People find solace in different places. My top picks usually include stupid comedies, time with children, a unique music palette, or intensive political/economic theory.This weekend involves options 2 and 4, rereading the works of Stephanie Kelton Deficit myth.

I really can’t recommend it highly (or time with kids, for that matter). It is one of those books that seemed counterintuitive before the sudden click, and it seemed obvious afterwards. If it is generally correct, I think it is, then we have a world of greater political possibilities than we realize.

Kelton borrowed from modern monetary theory, which was a product of Keynesianism. Its core is to distinguish between money producers and money users. Money users are subject to normal household budgeting: expenditures cannot exceed income for too long, otherwise bad things will happen. Currency users include ordinary people and governments at all levels below the federal level. The federal government (in the United States) is a producer of money; it has a monopoly on the production of dollars. If I try to create my own 20-something on the printer, I am fraud; the constitution gives the federal government the exclusive right to create currency.

As a currency producer, the federal government cannot “run out of money” just like a scorekeeper in a basketball game cannot run out of bonus points. When President Nixon abolished the U.S. gold standard in the early 1970s, he severed any link between the number of dollars and any single resource. As a monetary sovereign with legal tender, the federal government can literally spend U.S. dollars.

Dollars are valuable because they are the only currency that people can use to pay taxes. The need to pay taxes guarantees the market and value of the dollar. In Kelton’s world, the story of the government taxing for consumption is backward; it consumes, then taxes and borrows. This is how it should be.

This does not mean that we can simply let the good times roll; as Kelton rightly pointed out, the real constraint is inflation. If we drastically increase the amount of money running around, but we do not increase production capacity, then inflation is almost an inevitable result. (Taxes are an antidote to inflation by extracting excess funds from the economy.) The dollar may be unlimited, but production capacity is not.

This sounds like an indistinguishable difference, but it is not. If the real constraint is the actual production capacity of the economy, it does not really matter whether the federal government’s budget is balanced. What matters is whether the entire economy is balanced. When the economy is too cold, most of the time, the government should run hotter; when the economy is overheating, the government should cool it down. This is where the roots of MMT’s Keynesianism are clear. MMT retains the anti-cyclical elements of Keynesianism, but no longer has to worry about eventually repaying the national debt. If debt repayment helps balance the economy, that’s great, but it’s unlikely. In fact, Kelton has shown in history that the number of times when the deficit (referring to a year, not debt, which is accumulated) is zero, a recession will follow. The government took too much money from the economy, causing the economy to shrink.

Kelton’s book explains an observation that has troubled me for a long time. We have been told over and over again that high government deficits will lead to high interest rates. But they did not. In the past 50 years, this theory has been repeatedly proved to be extremely wrong. And not just in the United States! Japan has been running huge deficits for years, and its central bank is actually flirting with negative interest rates. I am getting older, and I still remember being taught that negative interest rates are impossible in Econ 101. Obviously, they are not. Jimmy Carter reduced the deficit, and interest rates skyrocketed; Trump expanded the deficit, and interest rates were at historically low levels. The theory of government borrowing “crowding out” private borrowing cannot explain this; in fact, it predicts the opposite. MMT is easy to explain. Japan, like the United States, is a currency sovereign country with legal tender.

(In contrast, countries that transfer monetary sovereignty to the euro or the dollar are actually currency users. They are bound by the traditional understanding of debt, just like individual countries in the United States.)

If MMT is generally correct, then when we come up with good and valuable ways to improve people’s lives—whether through single-payer health insurance, free universities, child allowances, or scientific research—the standard question is “You Okay? Come and pay?” It was a red herring. It missed the point. The right question is whether we have the production capacity for people to create it. If we can do this, the dollar will follow. We don’t have to worry about the scorekeeper running out of points.

As Kelton said, “austerity is a failure of imagination” (261). exactly. We will not have a healthy society if we do not make serious investments in the production capacity of the people. We can afford it; we always can. We just need to get rid of our own way.

This comforts me. And hope. Read this book. Then read it again, with a pen. I promise it will be worth it.


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