“The Deficit Myth,” was written by Stephanie Kelton in 2020, and is considered by many a groundbreaking work that challenges the economic perspectives on government spending, deficits, and fiscal policy that arise from neoliberal economic theory. Kelton, a leading proponent of Modern Monetary Theory (MMT), presents a compelling argument that seeks to shift the paradigm of how we understand and interpret government budgets and national economies.

An Overview of Modern Monetary Theory (MMT)

At the heart of “The Deficit Myth” lies Modern Monetary Theory, an economic framework that posits that countries with sovereign currencies, such as the United States, are not constrained by the same fiscal limitations as households or businesses.

According to MMT, such governments can create and spend money without the risk of defaulting on their debts, as long as they operate within the confines of their productive capacity and avoid triggering hyperinflation. So, what are the core principles of MMT?

1. Sovereign Currency Issuance: Countries that issue their own currencies can never run out of money in the same way a business or individual can.

2. Functional Finance: Government budgets should be evaluated based on their impact on the economy rather than arbitrary deficit targets.

3. Inflation Management: The primary constraint on government spending is inflation, not solvency.

4. Full Employment: Governments should prioritize achieving and maintaining full employment over balancing budgets.

Common Myths

Kelton meticulously dismantles several pervasive myths about government deficits that have dominated economic policy and public discourse for decades. These myths include:

Myth 1: The Government Should Operate Like a Household

REALITY: Unlike a household, the federal government issues the currency it spends.

One of the most persistent misconceptions is that the government should balance its budget like a household. Kelton explains that unlike households, the government can issue its own currency and therefore does not face the same financial constraints. She argues that striving for a balanced budget can be detrimental to the economy, particularly during times of recession.

Myth 2: Deficits Are Always Bad and evidence of overspending

One of the most persistent misconceptions is that the government should balance its budget like a household. Kelton explains that unlike households, the government can issue its own currency and therefore does not face the same financial constraints. She argues that striving for a balanced budget can be detrimental to the economy, particularly during times of recession.

REALITY: For evidence of overspending, look to inflation.

Kelton challenges the notion that deficits are inherently harmful. She posits that deficits can be beneficial if they are used to fund public investments and stimulate green economic degrowth. Instead of focusing on the size of the deficit, policymakers should consider the outcomes of their spending decisions.

Myth 3: We are all on the hook.

REALITY: The national debt poses no financial burden whatsoever.

Myth 4: Government Borrowing Crowds Out Private Investment, making us poorer.

REALITY: Fiscal deficits increase our wealth and collective savings

Another common belief is that government borrowing competes with and reduces private sector investment. Kelton argues that this is not necessarily the case, especially in a context where there is unused economic capacity. Government spending can, in fact, complement and boost private sector activity.

Myth 5: The trade deficit means America is losing.

REALITY: America’s trade deficit is its “stuff” surplus.

Myth 6: “Entitlement” programmes (Welfare) are financially unsustainable. We can’t afford them anymore.

REALITY: As long as the government commits to making the payments, it can always afford to support welfare. What matters is our economy’s long-run capacity to produce the real goods and services people need.

Myth 7: Deficits Will Lead to Hyperinflation

REALITY: Taxes can be used to prevent runaway inflation.

Fears of hyperinflation often accompany discussions of deficits and government spending. Kelton acknowledges that while inflation is a genuine concern, it is not an inevitable consequence of deficit spending. She emphasizes the importance of managing demand and supply factors to control inflation, rather than imposing arbitrary fiscal constraints.

Myth 8: We Are Burdening Future Generations

REALITY: Future generations will inherit assets and infrastructure if we combat the polycrisis and leave a liveable planet.

Kelton refutes the idea that current deficits unfairly burden future generations. She argues that future generations will inherit not the debt itself, but the assets and infrastructure funded by that debt. Investments in education, healthcare, and infrastructure can enhance the well-being and productivity of future generations.

Policy Implications

Kelton’s work has significant implications for fiscal policy and economic planning. She advocates for a more proactive and flexible approach to government spending, one that prioritizes public welfare and economic stability over rigid budget targets.

Job Guarantee Program

One of the key policy proposals stemming from MMT is the establishment of a federal job guarantee program. Such a program would provide employment to anyone willing and able to work, ensuring full employment and acting as 

One of the key policy proposals stemming from MMT is the establishment of a federal job guarantee program. Such a program would provide employment to anyone willing and able to work, ensuring full employment and acting as an automatic stabilizer for the economy.

Public Investment

Kelton emphasizes the importance of public investment in infrastructure, education, healthcare, and green energy. These investments can stimulate economic growth, create jobs, and improve quality of life.

Rethinking Taxation

In the context of MMT, taxation is not primarily a means of funding government spending but a tool for managing inflation and redistributing wealth. Kelton suggests that taxes should be designed to achieve social and economic objectives rather than simply balancing the budget.

Criticism and Counterarguments

While “The Deficit Myth” has garnered significant attention and support, it has also faced criticism from traditional economists and policymakers. Critics argue that MMT underestimates the risks of inflation and oversimplifies the complexities of fiscal policy. They caution against unchecked government spending and emphasize the importance of maintaining fiscal discipline.

Conclusion

“The Deficit Myth” by Stephanie Kelton offers a provocative and insightful re-examination of government deficits and fiscal policy. By challenging conventional economic wisdom, Kelton opens the door to new possibilities for addressing pressing social and economic challenges. Her work invites policymakers, economists, and the public to rethink the role of government spending and embrace a more nuanced and dynamic approach to economic management.

By C.M. Dick