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Reflections on Kelton’s Vision on Federal Deficit Essay (Critical Writing)

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Updated: Feb 22nd, 2022

Introduction

The article contains a number of significant points that seem relevant to discuss. However, its core idea might be contradictable to an exact extent. Visram gives a brief but consistent overview of the arguments from Stephanie Kelton’s new book – The Deficit Myth. The central assumption of Kelton is that according to Modern Monetary Theory (MMT), the federal deficit may be perceived as a positive phenomenon for the economy. Below, the critical analysis of the latter statement will be provided in order to figure out whether it has a solid and appropriate background or not.

Kelton’s Core Idea and its Weakness

First, to understand what a budget deficit is, it is important to comprehend what a balanced budget is. The latter is a budget in which government spending is the same as total revenue, but minus the loans that the government has issued. Roughly speaking, a deficit is an increase in debt or addition to debt. It should be noted that Kelton uses an expedient number of concepts from classical economic theory and adapts them to MMT, which makes the train of thought coherent and convincing.

Kelton argues that the deficit is not necessarily negatively assessed because it is an increase in costs, and increased costs mean increased production. The latter is growing – taxes are growing, and national income is growing. If the deficit is the result of increased efficient spending, it can lead to increased production. This improves employment, as well as overall income rates. As incomes grow – consumption, investments, and deferred demand demonstrate the same tendency. The deficit is an integral indicator of the economy and a part of it. In general, this topic was first developed by David Riccardo, a theorist who lived immediately after Adam Smith. For example, it was quite a significant action when Reagan increased the budget deficit. This increase in the budget deficit for a certain period contributed to economic growth. During this time, the economy can create so much that then this deficit will be covered.

It should be admitted that the governments of all countries are accumulating budget deficits – but not because an economic deficit is inevitable. Deficiency in a modern state is a political phenomenon; it has a very indirect relationship to economic reality. Almost any politician wants to provide the voter with more state benefits and, at the same time, not increase, but even cut taxes. This idea is seductive in every part of the world. Nevertheless, many American states, with reservations and inevitable exceptions, have been able to achieve this; hence, this idea is feasible. And if the agreement on balancing the state budget becomes law, there is no doubt that it will have an extremely positive effect on the economy, if only because it will allow for cutting taxes. The funds remaining in the hands of the people will then become additional fuel for the economy.

A balanced budget is extremely important for future generations of Americans. Today, the national debt is $ 3.3 trillion; several hundred billion are added to this amount every year. This is not just an abstract mass of existing debts on paper – the citizens pay interest on them, and these payments take away more and more of the government’s revenues that could be used for other purposes. As for the direct connection between the state budget deficit and the well-being of the economy, it does not seem to exist yet. Nevertheless, theoretically speaking, one can imagine that the moment will come (and now servicing the state debt is the largest item of federal spending) when the inevitable tax increase will become a burden for both the economy and the people.

Long gone are the days when President Franklin Roosevelt struggled to force Congress to neglect the budget and allocate funds during World War II for the creation of the modern military industry. Now unsecured spending has become a common way of financing various government programs, from which politicians are reluctant to turn themselves out for fear of voters’ reactions. Nobody wants to risk their political career by making plans to cut the system of, say, social security. Although free medical care for the elderly is one of the most expensive and ever-increasing government programs of social assistance, many politicians prefer to say that a legalized deficit-free budget will rob the president of ways to improve the economic situation. However, such statements seem to be casuistry and expressed only to maintain a particular policy’s course.

Conclusion

To conclude, it seems rational to claim that the arguments of Kelton are convincing and – from a certain angle – may be accepted. Nevertheless, the counterarguments presented above prove that the federal deficit has many negative outcomes for the US economy and citizens. Thus, utilizing MMT in terms of advocating an intended federal deficit seems to be inappropriate, especially in conditions when the country is obliged to pay considerable debts regularly. It might be assumed that this deficit remains an apparent burden on the economy, and politicians are to find ways to alleviate this.

Bibliography

Virsam, Talib. “What if the federal deficit didn’t actually matter? Modern Monetary Theory explained.” Fast Company (2020): 1–4.

Amadeo, Kimberly. “What Is the Current US Federal Budget Deficit?” The balance. Web.

Cebula, Richard, and Robert Boylan. “An empirical analysis for the US of the impact of federal budget deficits and the average effective personal income tax rate on the ex post real interest rate yield on ten-year Treasuries.” PSL Quarterly Review, 72, no. 288 (2019): 41–52.

Bixby, Robert. “Impacts of Aging on the Federal Budget and Economy: A Cross-Cutting Challenge.” Public Policy & Aging Report, 30, no. 2 (2020): 46–51.

Furman, Jason, and Lawrence Summers. “Who’s Afraid of Budget Deficits?” Foreign Affairs (2019): 82–95.

Guzman, Juan, and Joyce Philip. “International experiences informing federal budget reforms in the USA: exploring accruals, transparency, fiscal rules, and multi-year budgeting.” Public Money & Management, (2020): 1–11.

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IvyPanda. "Reflections on Kelton’s Vision on Federal Deficit." February 22, 2022. https://ivypanda.com/essays/reflections-on-keltons-vision-on-federal-deficit/.

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IvyPanda. 2022. "Reflections on Kelton’s Vision on Federal Deficit." February 22, 2022. https://ivypanda.com/essays/reflections-on-keltons-vision-on-federal-deficit/.

References

IvyPanda. (2022) 'Reflections on Kelton’s Vision on Federal Deficit'. 22 February.

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