The Deficit Myth | Stephanie Kelton

Summary of: The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy
By: Stephanie Kelton


Dive into the intriguing world of Modern Monetary Theory (MMT) with Stephanie Kelton’s ‘The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy.’ This book will challenge your understanding of conventional economics, dispel myths about government budgets, and reveal that federal governments with monetary sovereignty possess greater flexibility than we think. Discover how MMT can reshape fiscal policies, tackle pressing issues like unemployment and climate change, and redefine our perception of wealth and deficits. With an engaging and accessible style, ‘The Deficit Myth’ offers an enlightening perspective on harnessing the power of MMT for the greater good.

Why the Government Shouldn’t Budget Like a Household

The Modern Monetary Theory argues that the federal government should not budget like a household. The government has monetary sovereignty, which means it can make money, unlike a family which must earn or borrow it. The traditional taxing and borrowing precede spending model is not applicable to the government because it can spend first before collecting taxes and borrowing. The spending before taxing and borrowing model should be followed instead. However, the government needs to consider inflation when creating budgets.

Rethinking Budgeting

In “Deficit Spending Doesn’t Matter, But Inflation Does,” the author explores the concept of Modern Monetary Theory (MMT) as a new approach to fiscal policy. Unlike the traditional economic model that stresses the importance of keeping a balanced budget, MMT argues that governments should focus on using spending and taxing as tools to build balanced economies. The government should spend freely on infrastructure and jobs programs when necessary but carefully monitor inflation. MMT’s ideology suggests that running a deficit is not inherently good or bad since governments can’t really go broke. Therefore, large government spending programs are actually very beneficial, even if they cause deficits, such as the $787 billion fiscal stimulus bill, which helped kickstart the markets after the 2008 financial crisis. On the other hand, the government must ensure that the inflation stays under control by raising taxes and fixing the price of labor through federally funded job guarantees. The underlying idea is to move away from traditional deficit-dominated views, where deficits are evil and a balanced budget is good, and towards populist-led spending with a focus on complete employment and low inflation models.

The Truth about the National Debt

The National Debt Clock in Manhattan displays a staggering figure that seems like a looming disaster, but the truth is, the growing national debt does not pose an actual threat to the economy. Politicians often hype the national debt as justification for cutting back on government spending, but the national debt is not the same as your household debt. It comes from the government’s sale of US Treasury bonds, which accrue interest and are counted as debt. Modern Monetary Theory views the national debt as a measure of a specific type of asset available in the private sector. Eliminating or significantly reducing the national debt may not be necessary, as each time the government has done so in the past, it has led to a recession.

Rethinking Deficit Spending

Government deficits, far from being a national crisis, can actually work to our economic benefit. This runs contrary to the “crowding-out” theory that argues deficit spending takes money away from the private sphere, slowing economic growth.

The author challenges this myth by using a simple analogy with buckets. When the government runs a balanced budget, the total water in the economy is stagnant, proportionally divided between the public and private sectors. However, if the government runs a deficit and injects additional water into the private bucket, it can leave more wealth in the economy. This benefits everyone but only if the government invests in universal spending programs rather than focussing on specific sectors. Deficit spending should, therefore, be embraced as an opportunity to enhance collective wealth.

The Sustainability of Entitlement Programs

In the United States, social programs such as Social Security, Medicare, and Medicaid are often targeted by right-wing politicians who claim they are too expensive and unsustainable. However, Modern Monetary Theory (MMT) has shown that all entitlement programs are sustainable as they are paid for in US currency and can always be funded by the federal government. The real limits lie in political will and the economy’s productive capacity. Current funding schemes for entitlement programs can create artificial constraints, but the government could easily pass laws committing to fund these programs no matter what. The key to sustainability lies in ensuring that the economy has adequate productive capacity and investing in resources like training more doctors, building more hospitals, and funding more drug research, which will not only benefit citizens but also the economy as a whole.

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