The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy by Stephanie Kelton

(New York: Hatchette, 2020), 267

Cory recommended this to learn the "playbook" so I approached it with that goal. Unfortunately, while I understand better the broad outline of MMT and it's policy recommendations, this was not a rigorous explication and didn't go deep enough to address real questions. MMT in a nutshell: the government is the only one who issues money and therefore can and should issue as much as needed as long as it manages inflation. The policy recommendations derived from this view start with a federal job guarantee but then grow to eliminating all student debt, free healthcare, free affordable housing, fully funded entitlement programs, new infrastructure and solving climate change...all possible because the federal government can issue money and we are not near full employment. This seems to ignore the fundamental concept of scarcity of real resources and is lacking in historical evaluation of similar policies. I'm also left with an unanswered question about how this is possible with multiple governments with monetary sovereignty, and a concern about what the scope of the currency issuer becomes at the logical extension of this reasoning.


  • sovereign budgets (can print money) don’t work like household budget
  • federal deficits and good and necessary for the economy
  • it is the currency issuer—not the taxpayer—who actually funds the government (?)
  • “MMT clarifies what is economically possible”, aka “functional finance”
  • ...what is her opinion of the limits of what “government can and should do”?
  • “we can’t use deficits to solve problems if we continue to think of the deficit itself as a problem”
  • myths
      1. federal government should budget like a household; most important constraint is not taxes or borrowing, but inflation
      1. Deficits are evidence of overspending; deficit is surplus for another part of the economy
      1. Deficits will burden the next generation
      1. Deficits are harmful because they crowd out private investment and hamper long term growth
      1. Deficits make us dependent on foreigners
      1. Entitlements are propelling is toward crisis

Chapter 1: Don't Think of a Household

  • US government is the only legal issuer of USD
    • distinction between currency users (households, businesses, state & local governments) and currency issuers (federal government)
    • also don't convert currency into [gold, other currency], and don't borrow in another currency
    • this is monetary sovereignty
  • (TAB)S (taxing and borrowing precede spending) is backwards (the "Margaret Thatcher Dictum")
  • S(TAB) (spending before taxing and borrowing), the MMT model
    • says this is found in Wealth of Nations by Adam Smith and A Treatise on Money by John Maynard Keynes (23)
  • Warren Mosler is the "father of MMT", wrote Soft Currency Economics (23-24)
    • taxes are not to raise money, but to create demand for the government's currency
    • Mosler paid his kids with business cards for chores to demonstrate this (25-26)
  • Fed creates money through crediting accounts with bank reserves, just awarding "points"
  • Reasons for taxes:
    • create demand for currency
    • control inflation
    • alter wealth and income distribution
    • encourage/discourage behaviors
  • Reasons for borrowing:
    • government just borrows to offer interest-bearing dollars
  • Limits
    • "MMT is not a free lunch"
    • inflation is the "real" limit of MMT

Chapter 2: Think of Inflation

  • deficit is too small if there is unemployment
  • target inflation is 2% and economies have been struggling to bring it up to that level
  • cost push vs demand pull inflation
  • MMT disagrees with Friedman about natural unemployment
  • Fed has dual mandate: full employment and stable prices
  • monetary policy: interest rates
  • fiscal policy: spending/taxes
  • functional finance: manipulate fiscal policy to balance the economy
  • MMT supports federal job guarantee to eliminate involuntary unemployment and set de facto minimum wage

Chapter 3: National Debt

  • “debt imposes no burden whatsoever”
  • different answer to “would you get rid of the debt” when asking from perspective of government obligation or financial asset (treasuries)
  • !!!! I kind of get her argument if it was just one country, but don’t understand how this can work with multiple monetary sovereignty countries
  • STAB: spend, tax, ?, borrow
  • “there is no fixed pot of money, just room in the economy to safely absorb additional spending”
  • r<g: deficit is sustainable
  • central banks set overnight rate and let the market set longer term rates, but could set other rates too
  • budget surpluses have historically lead to depressions by taking money out of the economy

Chapter 4: Deficits Increase Wealth

  • “crowding out” thesis
  • Godley’s two bucket refutation of crowding out: government deficit = non government surplus
  • deficits push the overnight rate down
  • QE: buying US treasuries to push interest rates down
  • crowding out does apply to non-sovereign monetary countries, ie Europe on the Euro and Russia that converted to USD

Chapter 5: Trade Deficit

  • trade deficit “good” for goods, but “bad” for jobs
  • three bucket model: federal budget deficit must exceed trade deficit to keep private sector in surplus
  • federal job guarantee to solve the job problem
  • trade surplus needed when we had the gold standard
  • history discussion: Brenton Woods, Nixon off the gold standard
  • discussion of the trade implications for the developing world

Chapter 6: Entitlement Programs

  • Roosevelt’s “mistake” with social security was the payroll tax
  • ability to pay (unlimited with currency production) vs authorization to pay (regulation)
  • “pie challenge isn’t cost, but making sure our economy is producing the right mix of output over the coming decades”

Chapter 7: The Deficits that Matter

  • good jobs deficit; underemployment and proposed federal job guarantee
  • savings deficit: 77% of Americans don’t have adequate retirement savings...the underlying problems are such that either MMT-like proposals will be enacted or we will have other unrest; proposed free child care and erasing student debt
  • healthcare deficit: $10k per capita healthcare spend but falling life expectancy,
  • education deficit: free preschool for all, $30k avg student debt, propose eliminating student debt
  • infrastructure deficit
  • housing deficit and racism: build affordable housing for all
  • climate deficit
  • democracy deficit
  • “MMT imagines new policies and a new economy that refocuses from scarcity to opportunity”

Chapter 8: Building an Economy for the People

  • “MMT isn’t a free lunch”...?
  • MMT advocates using fiscal rather than monetary policy to stabilize the economy
  • discretionary vs automatic spending: have the budget respond automatically to changing conditions

Created: 2021-03-05-Fri
Updated: 2023-01-23-Mon