A Review of “The Deficit Myth” by Stephanie Kelton.

First, let me get some initial caveats out of the way. 

  1. This is a good and challenging book. It’s thought-provoking and uncomfortable.  Rare is the document that establishes a new world view that is crafted, considered and well-structured. It lays out economic concepts that were nestled in my intuition, but never articulated. The politics around MMT are left as a blank slate and it’s here where the debate will happen.
  2. I’m a lawyer in remission with deep experience in wealth structuring and investments as well as having experience in local, state and federal politics.  This is a long-winded way of saying I am not an economist. My bias on economists runs in the vein that I think they’ll be able to tell you tomorrow why what they predicted yesterday isn’t happening today. So my review is really a set of questions that came up as I made my way through the book.
  3. In addition to day job activities and a weekend scheduled to the teeth,  I’m also in the midst of writing a couple of horror short stories- so I have some bloodlust.  Apologies in advance if this reads like a spasm on one hand and a rambling discourse on the other . . .

With that, here we go . . .

For those not versed with Stephanie Kelton, she is a professor of economics and public policy at Stony Brook University, a former Chief Economist on the U.S. Senate Budget Committee and a former economic policy adviser to Bernie Sanders.  Kelton is one of the chief proponents of Modern Monetary Theory (MMT).

MMT is a macroeconomic worldview. (Here is the Wikipedia definition which is more than enough to get you started).  The main thrust of MMT was summarized by Alan Greenspan when he said, “The United States (as the issuer of a dominant currency- my words) can pay any debt it has because we can always print money to do that. So there is zero probability of default.  One can’t think of the Federal budget as a household budget where one can run out of money. Under MMT, government is not reliant on taxes for its funding, it relies on its printing press and the economic use of the resources under its purview.  MMT would add that the only major restriction to the printing of money for the needs of a country is its impact on inflation.  Adherents believe that if inflation can be controlled through taxation (and other measures to reduce the amount of money in the private sector), there is little limit to what can be accomplished in society.

Kelton argues that the traditional framing of government spending as being funded by taxes and borrowing (as opposed to the printing press) has contributed to an overall warping of policy decisions and political process.  The United States has left its most powerful and flexible tool (being the issuer of the dominant global currency) on the shelf.  As a result, many long-deferred priorities like infrastructure improvement, health care, and social security have been ignored and fallen into disrepair.

As I said before, I’m not well equipped to refute Kelton’s theory.  However, the economic concept holds water with me.  With inflation so irrelevant in our lives in the last 25 years, and numerous examples of massive fiscal support for societal emergencies (the Global Financial Crisis and the Pandemic being two recent ones).  Why not apply America’s natural currency issuer features to more mundane societal problems? 

There is obvious allure to the availability of free money (as restricted by inflation) and the graduation of society into a Roddenberry Economy (The term for a Star Trek future where mankind had evolved past money into a more egalitarian nirvana).  Big problems and big issues require big resources. Resources are finite and sacrifice is a difficult sell to an unwilling and skeptical public.  It would be a shame if their solution is frustrated by uneducated political will.

Therein lies a problem- the effectiveness of MMT lay in its ability to integrate with effective and nimble top-down political decision-making.  The U.S. political system is designed for piecemeal decision-making geared toward maintaining the status-quo.  MMT requires the belief that the government is the best allocator of resources (better than private enterprise) and that societies don’t degrade once the populace discovers the public bursar.  So, my questions with the Deficit Myth aren’t as an economic framework (which has a strong underlying logic), but as a concept with deep political ramifications- a concept that Stephanie alludes to anecdotally, but smartly sidesteps. 

Questions that came to mind as I was reading this:

  • What is the current outer end of spending that the US economy could support before inflation becomes an issue? 10T? 50T? 100T?  If our central planners overshoot or invest in projects that don’t have a multiplier effect, what are our real options for reining in the spend?
  • Aren’t we requiring a lot of the electorate to
    • Understand the high-level concepts of Government and Private sector money supply (and then foreign and domestic money supply)?
    • Distinguish between Currency User (Personal Household) and Currency Issuer (State)?
    • Distinguish between Federal (Issuer) and State (User)?
    • Understand their economic self-interest and can distinguish between short term and longer-term personal self-interest?
    • Distinguish between household economics vs fiscal economics when the average person doesn’t have $2,000 for an emergency or the concept of compound interest?
    • Make the leap from taxation as a funding mechanism to that of a wealth redistribution tool?  If socialism is one of the third rails of American politics is changing the nomenclature of taxes from funding mechanism to redistribution tool the equivalent of changing the label of life insurance to death insurance?
    • Understand their political short term and long-term self-interest?
    • Understand that the effects of lobbying and media manipulation on both sides are even more magnified in this scenario?
    • Become comfortable blurring the distinction between dollars and votes among the voters as they try to parse the distinction between economic and political self-interest?
  • What elected officials can make these distinctions? 
    • Is Representative Democracy an appropriate as the driver for macroeconomic decision-making that requires such minute by minute attention and steadiness at the wheel?
    • Does MMT necessitate a professional permanent representative government? 
    • Is that wise in an era where entrenched political interests are seen as one of them main problems with our government?
    • Does it push us toward a more authoritarian government?!?
  • Is #MMT a good fit for our representative democracy generally?
    • Does it require a permanent professional legislature for prudent oversight? Aren’t frequent elections a danger to the economic well-being of the Republic?
    • Wouldn’t a stronger (more authoritarian?) executive branch with a better handle on central planning and centralized program administration be important for an MMT framework?
    • Or does this make the electoral college and two senator per state even MORE important because resource allocation along popular vote lines mean that non-urban centers will be ignored in the furtherance of political consolidation?
  • Does MMT predict the Death of Federalism in this country? 
    • MMT will create a brutal tension for the Federal Government with state and municipal government.
    • IMO, it necessitates the consolidation of economic decision-making at the federal level and to (further) shift resource allocation decision-making away from the state and municipal level.
    • As we are seeing with NY and CA, are states generally becoming less able to fund their own initiatives?
    • How on earth is a state going to be able to justify a tax increase (or even a tax at all) to get to a balanced budget when the federal government is just “making up” numbers? Do they just abdicate financial responsibility to the federal government?
    • One of Stephanie’s core tenants is the government guaranteed job:
      • Federal Job guarantee- can that even be administered with a state system?
      • Does it require a more authoritarian form of democracy with less flexibility to deal with localized needs?
      • I worry about this especially since states theoretically will have to have balanced budgets (NY and CA I’m looking at you) even though they have to implement federally mandated programs created without an eye toward resource limits.
  • What happens when a big state figures out that printing one’s own currency creates more program flexibility and a reduction in reliance on a larger Republic that disagrees with its political allocation of scarce resources.  For instance, taken to the logical extreme shouldn’t CA (like the UK) (as the world’s 6th largest economy) secede & establish its own currency & central bank? What about NY (although it’s probably more like Greece)?  Or Illinois or TX?
  • Does MMT necessitate a broader cultural shift to de-emphasize the primacy of the private sector as the driver of economic development and to emphasize the use of taxes not as a project funding mechanism but a meaningful participation in a new wealth distribution structure. The larger question is “are we willing to have this country’s private sector compete, not with other private sector companies, but with a more unwieldy and resource-unlimited government who’s effectiveness is measured in votes rather than profit?
  • If the voter (as distinguished from the consumer- we are asking people to wear two hats in the voting booth) is transported another level of abstraction away from the value of the countries’ currency, do we create another scenario for a culture change with unintended consequences?  Is that offset by necessary health care, retirement, entitlement, climate modulation and employment?
  • Are we comfortable creating systems where certain events like a high unemployment number cause automatic fiscal funding initiatives? Automatic spending scares the hell out of me- somewhat in the same vein as Long Term Capital Management . . . or Skynet.  On the other hand, watching our Congress and Executive Branch at work solving massive economic issues induces vomit too.
  • Stephanie lays out potential deficit spending projects that MMT could address and they make a lot of sense to me: health care, retirement, Green New Deal, education (higher and otherwise), infrastructure among others.
    • Where do social justice deficits fit into the Roddenberry line of thinking? 
      • Are reparations an appropriate use of funds?
      • Is that an appropriate use of fiscal tooIs?  It is already being used as the basis for a plan to fund $14T to the African American community.  What about other aggrieved groups?  Or soon-to-be aggrieved groups? If the value of federal money doesn’t matter then, why assign a value to all?
      • Is this a tool to break the two-party system of government?  By promising more direct payments for political party identification?
      • What happens when this spending does finally run into the inflation boogeyman?  How does the music stop? what if a foreign power destroys a certain segment of our resources or productivity (ala EMP, crop destruction etc . . .)
      • What does this ultimately do the IP laws generally where federal protection of intellectual property will have to be viewed under a different economic framework? If there isn’t enough money to go around to make certain IP profitable on a private sector basis, does the government make up the shortfall?
      • Are we ready to commit to an equality of result mindset and does that swing the pendulum to a different dangerous place?
    • Stephanie doesn’t lay out the importance of a strong military in maintaining the vaunted currency status (and power) of the dollar. I would assume that she would think that we are in surplus mode there . . . i.e. we’re spending more than we have to in order to keep our currency dominant.
      • In actuality, are we spending the right amount (or even not enough?!?), if our currency’s value is pegged to its current international standing?
      • Can we afford to have shakes in confidence (for example lack of access to the South China Seas)?
      • What if our internal strife is such that economies like California and New York decide to chart a different course?
      • What happens when our deficit spending comes into conflict with another superpower?  Do we punish them? Conquer them? Not care? How intertwined is our military might in our new blank check domestic world?
  • I think there are two unintended consequences of MMT (especially if it flies too close to the sun of inflation):
    • A new Monroe Doctrine into political thinking. Is it easier for the state to conquer new territories to increase the availability of potential consumption of resources?
    • A stronger eminent domain doctrine where the government decides that its interpretation of a better use of resources trumps private property concepts
  • Bitcoin and Cryptocurrency
    • Where do these fit in to this discussion?
    • Can you be an MMT supporter and support a cryptocurrency backed by the confidence of an algorithmically stable value transfer system?
    • Isn’t this a backdoor weakness of MMT?  How can a Currency Dominant country allow crypto-currencies to persist?  Isn’t this an existential threat to currency control and program funding?
    • I assume Bitcoin is not a pointed threat as it has a finite amount of currency (i.e. more theoretically can’t be printed), but what about the other currencies? ETH etc? What if we gravitate to one currency that we don’t control (and have trouble tracking)?
  • Assuming we aren’t going to go wholesale into MMT . . . what does an intermediate transition to MMT look like?  Are we in the middle of it with COVID-relief funding programs?
  • What does MMT look like in a hyperinflation environment?
    • Can you put the spending genie back in the bottle? (I don’t think so)
    • Is taxation as wealth redistribution going to fly when you are wheelbarrowing currency to buy bread?
    • Will other countries smell blood and pounce in a diplomatic, economic or military way?
    • Would it force countries to adopt a foreign policy of conquest to grow its way out of the problem?

Some final thoughts:

  • As Stephanie notes, both sides of the aisle can use this fiscal framework.  Here is a thought project:  What if Donald Trump had looked at this before he took office?  We are talking about a real estate developer who grew up financing projects with little or any intent of paying them down.  MMT fits squarely into his toolkit that he would understand AND further exploit for political purposes.  What if he solved social security, health care, infrastructure, the funding of the military and education with the stroke of a pen?  Would have been governmental malpractice for the Democratic side of the aisle to object?  What if he proposed these things before this election? Would it be a savvy move to propose these programs and outflank Biden?
  • Parlor game:  If MMT thinking was fully adopted tomorrow, which would happen first and when: Would California secede or would Cuba become a state?


This is an impactful, thought-provoking book.  I appreciate Stephanie’s desire to “stay in her lane” and focus on the economics and foundational logic of her world view.  To that end, I’m already late to the party regarding its impact.  It spawns more political questions with me than economic ones. In that arena, we are only just beginning to see its significance. I think its greater impact will be in political science circles as we try to digest the impact of her thinking on actual governmental function. 

Is it wise to go the MMT route? In many ways, we already have. When something important needs funding . . . we find the resources. I’m uneasy around the concept. I think it eventually sends the country on a political trajectory that is completely different than our tradition- one much more dependent on the federal government for all functions and one which dispenses with the need for states and municipalities. I think it would mark a decided move away from Federalism for better or worse. In an effort to be all things to all people, MMT could thrust us back into more socialistically-motivated central planning and imperialistic attitudes out of future economic necessity. Ironically, while this is a keystone for the financing of many (worthwhile) progressive initiatives, it is probably the lever to a more authoritarian government over the long term. As a result, I’m not sure it’s politically practical for this country, but I’m glad to know more about it.

“The Deficit Myth” is well worth the read- especially for relative economic novices like me and if you like your worldview challenged!

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