Before getting into my review of Stephanie Kelton’s new bestseller, “The Deficit Myth: Modern Monetary Theory and How to Build a Better Economy”, it’s important to stipulate a few things. That the public discourse about debt and deficit in Western media, politics and academia is deeply, profoundly stupid. That advanced democracies - including Australia - face essentially no challenge to their ability to finance their fiscal deficits. That in the midst of what will no doubt be the opening stages of a second Great Depression, it’s inevitable that public debt should increase rapidly. And that the decision of the Australian federal Labor Party to launch a scare campaign against debt in the middle of a pandemic is at best questionable and at worst political malpractice. It is possible to believe all these things to be true, and remain strongly critical of Modern Monetary Theory (‘MMT’).
Deficit hawks - economists, journalists and politicians - who wring their hand at the size of government deficits are not now, nor have they ever, acted in good faith. It’s a right-wing propaganda exercise that has been so successful as to dominate the strategic imagination of almost all modern political leaders. Professor Kelton is quite right when she points out that the legal and budgetary manifestations of this ideology - debt ceilings, pay-as-you-go rules, efficiency dividends etc. - are arbitrary procedural constraints on our ability to build a better, more just world. But here’s the obvious question raised by Kelton’s career: is MMT also an exercise in propaganda? Do she and her colleagues genuinely believe that it’s only “bad reasoning [that’s] led to bad policy” and that MMT worldview will improve the quality of government decision-making? Or will her legacy be that of a highly effective communicator and propagandist? In the end, does it matter is MMT is true if it succeeds in demolishing ‘The Deficit Myth’ and encouraging political leaders and activists to ask more from their government?
Kelton is an effective and persuasive writer, and she’s written a popular and accessible introduction to MMT. The first four chapters of her book, outlining some of the key ideas of the MMT theory (that is: chartalism, a jobs guarantee, monetary financing and sectoral accounting) are succint, witty, well-argued and powerful. Kelton is also direct and up front in tackling some of the most common criticisms of MMT. Unfortunately, the back half of the book fares less well - it’s more-or-less a shopping list of ‘wouldn’t it be nice’ progressive policies that anyone who’s read a popular left-wing book in the last ten years (by Paul Mason, Rutger Bremen, Naomi Klein or the like - hell, even my first book) will be familiar with. Isn’t climate change terrible? Isn’t inequality bad? Shouldn’t someone do something about declining access to health, jobs and education? The limits of Kelton’s brand of politics are here on full display - as a former Democratic Party staffer, the last four chapters are as dry as you’d expect a staffer’s policy wish list to be. The book is similarly peppered with personal anecdotes and touching stories about the ordinary people she’s met outside Washington in the Real World(TM) - persuasive to the cocktail set, maybe, but not a manifesto for political revolution.
An Economist of Bravery & Renown
Kelton begins her book by tackling the conventional story about how governments fund their activities. Modern governments traditionally raise revenue in one of two ways - they either tax or borrow from the private sector. Kelton builds this picture into something of a straw man before commencing her attack upon it - that the government must raise revenue before it spends [i.e. a government can’t spend a dollar it doesn’t have]. Kelton made her bones as an economist by demonstrating that this isn’t accurate (you can read Nathan Tankus’ restatement of this article in a recent blog post here). The short version is that the Treasury can spend whatever it wants, whenever it wants, and Central Banks adjust the monetary reserves held by financial institutions to ensure that private savers can lend funds to the government. This is what MMT advocates mean when they say their theory is merely a description of the status quo: in their minds, government spending is already being financed by money creation - just with a few extra steps.
You can do several creative things with this insight. You can ignore the independent institutional existence of various government entities to claim that the Treasury and central bank are are single accounting entity, called the ‘federal government’, which creates money by spending it into existence. You can go down a chartalist rabbit-hole, arguing that the value of money is a result of demand for government-issued currency generated through taxation And, finally, you can argue that the middle men in the financial sector are unnecessary, and that the central bank’s ability to create money should just be plugged directly into the Treasury’s veins - monetarily financing government spending without deficits being covered by the issuance of government securities [i.e. bonds]. Kelton is upfront on a point that most MMT advocates - who are keen to downplay any radical implications of their theory - avoid: that is, that government’s choose to issue bonds to cover their debt, and could just as easily choose not to.
The Chartalism Fallacy and the Ontology of Money
I take issue with the Kelton’s account of money creation on several grounds. In the first instance, it’s misleading to claim that traditional budgeting says that governments can only spend dollars on hand: only that these accounts balance over an arbitrarily decided period of time. Tax revenue does not flow into government coffers evenly, and spending is spread out over the whole year. It’s just good financial practice to calculate all your incoming and outgoing, and identify any shortfalls. The decision of when the books must balance is arbitrary. Secondly, and perhaps more importantly, the value of money is not simply derived from its role in the payment of taxes. Money has value to consumers as a stable medium of exchange - destabilising expectations of stability could make prices and wages unpredictable. But beyond that, money has value as a standard of deferred payment - a way of measuring imbalances in the inter-temporal flows of currency. Treasury bonds have value because they’re a record of the government’s promise to one day balance its books.
Moreover, all those middle men and financiers that MMT dismisses - the bond purchasers, the secondary dealers and primary financial institutions - are not merely there to take a cut of government spending [although they do that too!]. They generate resistance in the system, ensuring the flow of currency into the real economy doesn’t exceed the capacity of the private sector to handle it. I like to think of the difference between traditional government financing and MMT as akin to the difference between AC and DC power. In both instances, the central bank is generating monetary reserves which supply the operations of the Treasury. But in the ‘AC’ system, the bank is adding and taking away a fraction of the bank reserves of private financial institutions every day [‘oscillating the money supply’], which is passed on to those bank’s institutional customers, which is passed on to lenders and savers and eventually to the government in the form of either taxes or loans. In the MMT ‘DC’ system, money would flow directly from the central bank to the Treasury - without the resistance and accountability provided by the financial sector and with no guarantee that the real economy can handle the volume of currency being delivered safely.
Kelton truthfully admits that chartalism could be exploited by political conservatives to argue for widespread tax cuts. She herself often seems skeptical of taxation (like her intellectual mentor, Warren Mosler), describing it at various times as a burden, and is half-hearted in her condemnation of Republican giveaways to the elite. She also deliberately distances herself from what she describes as the ‘Robin Hood’ policies of Bernie Sanders and Elizabeth Warren. Kelton does helpfully provides a list of reasons why taxes might be needed: for the government to requisition resources, to manage inflation, to engage in redistribution of wealth and income, and, as with the use of ‘sin taxes’, to control behaviour. One could argue that bonds have a similar set of purposes - for the government to requisition savings that aren’t being used, as a ‘sin tax’ on wealth that is not being productively invested, and as an equality-boosting measure to invest that capital for the benefit of those with the least access to it. And most importantly of all, to control inflation by removing liquidity from the private market in proportion to the liquidity injected by public spending.
In summary, then, MMT advocates a revolution in public finance. Either governments stop issuing bonds (and allow those already issued to be paid off gradually over time), or we anticipate that at some point in the future central banks will simply ‘delete’ their holdings of Treasury securities - a possibility that has already been floated by some as a response to massive balance sheets central banks have built up via quantitative easing. In some ways, this would be the ultimate debt ‘jubilee’ - governments unilaterally writing off their own prior promises to pay. But to destroy the bond market would be to un-moor a key tool of managing market interest rates and determining the value of country’s currency. Without information on market conditions, expectations of short and long run inflation could fluctuate wildly.
Despite its claims, MMT doesn’t end the debate over ‘how will we pay for it?’ - it simply resurrects a technique [monetary financing] that more conservative economists and politicians long assumed was anathema. To paraphrase Ian Malcolm, just because the government can do something, doesn’t meant it should.
The Last Word on Inflation?
Kelton’s chapter on inflation is appropriately cautious and realistic, given that inflation concerns are frequently levied by MMT critics. Conventional monetary theory predicts that monetary financing without debt issuance will increase inflation, outside of unusual economic conditions like demand shock we are currently living through. MMT advocates must tackle this topic head on, and Kelton does so by making the entirely valid point that no one, really, has any good idea of what causes inflation, and that the experts and institutions we rely on to manage inflation today have poor tools for the job. Shemakes the point that MMT only says that money is unlimited, not ‘real resources’, and that inflation can and will occur if government spending exceeds the capacity of the real economy to deliver goods and services. Fair enough [such a view is widespread among Keynesians], but if money quantises the power of currency users to call upon real resources, then expanding the money supply will also alter the capability of both public and private actors to access real resources - most likely reducing private purchasing power [i.e. causing inflation].
Kelton claims that inflation is only a risk when an economy is already operating at it’s ‘speed limit’, and that the existence of unemployment and other inefficiencies in the market economy suggests we are a long way from hitting this limit. I’ll address the unemployment question in the final part of this review, but Kelton goes on to claim that rather than worrying about debt and deficit (the measurable component of the currency flowing in and out of government) governments should concern themselves with balancing the supply and demand of real resources in the economy. Kelton’s vision is one of active and continuous tweaking of tax and spending levels to balance economic output and consumption, a herculean - perhaps utopian - and certainly politically impossible task. How these things are to be measured, and how governments should make policy under these conditions is anyone’s guess [MMT-er Brian Romanchuk labels this the ‘Noble Lie’ critique of MMT, and it’s also discussed in this review of Kelton’s book].
An economy’s ‘speed limit’, is in large part a function of the composition of its capital base, the skills and knowledge base of its workers, and its supply of natural resources and environmental goods. Moreover, these things are unevenly distributed between different geographical regions, across classes and among ethnic groups. It’s implausible that these things should be - or could be - meaningfully ’balanced’. The market will always be inefficient in some way or another, always operating at less than ‘full speed’ [in other words, structural unemployment is real] and to suggest that inflation is not a risk, or that it’s a risk that can be managed in a technocratic fashion, under these conditions seems positively Soviet in its ambition.
In the Dark Future of the 41st Millennium, there is only the Jobs Guarantee
It’s only towards the end of ‘The Deficit Myth’ that the beating technocratic heart of the MMT vision is on full display. Kelton knows and recognises that politicians who are barely able to make their accounts balance would never be able to make the finely-tuned tax and spending decisions necessary to regulate inflation in an unconstrained monetary environment. So in response she advocates taking policy-making out of the hand of legislators, of putting in place automatic spending programs - those designed by MMT economists, of course - that would algorithmically dispense funds and set taxation levels to ensure the economy was always running at ‘full speed’.
The MMT prescription for a jobs guarantee is emblematic of this way of designing public policy. Kelton argues, accurately I think, that central banks lack the conceptual and policy tools to fulfill their mandate of full employment, and instead set an arbitrary level of unemployment they judge ensures price stability. In the place of these technocrats, MMT argues, we should have an entirely different set of technocrats managing a universal jobs program, that would determine a minimum wage at which they would offer unlimited public jobs to anyone who wanted them with the objective of controlling inflation and maintaining full employment at all times. What these public jobs would entail is left largely unspecified and up to the reader’s imagination (but don’t worry, they’ll only be good, productive things, Kelton assures us!).
Kelton disavows the idea that a jobs guarantee would be a panacea for our economic and social ills, but she sure does come close to arguing that. Rather than acknowledge the democratic deficit that underlies the trade policies of modern capitalist states, and which have driven much of economic anxiety and dislocation that drove Brexit and the rise of Trump, Kelton merely promises us that a jobs guarantee would more than compensate for the losses of employment that follow trade liberalisation. Oh, and by the way, the job guarantee wage would be the minimum wage, competing directly with the most exploitative part of the labour market for workers while miraculously matching matching people with jobs that best suit their skills with zero friction.
As a leftist, I’m all for nationalising things in principle, but the jobs guarantee would represent nothing less than the nationalisation of the majority of the labour market. Which again, sounds very Soviet. Why any of this would be better than a guaranteed minimum income without any obligation to work is beyond me. In the last few days, MMT guru Bill Mitchell has become increasingly open about the authoritarian impulse that lies behind the jobs guarantee - but as Matt Breunig has helpfully pointed out over at the People’s Policy Project, the notion of replacing the current welfare system with a ‘duty to work’ has a deep roots among MMT advocates, including in Kelton’s own work. Maybe MMT is a fair and accurate description of how an economy that has solved the communist Calculation Problem could work [as one unfriendly review has pointed out, a recipe for permanent War Communism]. And in the meantime, if individuals have to put to work doing make-work tasks to ensure that the government ‘printing press’ doesn’t run the economy off the rails, well that’s just the price to pay for a rationally-organised economy.
Conclusion
Socialists agree with Kelton and the MMT crowd that government’s are neither good nor evil, and that distributional outcomes across the economy are what matters. So why then do we need MMT at all? Socialists have been arguing for social and economic redistribution for hundreds of years now. It’s hard, often brutal work that won’t be completed in our lifetimes. If the claim of MMT advocates like Kelton is that their theory will make winning redistribution easier, then they must also knowledge that it also makes life easier for the bad kind of government spending - enormous tax cuts, reckless foreign wars, insane subsidies for the already-well-off - and lays a rhetorical framework for the end of most tax-and-transfer programs as we know them. Ultimately, I think MMT has some value to the left as a rhetorical cudgel, to dispel the Deficit Myth once and for all. And in playing that role alone, Kelton’s success can be [carefully] applauded.