The Deficit Myth Book Review
It ain’t what you know that gets you into trouble. It’s what you know for sure that just ain’t so. Kelton opens her book with that Mark Twain quote which foreshadows her attempt to overturn years of conventional wisdom regarding government deficits. As the gold standard ended, the science of Economics has not kept up with Economic reality. This book assays to dispel the myths that modern economic thinking surrounding public deficits rests upon. They could boiled down to; Public deficits and debt pose a genuine financial burden. Since the government’s budget functions much like a household’s, the United States must get its fiscal house in order to avoid harmful cuts to critical public services.
To anyone who has sat through an intro-level economics course, or who has tuned into to political debates about the deficit and national debt, these myths might sound reasonable. Looking at the world through the lens of MMT (Modern Monetary Theory), they are not. As long as the country has a certain level of monetary sovereignty, meaning they issue their own currency, solely owe debt in that currency, and have sophisticated enough industries in crucial sectors such as agriculture and energy, these financial constraints do not apply. The solitary roadblock government spending faces is the real resources within the economy, or put another way, inflationary pressures. Kelton, being the most effective spokesperson MMT currently has, wishes to shift the debate about deficits from “Can we afford that?” to “Can the economy safely absorb this new deployment of resources without inflation?”, and the goal from a “balanced budget” to a “balanced economy.”
After laying out an easily digestible, fairly comprehensive introduction to MMT, she gets into the minutia of the theory. She cites low interest rates and higher levels of government debt, as reasons to ignore the “Crowding Out Effect” theory. In a number of cases, namely the United States and Japan, interest rates are at record lows, while government debt is rising. MMT argues that public deficits create private surpluses since the government adds more money into circulation than it subtracts. Private surpluses lead to more bank deposits, pushing interest rates down, not up. However, this is not particularly important, as she argues that interest rates, long- and short-term, are merely a policy tool that can be adjusted by a country’s central bank.
Perhaps the most interesting part of the book relates to the idea of monetary sovereignty itself. It is not yes or no, 0 or 1, but a spectrum. Not every currency-issuing country can take full advantage of the ideas MMT provides, namely if their economy requires importing crucial goods denominated in a foreign currency. Worrying about how their currency will fair on the FX market when compared to other currencies will eat away at their ability to independently create monetary policy. However, it seems the theory has yet to define which exact level of monetary sovereignty is needed to make financial restraints arbitrary.
The final two chapters lay out Kelton’s vision for public policy in the United States, entitled the “People’s Economy.” Her pseudo-silver bullet policy prescription is a federal job guarantee, which, if this book has convinced you, serves as its natural conclusion. She argues this could more or less achieve the goal of a truly balanced economy, eliminating involuntary unemployment and keeping inflation in check. Kelton’s book urges the reader to dream bigger. To imagine a better world, one of which we have been told we cannot afford. The old story about the unaffordable price tag for solving the nation’s problems is, well, just a myth.
