Stephanie Kelton, the author of The Deficit Myth, looks at the shortfall from a different perspective. This book inspires the reader with a specific way of thinking that changes generally accepted views on the federal budget deficit. Kelton makes absurd claims about money, but then she confirms them, turning to the Modern Monetary Theory that could open up new opportunities for the federal government. However, the author delivers a controversial and even dangerous message, as the implementation of her specific political proposals could lead to an economic disaster.
Kelton says that since the Federal Reserve has the legal ability to print unlimited money, people should stop worrying about how the government will pay for various spending programs. If too much money will be printed, the country will get high inflation, but it doesn’t have to worry about finding the money the way a family or business does. This is a dangerous message that Kelton tries to infuse into American discourse. The author may end up convincing a large number of readers that the Modern Monetary Theory can turn unaffordable loans into smart investments by simply changing the way the government thinks about them.
According to Kelton, countries with monetary sovereignty do not need to manage their budgets the way a family does. Currency users have to worry about financing costs since they need to borrow money. In contrast, the issuer of a currency does not have such restrictions and does not have to worry about revenues when deciding which projects to fund. In fact, the situation is more complicated since the countries need to do more than just grant themselves the exclusive right to issue currency. To truly enjoy the benefits of the Modern Monetary Theory, the government must have monetary sovereignty. However, even the countries with a high degree of monetary sovereignty were not sovereign during the gold standard, because they had to be careful about issuing currency lest gold runs out. If the federal government prints too many dollars in a futile attempt to fund too many programs, prices will rise quickly. A failure to define and respect limits can be harmful. The Modern Monetary Theory is about distinguishing real limits from voluntary limits that can be changed.
Kelton and other Modern Monetary Theory theorists argue that inflation is not a problem in the United States and other advanced economies, so the printing press can be turned on. However, it can be argued that no matter what happens to the price level, monetary inflation transfers real resources from the private sector into the hands of political officials. If a government project is considered unavailable under traditional accounting, then it should be denied funding. Regardless of whether the CPI growth rate is unacceptable, when the government allocates an additional one million dollars to finance costs, then prices get higher, and people with dollar assets become poorer.
Kelton argues that if there is still a downturn in the economy in terms of unemployed workers and factories operating below capacity, then a surge in monetary inflation can put these idle resources to work. Although the rise in prices leads to redistribution, if the total output is higher, then the output per capita should also be higher. According to Ludwig von Mises’s business cycle theory, unoccupied manufacturing capacity in an economy is the result of inappropriate investments made during the previous boom. Thus, if the government follows Kelton’s advice and turns on the printing press in an attempt to bring idle resources back to work, it will simply start another boom and bust cycle.
Stephanie Kelton also writes about the Job Guarantee model of the Modern Monetary Theory. According to it, the federal government will be obliged to hire anyone willing for $ 15 per hour. She argues that her proposal would eliminate unnecessary weakness in an economic system where millions of workers languish as a result of forced unemployment. In addition, the author claims that this model will raise the long-term productivity of the workforce and even help people find better jobs in the private sector. However, there are several problems with this theory since looking at it differently, it becomes clear that this is not a guarantee of work. Workers will be pushed out of the private sector into government jobs, providing questionable services at the direction of political officials. Moreover, if people running the federal employment program are allowed to fire bad workers, then that is no longer a guarantee.
To sum up, Stephanie Kelton’s book The Deficit Myth explains the Modern Monetary Theory and discusses different topics from a new perspective, in a way that is controversial but convincing. This theory is based on fresh insights showing how all mainstream economists are locked in old ways of thinking. However, the problem is that this book is wrong in stating that the US federal government can print and spend as much money as it wants. The lack of restrictions on printing dollars does not give it more opportunities. It only gives more possibilities to trigger boom and bust cycles, as well as redistribute wealth among politically connected insiders.
Bibliography
Baker, Andrew, and Richard Murphy. “Modern Monetary Theory and the Changing Role of Tax in Society.” Social Policy and Society (2020): 1-16.
Coats, Warren. “Modern Monetary Theory: A Critique.” Cato Journal 39, no. 3 (2019): 563-576.
Dowd, Kevin. “The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy.” Cato Journal 40, no. 3 (2020): 795-809.
Kelton, Stephanie. The Deficit Myth: Modern Monetary Theory and How to Build a Better Economy. Hachette UK, 2020.
Murphy, Robert. “Book Review: The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy.” Quarterly Journal of Austrian Economics 23, no. 2 (2020): 232-251.
Visram, Talib. “What If the Federal Deficit Didn’t Actually Matter? Modern Monetary Theory Explained.” Fast Company (2020): 1-4.