It’s Just a Theory

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

Stephanie Kelton

The only social science that sees its contributions recognized with a Nobel Prize, is economics. So you can forgive the practitioners for mistaking their field of study with chemistry and physics.

If you pause for a moment, though, and consider that the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, is not, in fact, one of the prizes established by the inventor of TNT despite all the energy put into obscuring that fact, you might feel your skepticism muscles beginning to twitch.

They should.

Because here’s the big difference between hard science and economics: no two chemists will argue about what results from combining two atoms of hydrogen with one of oxygen. No two physicists will argue about what happens when an object in motion meets an object of equal mass at rest.  Now ask a group of economists about, say, prices or market functioning and you’ll see the difference immediately.

An everyday item that was also money–you could buy the Times with it at a newsstand.

I hear the protests already. So let’s take a  concept as simple as money. The definition I learned is that money is both a store of value and a medium of exchange. You can save it. You can spend it. You can lend it. We used to use a subway token to illustrate that money could take many forms. Nowadays you could use Bitcoin, though that would probably just start another argument.

If you really want to start an economics brouhaha, though, you can’t do much better than to inquire about Modern Monetary Theory, or MMT as its proponents abbreviate it. And if you’re going to debate the subject I’d suggest you find someone other than Stephanie Kelton to spar with. It’s fair to say that with this volume, aimed at an educated reading public, she’s written the book on the subject, well, at least what’s likely the only book on the subject most non-economists will ever read.

Here’s a vast oversimplification of an already simplified explanation. Most of us think about spending as we experience it as an individual or household member. We have needs. We have income. We have some credit cards. And we juggle, trying to stay above water.

In this sense, everyone understands economics as Mr. Micawber summed it up:

“Annual income twenty pounds, annual expenditure nineteen nineteen and six , result happiness.
Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery” David Copperfiled by Charles Dickens

At least since Ronald Reagan’s administration, Wilkins Micawber has been the Assistant Secretary of the Treasury charged with telling us the government is on the verge of financial collapse. Either that or that we are mortgaging the future–our own or our grandchildren’s, the choice seems to represent a political judgment on which will motivate voters (or donors ) the most.

Professor Kelton provides a handy acronym for understanding how this household model has been applied to the way we commonly think about government spending: TAB(S). That is, the government taxes individuals and businesses, issues bonds (borrows) and then spends money.  It is, she believes, completely backward. The government spends, then taxes and issues bonds to pay for those expenditures: S(TAB).

Budget deficits are always political, as this CNN graphic illustrates.
Image (c) CNN

About this time the reasonable man or woman, along with every CEO, CFO, mainstream economist and employee in the financial sector is asking: How can you spend what you don’t have? Here’s where MMT asks us to shift our perspective from what we think we know to take in what is really happening.

Here’s how the government actually spends money. Congress passes an appropriations bill. Each Department in the Executive Branch must procure goods or services for the appropriated purpose. A vendor is selected, a contract written and (this is the important part) the Treasury instructs the Federal Reserve to credit the bank account of the vendor.

On the one hand, this makes complete sense. In a $20+ trillion economy you can’t go transporting checks everywhere, let alone dollar bills. On the other hand, to accept this means you have to accept an uncomfortable fact: the government manufactures money out of thin air. That might sound scary but we’ve been told the financial sky is falling since 1980 or before, and the government is still a going concern.

While the NY Fed is a fortress, it’s more about manufacturing digital dollars than storing gold or banknotes.

Here’s why: the US government issues the currency we use. It only accepts that currency as payment for taxes. It can never, ever run out of money. We have what’s known as a fiat currency. There’s no pile of gold sitting somewhere backing it up. To have more money we don’t need more gold, we just tap a few keys.  As long as we pay ourselves back in dollars the music keeps playing.

Still not convinced?  A basic accounting principle is balance. Say the government spends a dollar it doesn’t have. That’s a deficit. On the books, it’s either -$1 or the government issues a bond with a face value of $1. That buck is now a $1 asset for the bondholder or company accepting the currency.  Try as one might to argue this away, you can’t. In both math and accounting, it’s what’s known as an identity, it’s always true.

Lest you think this is something a group of woolly-headed academics dreamed up, a Wall Street veteran named Warren Mosler is the man behind this insight. Then the academics ran with it, although there’s been stiff opposition along the way. But it’s eroding, usually by conversion of skeptics not too closely wedded to the existing framework.

In fact, I first learned of MMT and Stephanie Kelton from a newsletter penned by a refugee from the Street. Despite that employment history, he’s actually a Ph.D. political scientist and so is capable of distance. Once I dug into a few of the book’s more technical footnotes, I found that the factual basis asserted by Dr. Kelton aligned with what I’d been taught about bond market operations decades ago by the capital markets guys in a major wirehouse.

From the start, one political party has been trying to kill Social Security, viewing it in demonic terms.

There are three reasons MMT strikes terror among the mainstream set. First, it takes the economics out of what are really political issues. Social Security isn’t a bad idea, defunding it is. But once you ground defunding in economics it’s just science, isn’t it?

Second, it increases the role of government. MMT requires the government to act to maximize resource utilization. A permanent, living-wage granting jobs program is part and parcel of the MMT program and that’s about as popular with conservative thinkers as any New Deal job program was during the Great Depression.

Finally, with debt not being a problem, neither is spending. So every item on the liberal/Progressive wish list is possible. At least half this book dwells on public policies that could be funded by adopting the MMT framework. It’s an expansive, optimistic vision, entirely unwelcome among the half of the political/economic spectrum that secretly enjoys their inner Malthus.

Thomas Malthus
The apostle of the economics of scarcity.

I’ll be fair, you can’t adopt half of MMT anymore than you can be half pregnant, and Kelton says so, but it’s easy to see how the promise could overwhelm the details. At the heart of it all lies a big question that I love, and not just because it works so well with my oft-expressed view that economics really boils down to an agreed-upon set of social activities related to exchange. It’s an important question and it needs to be raised more often. What, asks Kelton, is the purpose of an economy?

Whether you believe the answer is the best life possible for the most people or the best opportunity for a relatively few people to maximize their financial gain will color how you view this book and theory. I warn you, Kelton is a formidable advocate for what she believes in, with a real ability to explain complicated concepts in plain English. There is absolutely nothing scary about her, “Gee, folks” presentation and I’d be surprised if we didn’t see more of her in the coming years. Her academic/government resume all but guarantees it.

And if she’s right, we’ll all be better off. At least as I see it.


The online newsletter mentioned in passing above is The Heisenberg Report. Its chief scribe, the self-identified Walt, has for some time been stating that MMT merely describes the way things actually work, a view I’ve come to embrace. Last October he printed a transcript of a conversation with Kelton. It’s worth reading, or if you have the time, listen to her interview with Macro Voices and see if you agree with me about her selling skills.






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