal	monies	spent	that	matters.	Rather	what	matters	is	the	balance	of	real	resources	(257	–	260),to	avoid	generating	bottlenecks,	and	the	threat	of	inflation	(44-47).USApp – American Politics and Policy Blog: Book Review: The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy by StephanieKeltonPage 3 of 4		Date originally posted: 2020-06-28Permalink: https://blogs.lse.ac.uk/usappblog/2020/06/28/book-review-the-deficit-myth-modern-monetary-theory-and-the-birth-of-the-peoples-economy-by-stephanie-kelton/Blog homepage: https://blogs.lse.ac.uk/usappblog/In	the	present	moment,	inflation	is	no	threat	whatsoever.	The	severe	lack	of	consumption	demand	from	householdsand	investment	demand	from	businesses	makes	deflation	a	greater	worry	than	inflation.	Once	the	economy	beginsto	recover,	policymakers	will	have	to	keep	their	eye	on	inflation.	Nonetheless,	for	nearly	40	years,	inflation	has	beenwell	controlled.	Partially	this	is	due	to	international	supply-chain	competition	and	the	business	models	of	bigcorporations	(Amazon,	Wal-Mart,	etc)	that	are	built	on	low	prices.	There	are	several	forces	that	will	keep	lowinflation	intact.With	no	inflation	and	no	bottlenecks,	the	government	can	address	the	true	deficits	(Chapter	Seven),	such	as	thegood	jobs	deficit,	the	healthcare	deficit,	the	education	deficit,	the	infrastructure	deficit,	the	green	climate	deficit	andthe	democracy	deficit,	with	no	fiscal	constraint.	As	such,	Kelton	contends	the	normative	side	of	MMT	should	supportbuilding	an	economy	that	is	geared	toward	people	over	profits	and	people	over	balanced	budgets	(Chapter	Eight).Kelton	produces	a	dual	shift	in	perspective.	First,	she	demonstrates	fiscal	policy	measures	outdo	monetary	policyfor	steering,	stabilising	and	managing	the	economy.	Second,	which	specific	fiscal	policy	measures	are	preferred	aremore	a	matter	of	politics	and	social	preference	than	the	science	of	economics.	As	Kelton	states,	the	normativeimplications	of	her	argument	‘can	be	used	to	defend	policies	that	are	traditionally	more	liberal	(e.g.	Medicare	for	all,free	college,	or	middle-class	tax	cuts)	or	more	conservative	(e.g.	military	spending	or	corporate	tax	cuts)’	(235).To	be	sure,	the	MMT	tradition	has	promoted	a	job	guarantee	as	the	best	fiscal	buffer	for	the	capitalist	boom-bustcycle.	Further,	they	have	emphasised	a	guaranteed	jobs	programme	should	be	built	around	public	service	and	a‘care’	economy.	However,	someone	could	fully	agree	with	Kelton’s	economics	and	disagree	with	her	suggestedpriority	of	fiscal	measures.Kelton’s	book	achieves	a	revolution	in	political	economy.	Kelton’s	first	great	achievement	leaves	the	conventionalhawk/dove	conception	of	deficits	shattered.	She	decisively	shows	there	is	no	budgetary	constraint	on	governmentspending;	instead	the	only	real	constraints	on	government	spending	are	the	limits	of	real	resources	and	the	threatof	inflation.	Kelton’s	second	great	achievement	is	to	shift	the	normative	grounds	of	government	spending	from	thefalse	and	unproductive	idea	that	federal	deficits	are	evil,	and	to	the	productive	political	activity	of	deciding	whichspending	programmes	should	be	prioritised.	Her	Copernican	achievements	furthermore	make	esoteric	debates	onmoney	accessible	to	a	wide	audience	and	wonky	‘pie-in-the-sky’	policy	debates	both	comprehensible	and	realistic.The	context	of	the	current	economic	shutdown	will	place	modern	monetary	theory	and	The	Deficit	Myth	centrestage.	Stephanie	Kelton	is	the	economist	to	carry	this	debate	forward.This	review	originally	appeared	at	the	LSE	Review	of	Books.Image	One	Credit:	Photo	by	kaleb	tapp	on	Unsplash.Image	Two	Credit:	Image	by	Krzysztof	Dzwonek	from	Pixabay.Please	read	our	comments	policy	before	commenting.Note:	This	article	gives	the	views	of	the	authors,	and	not	the	position	of	USAPP–	American	Politics	and	Policy,	norof	the	London	School	of	Economics.Shortened	URL	for	this	post:	https://bit.ly/2Zj5j25About	the	reviewerHans	G.	Despain	–	Nichols	CollegeHans	G.	Despain,	PhD,	is	a	Professor	of	Political	Economy	at	Nichols	College	in	the	USAUSApp – American Politics and Policy Blog: Book Review: The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy by StephanieKeltonPage 4 of 4		Date originally posted: 2020-06-28Permalink: https://blogs.lse.ac.uk/usappblog/2020/06/28/book-review-the-deficit-myth-modern-monetary-theory-and-the-birth-of-the-peoples-economy-by-stephanie-kelton/Blog homepage: https://blogs.lse.ac.uk/usappblog/

Book review: The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy by Stephanie Kelton

Book	Review:	The	Deficit	Myth:	Modern	MonetaryTheory	and	the	Birth	of	the	People’s	Economy	byStephanie	KeltonIn	The	Deficit	Myth:	Modern	Monetary	Theory	and	the	Birth	of	the	People’s	Economy,	Stephanie	Keltondispels	six	key	myths	that	have	shaped	the	conventional	understanding	of	deficits	as	inherently	bad,	insteadarguing	that	deficits	can	strengthen	economies	and	lead	to	faster	growth.	This	book	is	a	triumph,	writes	ProfessorHans	G.	Despain,	shifting	normative	grounds	of	government	spending	away	from	the	false	and	unproductive	ideathat	deficits	are	irresponsible	and	ruinous	towards	the	productive	political	activity	of	deciding	which	spendingprogrammes	should	be	prioritised.The	Deficit	Myth:	Modern	Monetary	Theory	and	the	Birth	of	the	People’s	Economy.	Stephanie	Kelton.PublicAffairs.	2020.Countries	across	the	globe	have	shut	down	their	economies	in	an	effort	to	combatCOVID-19.		Massive	increases	in	government	spending	have	offered	relief	tohouseholds	and	businesses,	but	according	to	many	politicians	and	economists,	thisgovernment	spending	has	generated	‘national	debt	dilemmas.’The	United	States	and	the	United	Kingdom	are	projected	to	have	public	debt	levelssoar	above	100	per	cent	of	gross	domestic	product	(GDP).	Japan’s	public	debt	toGDP	ratio	is	expected	to	grow	above	250	per	cent.	The	IMF	anticipates	the	averagedebt-to-GDP	ratios	in	advanced	economies	will	rise	above	120	per	cent.With	debt-to-GDP	ratios	so	high,	mainstream	economists	warn	there	will	be	a	debtoverhang	post-pandemic,	which	they	proclaim	will	force	a	curtailment	of	publicspending	in	the	future	and	an	increase	in	taxes.	The	increased	taxes	will	lowerconsumption	spending	of	households	and	investment	spending	of	businesses.	Theresult	is	slower	GDP	growth	and	stagnation	in	worker’s	wages	and	salaries.Stephanie	Kelton,	in	her	new	book	The	Deficit	Myth:	Modern	Monetary	Theory	and	theBirth	of	the	People’s	Economy,	demonstrates	that	concerns	about	public	debt	overhang	are	ill-founded.	Keltonargues	that	government	spending	properly	targeted	and	government	debt	need	not	be	problematic.	Indeed,	sheargues	that	public	deficits	can	be	very	healthy	for	an	economy.		Kelton	contends	bigger	deficits	can	strengthen	aneconomy	and	lead	to	faster	growth.However,	the	conventional	wisdom	regarding	deficits	is	that	they	impede	economic	growth	and	weaken	theeconomy.	Conventional	wisdom	warns	against	using	‘deficits	to	solve	problems	[when]	we	continue	to	think	of	thedeficit	itself	as	a	problem’	(8).Currently	the	US	national	debt	is	more	than	$24	trillion,	106	per	cent	of	GDP.		However,	$6	trillion	of	the	nationaldebt	is	held	by	government	agencies	such	as	the	Social	Security	Trust	Fund.	If	it	seems	strange	the	federalgovernment	can	owe	itself	money,	well	indeed,	federal	debt	is	strange.This	strangeness	is	one	of	the	reasons	so	many	‘myths’	cloud	our	understanding	of	public	debt.		Kelton	identifiessix	primary	myths	of	public	debt.	The	first	six	chapters	of	her	book	dispel	each	primary	myth.	Chapters	Seven	andEight	explain	how	deficit	can	be	used	to	generate	a	stronger	economy	with	shared	prosperity	to	reduce	inequalityand	other	social	ills.	In	so	doing,	Kelton’s	book	achieves	two	groundbreaking	triumphs	and	has	one	major‘shortcoming’.LSE Review of Books: Book Review: The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy by Stephanie Kelton Page 1 of 4		Date originally posted: 2020-06-22Permalink: https://blogs.lse.ac.uk/lsereviewofbooks/2020/06/22/book-review-the-deficit-myth-modern-monetary-theory-and-the-birth-of-the-peoples-economy-by-stephanie-kelton/Blog homepage: https://blogs.lse.ac.uk/lsereviewofbooks/First,	theshortcoming.	Kelton’s	argument	is	based	on	modern	monetary	theory	(MMT),	which	hinges	on	a	critique	of	theorthodox	view	of	money.		The	orthodox	view	of	money	asserts	that	the	value	of	money	is	based	historically	on	itslink	to	precious	metals	and	especially	on	its	function	as	a	medium	of	exchange.	MMT	contends	the	value	of(modern)	money	derives	from	its	link	to	credit	(and	debt)	and	underscores	the	important	role	the	state	playsregarding	the	ontology	of	money.	George	Knapp	(1924)	called	this	‘the	state	theory	of	money’,	J.M.	Keynes	furtherdeveloped	it	in	The	Treatise	on	Money	(1930),	and	it	has	been	most	recently	promoted	by	L.	Randall	Wray	(1998)and	Warren	Mosler	(1993).Kelton	does	not	address	the	ontology	of	money	of	MMT.	This	can	be	seen	as	a	shortcoming	because	it	leaves	atheoretical	understanding	of	MMT	undeveloped.	However,	my	reading	of	Kelton	has	the	shortcoming	as	a	greatstrength,	because	it	makes	her	argument	far	more	accessible	to	a	wider	readership.	Moreover,	MMT’s	moreesoteric	theoretical	and	historical	accounts	of	money	are	available	elsewhere	(e.g.	Wray,	1998).Kelton’s	groundbreaking	triumphs	are	twofold.	The	first	is	that	Kelton	shatters	both	the	deficit	hawk	and	deficit	doveview	of	public	debt.	Deficit	hawks	constitute	the	conventional	wisdom	on	debt	and	contend	the	government	is	beingirresponsible	when	it	has	a	deficit,	and	therefore	needs	to	balance	its	budget	at	almost	any	cost.	Deficit	hawksargue	that	public	debt	is	ruinous	to	a	currency	and	the	country	itself.	Deficit	hawks	argue	a	country	should	tightenits	purse	strings	and	suffer	short-term	consequences	to	avoid	long-term	disaster.	Deficit	doves	agree,	but	contenddeficits	can	be	used	in	the	short	term	for	emergencies	and	overcoming	economic	crises.Kelton	contends	this	leaves	the	debate	stuck	in	the	faulty	idea	that	deficits	are	sinful.		According	to	Kelton,	we	needto	change	our	perspective	and	be	wiser	regarding	deficits.	Kelton	calls	herself	a	‘deficit	owl’	because	owls	have	theability	to	rotate	their	heads	nearly	360	degrees	for	better	perspectives	and	are	associated	with	wisdom	(76).The	conventional	story	contends	governments	levy	taxes	and	then	use	them	to	pay	for	government	spending.	Ifgovernment	spending	is	greater	than	tax	revenues,	the	government	must	borrow	the	rest	by	issuing	bonds	toinvestors	(21-24).	The	conventional	story	contends	government	borrowing	comes	with	huge	snares.	The	increase	indemand	from	loans	increases	interest	rates.	Government	borrowing,	via	selling	bonds,	competes	for	the	limitedamount	of	savings	so	that	private	investment	tends	to	fall,	or	gets	‘crowded-out’	(101-104),	and	GDP	slows.	Further,	deficits	make	a	country	dependent	on	overseas	investors	(81-84).Kelton	contends	the	conventional	story	is	a	series	of	myths.	To	begin	with,	Kelton	takes	on	the	myth	thatgovernments	should	be	fiscally	run	like	a	household	(Chapter	One).	This	is	false	because	the	government	isnothing	close	to	a	household	or	private	business.	The	big	difference	is	that	households	and	businesses	are	users	ofmoney,	while	governments	are	issuers	of	money	(17	–	18).LSE Review of Books: Book Review: The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy by Stephanie Kelton Page 2 of 4		Date originally posted: 2020-06-22Permalink: https://blogs.lse.ac.uk/lsereviewofbooks/2020/06/22/book-review-the-deficit-myth-modern-monetary-theory-and-the-birth-of-the-peoples-economy-by-stephanie-kelton/Blog homepage: https://blogs.lse.ac.uk/lsereviewofbooks/Think	of	it	this	way:	if	you	were	granted	the	legal	right	and	the	ability	to	print	as	many	US	dollars	as	you	wished,would	that	change	your	debt?	The	answer,	of	course,	is	yes.	Your	debt	would	no	longer	matter,	because	you	canalways	just	print	more	money.Second,	to	view	public	deficits	as	overspending	is	a	myth	(Chapter	Two),	because	a	government	deficit	creates	asurplus	for	someone	else.	The	third	myth	is	that	deficits	burden	the	next	generation	(Chapter	Three).	It	is	false	thatdeficits	make	the	next	generation	poorer,	and	it	is	also	false	that	reducing	deficits	will	make	the	next	generationricher.	Rather,	the	historical	record	shows	high	national	debt	creates	wealth	and	increases	the	income	of	the	nextgeneration.The	fourth	myth	is	that	deficits	crowd	out	private	business	(Chapter	Four).	Kelton	argues	that	deficit	spendingproperly	targeted	stimulates,	or	‘crowds-in’,	private	business	growth.	The	fifth	myth	is	that	deficits	make	usdependent	on	overseas	nations	(Chapter	Five).		Instead	trade	deficits	should	be	understood	as	a	‘stuff’	surplus:	e.g.China	gets	US	Treasury	bonds,	and	the	US	gets	Apple	computers	and	other	‘stuff’.	The	sixth	myth	is	that	SocialSecurity	and	public	health	programmes	are	propelling	us	toward	a	fiscal	crisis	(Chapter	Six);	here,	Kelton	shows	thegovernments	can	always	meet	demographic	and	healthcare	fiscal	obligations.Thecurrentsurge	inpublicexpenditure	given	the	sudden	economic	shutdown	is	quite	telling	and	supports	Kelton’s	argument.	The	governmentis	self-financing:	they	do	not	necessarily	need	to	collect	taxes	or	borrow;	they	simply	need	to	pay	the	dollars	for	thework	activity	they	want	accomplished.	They	cannot	run	out	of	money	any	more	than	a	score	keeper	of	a	footballgame	can	run	out	of	points.	So	long	as	a	country	is	sovereign	in	its	currency	–	that	is,	it	issues	and	controls	thesupply	of	its	currency	(for	instance,	the	UK	and	US	governments)	–	it	cannot	run	out	of	currency.Government	debt	does	matter,	but	we	need	to	shift	our	understanding.	Government	debt	is	nothing	like	personaldebt,	because	the	federal	government	can	issue	more	money.	Nonetheless,	it	is	not	the	imbalance	between	taxescollected	and	federal	monies	spent	that	matters.	Rather	what	matters	is	the	balance	of	real	resources	(257	–	260),to	avoid	generating	bottlenecks,	and	the	threat	of	inflation	(44-47).In	the	present	moment,	inflation	is	no	threat	whatsoever.	The	severe	lack	of	consumption	demand	from	householdsand	investment	demand	from	businesses	makes	deflation	a	greater	worry	than	inflation.	Once	the	economy	beginsto	recover,	policymakers	will	have	to	keep	their	eye	on	inflation.	Nonetheless,	for	nearly	40	years,	inflation	has	beenwell	controlled.	Partially	this	is	due	to	international	supply-chain	competition	and	the	business	models	of	bigcorporations	(Amazon,	Wal-Mart,	etc)	that	are	built	on	low	prices.	There	are	several	forces	that	will	keep	lowinflation	intact.LSE Review of Books: Book Review: The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy by Stephanie Kelton Page 3 of 4		Date originally posted: 2020-06-22Permalink: https://blogs.lse.ac.uk/lsereviewofbooks/2020/06/22/book-review-the-deficit-myth-modern-monetary-theory-and-the-birth-of-the-peoples-economy-by-stephanie-kelton/Blog homepage: https://blogs.lse.ac.uk/lsereviewofbooks/With	no	inflation	and	no	bottlenecks,	the	government	can	address	the	true	deficits	(Chapter	Seven),	such	as	thegood	jobs	deficit,	the	healthcare	deficit,	the	education	deficit,	the	infrastructure	deficit,	the	green	climate	deficit	andthe	democracy	deficit,	with	no	fiscal	constraint.	As	such,	Kelton	contends	the	normative	side	of	MMT	should	supportbuilding	an	economy	that	is	geared	toward	people	over	profits	and	people	over	balanced	budgets	(Chapter	Eight).Kelton	produces	a	dual	shift	in	perspective.	First,	she	demonstrates	fiscal	policy	measures	outdo	monetary	policyfor	steering,	stabilising	and	managing	the	economy.	Second,	which	specific	fiscal	policy	measures	are	preferred	aremore	a	matter	of	politics	and	social	preference	than	the	science	of	economics.	As	Kelton	states,	the	normativeimplications	of	her	argument	‘can	be	used	to	defend	policies	that	are	traditionally	more	liberal	(e.g.	Medicare	for	all,free	college,	or	middle-class	tax	cuts)	or	more	conservative	(e.g.	military	spending	or	corporate	tax	cuts)’	(235).To	be	sure,	the	MMT	tradition	has	promoted	a	job	guarantee	as	the	best	fiscal	buffer	for	the	capitalist	boom-bustcycle.	Further,	they	have	emphasised	a	guaranteed	jobs	programme	should	be	built	around	public	service	and	a‘care’	economy.	However,	someone	could	fully	agree	with	Kelton’s	economics	and	disagree	with	her	suggestedpriority	of	fiscal	measures.Kelton’s	book	achieves	a	revolution	in	political	economy.	Kelton’s	first	great	achievement	leaves	the	conventionalhawk/dove	conception	of	deficits	shattered.	She	decisively	shows	there	is	no	budgetary	constraint	on	governmentspending;	instead	the	only	real	constraints	on	government	spending	are	the	limits	of	real	resources	and	the	threatof	inflation.	Kelton’s	second	great	achievement	is	to	shift	the	normative	grounds	of	government	spending	from	thefalse	and	unproductive	idea	that	federal	deficits	are	evil,	and	to	the	productive	political	activity	of	deciding	whichspending	programmes	should	be	prioritised.	Her	Copernican	achievements	furthermore	make	esoteric	debates	onmoney	accessible	to	a	wide	audience	and	wonky	‘pie-in-the-sky’	policy	debates	both	comprehensible	and	realistic.The	context	of	the	current	economic	shutdown	will	place	modern	monetary	theory	and	The	Deficit	Myth	centrestage.	Stephanie	Kelton	is	the	economist	to	carry	this	debate	forward.Note:	This	review	gives	the	views	of	the	author,	and	not	the	position	of	the	LSE	Review	of	Books	blog,	or	of	theLondon	School	of	Economics.Image	One	Credit:	Photo	by	kaleb	tapp	on	Unsplash.Image	Two	Credit:	Image	by	Krzysztof	Dzwonek	from	Pixabay.	LSE Review of Books: Book Review: The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy by Stephanie Kelton Page 4 of 4		Date originally posted: 2020-06-22Permalink: https://blogs.lse.ac.uk/lsereviewofbooks/2020/06/22/book-review-the-deficit-myth-modern-monetary-theory-and-the-birth-of-the-peoples-economy-by-stephanie-kelton/Blog homepage: https://blogs.lse.ac.uk/lsereviewofbooks/

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Book review: The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy by Stephanie Kelton

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