• Confessions of a Community College Dean

    In which a veteran of cultural studies seminars in the 1990s moves into academic administration and finds himself a married suburban father of two. Foucault, plus lawn care.


Read this Book. Seriously.

(Re-)reading Stephanie Kelton’s The Deficit Myth.

August 16, 2021

People find solace in different places. My go-tos usually involve silly comedies, time with the kids, an idiosyncratic palette of music or dense political/economic theory. This weekend involved options two and four, with a pen-in-hand reread of Stephanie Kelton’s The Deficit Myth.

I really can’t recommend it (or time with the kids, for that matter) highly enough. It’s one of those books that seems counterintuitive until it suddenly clicks, after which it seems obvious. And if it’s broadly correct, which I think it is, then we have a much larger world of political possibility than we realize.

Kelton draws on Modern Monetary Theory, which is an outgrowth of Keynesianism. At its core, it distinguishes between currency producers and currency users. Currency users are bound by the normal household ways of budgeting: expenses can’t get too far ahead of income for too long, or bad things happen. Currency users include ordinary people and every level of government below the federal one. The federal government (in the U.S.) is a currency producer; it has a monopoly on dollar production. If I try creating my own 20s on a printer, I’m counterfeiting; the Constitution gives the federal government the exclusive right to create currency.

As a currency producer, the federal government cannot “run out of money” any more than a scorekeeper at a basketball game can run out of points to award. When President Nixon took the U.S. off the gold standard in the early 1970s, he severed any connection between the number of dollars and any single resource. As a monetary sovereign with a fiat currency, the federal government can literally spend dollars into being.

Dollars have value because they are the only currency in which people can pay taxes. The need to pay taxes guarantees a market, and a value, for dollars. In Kelton’s world, the story that the government taxes in order to spend is backward; it spends, and then it taxes and borrows. And that’s how it should be.

That doesn’t mean that we can simply let the good times roll; as Kelton correctly notes, the real constraint is inflation. If we vastly increase the amount of money sloshing around, but we don’t increase our productive capacity, then inflation is the nearly inevitable outcome. (Taxes are an antidote to inflation, by taking excess money out of the economy.) Dollars are potentially infinite, but productive capacity is not.

That may sound like a distinction without a difference, but it isn’t. If the real constraint is the actual productive capacity of the economy, then it really doesn’t matter if the federal government’s budget is balanced. What matters is whether the economy as a whole is balanced. When the economy is too cold, which is most of the time, the government should run hotter; when the economy overheats, the government should cool it down. This is where the Keynesian roots of MMT are clear. MMT keeps the countercyclical component of Keynesianism but drops the concern about eventually paying off the national debt. If paying off the debt helps balance the economy, then fine, but that’s unlikely. And in fact, Kelton shows historically that the few times that the deficit (which refers to one year, as opposed to the debt, which is cumulative) went to zero, recessions followed. The government took too much money out of the economy, leading to contractions.

Kelton’s book explained an observation that has bugged me for a long time. We are told over and over again that high government deficits lead to high interest rates. But they don’t. Over the last 50 years, that theory has proven spectacularly wrong over and over again. And not just in the United States! Japan has been running massive deficits for years, and its central bank actually flirts with negative interest rates. I’m just old enough to remember being taught in Econ 101 that negative interest rates were impossible. Evidently, they are not. Jimmy Carter reduced the deficit, and interest rates exploded; Trump exploded the deficit, and interest rates are historically low. The theory of government borrowing “crowding out” private borrowing can’t explain that; in fact, it would have predicted the exact opposite. MMT explains it easily. Japan, like the U.S., is a monetary sovereign with a fiat currency.

(By contrast, countries that have surrendered their monetary sovereignty to the euro, or the dollar, are effectively currency users. They’re bound by conventional understandings of debt, just like individual American states are.)

If MMT is broadly correct, then it follows that when we propose good and worthwhile ways to improve people’s lives -- whether through single-payer health insurance, free college, child subsidies or scientific research -- the standard question of “how are you going to pay for it?” is a red herring. It misses the point. The correct question is whether we have the productive capacity to put people to work creating it. If we can do that, the dollars can follow. We don’t need to worry that the scorekeeper will run out of points.

As Kelton puts it, “austerity is a failure of imagination” (261). Yes, yes, yes. We aren’t going to have a healthy society without serious investment in the productive capacity of our people. We can afford it; we always could. We just have to get out of our own way.

That gave me solace. And hope. Read this book. Then read it again, with a pen. I promise it will be worth the time.

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Matt Reed

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