The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy
Reviewed by J. E. McNeil
October 6, 2021
By Stephanie Kelton. PublicAffairs, 2020. 352 pages. $30/hardcover; $18.99/paperback; $12.99/eBook.
When I was a hiring partner for a small general practice law firm, my last interview question for prospective employees was: “What area of law would you never want to practice?” Every last one would answer: tax. The thing was, my practice in the firm was largely tax.
Everyone in the United States is touched by the tax law. That equal justice for which we work is intertwined with taxes and the economy. If we are ever to reach that point of economic justice, we will have to be able to get past the big lie: The national deficit is dangerous and the United States needs a zero balanced budget.
So, even though I understand that many people, like those prospective employees, think they can’t follow financial and economic discussions, I ask you to bear with me and consider this book.
Kelton’s work, which was explicitly written “for everyone,” is an opportunity to understand the problems, the lies, the roadblocks, and the paths to real economic justice. Yes, there are jargon and complex explanations in this book. There needs to be in order to help readers understand the theories. But there are even more clear, well thought out illustrations and plain language examples of the points Kelton is trying to get across. If we do not take this opportunity, we will be relegated to arguing “Is not!” rather than, as former chair of the Federal Reserve Alan Greenspan did in a 2005 congressional hearing, explaining why “there’s nothing to prevent the federal government from creating as much money as it wants and paying it to somebody.”
I have always been annoyed by the concept that the government should be run like a business. We should charge for “services,” and the U.S. Postal Service should make a profit, some say. But government is not a business. I notice that the very executives who run corporations that have billions and even trillions of dollars in debt in the form of bonds (ExxonMobil, for example, refinanced roughly $7 billion in debt in 2019 before the pandemic) say debt is bad when talking about the government—the one entity that has the power to wipe out its own debt.
Kelton makes several clear points about the concepts behind Modern Monetary Theory. First is the fact that the U.S. government, unlike businesses and households, creates its own money. If it wanted (and there were the political will to do so), it could deal with the debt. In fact, it has done so, usually during wars, including World Wars I and II. However, Kelton notes that every time the government substantially pays down the deficit, a recession or depression follows.
Kelton also explains, with drawings of buckets, where the real balancing should take place. Balancing the U.S. government budget and not the entire U.S. budget (including gross national income and expenses) is like one parent balancing their budget but ignoring the other members of the family. The whole budget must be balanced.
Kelton is a proponent not of universal income but of guaranteed employment (while a little vague on what that would entail). This is not a new idea: Franklin D. Roosevelt said in his 1944 State of the Union address that Social Security was the cornerstone of a “broader vision in terms of economic rights,” including the right to what he called a “‘useful and remunerative job,’ as well as the right to an adequate income.”
Kelton makes clear that there are three issues related to “entitlement programs” such as Social Security: “(1) the government’s financial ability to pay, (2) the legal authority to pay benefits, and (3) our economy’s productive capacity to deliver real program benefits.”
As Kelton relates, in 1962, when then President John F. Kennedy was in the midst of greatly expanding the United States’ space program, he asked economist James Tobin, who had recently been a member of Kennedy’s Council of Economic Advisers, “[I]s there any economic limit?” The reply was: “the only limit is really inflation.” The president replied, “That’s right, isn’t it? The deficit can be any size, the debt can be any size, provided they don’t cause inflation. Everything else is just talk.”
That is the bottom line: We must understand that the federal deficit is not the danger we have been told it is for more than 100 years. The important deficits are not in resources and finances but in jobs, personal savings, education, infrastructure, dealing with climate change, healthcare, and democratic will.
Understanding this will help bring the justice we seek in the future. I encourage you to read this book, even if you worry you will skim over the complex parts. You may not.
J. E. McNeil is a member of Friends Meeting of Washington (D.C.) and a practicing lawyer for more than 40 years focusing on tax law and First Amendment issues.