The Deficit Myth

Kelton's starting point is that the federal government is nothing like a household. Because the United States issues the dollar, borrows in dollars and does not peg its currency, it can always pay its bills. The constraint that matters is the economy's real capacity: spend beyond the available labor and resources and you get inflation. Taxes, in this view, exist mainly to create demand for the currency and to drain spending power when the economy runs hot, not to fund the government.

Kelton is a professor of economics and public policy at Stony Brook University, served as chief economist for the Democratic staff of the Senate Budget Committee, and advised Bernie Sanders's presidential campaigns. The book is accessible and argued with conviction, and it is also openly political, ending with a program built around a federal job guarantee.

Publishers Weekly called it a clear introduction. Hans Despain, writing on the LSE's USAPP blog, noted that it leaves MMT's underlying theory of money undeveloped. The Washington Free Beacon argued that under MMT, inflation measures and the response to them would fall prey to political incentives. Readers today will also weigh it against the inflation of 2021 to 2023, which critics of MMT cite as a test of its claims.

Read it to understand the arguments behind large peacetime deficits, whether or not you end up agreeing.

1. Monetary sovereignty changes the math. A government that issues its own floating currency and borrows in it cannot be forced to default, which is why MMT treats US and Japanese debt differently from Greek or Argentine debt.
2. Inflation is the binding constraint. In Kelton's framework the useful question about any budget is whether the economy has the real resources to absorb the spending, not how big the deficit is.
3. One sector's deficit is another's surplus. Government deficits show up as private-sector savings, so cutting the deficit takes financial assets out of household and corporate balance sheets.
4. Taxes manage demand. Kelton sees taxes as a tool for drawing spending power out of the economy and shaping behavior more than as a source of funds, which reframes debates over tax cuts and pay-fors.
5. The politics are the weak point. Critics argue that the approach relies on Congress raising taxes or cutting spending promptly once inflation appears, which the post-2021 inflation put to the test.

An introduction describes how Kelton came to MMT as a skeptic. The book then takes apart six common beliefs about deficits, one per chapter, before turning to policy.

1. The household myth. Kelton argues that a currency issuer should not budget like a family or a firm, and that the real limit on spending is inflation, not revenue.
2. Deficits as overspending. She contends that deficits are usually too small rather than too big, and that unused labor and capacity are the right test of whether spending is excessive.
3. Debt and future generations. She treats the national debt as the stock of dollar-denominated safe assets held by the private sector and argues that it does not leave future generations poorer.
4. Crowding out. Government deficits add to private-sector savings, she says, so they need not crowd out private investment, and the government's red ink is the private sector's black ink.
5. Foreign dependence and entitlements. She argues that Chinese and Japanese holdings of Treasuries do not give those countries leverage over the United States, examines trade deficits, and argues that Social Security and Medicare face no financing crisis the government cannot meet.
6. The deficits that matter. The closing chapters redirect attention to what she sees as the real shortfalls in jobs, health care, education, infrastructure and climate, and lay out a federal job guarantee as an automatic stabilizer for an economy built for the people.

The leading thinker and most visible public advocate of modern monetary theory - the freshest and most important idea about economics in decades - delivers a radically different, bold, new understanding for how to build a just and prosperous society. Any ambitious proposal - ranging from fixing crumbling infrastructure to Medicare for all or preventing the coming climate apocalypse - inevitably sparks questions: how can we afford it? How can we pay for it? Stephanie Kelton points out how misguided those questions really are by using the bold ideas of modern monetary theory (MMT), a fundamentally different approach to using our resources to maximize our potential as a society. We've been thinking about government spending in the wrong ways, Kelton argues, on both sides of the political aisle. Everything that both liberal/progressives and conservatives believe about deficits and the role of money and government spending in the economy is wrong, especially the fear that deficits will endanger long-term prosperity. Through illuminating insights about government debt, deficits, inflation, taxes, the financial system, and financial constraints on the federal budget, Kelton dramatically changes our understanding of how to best deal with important issues ranging from poverty and inequality to creating jobs and building infrastructure. Rather than asking the self-defeating question of how to pay for the crucial improvements our society needs, Kelton guides us to ask: which deficits actually matter? What is the best way to balance the risk of inflation against the benefits of a society that is more broadly prosperous, safer, cleaner, and secure? With its important new ways of understanding money, taxes, and the critical role of deficit spending, MMT busts myths that prevent us from taking action because we can't get beyond the question of how to pay for it.