Book Review: The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy

An Alternative Monetary Policy That Falls Short of Viability

In The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy author Stephanie Kelton explains Modern Monetary Theory (MMT) and how it can be used to transform our economy. While Kelton did an excellent job of explaining MMT on a level that could be understood by all readers she failed to convince me that the government should adopt MMT as the basis for its budgeting process.

Current government budgeting practice treats the government budget like a household budget. In other words, the government can only spend funds that it recovers through borrowing and collection of taxes. Negotiations for a such a balanced budget are between budget doves who fight for additional spending to support social programs and budget hawks who fight for reduced spending to support reduced taxes.

In the first portion of her book Kelton explains that MMT rejects the concept that the Unites States’ budget operates the same as a household budget. More specifically, she contends that the United States does not run a fiscal deficit if it fails to collect sufficient taxes to cover its expenditures. Instead, as the issuer of the currency, the United States can print as much money as it needs to meet all of its expenditures, including enough to guarantee full employment for all of its citizens. Under MMT the government only needs to limit the issuance of currency (or to collect taxes) if, and as, needed to control inflation.

Kelton should have stopped at this point. She clearly explained MMT and suggested it as a viable alternative to current orthodox budgeting practices.

However, after explaining MMT Kelton deviates into a description of all of the great social programs that could be paid for with the additional funds that MMT would make available. For example, she advocates elimination of what she refers to as the “education deficit”, the “housing deficit”, the “health care deficit” and the “infrastructure deficit”. As a result, her clearly explained alternative to the current government budgeting process is buried by an argument for all of the social programs advocated by progressives.

The only current control on government spending are the budget hawks who represent their fat cat donors who seek to lower their taxes. Kelton worked in Congress long enough to know that these budget hawks will not just sit back and watch as the government uses any new found funds to support social programs. They will do what they can to eliminate as many taxes as possible and then to figure out how these funds can find a way to their donors’ pockets. While everyone is fighting over how to distribute these new funds I fear that there will be little concern about the potential impact of this spending on inflation (the one issue that Kelton says should limit government spending). The current process, misguided as it may seem under MMT, at least has not led to inflation caused by injection of too much currency into the economy.

After reading this book I am convinced that there may be some theoretical merit to MMT. But Kelton failed to convince me that MMT should be adopted by the government as the basis for its budgeting process. I fear that the extra funds made available under MMT will not fix all the problems described by Kelton and could raise a real possibility of ruinous inflation. I give this book 3 stars.