The Deficit Myth: Modern Monetary Theory and the Birthplace of the People’s Economy, by Stephanie Kelton (PublicAffairs, 336 pp., $30)

Neither Democrats nor Republicans officially subscribe to “modern monetary theory,” or MMT—the idea that the U.S. can print or borrow as much money as its elected officials desire. Former president Donald Trump proposed several spending plans that purported to balance the budget over 15 years, and President Joe Biden campaigned on financing his spending plans with tax hikes. Yet in practice, both parties govern as if MMT is now the law of the land, with tax policy entirely unrelated to spending policy, both in good times and bad.

The United States is now running its biggest budget deficits since World War II: 14.9 percent of GNP last year, and 10.3 percent this year. Total debt easily exceeds 100 percent of GDP. It’s natural to wonder whether this can go on forever. In her 2020 book, The Deficit Myth, economist Stephanie Kelton has a surprising answer: not really.

Several academic authors have published MMT books in the past half-decade, but Kelton’s is the first to target a lay audience rather than students or academics. An economics professor at Long Island’s Stony Brook University and a former adviser to Bernie Sanders’s Senate Budget Committee, Kelton aims to demolish what she calls “the household myth”: that is, as we’ve often heard from politicians, that we should balance the federal budget the same way we balance our family budgets.

Kelton explains why, to MMT theorists, the U.S. government is nothing like a household. Unlike the average person, the U.S. government doesn’t need to earn money, she argues. The government doesn’t tax people and companies because it needs money, contrary to popular myth. It literally makes money with the central bank, the Federal Reserve, creating electronic currency out of thin air.

Why, then, does the government tax anyone? Four reasons: first, to maintain a monopoly currency. If American citizens and companies didn’t need to pay taxes in dollars, they wouldn’t need to earn money in dollars, and the U.S. wouldn’t find a market for the dollars it makes. Second, to control inflation, raising taxes to take money out of the economy and lowering them to put money in. Third, to redistribute income, levying a negative income-tax rate on poorer parents, for example, or a higher tax rate on millionaires. Fourth, to encourage or discourage certain behaviors, via tax credits for solar panels or high tax rates on gasoline. The government doesn’t tax people to balance the budget, though. It can fulfill the above goals with tax rates that take in far less revenue than needed to make ends meet, and it can do so for years—even decades.

In thinking that we have to balance the national budget, Kelton says, “we run our economy like a six-foot-tall guy who wanders around perpetually hunched over in a house with eight-foot ceilings.” Kelton suggests that the government can borrow indefinitely without seeing interest rates rise, because “the U.S. can’t lose control of its own interest rate.” People, businesses, and other governments will always want to lend us money, in holding Treasury bonds, because few other options exist for savings, and so they will have no choice but to accept low interest rates.

What should we do with this MMT windfall—the result of all this extra borrowing without worry? Kelton, like many liberal MMT theorists, suggests a federally funded jobs-guarantee program, with a “living wage” (as usual, undefined) and good benefits. She notes, however, that Congress could allocate this money any way it wishes, including for traditionally Republican goals such as higher defense spending or lower taxes.

This is all elegant theory and an exhilarating mental exercise, but in the end, apparently, it means nothing. “MMT is not a free lunch,” Kelton warns. “There are very real limits, and failing to identify—and respect—those limits could bring great harm.” In case you don’t get it: “inflation . . . is a real danger. . . . MMT places inflation at the center of the debate over spending limits.”

After all these worthy thought experiments, then, Kelton is saying what traditional conservative economists have been saying for decades: if the U.S. prints excessive amounts of money, for years on end, we will suffer from inflation. We avoid inflation, Kelton says, only by “making sure that our economy is producing the right output mix.”

The U.S. government, then, must invest the dollars it creates productively, such that they come back with a return. In the simplest terms, the government could give everyone $50 a month to spend on leafy green vegetables, and the price of leafy green vegetables wouldn’t go up because farmers of leafy green vegetables could invest in new supply to meet higher demand. But if the government were to give everyone $9 trillion a month to spend on leafy green vegetables, the price of leafy green vegetables would rise multifold, because both supply and demand are constrained. You can only grow and eat so many vegetables; every vegetable dollar would be chasing the same quantity of vegetables.

In more complex terms, we’re right back to where we were before MMT came along: government must make choices on what to spend public money on, and MMT can’t help government make those choices.

Better infrastructure and higher-quality education, for example, can result in a more productive populace capable of creating sufficient goods and services to soak up the extra dollars. But the definition of productive is hardly objective, and results of today’s spending—if any—are years or decades in the future. It’s always politically popular to spend money on education, notwithstanding the fact that the U.S. spends the fifth-most globally, just behind Norway, at an average of $14,000 per student annually. Most education money gets spent on teacher salaries. Should a teacher be paid $50,000, or $200,000? Should she retire at 55, or 70? Should children learn in front of a blackboard in a perfectly serviceable 30-year-old cement-block school building with updated ventilation, or do they all need state-of-the-art “smart” whiteboards in new edifices and multimillion-dollar school-sports stadiums? Similarly, should the U.S. spend its infrastructure money on heavy rail, requiring (or at least strongly encouraging) people to live in dense urban apartments, or should it spend on highways and electric cars, encouraging single-family suburban living? MMT can’t answer these questions; only the democratic process can, with all its flaws.

Another issue: how can you tell when inflation is too high, thus requiring, under MMT theory, far higher tax rates to soak up the excess money that the government has printed? One need only glance at the headlines to understand the difficulty here. There’s no doubt that the U.S. is experiencing asset inflation. The prices of stocks, bonds, and houses have risen far faster than any fundamentals, such as future corporate profits (to justify high stock prices) or future personal income (to justify high house prices). The stock prices of GameStop and other speculative investments soared recently not because their prospects had improved, but because day traders, many out of work and using federal unemployment money, pushed them up. “Money printer go brrrr,” say the Robinhood speculators in their Reddit cartoon meme, referring to the idea that the Federal Reserve will keep increasing the money supply to ensure that the money goes straight into stocks and that stock prices never decline. Is this well-allocated MMT?

The price of goods and services is harder to discern and predict. With the economy still significantly shut down and consumers cut off from travel, entertainment, and leisure options, the personal-savings rate stands at a record high—close to 14 percent in December 2020, well more than twice the recent average. When Covid-19 is under control, will these pent-up savings result in soaring demand for travel and entertainment? Does the resultant doubled price for a restaurant meal, hotel room, or plane flight herald high inflation, subsequently requiring the government to clamp down hard, raising taxes to soak up the extra dollars? Or is it simply a useful price signal, telling some consumers to splurge and others to wait at home a little longer? MMT requires the government, acting through the democratic process, not only to read these signals correctly but also to respond quickly. It’s a lot to ask.

Kelton accuses U.S. politicians and voters of “an obsession with budget deficits”—that is, not spending enough, for fear of higher borrowing. But outstanding federal debt has reached $23.3 trillion, and the government has run a near-permanent deficit over six decades, through expansion and depression, under Republicans and Democrats alike, for tax cuts and for infrastructure spending. A lack of spending hardly seems the problem. We just don’t agree on what to spend the money on. MMT has no answer for that.

Photo by Mark Wilson/Getty Images


City Journal is a publication of the Manhattan Institute for Policy Research (MI), a leading free-market think tank. Are you interested in supporting the magazine? As a 501(c)(3) nonprofit, donations in support of MI and City Journal are fully tax-deductible as provided by law (EIN #13-2912529).

Further Reading

Up Next