How does the US Federal Government raise the money it spends to run its programs, conduct its wars and pay out unemployment benefits? It taxes and borrows, right? No, says this author, that's not how it really works. Since the Federal Government issues its own "fiat" currency -- "prints" it, as it's usually put -- it can never run out of money, so it really doesn't need to either tax or borrow. It can just spend. For a variety of reasons including the fact that that's the way it's "always been done", it taxes and borrows anyway, except when there's a crisis. That's when it really cranks up the virtual printing presses and simply spends without benefit of bothering to pretend to raise the money. That's what much of the spending to bring the Great Recession to an end by the Obama administration (and the very tail end of the Bush administration) was all about -- pumping trillions of dollars into the banking system with emergency transfusions that were nothing more than electronic transactions at the Federal Reserve of NY. "Quantitative easing", which pumped further trillions into the economy over a period of several years up until 2013, had the same idea. The Federal Reserve did not raise these funds through either taxing or borrowing -- it simply credited all the necessary bank balances, and that was that.
This idea is the key one behind Modern Monetary Theory, of which Stephanie Kelton is a prominent exponent. She has no time for arguments that Social Security is going to run out of money unless it's cut back, or that we lack the money to rebuild our decaying national infrastructure of roads and bridges and airports, or that we can't fund some version of health insurance for all. When we need to, just print it, she says. The real limit is running out of resources -- that is, running out of additional productive capacity -- not running out of money.
An important caveat to the above is that this model only works for central governments of countries that have have their own sovereign fiat currencies AND have a history of paying their debts (particularly if they want to sell debt instruments to foreigners). So, this excludes the Eurozone countries that don't have their own individual currencies, but rather a shared one. It excludes places like Venezuela and Argentina and Zimbabwe that can't borrow in their own currencies because of their weak economies, high inflation and lousy credit. It excludes countries that use another country's currency, like El Salvador and Panama and Ecuador that use the US dollar. And it excludes governments that are not in charge of their country's currency, such as state/provincial and local governments.
Kelton does NOT think that governments should stop taxing, however, for several reasons such as: One, taxes help to redistribute income and wealth to limit inequality, which she thinks is not only corrosive to democracy but is also bad for the economy, because as inequality rises, the great mass of consumers will simply have so little money to spend that the economy starts sputtering from a lack of aggregate demand. Two, taxing the population ensures that consumers don't consume so much of the economic output of the country that there are not enough resources allocated to government to carry out its functions. Three, the need to pay taxes motivates people to work more. (This is not one of her stronger arguments). Four, targeted taxes help to raise the price of products that have negative, costly side effects that are not otherwise priced into the product, such as cigarettes, fossil fuels, and alcohol -- with the increased price helping to discourage consumption of these products and offset the cost of curing the damage they cause.
The counter-argument to the "print more money whenever you run short" argument is that doing so will trigger inflation, with too many dollars chasing too few goods and services. Inflation is taken to be a bad thing for most people, especially on the grounds that it erodes buying power for those on fixed incomes or who have too little market power to keep their incomes rising at the same or faster rate as inflation.
Her answer to the inflation argument is simple: the US economy always runs with some amount of "slack", that is, some amount of unemployed human and capital resources, which of course is true. The real involuntary unemployment rate in the US is about 10% today, in these Covid times. So, she says, print money up until the point that you see inflation above some acceptable threshold such as 2%, and then ease up on the presses. But in the process, you will have brought into production a large part of not only the unemployed, but also those who are no longer counted as unemployed because they have simply given up on finding a job. The added 5-10% of production -- forever -- will largely pay for those expanded government programs AND will increase the productive capacity of the economy further by making it more efficient through creating, for example, a national transportation infrastructure that actually works well, a health insurance system that covers everybody, and an education system that is better resourced.
Embedded in the idea of managing to the optimal amount of slack in the economy is that the real hard limit on how much a country can consume is how much much it produces (ignoring the effect of trade). The combined use of goods and services by government, consumers and business investment can'be be more that the goods and services produced. Trying to consume more just results in rising prices a.k.a. inflation. So, Kelton says, worry about the country using up all its resources of productive capacity, not about accounting entries. So, for example, Social Security won't "run out of money" until the ability of the economy to produce can't keep pace with the resources required by the program, not when some magical balance in the Social Security fund runs dry.
There's more to the book than this, of course, notably the idea of a federal jobs guarantee, which is more controversial, but her core idea is the one above. Her arguments are very Keynesian, in the main, in that she is advocating that it is part of the role of government to stimulate the economy through added spending when aggregate demand is too low and therefore resources are sitting idle. The only difference -- which is a big difference -- is in saying the government doesn't necessary need to pretend that it's financing itself with a budget that pays for all these expenses through taxes or borrowing by selling bonds. Her argument also draws on the experience such as that of the FDR era in the US in the 1930's, when programs such as the Civilian Conservation Corps directly employed masses of Americans in carrying out public works projects, such as building infrastructure in parks. This theory makes sense at a high level, but whether it's a good idea to provide a guaranteed job to all who want one, at a minimum of $15/hr, by hiring job-seekers directly, or instead to do it by spending through 3rd parties such as private social service agencies and construction companies building roads/bridges and the like is highly debatable.
All in all, this is a very refreshing book, and has caused me to look through a different perspective at how we finance government and how we might therefore be able to fix our shredded safety net, infrastructure and public services. Even if you disagree with some or all of her thesis, this book will challenge you to think a lot more deeply about the role of national governments -- in the US and other country with a similar strong sovereign currency -- and how to finance what they do.
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Reviewed in the United States on September 12, 2020
Reviewed in the United States on July 26, 2020
Back after the 2008 crisis, I had lost my job and was sitting around unemployed and I started to get interested in economics for the first time in my life. The reason was that for all my life to that point the broader economy had not really broken down during my lifetime. I had long considered myself a Marxist from the experience of being a worker at the point of the spear in the service economy. In food service you see the menu price and you know your price and there’s a huge discrepancy between the two.
I had a sense that in the shadow of that crisis that we were bounded by only being to push at the edge of the status quo. The bailouts, both TARP and ARRA were real money that had to be paid back, so the democratic-led government in 2010 and through pressure from their political opponents, started to roll back the funding that was on offer through the state. “Austerity” was the name of the game and big debts were scary and more important than the mass of Americans who were still without jobs in the economy that had been showing “green shoots” every quarter for 18 months.
I was unemployed and reading as much as I could about economics and especially the crisis. There were scores of books written by commentators and economists trying to get their hands around just what happened and why it happened. But it was not the first crisis. I eventually found myself making my way through Keynes and Minsky – with some understanding but not 100% of it. Keynes had some integrals I just skipped over and hoped that he was explaining all of them in the text. It was during this time that I came up with what I thought was a fairly novel idea that the household metaphor that politicians used was completely wrong. The government lives forever, I said, and it creates money. A worker is constrained in the money they have and the only way to get more is to work more even if the can temporarily increase their spending by borrowing they eventually have to pay it off (or pass down the debt once they die). I created an imaginary currency called “EdgarBucks” and knew my biggest problem was making sure that people accepted these “EdgarBucks”.
My insight about the fallacy inherent in the household fallacy was not novel it seems. While politicians and many economists talked about spending money being the constraint, there was a then little-known school of thought who had fleshed out the idea that money is not the constraint in the economy, but real resources are that constraint. You cannot run out of money if you are a currency issuer, but you can run out of factories. It brings to mind Keynes looking at idle workers and idle factories and realizing that you can have suboptimal equilibria where resources are underutilized. But what this little-known school of thought had done was flesh out that idea, and it has a name – Modern Monetary Theory (MMT).
The basics of MMT are that the real constraints are the real economy and in the book Professor Kelton works through the implications of the idea that money is more a record keeping device than some sort of fetishized commodity through simple, easy to understand metaphors. What is dangerous through the world as described through MMT is inflation and not debt, and the way to pull that back is to increase taxation. Also embedded in the structure is a call for a Job Guarantee to make sure that people have and can spend money. I personally am not for a Job Guarantee but lean more towards a Basic Income, but that is outside the realm of this review but I think within the realm of possible debates, so MMT is not strictly dogmatic.
I was receptive to the ideas of MMT because I was not a slave to the old orthodoxy and especially because I thought that the old orthodoxy was in a large part to blame for not preventing and not really being able to predict the crisis of 2008, I was ready to throw it all out and find an explanation for how capitalism worked and if possible how it could be made better for people if we were going to keep putting off the eventual worker’s revolution. MMT was, and still is centered on a couple of institutions like UMKC and Bard College in the US and has a couple of figureheads like Professor Kelton but also Warren Mosler and Scott Fullwiler. Despite this, MMT punches above its weight in policy discussion because it has many passionate adherents in both the blogosphere and on Twitter. It is, to me, also inherently commonsensical as we are not constrained by the amount of a shiny rock in the vaults of the Federal Reserve in New York or in Fort Knox.
I was sitting, unemployed though the summer of 2011, smart and a hard worker and ready to be put to use so I could get money to pay my rent but no one was answering my applications. It was confounding and scary and just a total failure of policy because there were tens of thousands of people like me who wanted to work. But I was reading. The biggest problem for me when I was learning more about different economic schools in terms of learning about MMT was that there was no centralized place to start learning about it. People would talk about it in blog comments and you would ask where to go for more details and they would send you a link to a pdf or a self-published book on amazon and that did not inspire a lot of confidence. If someone was asking where to start to learn about Marxism you could point them to many different publishers who had put out versions of the Manifesto but this was like if the only resource available was Marxists dot org. What “The Deficit Myth” does is not just synthesize the ideas of MMT in a simple and easy to read format, but it also formalizes the school as something to be taken seriously by readers of levels. And for that reason, it is an especially important and necessary book.
I had a sense that in the shadow of that crisis that we were bounded by only being to push at the edge of the status quo. The bailouts, both TARP and ARRA were real money that had to be paid back, so the democratic-led government in 2010 and through pressure from their political opponents, started to roll back the funding that was on offer through the state. “Austerity” was the name of the game and big debts were scary and more important than the mass of Americans who were still without jobs in the economy that had been showing “green shoots” every quarter for 18 months.
I was unemployed and reading as much as I could about economics and especially the crisis. There were scores of books written by commentators and economists trying to get their hands around just what happened and why it happened. But it was not the first crisis. I eventually found myself making my way through Keynes and Minsky – with some understanding but not 100% of it. Keynes had some integrals I just skipped over and hoped that he was explaining all of them in the text. It was during this time that I came up with what I thought was a fairly novel idea that the household metaphor that politicians used was completely wrong. The government lives forever, I said, and it creates money. A worker is constrained in the money they have and the only way to get more is to work more even if the can temporarily increase their spending by borrowing they eventually have to pay it off (or pass down the debt once they die). I created an imaginary currency called “EdgarBucks” and knew my biggest problem was making sure that people accepted these “EdgarBucks”.
My insight about the fallacy inherent in the household fallacy was not novel it seems. While politicians and many economists talked about spending money being the constraint, there was a then little-known school of thought who had fleshed out the idea that money is not the constraint in the economy, but real resources are that constraint. You cannot run out of money if you are a currency issuer, but you can run out of factories. It brings to mind Keynes looking at idle workers and idle factories and realizing that you can have suboptimal equilibria where resources are underutilized. But what this little-known school of thought had done was flesh out that idea, and it has a name – Modern Monetary Theory (MMT).
The basics of MMT are that the real constraints are the real economy and in the book Professor Kelton works through the implications of the idea that money is more a record keeping device than some sort of fetishized commodity through simple, easy to understand metaphors. What is dangerous through the world as described through MMT is inflation and not debt, and the way to pull that back is to increase taxation. Also embedded in the structure is a call for a Job Guarantee to make sure that people have and can spend money. I personally am not for a Job Guarantee but lean more towards a Basic Income, but that is outside the realm of this review but I think within the realm of possible debates, so MMT is not strictly dogmatic.
I was receptive to the ideas of MMT because I was not a slave to the old orthodoxy and especially because I thought that the old orthodoxy was in a large part to blame for not preventing and not really being able to predict the crisis of 2008, I was ready to throw it all out and find an explanation for how capitalism worked and if possible how it could be made better for people if we were going to keep putting off the eventual worker’s revolution. MMT was, and still is centered on a couple of institutions like UMKC and Bard College in the US and has a couple of figureheads like Professor Kelton but also Warren Mosler and Scott Fullwiler. Despite this, MMT punches above its weight in policy discussion because it has many passionate adherents in both the blogosphere and on Twitter. It is, to me, also inherently commonsensical as we are not constrained by the amount of a shiny rock in the vaults of the Federal Reserve in New York or in Fort Knox.
I was sitting, unemployed though the summer of 2011, smart and a hard worker and ready to be put to use so I could get money to pay my rent but no one was answering my applications. It was confounding and scary and just a total failure of policy because there were tens of thousands of people like me who wanted to work. But I was reading. The biggest problem for me when I was learning more about different economic schools in terms of learning about MMT was that there was no centralized place to start learning about it. People would talk about it in blog comments and you would ask where to go for more details and they would send you a link to a pdf or a self-published book on amazon and that did not inspire a lot of confidence. If someone was asking where to start to learn about Marxism you could point them to many different publishers who had put out versions of the Manifesto but this was like if the only resource available was Marxists dot org. What “The Deficit Myth” does is not just synthesize the ideas of MMT in a simple and easy to read format, but it also formalizes the school as something to be taken seriously by readers of levels. And for that reason, it is an especially important and necessary book.
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Top reviews from other countries
Robin Chase
The government can never run out of money.
Reviewed in Canada on October 9, 2021
A Amarender Reddy
Deficit Myth is an eye opener and is many steps forward than Keynes expansionist policies
Reviewed in India on May 5, 2023Marcus
'A better economy' with inflation at its core
Reviewed in the Netherlands on July 7, 2022Amazon Customer
Injectant la monnaie seulement là où il y a des ressources disponibles
Reviewed in France on April 4, 2021