Book Review: The Deficit Myth

I first read about Stephanie Kelton in the Financial Times in their "Lunch with the FT" series. In that series, FT reporters meet their quarry at a restaurant, eat great food, talk about stuff and then the reporter writes their article in the FT. The idea is that readers, such as yours truly, get to vicariously eat lunch with the subject. The article describes the food eaten and the itemized bill as well! At any rate, that article was eye opening for me. That was the first time I read about a contrarian idea that Money (aka, cash, aka moolah) was invented as means of credit and not as a means of barter as is widely believed. Per popular wisdom, long ago, humans started bartering goods to receive things they needed in return for things they had but did not need. Soon, they were using sticks, shells and stones as currency in open markets and that lead to standardization into Money. Stephanie Kelton's ilk posit that, in fact, Money was first invented as a form of credit. Meaning, people took things from others and in return gave them tokens of credit (such as sticks, shells, stones) that could later be called in for return favors. The first recipient of the token could then pass that token to someone else with the same rights of an expected return favor. What they posit is more an economic theory than a scientific fact. They call this theory "Modern Monetary Theory". 

Understanding money is important to public policy that in turn affects everything in our life. You and I can only earn money, but, only Government can print money. How money is distributed across the economy and who earns how much money can sometimes be taken for granted and other times be questioned with equal fervor. Some people are willing to kill for money and others find ways to give it up completely. I can write a pretty long dramatic prose just on this topic of understanding money only because it is such an enigma to me. Out of consideration for you, my dear reader, I decided not to do that. However, I did decide to read the book and write about it here. That book is Stephanie Kelton's June 2020 book named "The Deficit Myth: Modern Monetary Theory and the birth of the people's Economy". 

I have to say: this is by far the simplest and most interesting economics book that I have read. It begins with the meat of the topic in the very first few pages. I remember the aha moment I had when I was listening to chapter one, walking on a nature preserve trail near my house. I could not resist but look up to the sky, amused and awed at the same time about how simple the concept was. It starts with the idea that Government Income (Taxation) and Government Spending are two unrelated things and are not the same as Household Income and Household Spending that are highly related. In Econ 1, I studied that Governments should strive for a balanced budgets such that Tax income should equal Spending. Now, Modern Monetary Theory (MMT) turns that on its head. It posits that Government Income (Taxation) is not really a means of Income in the sense of "Profit" or "Surplus". It is simply a number on a ledger that can be increased at will by Sovereign, Fiat Currency Governments. Let me try to say in a few lines what Kelton takes a whole chapter to say - forgive me for butchering this. MMT says that Tax was not invented as a means for Governments to collect money that can then be spent on public projects. Old world Rulers instead invented Tax as a means to coax their subjects into working for them. The Rulers decided that they would simply take a percentage of the Subject's Produce without giving them any Credit Tokens. Unless, of course, the subjects worked on the Ruler's Projects such as building roads, forts, and iron smithy. In that case, the Ruler would offer the Subject a Credit Token (a stick, shell, or a stone) and then, when the Tax Man came around, the Subject would simply offer up one of the shells to show that they had worked on the Ruler's project and hence are exempt from offering produce. Hence, there was always an incentive for the Subject to work for the Ruler as long as the Produce was dearer than the labor spent on the Ruler's Projects. That is how Money was first invented as a Credit Token that replaced domestic Produce for taxation. Then, a secondary economy sprouted around these credit tokens as people started trading these tokens for other kinds of work between each other. For example, a farmer could offer one of his hard earned Credit Tokens to a iron smith to produce an augur. Hence, by MMT, the Ruler could simply continue to offer as many Credit Tokens (a.k.a. dollars) as they wanted and as long as they wanted work done. The only limitation that the Rulers must be wary of is limitation of physical resources. Meaning, the Ruler cannot expect to purchase goods and services after all able men are already occupied and after all grains and water is already consumed. In the modern world such unbridled demand would lead to inflation. Inflation is the only real limit to Government Spending.

Now that I have butchered the whole thing for you - I suggest you go read the book!

At any rate. Kelton opens the book with some eye opening, mind blowing positions. After the first chapter, she goes on to refute other misgivings and fervent objections to an idea that Uncle Sam can spend spend spend. She addresses current thinking that each dollar spent in the US must be accounted for in taxes. She addresses trade deficits, national debts, balance of payments, entitlements (Social Security, Healthcare, Welfare) and all other so called budget deficit expenses that are going to doom our country. It is very clear to me (the reader) that MMT has in fact addressed these and it is almost a panacea to many of our problems today. I was surprised that this has not already been done in the US Government. I agree with her representation that politics and not economics is the driving factor in Washington DC and I am appalled that politicians do nothing to improve human conditions in spite of an easy way out. Human suffering, in this case, is a more easily reparable state than the CBO (Congressional Budget Office) would lead you to believe. All in all, MMT makes a important case for Governments to solve all human problems with a stroke of a pen (or a keystroke on a keyboard). 

I must admit, I got a million questions from people with whom I shared my thoughts. The first question was "But, isn't that simply socialism/communism". Communism or Socialism, which erstwhile USSR had, and today's China has, is Government Ownership of all resources in the nation. In communism, Government owns everything and allows Subjects to partake of those resources in "equal" parts. In Socialism, Government owns a master license to all resources and it allows private citizens to partake of the license to produce, consume such that all private activity affects social gain. Now, if I run my uneducated mind on high gear, I could reach the conclusion that eventually, the US Government, under the influence of MMT, could spend money to the point that they elbow out all private companies and all resources in the country would then be owned by the Government. Ergo, Communism. However, I do feel that is a big leap of imagination and nothing else. To keep it simple, I will only say that the US Constitution simply won't allow the Government to take over private sector. The more I think of the questions I got about this book, the more I feel that those questions are simply unfounded doubts and suspicions. I feel that the Ronald Reagan administration successfully screwed everyone's mind about how Governments work. I agree that there have been many political thoughts in US about "less government", but, Reagan administration turned a lot of those thoughts into policy. 401k (vs pension), social security delays (1983 amendments), tax cuts and many others turned the public spending conversation in the wrong direction. Today, Tens of millions of people are at best living an ordinary life and some, at worst, dying early in poverty, and I think Reaganomics has a role to play in it. MMT might be the anti-Reagan medicine to resolve many living condition issues for all of us. I do not mean to say that Kelton's book compares MMT to Reagan or any other past policies. This paragraph was just my thought process after having read the book.

I say that Kelton's book and the whole MMT concept can unleash human potential much like how torrential April rain can bring May flowers.

Today, that Lunch with the FT article is one of the top article on the "Lunch with the FT: Top 10 interviews of 2020" and Bernie Sanders is the Senate Budget Committee chairman. I cannot wait for Joseph Biden to apply some of these MMT principles to US public policy to bring it out of stupor.

All in all, I highly recommend reading this book.