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The Deficit Myth

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During the heat of the 2020 Democratic Primary, I often heard skeptical references to Modern Monetary Theory and its influence on the campaign of Senator Bernie Sanders. It was during that time that I first heard of The Deficit Myth, Stephanie Kelton’s explanation of MMT for general readers. I was excited to learn more about an esoteric corner of economic thought, and I still intended to read it after Sanders left the race and it appeared that more traditional economics would inform the campaign of Joe Biden. When I did get the chance to read it, we were in a pandemic-created depression and the world’s economic future has never been more in doubt. The Deficit Myth is an approachable introduction to MMT, and a reminder--very much needed in an enormously difficult time--that we have the capacity to improve the lives of the nation’s citizens, but we can only do it if we properly prioritize our needs and understand our actual constraints. I anticipated that this book would be interesting, but I didn’t expect that it would be vital.
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TL;DR

The Deficit Myth by Stephanie Kelton explains a revolutionary finance theory in easy to understand terms. It places the focus of government finances back where it belongs…on helping citizens. Highly Recommended.

Disclaimer: The publisher provided a free eARC of The Deficit Myth in exchange for an honest review.

Review: The Deficit Myth

How many times have you heard people try to compare the government’s finances to that of a household? Many of my conservative friends say that money coming in has to equal money going out because that makes sense. It’s how a family budgets. For state and local governments – even for some foreign national governments – this analogy works. But for the U.S. federal government and any national government that issues its own currency, this analogy fails according to advocates of Modern Monetary Theory (MMT). In short, MMT is a theory of government deficit. Proponents of this philosophy tell us that thinking about the federal government’s budget acting like a household budget is wrong. In The Deficit Myth, Stephanie Kelton explains MMT by debunking six common myths about U.S. federal finances. This radical approach to government finances could change the country forever. Whether for better or worse, I’ll leave that for the experts, but The Deficit Myth convinced me that more politicians should give some MMT policies a chance.

Stephanie Kelton addresses six myths about federal government spending in The Deficit Myth: 
•	The federal government should budget like a household
•	Deficits are evidence of overspending
•	Deficits burden the next generation
•	Deficits crowd out private investments, undermining long-term growth
•	Deficits make the U.S. government dependent on foreign governments
•	Entitlements propel the U.S. toward long-term fiscal crises

Dr. Kelton devotes a chapter to each of these myths and explores in detail why each is false. As evidence of her arguments, she uses history, basic accounting, and her experience in government. The first, most basic part of her argument requires understanding the difference between a currency-issuer, like the federal government, and a currency-user, U.S. citizens. You see, unlike you or I, the government can print money out of thin air, or rather by typing out a command on a keyboard at the Federal Reserve.
Everyone knows this fact, but economists of most stripes think this MMT fantasy. And to be fair, it really does sound too good to be true. After all, if we can just print money, what stops the government from printing continuously? Dr. Kelton answers that in the book in detail by pointing out how economists have erred in their economic predictions. Just as she starts with myths and goes on to disprove the myths, Kelton describes the ideas of MMT’s critics and then shows the flaws in their arguments. The whole book is written in terms that I, not an economist, could easily understand.

Is It Socialism?

Is Modern Monetary Theory socialism? It depends on the policies that implement MMT. As we saw with the 2009 bailouts and the 2020 Covid-19 bailouts, Republicans will take government money and give it to corporations and rich people at every opportunity. For some reason, Republicans and conservatives don’t consider it socialism when the rich and corporations get government money; only poor people receiving government funds is socialism and therefore bad. If MMT theory got popular enough to be viable, I have no doubt that Republican politicians will use it to give money to corporations and rich people. The current, unofficial motto of the Republican party is privatize profits and make debts public, after all.

Dr. Kelton proposes a guaranteed jobs program that would send the money to the people who need it most. While some on the left want a universal basic income, I think there’s too many problems with just giving people money. I strongly believe in the dignity of work, and I think most people do as well. Unfortunately, in our current society, the dignity of work has been replaced by the fear of getting fired and of losing health insurance. A guaranteed jobs program would solve one of those problems, and a public option for health insurance solves the other. In addition, as Dr. Kelton points out, competition in the job market would cause wages to rise. Wage stagnation leads to increasing economic inequality, and a guaranteed jobs program would combat that inequality. Employers would have to increase worker pay to compete with the guaranteed job. Stores like WalMart would no longer be able to keep store clerks as part time employees who want to work full time. In this case, yes, it would be socialism. As the guaranteed jobs program would give back to the community, we’d all benefit.

But Could It Work?

Honestly? I’m not the person to answer this question. I do know that of the 42 years I’ve been on this planet, only 4 of which didn’t see the government have a deficit. If in all that time the deficit hasn’t caused a problem, why would it now? We’re told that the debt is a problem, but who do we owe that debt to? The majority of it is held by U.S. citizens. And if the debt was such a bad thing, why would banks be clambering to buy U.S. securities? In reality, we already engage in MMT; we just don’t call it that. If you want to understand the difference between the government and the rest of us, look at debt limits. When the average person approaches their credit card limits, do they simply say increase the limit and, poof, have more credit? No, they have to ask the bank. Who does congress have to ask to increase their debt limit? They ask themselves, and then they all vote on it. Congress tells congress how much money it can spend. The average person can’t do that.

Dr. Kelton makes a convincing argument that MMT could. I think her assessment is a bit rosy, though. As the chief advocate for this theory, she has to be. But, like other Bernie Sanders supporters1, she thinks that once all lower and middle class workers see how they’ll benefit, they’ll jump on board. As W.E.B. DuBois said in Black Reconstruction (page 701), “…every problem of labor advance in the South was skillfully turned by demagogues into a matter of inter-racial jealousy.” Dr. Jonathan Metzl in Dying of Whiteness showed how white people support policies that directly harm them but propagate structural racism. I just don’t see the majority of working class whites accepting MMT policies even if said policies make their lives better. A big worry will be how will ‘we’ pay for it, and though Dr. Kelton discusses how we will, then the next hurdle will be the scarcity mindset. Working and middle class whites worry about ‘those people’ getting money for nothing. How Dr. Kelton and MMT advocates rid people of the scarcity mindset is beyond me.

In the book, Dr. Kelton shows how MMT could help developing nations achieve financial security and independence from established nations. While I think this is a good thing to do, this section will definitely turn off even the curious conservative mind. In our current political climate, sending money to other nations is incredibly divisive and seen as not caring about regular Americans. If MMT policies raise the living standards of all in the U.S., then we can start to look beyond our borders. While MMT has the potential to increase the quality of lives around the world, convincing the average person in the U.S. right now to send help overseas will be a non-starter. I like Dr. Kelton’s argument, but I think it will work against her.

Conclusion

Stephanie Kelton’s The Deficit Myth switched my thinking about federal finances. I still have a lot of questions about MMT, but The Deficit Myth has me questioning what I thought I knew about federal budgeting. In a saner time, we’d be able to debate these ideas across political lines. But for now, The Deficit Myth shows that U.S. politicians care more about money matters than helping people. The Deficit Myth is a call to rethink our assumptions about government finances to put ‘we the people’ back at the center of government’s focus.

The Deficit Myth by Dr. Stephanie Kelton becomes available from Public Affairs Books on June 9th, 2020.
8.5 out of 10!
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*** Special Thanks to Netgalley for providing me with a review copy in exchange for an honest review***

In this episode, my world view was turned on its head...

Friends, friends, friends. 

Welcome back to Teatime Reading where there are books in progress. We are currently in the middle of a challenging moment with a global pandemic, a dangerous and uncertain economic predicament for millions, if not billions, of people, and political frustrations galore. After Senator Bernie Sanders failed to secure the Democratic nomination in the U.S., I wasn’t sure what the future of politics would be in my country. 

Fortunately, I got to distract myself from the political horse-trading, and the frustrating federal response to the Coronavirus with Stephanie Kelton’s exceptional book The Deficit Myth. I’d heard Professor Kelton on the Hear the Bern podcast as well as on Nick Hanauer’s podcast Pitchfork Economics, but I wasn’t completely clear on the intricacies of Modern Monetary Theory, MMT. 

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. The revelations and explanations that there were inherent differences between currency users and currency creators were shocking at the extreme, and the subsequent bombshells about the fallacies that both progressive liberals and right-wing conservatives abide by in Congress and the Senate just blew my mind. 

The Deficit Myth made Kelton’s case loud and clear, and it is a book that rewards attention and patience. It is a stunning book that pulled back the curtain on government, currency, and the true hope for our future economy and prosperity. 

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. 

That’s all for Teatime Reading. Until next time, keep your bookmarks close. 

Peace, Love, Pages.
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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
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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.
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