New York Times op-ed: Learn To Love Trillion-Dollar Deficits, by Stephanie Kelton (Stony Brook; author, The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy (2020)):
As a proponent of what’s called Modern Monetary Theory and as a former chief economist for the Democrats on the Senate Budget Committee, intimately familiar with how public finance actually works, I am not worried about the recent multitrillion-dollar surge in spending.
But there was a time when it would have rattled me too.
I understand the deficit myth because in the early part of my career in economics I, too, bought into the conventional way of thinking. I was taught that the federal government should manage its finances in ways that resemble good old-fashioned household budgeting, that it should hold spending in line with revenues and avoid adding debt whenever possible. ...
It is true that the dollars in your pocket are, in a physical sense, just pieces of paper. It’s the state’s ability to make and enforce its tax laws that sustains a demand for them, which in turn makes those dollars valuable. It’s also how the British Empire and others before it were able to effectively rule: conquer, erase the legitimacy of a given people’s original currency, impose British currency on the colonized, then watch how the entire local economy begins to revolve around British currency, interests and power. Taxes exist for many reasons, but they exist mainly to give value to a state’s otherwise worthless tokens.
Coming to terms with this was jarring — a Copernican moment. By the time I developed this subject into my first published, peer-reviewed academic paper, I realized that my prior understanding of government finance had been wrong.
In 2020, Congress has been showing us — in practice if not in its rhetoric — exactly how M.M.T. works: It committed trillions of dollars this spring that in the conventional economic sense it did not “have.” It didn’t raise taxes or borrow from China to come up with dollars to support our ailing economy. Instead, lawmakers simply voted to pass spending bills, which effectively ordered up trillions of dollars from the government’s bank, the Federal Reserve. In reality, that’s how all government spending is paid for.
M.M.T. simply describes how our monetary system actually works. Its explanatory power doesn’t depend on ideology or political party. Rather, the theory clarifies what is economically possible and shifts the terrain of policy debates currently hamstrung by nagging questions of so-called pay-fors: Instead of worrying about the number that falls out of the budget box at the end of each fiscal year, M.M.T. asks us to focus on the limits that matter.
At any point in time, every economy faces a sort of speed limit, regulated by the availability of its real productive resources — the state of technology and the quantity and quality of its land, workers, factories, machines and other materials. If any government tries to spend too much into an economy that’s already running at full speed, inflation will accelerate. So there are limits. However, the limits are not in our government’s ability to spend money or to sustain large deficits. What M.M.T. does is distinguish the real limits from wrongheaded, self-imposed constraints.
An understanding of Modern Monetary Theory matters greatly now. It could free policymakers not only to act boldly amid crises but also to invest boldly in times of more stability. It matters because to lift America out of its current economic crisis, Congress does not need to “find the money,” as many say, in order to spend more. It just needs to find the votes and the political will.
Wall Street Journal Book Review: John Cochrane (Hoover Institution) reviews Stephanie Kelton (Stony Brook), The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy (2020):
Modern monetary theory, known as MMT, erupted suddenly into the public consciousness when it won the attention of high-profile politicians including Bernie Sanders and Alexandria Ocasio-Cortez and their media admirers. Its central proposition states that the U.S. federal government can and should freely print money to finance a massive spending agenda, with no concern about debt and deficits.
What is MMT? Its advocates have told us in essays, blog posts, videos and tweets what MMT says about this and that, but what is its logic and evidence? As a monetary theorist who is also skeptical of conventional wisdom, I looked forward to a definitive exposition from Stephanie Kelton’s The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy.
Ms. Kelton, a professor of economics at Stony Brook University and senior economic adviser to Bernie Sanders’s presidential campaign, starts with a few correct observations. But when the implications don’t lead to her desired conclusions, her logic, facts and language turn into pretzels. ...