Modern Monetary Theory and the Birth of the People’s Economy
Economist Stephanie Kelton's new book about Modern Monetary Theory (MMT) explains the fundamental difference between governments that are currency issuers and households that are currency users. Rather than "tax and spend"—the household pattern—MMT says people need dollars to pay those taxes, so government must spend them first before it can ask for them to return in taxes. It's not "tax and spend," it must be "spend first, then retrieve some dollars in taxes."
What do we call the dollars left in the economy, not paid in taxes? Answer #1: the dollar financial assets of the population. Answer #2: National 'debt.' Both answers describe exactly the same thing, just as your bank account is your asset, but the bank's liability. The idea of depositors marching down to their bank to demand it reduce its liabilities is...well, not very sensible, but it's literally the kind of thing proposed by deficit hawks like the late Pete Peterson. The Myth Kelton debunks is that deficits are harmful to currency issuers as they are to currency users.
The myth Kelton debunks is that deficits are harmful to currency issuers as they are to currency users.
For currency issuers, taxes cannot fund government spending, since spending must logically precede any tax revenue. Taxes are still necessary, though. Dollars are valuable because they retire the inevitable liability of taxes.
This contradicts popular perception Margaret Thatcher expressed: “the state has no source of money other than the money people earn themselves. If the state wishes to spend more, it can only do so by borrowing your savings or by taxing you more.” MMT reminds us that government makes the money, rather than confiscating our hard-earned dollars with its taxes. The constraints on government spending, like deficit ceilings, are self-imposed, and artificially limit government's ability to mobilize resources to address society's problems.
Kelton is careful to point out that, in theory, government can spend too much, and cause inflation. The real constraint for government spending, though, is resources, not finances. We can no more run out of dollars than the scorekeeper at the ball game can run out of points.
In any case, inflationary periods typically began with shortages of goods and balance of payments problems. The French army shut down the industrial heart of Germany (the Ruhr) after World War I, and the subsequent shortage of goods began the Weimar hyperinflation. Rhodesian farmers left Zimbabwe, and a country that had previously fed itself had to import food. Inflation followed that shortage.
And just "printing" money does not cause inflation: the Federal Reserve issued $16 - $29 trillion* in credit to the financial sector in 2007-8, no surge of inflation ensued. So a shortage of resources, not "printing" money is what starts inflation.
Kelton's experience in Washington offers a depth and resonance to her narrative too. She reminds us that MMT's policy recommendations like a job guarantee echo previous programs, like the New Deal's WPA. Perhaps most importantly, she reminds us that an unbalanced budget puts money into the economy mobilizing idle resources. It doesn't "crowd out" the private sector's access to resources, as conventional economics claims.
Kelton met with MMT founder Warren Mosler and Missouri congressman Emanuel Cleaver to explain MMT to the congressman. Mosler began to describe how an issuer of currency like our government is unique in the economy, and how it's fiscally unconstrained. Cleaver grew increasingly uncomfortable, until he had a "Copernican moment," and realized that MMT was accurate.
Says Kelton: "For the first time, the congressman was seeing the world through an MMT lens, and things had just come into focus. From that moment his entire demeanor changed. His eyes widened. His posture became confident. And then he leaned forward, clasped his hands, looked [Mosler] in the eye, and softly said 'I can't say that.'"
Kelton concludes that revolutionary insights like MMT gain traction not from the top down, but from the bottom up. When Cleaver hears MMT from his constituents, he can propose its policy recommendations. For that reason alone, Kelton's Deficit Myth is an important publication. It makes MMT accessible to those constituents.
Finally, Kelton talks about society's real problems: Not financing, resources. These include not only COVID-19, but healthcare generally, poverty, infrastructure, education, unemployment, and the looming climate catastrophe. MMT makes it clear that for public policy makers to plead that financial constraints keep them from solving these problems is malfeasance of the worst kind.
It's Simpler Than It Looks
Kelton's Deficit Myth is the culmination of nearly three decades of popularizing MMT, a movement that now includes blogs, textbooks (Macroeconomics, by Mitchell, Wray and Watts) and a host of other media releases (search for MMT on Youtube, for one example). Among other things, Kelton served as chief economist on the U.S. Senate Budget Committee for the Democrats in 2015 and as a senior economic adviser to Bernie Sanders’ 2016 and 2020 presidential campaigns. Barron’s named her one of the 100 most influential women in finance in 2020.