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The tax is there to create a demand for the government's currency. Before anyone can pay the tax, someone has to do the work to earn the currency.
Taxes enable governments to provision themselves without the use of explicit force.
Third, taxes are a powerful way for governments to alter the distribution of wealth and income.
The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy Hardcover – Illustrated, June 9, 2020
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"Stephanie Kelton is among the most prominent of the dozen or so economists associated with MMT. Her new book The Deficit Myth is intended to bring MMT to a broader audience. In addition to an impassioned call for a bigger, more active public sector, The Deficit Myth contains a number of distinct economic arguments."
―The American Prospect
"Clear and vigorously written book."―Foreign Affairs
"She has succeeded in instigating a round of heretical questioning, essential for a post-Covid-19 world, where the pantheon of economic gods will have to be reconfigured."―The Guardian
"Kelton and her colleagues have brought a great many non-economists into the economic conversation in a way that no other contemporary branch of heterodox economics has been able to....[Sh]e's dead right about a central political fact of our times: A large, active public sector is more needed today than ever, and unfounded fears of public debt are a big reason we haven't gotten it. Which means her eloquent, accessible book is performing an important public service."―The American Prospect
"Kelton certainly offers food for thought at a time when governments are spending eye-watering sums to mitigate damage from the coronavirus pandemic."
"The big thing she gets right is in the way she structures her book around our current beliefs. In addressing our current understanding of how the world works - interpretations she identifies as myths - Kelton leads us step-by-step towards a new understanding of how federal spending works."―Inside Higher Education
"Stephanie Kelton convincingly overturns the conventional wisdom that federal budget deficits are somehow bad for the nation. ...Kelton argues that our government's inability to provide for citizens isn't due to a lack for money; instead, our leaders lack political will."―Farhad Manjoo, The New York Times
"The Deficit Myth is simply the most important book I've ever read. Stephanie Kelton carefully articulates a message that obliterates economic orthodoxy about public finance, which assumes that taxes precede spending and deficits are bad. Kelton's work is on a par with the genius of DaVinci and Copernicus, heretics who proved that Earth revolves around the sun."―David Cay Johnston, recipient of the Pulitzer Prize, an Investigative Reporters and Editors Inc. Medal, and the George Polk Award
"A remarkable book both in content and timing. A 'must-read' that is sure to influence many aspects of policymaking going forward."
―Mohamed El-Erian, chief economic advisor, Allianz
"In a world of epic, overlapping crises, Stephanie Kelton is an indispensable source of moral clarity. Whether you're all in for MMT, or merely MMT-curious, the truths that she teaches about money, debt, and deficits give us the tools we desperately need to build a safe future for all. Read it--then put it to use."―Naomi Klein, author of On Fire: The Burning Case for a Green New Deal
"Kelton's game-changing book on the myths around government deficits is both theoretically rigorous and empirically entertaining. It reminds us that money is not limited, only our imagination of what to do with it. After you read it you will never think of the public purse as a household economy again. Read it!"
―Mariana Mazzucato, author of The Value of Everything: Making and Taking in the Global Economy
"The Deficit Myth is a triumph. It is absorbing, compelling, and--most important of all--empowering. Embracing a well-researched framework that focuses on how real-world economies actually operate, she lays out a realistic path to true economic prosperity. It is an approach that focuses on Main Street and not Wall Street and will permit us to not only revitalize the struggling middle class, but address critical social problems like chronic unemployment, poverty, health care, and climate change. We of course face many binding constraints on our ability to act, but Kelton argues that the intentional underemployment of our own resources that results from the pervasive influence of deficit myths should not be one. We have needed this book for a very long time. Everyone should read it, and then reread it, before it is too late to change course."
―John T. Harvey, professor of economics, Texas Christian University
"Kelton's mission in this powerful book is to free us from defunct orthodox thinking about fiscal deficits rooted in the bygone era of the gold standard. Her theoretical canvas is modern monetary theory. At its core MMT offers a simple proposition: In a fiat currency world, the finances of we the people ain't the same as a summing up of our individual budget constraints, because we the people can't go broke, only deficit-spend our collective self into inflationary excesses. In the prevailing era of too-low inflation, the macro policy implication should be obvious: We the people presently have far more fiscal space than the deficit scold, pay-for crowd preaches. Kelton is a gifted writer and teacher and I confidently predict that The Deficit Myth, brilliantly written and argued, will become the defining book on what MMT is--and what it is not."―Paul Allen McCulley, retired managing director and chief economist, PIMCO, and senior fellow, Cornell University Law School
"Clear! Compelling! Eye-opening and persuasive, The Deficit Myth is an adventure in the world of budgets, jobs, trade, banking and--above all--of money. With the great force of common sense, Stephanie Kelton and the MMT team have broken through the closed circles of so-called sound finance, a stale orthodoxy that has weakened and impoverished us all. This book shows how they did it, and it blazes a path forward, toward a better world built on better ideas."―James K. Galbraith, The University of Texas at Austin
"A robust, well-reasoned, and highly readable walk through many common misunderstandings. A 'must-read' for anyone who wants to understand how government financing really works, and how it interplays with economic policy."
―Frank Newman, former deputy secretary of the Treasury
"[A] provocative, engaging, and thoroughly readable new book on modern monetary theory, economic policy, and job creation...Kelton... does a masterful job of challenging conventional wisdom with new facts, trends and data. You may not end up agreeing with her, but Kelton most certainly will make you think."―Larry Gennari, Boston Business Journal
About the Author
- Publisher : PublicAffairs; Illustrated edition (June 9, 2020)
- Language : English
- Hardcover : 336 pages
- ISBN-10 : 1541736184
- ISBN-13 : 978-1541736184
- Item Weight : 1.2 pounds
- Dimensions : 6.6 x 1.35 x 9.7 inches
- Best Sellers Rank: #60,141 in Books (See Top 100 in Books)
- Customer Reviews:
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Top reviews from the United States
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The book opens with an overwrought, frankly mystical, account of what might be fairly called "magical monetary theory." This is the version some politicians and journalists have picked up. It seems to claim that governments can spend unlimited amounts without raising taxes or taking on debt, making everyone prosperous. During this stage the author talks about epiphanies and astounding new truths, as if she's founding for a new religion rather than making coherent claims about the effect of fiscal policies.
In the middle of the book the author settles down in what seems to be a serious attempt to explain the non-magical version of the theory. This starts out well enough. The claim is that governments create money and have a monopoly on it. They can print and spend as much as they like. In conventional economic theory, people will only voluntarily hold a limited amount of money. If the government prints more than people are willing to hold, it will either have to sop up the extra with taxes, issue interest-bearing debt for people to buy with the excess money or there will be inflation as everyone wants to spend money and no one wants to take it.
The author argues that these bad effects will not occur until every person is hired and every economic resource is in use. If people have more money than they want to hold, they will hire even the least skilled workers, and put even the least useful resources to work. And if they don't, the government can do it directly, guaranteeing everyone a $15/hour job. If anyone is unemployed, if any house or factory is boarded up, the government isn't running a big enough deficit.
That's clear enough, but it raises questions. Is money really something created by governments, or do people just use the government-issued version because it's reasonably good and laws encourage it? In the latter case, uncontrolled money supply might cause people to find alternatives. That is certainly what happened in many over-regulated economies, where black markets grew up and many people used foreign currency or gold in preference to official currencies. If Stalin couldn't force people to use only official rubles, it's hard to imagine any modern democratic government succeeding. In Europe today, and to a lesser extent in the US, financial regulation has driven significant shares of the economy underground, and MMT might exacerbate that. Moreover with improved technologies there are many alternatives to official currencies.
Another question is whether people really would hire even the least-employable people, or move into abandoned neighborhoods, or restart mothballed factories. The government could do it by fiat, of course, but would there be any net production? Or would it cost more to force unwilling workers with few job skills to produce goods and services, than the likely low quality results would be worth? The author seems to regard employment as a good in itself, rather than as a means of producing more useful goods and services than it consumes.
Now I don't say these questions don't have answers, but the book doesn't even begin to address them. There is no sense that the author is trying to convince skeptics, or address these and other questions that have been raised by many commentators. The book seems written only for people who want to believe, even if it's not clear exactly what they're being asked to believe.
The book is also missing any discussion of history. Communism had full employment and unlimited money printing, more or less along the lines the author suggests. In the Soviet Union, it was illegal to be unemployed. Workers could get lots of rubles, but often had to stand in long lines to spend them, or go without because necessities weren't available to buy. Many governments have found massive deficits leading to inflation or even hyperinflation and financial collapse. If the author discussed these historical examples in detail, explaining why her current proposals differ, it might become clear precisely what she means to do. WIthout that, it's hard to see what she's proposing that hasn't failed spectacularly in the past.
The last part of the book is the most useful. Unfortunately, most skeptics probably won't get there. When the author makes actual policy recommendations, the magical stuff is gone, and the assumptions and intentions are clear. There is a strong argument that the natural rate of unemployment has been consistently overestimated in the past, and that looser fiscal policy could support more jobs and higher wages for less-skilled workers, without inflation. Gone is the suggestion that trade-offs do not exist, the argument is only that the optimal trade-off point involves bigger deficits. Also absent is the idea that people will accept and use any amount of money the government prints, and the claim that everyone is employable, and the suggestion that output doesn't matter, only the fact of employment.
This is an interesting discussion although I don't find it convincing myself. But the author does make a case that will appeal to many. While it has elements of both traditional and modern Keynesian arguments, it comes at things from a different direction and makes bolder claims. It actually has quite a bit of Reaganomics in it, absent the supply-side part (the supply side seems invisible to the author, she seems to be of the "if you come, they will build it" school). No doubt many critics will say it's old-hat, and perhaps each thread individually has been argued before, but it does seem to me to be a new recipe using old ingredients; and one that will be irresistably appetizing to many.
Unfortunately, like all MMT economists, Miss Kelton makes the mistake of equating currency issuance with the creation of money. In advanced modern-day economies, they are not one and the same. MMT economists further suggest that the governments of advanced modern-day economies create all the money that flows throughout an economy. They most definitely do not. While she clearly has a hard left political agenda, I don’t think she’s intentionally trying to mislead her readers; I believe she was simply taught something that isn’t so and then had it reinforced by being told the same by others. After well over a decade of working with people at all levels of economics and finance I’ve come to the realization that this misunderstanding of how money is created and propagated throughout an economy is so common that even a very large majority of professional economists, academics, strategists, and financiers believe it to be so.
Equating currency issuance with the creation of money describes a system that is over 2,000 years old, has not existed in developed markets for decades, and currently only exists in lesser developed emerging markets and frontier markets. Contrary to popular belief, Modern Monetary Theory is archaic.
It’s true that any government can print as much of its own currency as it wants in order to satisfy the obligations that are in its own currency. Contrary to what MMT economists seem to believe, I don’t think there are many economists of any kind who would disagree with this—it’s not some brilliant, new discovery. However, developed market governments today, including those with stable sovereign currencies, like the US, the UK, Canada, etc. don’t do it because it’s been tried over and over again for centuries and has always ended in financial and economic calamity.
Put simply, the money that flows through the US economy is created in the private banking system. Not by the Treasury, not by the Fed, and not through some secretive process developed by the Treasury and the Fed that occurs out of the public’s view. In fact, it’s almost certainly happened right before your very eyes. Specifically, when a bank makes a loan it simultaneously creates a deposit, and, voila, money has been created.
So, why can’t US banks just create as much money as they want into perpetuity? There are a number of reasons, including: 1.) banks have capital and liquidity restrictions imposed by the Federal Reserve that limit the amount of assets, including loans, that they can hold relative to their regulatory capital and 2.) markets impose natural restrictions during periods of relative calm because even though the bank creates the money, when someone defaults on their loan the bank still incurs a loss---a few too many losses eating into the bank’s capital and the bank will fail.
All of this said, what the Federal Reserve CAN do is lend money to the country’s private banks. HOWEVER, this only creates what are called “reserves” that are reflected on both the Fed’s and the private banks’ balance sheets. Importantly, these reserves cannot be loaned out by the private bank. So, while these newly created reserves are technically newly created money, they do not serve as money that will ever flow into the US economy. This is the same process by which the Fed purchases USTs or other fixed income securities. The Fed pays for the securities that they buy from the selling bank by creating an offsetting balance on the Fed’s balance sheet that pays a fixed rate of interest to the seller.
In attempt to prove to the reader that the Federal Reserve and Treasury DO create money out of thin air that eventually flows into the economy, Kelton points to an interview where Ben Bernanke says, in reference to the Fed’s assistance to private banks during the 2008/09 financial crisis, “It’s not taxpayer money. We simply use the computer to mark up the size of the account”. What Kelton doesn’t point out, or perhaps doesn’t realize, is that Bernanke was referring to the type of loan I just described above. She also quotes Alan Greenspan without noting that in the same statement he was warning that simply printing money out of thin air to fulfill obligations is risky and potentially inflationary.
The point to take from all this jibber jabber I’ve just written is that one should be very careful in drawing any conclusions from MMT economists’ explanations. Many, if not most, of their policy recommendations are based on theories and explanations that are entirely detached from economic, financial, political, and social realities. Keep in mind that one of their foundational premises, that all the money that flows throughout an advanced modern-day economy is created by the government, is simply untrue. The fact that they believe that MMT is an accurate description of how a modern-day monetary system works is troublesome. The fact that the policies prescribed by MMT economists have been tried time and again over a period of centuries and failed time and again over this period is a bit disturbing.
This is not to say that Miss Kelton’s book isn’t worth reading. Indeed, she certainly offers some interesting insights into financial and economic theory, it’s just that one has to tread very carefully lest they fall into the same trap of falsehoods that MMT economists have.
I could continue with the explanations of all the problems with MMT, but I’m tired of typing and my brain hurts, so I think I’ll stop here. Thanks for reading
There’s a lot of zingers floating around about this being a book about magical money trees, or that it ignores hyperinflationary events of the past — it does not. It’s a rethinking of what money is, how it’s used, and where it comes from. It does not ignore Zimbabwe or Weimar. Under this paradigm, money is not a store of value to the state — how could it be, when the state can create more on demand? Money functions as a tool for maximizing productivity by connecting idle labor with idle resources to create real economic growth. There are real constraints on spending, they’re just not what your common sense — nor what decades of misinformed politicians and pundits — have led you to believe.
Top reviews from other countries
Central to the rigidity of both economists and politicians has been a myth that governments have to budget like a household. Kelton starts her book by demolishing this myth. Households cannot spend more than they bring in, without incurring debts that have to be repaid. In contrast, governments with monetary sovereignty can simply issue the money they need. How much they take back, in taxes or in debt repayment, is a political choice. The only constraints, Kelton argues, are real (resource availability and inflation) not budgetary.
Kelton goes on to demolish other myths - that government deficits result in insolvency (rather than inflation), or that national debt is a burden (rather than a vehicle for private savings deposits). She draws on her experience as chief economist on the US Senate Budget Committee to provide detailed evidence to back up her arguments. Obviously, much of this evidence is from the US, but the same principles apply to the UK and other countries whose governments have monetary sovereignty.
Towards the end of the book, Kelton explores the political choices that monetary sovereignty makes possible. Instead of striving for debt reduction and a balanced budget, with all the austerity that entails, Kelton suggests that governments should be using public spending and taxes to re-balance the economy. That means prioritising aims like full employment, a fairer distribution of income and wealth, quality health, education and housing, and decarbonisation. These are political choices, she emphasises, which are constrained by real resource and ecological limits, not artificial limits on the ability of governments to issue money.
We are living through a time of acute crisis - both immediate (Covid-19), and longer term (climate change). Addressing these crises will require governments to spend money, money that they can and should create. And the constraints on that money creation are weak at present - inflation and interest rates are near zero, and there are huge under-employed resources. The last thing we need is a return to austerity, justified by out-dated notions that we need to reduce the deficit.
Stephanie Kelton’s book could not be more timely.
1 The US government is the monopoly creator of dollars (actually it isn’t because all banks create money through fractional reserve banking)
2 It can create as many dollars as it likes and spend them on anything it likes (e.g. a “jobs guarantee”, under which everyone who wants a job can have one at a decent salary and with good benefits, paid for with these dollars)
3 As long as there is spare capacity in the resources of the economy (e.g. labour), it can inject unlimited numbers of dollars without any resulting inflation.
There are some big problems with this. I fully accept that money (notes, coins and bank account balances) has no intrinsic value (you can’t eat it, live in it, power your car with it etc). Nevertheless, it is treated by everyone as if it does have intrinsic value. In a sense it is like a giant confidence trick. But that word “confidence” is at the very heart of why the illusion works.
In order to maintain that confidence, it follows that Governments cannot be seen to be able to “print” money to support their own spending, so that power to create money resides exclusively with the Central Banks (such as the Federal Reserve). There are differing degrees of formal independence of such banks, but the fiction has to be maintained that (even if the bank is technically an arm of government) there are at least “Chinese walls” between them. So, if the Government needs dollars for its spending plans, it can’t just issue them, it can only borrow them from the Central Bank or other lenders. That’s exactly what it does and has always done. It issues bonds. The bonds carry interest and have to be paid back. And the Central Bank cannot just buy the bonds and then write them off as the author contends (because the bank would go bust).
Every accountant and most businessmen understand that there is a difference between profit/loss and cash. A profitable business can go bust if it runs out of cash, even though it is making profits. The author is right to say that the government can never run out of money, but equally it cannot sustainably run up losses (deficits) continuously and increasingly. At some point (and nobody knows where that lies), confidence in the currency falls through the floor and the citizens of such a country are in a world of pain.
The author throughout the book refers to “Modern Monetary Theory” as MMT. But MMT also stands for Magic Money Tree.
The book is based on what passes for American fiscal policy but also ANY country that is a sovereign issuer of its own currency (like here in the UK) could do what Stephanie Kelton and other pro-Modern Monetary Theorists (MMT) advocate in this book. EU countries whose currency is issued by the European Central Bank cannot carry out MMT.
I have learnt about MMT chiefly through Richard Murphy's blog (highly recommended) but I also bumped into Warren Mosler and his book 'The Seven Deadly Innocent Frauds of Economic Policy' earlier and this to me opened up the subject, as did looking at Economist Bill Mitchell's blog although Mitchell is not convinced of the role of taxation.
I choose to go with Kelton, Murphy et al on the latter - tax is fundamental to MMT because the cash injection can cause inflation: tax however is the cooling agent - the other half of the coin - what you put in at one end has to be taken out at the other, otherwise like a bucket over filling with water, money will overflow and inflation will happen. The other issue is that this is spending and then taxing - the Government is not taxing to spend - another lie that is constantly told to people in the USA and the UK - if not world-wide.
This is why Thatcher and the Neo-liberals wrongly thought that using unemployment (very cruel and unnecessary) and curtailed state spending (a dereliction of a Government’s promise to provide) plus just using interest rates (monetarism) would control inflation when they took power in 1979. It did not. Why? Because Thatcher also reduced taxes, especially for the rich. Much of Thatcher's boom was created by privately created debt - whether from the expansion of consumer debt in households or leveraged take overs of public utilities and an exponential growth in the real estate sector- a lot of it was under taxed rich money pouring into the City of London as private investment to help the rich's money make more money AND relaxed credit and banking rules and that is why inflation was a continuous problem for even Tory Chancellors. Inflation came about because of a lack of tax and more credit being available. These were all Thatcher's decisions. Bad ones that persist to this day because politicians of all colours do not understand tax.
In the practice of MMT, tax is not needed for spending - just for controlling inflation. Spending is from printing fiat money - money that the Government just creates by choice (or not!) out of thin air for its policy choices, for its people. Because it can. It always could since the day the State was founded. And there are people with money to save who can act as the counter party and buy Government bonds and gilts with confidence because they will always get their money back.
The pivotal part in this book for me though is from p.142 where Kelton explains the facts of sovereignty (the power of the Kings of old) to enable a State to print its own money for its people. She says it is key to understanding MMT and I totally agree with her. At a time where most politicians (whether Right or Left) seem to agree that the States they are meant to be in charge of are not as good as the market at allocating resources, this is a breath of fresh air. A State printing enough money for its people (all of them - not just enabling the rich to get richer by under taxing them and allowing the rich through their under-taxed income to charge us poorer folk through privatised utilities they buy and pay day loans they fund) is what we want both now during the Covid crisis and in the future.
BREXITEERs will tell us that sovereignty is in our laws and borders. But the most powerful form of sovereignty in a country however is printing your own money - whether the pound or the dollar (Kelton contrasts this by telling us what happens in countries that don't print their own cash). And rather than leaving money to be circulated by un-elected and greedy not to be trusted private sector (think now about 2008 and all the crashes we had up to then, as well as the accounting fiascos and money laundering of criminal money as well as how the rich have got richer after 10 years of austerity whilst the rest of us lost it and jobs), MMT puts YOUR Government firmly in the seat of responsibility for ensuring that all our services (the NHS, Adult Social Care, schools and even our needs over Covid -19) are funded sufficiently.
BTW - that Government could be Left or Right - MMT is politically neutral - it explains a factual, extant, practical State power that any British Government could use - Tory, Green, Labour, Marxist, Trotsky, The BREXIT Party, The Official Monster Raving Lunatic Party - ANY of them could choose to use this power for the good of its citizens.
If MMT is such a good idea then, why is it not more widely known? Why do people - even the supposedly well read middle class and those who go to Oxford, Cambridge and Harvard still think - politicians included - that tax pays for everything?
Well, there are a number of reasons for this. Kelton thinks that efforts to add contributory and qualifying payments to citizen's State funded help has helped to muddy the waters and helped certain politicians over-egg the contribution side because those contributions have become a means by which we might choose to elect them (tax cutting/service cutting competition in elections). But there is also the Neo-lib myth of the State 'crowding out' the private sector - that when the State prints money into its society, the private sector does not get the opportunity to turn that activity into a profit making enterprise. So, States are encouraged to privatise, spend less money on direct support, turning over those budgets to the private sector instead for what can be a worst service. If we look at the amount of privatisations over the years, it is clear that rich capitalists - the same ones that fund parties of all persuasions who don't mind privatising (and financially support leading universities too) - are having their needs met before millions of voters.
Look at British Rail today - it receives more state subsidy as a private concern than it did when it was owned by the Government even at pre-privatisation prices; look at how those water & utility bills have gone up since privatisation; Crowded out? The private sector has been 'crowding in' more like - to grab hold of money that should be being used to help people like me and you.
There is also the inherent anti-Statism seen in Neo-liberalism - one of the dominant but not necessarily right economic philosophies of our time - the State bad/private good mantra for example.
Kelton goes on at the end to advocate MMT being used to address the increasing pauperisation of the commons in America but also prevalent in the UK - we can look around most inner city areas and outer regions in the UK and see that lots of work needs to be done; there are potential jobs everywhere. We need new green technology start ups to deal with globalised climate change. And we need to realise that deliberate unemployment and constant market collapse is leaving people increasingly angry and frustrated - ripe for exploitation by neo-Fascism and potential social breakdown and instability throughout the world.
So what to do?
Start by reading this book but also buy it (from Amazon!) for your family, your kids (especially for them) your friends and even work mates if you can. We have to start by raising our expectations of our politicians - expecting them to know about MMT, sovereign currency creation and demanding that, in return for our votes, they use MMT to help us and those we love and value - not just the well heeled who lobby politicians and make donations and push to the front.
Expecting better than we have now - that is where we voters have to start in my view. This may well help us to have a proper public debate on MMT and see it put into practice to the point that it reaches its objectives - full, well paid employment and inflation controlled by a progressive tax system and happier, supported people with a future.
Buy it and spread the word. It's worth a go. We can't go on like this.