The Capitalist Muse

Modern Monetary Theory and the Deficit Myth

Stephanie Kelton, Economist and Advisor to Bernie Sanders, has written about the Deficit Myth and Modern Monetary Theory

There is a fascinating new economic insight emerging that is changing the debate over government spending and “deficits”. It’s called Modern Monetary Theory and one of its vocal proponents is Stephanie Kelton, who was Bernie Sanders’ economic advisor during his presidential campaign. She has a book (to be released June 8, 2020) called the Deficit Myth which lays out the concepts behind Modern Monetary Theory.

It is a concept of wide-reaching implications and is becoming increasingly embraced by serious economists and policy makers. It’s still quite a novel and counterintuitive idea and if you haven’t heard about it you will undoubtedly be bombarded with it soon, specially as the coronavirus epidemic puts new pressure for government spending for vital public needs.

In essence Modern Monetary Theory (MMT) says government deficits are not necessarily bad. Since our government has the authority to “print” money it cannot go bankrupt. In this way the government is not like a household which must balance its income with its expenditures. We shouldn’t even label the gap between taxes and public spending as a “deficit”. To the economy at large, such as  the American households, the small businesses, the NGO’s, the corporations etc.  the extra spending by government means a surplus. So the deficit is really a surplus when viewed from the point of view of the actual economy.

Yes, the government can overspend, but that can’t result in bankruptcy The accumulated debt is NOT something we are leaving for our children to repay –  the only possible harmful side effect is inflation. 

But here’s the key insight: as long as the spending is for useful purposes, and as long as there is a slack in the economy   (i. e. surplus capacity to produce goods and services) the government deficits will not produce inflation. In effect we can get a big stimulus, a huge boost to stir up jobs, build the infrastructure, provide healthcare, clean up our environment, develop new technologies and make education affordable without constraints on how to pay for all these things because we do not have to balance government expenditures with taxes. We might be constrained by resources to do all this: manpower needed, skills needed etc – there is an upper speed limit to how fast we can produce new highways, new services, new education, new technologies etc. If we outrun these resources we will create inflation as stimulus money will be wasted in non-productive activities.

But the good news from Stephanie Kelton (and others) is: we are nowhere near capacity in the US; there is plenty of surplus resources not used. Even before the COVID-19 induced economic slowdown we could easily spend $500 billion to a $1 trillion more per year in “deficits” without any overheating of the economy. Now with 30 million (and more) people out of work there is a huge slack in the US economy. Redirecting these idle resources into rebuilding America should not be constrained by a fear of deficits.

Here is a quote from Stephanie Kelton in a recent Bloomberg article:

The claim that deficits are a sign of overspending is just one myth distorting the national debate about the deficits. Liberals as well as conservatives have argued that the trillion-dollar deficits the U.S. is projected to run, beginning as early as 2022, are putting America on a dangerous and unsustainable path. Distinguished economists on both the left and the right have warned that a debt crisis is coming, and that we should act sooner rather than later to deal with our looming budget problems.

Both sides have this wrong. This is not a trivial complaint. Myths and misunderstandings about budget deficits distract from the many legitimate challenges facing our country and leave us poorer than we could otherwise be. 

Here’s a YouTube video of a lecture on MMT by Stephanie Kelton. Worth seeing as she goes in some depth.

Implications For Us Today

What does this mean as we reel from the impact of the health crisis?

The coronavirus has shone a very unflattering light on the U. S.. The picture is not pretty.

We see grotesquely lit, in front of our eyes, something that was lurking in the shadows: a country whose public institutions have been allowed to rot; where not only the poor, but  much of the middle class lives one paycheck away from choosing between paying rent or eating, and where the infrastructure is worse than many of the poorest countries. Now more than ever we need an epiphany – a Roosevelt like New Deal to rebuild our fractured society from the bottom up, and to undo decades of deferred maintenance on our infrastructure and our institutions.

Bernie Sanders and many in his camp (like Alexandria Ocasio-Cortez, Ro Khanna, Elizabeth Warren and Ed Markey to name a few) saw the hollowing out of America even before the COVID-19 crisis. They have been suggesting urgent action, what they call a Green New Deal (GND), a very audacious program to bring our country’s backbone into the 21st century while solving the issues of middle class poverty and alienation. Their New Deal for America contained a very bold re-prioritization of our economy:

• A massive overhaul of our infrastructure into the 21st century: roads, ports, sewers, utilities, green tech, intelligent grids, solar and wind power to replace fossil fuels, zero emission housing and factories etc. Non-exportable, decent blue collar jobs would be created in the private sector to rejuvenate the rust-belt rot and the globalization-induced job losses. The America Society of Civil Engineers estimates a deferred maintenance in our infrastructure to be $4 Trillion. Fix this backbone and you might get a 100-fold  return on your $4T, as we did in the original New Deal.
• Healthcare, paid for the government (like Medicare) but possibly delivered via the private sector, for all people living in (or visiting) the U. S. Healthcare to be enshrined as a fundamental right and value of our society.
• Free college education for all who want it. Forgiveness of existing college debt.
• Rebuilding of our public institutions to provide a public-private partnership in enhancing the efficiency and resiliency of the country. Strengthening of Institutions like the CDC, EPA, DARPA, FEMA, Energy Department etc. that reduce risk to society. (By the way to get a better flavor for the benefits of reduced societal risk please read the excellent book by Michael Lewis, The Fifth Risk. I promise you won’t be able to put it down and will learn a lot.)

Not many argued against the benefits of doing this but the question most persistently asked was: How are you going to pay for it? The question was not answered well: I winced as Bernie Sanders and Elizabeth Warren, the presidential candidates, stammered defensively every time the question was asked.

We’ll tax Wall Street, they said.
Corporations have made obscene profits, they must pay, they avowed
A wealth tax on the rich, they offered.

And these, of course, were non starters. We are talking about large amounts of money, something like 15 Trillion dollars over 10 – 15 years by some estimates. Give or take. (Although to put this in context it is about 3 – 5% of GDP over 10 years.).

Bernie and his ideas scared many. The Green New Deal was considered pie-in-the-sky, wishful thinking, pollyana-ish. The Democratic Party got scared and acted to make sure he would not prevail. To be fair he did not explain it very well in MMT terms. It’s possible he did not grasp the full impact of his advisor, Stephanie Kelton’s views. It must have sounded too good to be true – naively interpreted she says: spend as much as you want without any negative consequences! Had we learned the lesson from the subsequent coronavirus health disruption, we would have realized that the costs of social catastrophe are even larger when fundamental well being is neglected.

So how would we pay for all the projects of the Green New Deal? Would we raise taxes; would we run ruinous “deficits”; would we leave our children with unsustainable debt?

That’s where MMT comes in. It teaches us that that the debate is not about how we’ll pay for it but about what we should do and how to design and implement a practical plan that serves us to become strong and prosperous. The Green New Deal was the start of the debate. Maybe we can all join the debate, and fine tune the ideas in the plan and embark on a rejuvenation course with new vigor.

If so the coronavirus emergency will have taught us a valuable lesson and we will be stronger for it.