The Deficit Myth: Modern Monetary Theory and How to Build a Better Economy

It is now nearly 5 decades since many governments, including those of the US and UK, achieved monetary sovereignty, with their currencies not tied to each other or to gold. But it has taken many of those decades for economists to grasp the implications. Prime among these implications , Stephanie Kelton suggests in this ground-breaking book, is that these governments are freed from financial constraints on spending, so long as most of their borrowing is in their own currency,. If economists have been slow to realise what this made possible, most politicians are totally oblivious - indeed, many of them use pre-1971 thinking to argue for austerity and a reduced economic role for the state.Central to the rigidity of both economists and politicians has been a myth that governments have to budget like a household. Kelton starts her book by demolishing this myth. Households cannot spend more than they bring in, without incurring debts that have to be repaid. In contrast, governments with monetary sovereignty can simply issue the money they need. How much they take back, in taxes or in debt repayment, is a political choice. The only constraints, Kelton argues, are real (resource availability and inflation) not budgetary.Kelton goes on to demolish other myths - that government deficits result in insolvency (rather than inflation), or that national debt is a burden (rather than a vehicle for private savings deposits). She draws on her experience as chief economist on the US Senate Budget Committee to provide detailed evidence to back up her arguments. Obviously, much of this evidence is from the US, but the same principles apply to the UK and other countries whose governments have monetary sovereignty.Towards the end of the book, Kelton explores the political choices that monetary sovereignty makes possible. Instead of striving for debt reduction and a balanced budget, with all the austerity that entails, Kelton suggests that governments should be using public spending and taxes to re-balance the economy. That means prioritising aims like full employment, a fairer distribution of income and wealth, quality health, education and housing, and decarbonisation. These are political choices, she emphasises, which are constrained by real resource and ecological limits, not artificial limits on the ability of governments to issue money.We are living through a time of acute crisis - both immediate (Covid-19), and longer term (climate change). Addressing these crises will require governments to spend money, money that they can and should create. And the constraints on that money creation are weak at present - inflation and interest rates are near zero, and there are huge under-employed resources. The last thing we need is a return to austerity, justified by out-dated notions that we need to reduce the deficit.Stephanie Kelton’s book could not be more timely.

First of all, I'd like to associate myself with all the 5 star reviews below which all in their way explain the book and its concepts very well.The book is based on what passes for American fiscal policy but also ANY country that is a sovereign issuer of its own currency (like here in the UK) could do what Stephanie Kelton and other pro-Modern Monetary Theorists (MMT) advocate in this book. EU countries whose currency is issued by the European Central Bank cannot carry out MMT.I have learnt about MMT chiefly through Richard Murphy's blog (highly recommended) but I also bumped into Warren Mosler and his book 'The Seven Deadly Innocent Frauds of Economic Policy' earlier and this to me opened up the subject, as did looking at Economist Bill Mitchell's blog although Mitchell is not convinced of the role of taxation.I choose to go with Kelton, Murphy et al on the latter - tax is fundamental to MMT because the cash injection can cause inflation: tax however is the cooling agent - the other half of the coin - what you put in at one end has to be taken out at the other, otherwise like a bucket over filling with water, money will overflow and inflation will happen. The other issue is that this is spending and then taxing - the Government is not taxing to spend - another lie that is constantly told to people in the USA and the UK - if not world-wide.This is why Thatcher and the Neo-liberals wrongly thought that using unemployment (very cruel and unnecessary) and curtailed state spending (a dereliction of a Government’s promise to provide) plus just using interest rates (monetarism) would control inflation when they took power in 1979. It did not. Why? Because Thatcher also reduced taxes, especially for the rich. Much of Thatcher's boom was created by privately created debt - whether from the expansion of consumer debt in households or leveraged take overs of public utilities and an exponential growth in the real estate sector- a lot of it was under taxed rich money pouring into the City of London as private investment to help the rich's money make more money AND relaxed credit and banking rules and that is why inflation was a continuous problem for even Tory Chancellors. Inflation came about because of a lack of tax and more credit being available. These were all Thatcher's decisions. Bad ones that persist to this day because politicians of all colours do not understand tax.In the practice of MMT, tax is not needed for spending - just for controlling inflation. Spending is from printing fiat money - money that the Government just creates by choice (or not!) out of thin air for its policy choices, for its people. Because it can. It always could since the day the State was founded. And there are people with money to save who can act as the counter party and buy Government bonds and gilts with confidence because they will always get their money back.The pivotal part in this book for me though is from p.142 where Kelton explains the facts of sovereignty (the power of the Kings of old) to enable a State to print its own money for its people. She says it is key to understanding MMT and I totally agree with her. At a time where most politicians (whether Right or Left) seem to agree that the States they are meant to be in charge of are not as good as the market at allocating resources, this is a breath of fresh air. A State printing enough money for its people (all of them - not just enabling the rich to get richer by under taxing them and allowing the rich through their under-taxed income to charge us poorer folk through privatised utilities they buy and pay day loans they fund) is what we want both now during the Covid crisis and in the future.BREXITEERs will tell us that sovereignty is in our laws and borders. But the most powerful form of sovereignty in a country however is printing your own money - whether the pound or the dollar (Kelton contrasts this by telling us what happens in countries that don't print their own cash). And rather than leaving money to be circulated by un-elected and greedy not to be trusted private sector (think now about 2008 and all the crashes we had up to then, as well as the accounting fiascos and money laundering of criminal money as well as how the rich have got richer after 10 years of austerity whilst the rest of us lost it and jobs), MMT puts YOUR Government firmly in the seat of responsibility for ensuring that all our services (the NHS, Adult Social Care, schools and even our needs over Covid -19) are funded sufficiently.BTW - that Government could be Left or Right - MMT is politically neutral - it explains a factual, extant, practical State power that any British Government could use - Tory, Green, Labour, Marxist, Trotsky, The BREXIT Party, The Official Monster Raving Lunatic Party - ANY of them could choose to use this power for the good of its citizens.If MMT is such a good idea then, why is it not more widely known? Why do people - even the supposedly well read middle class and those who go to Oxford, Cambridge and Harvard still think - politicians included - that tax pays for everything?Well, there are a number of reasons for this. Kelton thinks that efforts to add contributory and qualifying payments to citizen's State funded help has helped to muddy the waters and helped certain politicians over-egg the contribution side because those contributions have become a means by which we might choose to elect them (tax cutting/service cutting competition in elections). But there is also the Neo-lib myth of the State 'crowding out' the private sector - that when the State prints money into its society, the private sector does not get the opportunity to turn that activity into a profit making enterprise. So, States are encouraged to privatise, spend less money on direct support, turning over those budgets to the private sector instead for what can be a worst service. If we look at the amount of privatisations over the years, it is clear that rich capitalists - the same ones that fund parties of all persuasions who don't mind privatising (and financially support leading universities too) - are having their needs met before millions of voters.Look at British Rail today - it receives more state subsidy as a private concern than it did when it was owned by the Government even at pre-privatisation prices; look at how those water & utility bills have gone up since privatisation; Crowded out? The private sector has been 'crowding in' more like - to grab hold of money that should be being used to help people like me and you.There is also the inherent anti-Statism seen in Neo-liberalism - one of the dominant but not necessarily right economic philosophies of our time - the State bad/private good mantra for example.Kelton goes on at the end to advocate MMT being used to address the increasing pauperisation of the commons in America but also prevalent in the UK - we can look around most inner city areas and outer regions in the UK and see that lots of work needs to be done; there are potential jobs everywhere. We need new green technology start ups to deal with globalised climate change. And we need to realise that deliberate unemployment and constant market collapse is leaving people increasingly angry and frustrated - ripe for exploitation by neo-Fascism and potential social breakdown and instability throughout the world.So what to do?Start by reading this book but also buy it (from Amazon!) for your family, your kids (especially for them) your friends and even work mates if you can. We have to start by raising our expectations of our politicians - expecting them to know about MMT, sovereign currency creation and demanding that, in return for our votes, they use MMT to help us and those we love and value - not just the well heeled who lobby politicians and make donations and push to the front.Expecting better than we have now - that is where we voters have to start in my view. This may well help us to have a proper public debate on MMT and see it put into practice to the point that it reaches its objectives - full, well paid employment and inflation controlled by a progressive tax system and happier, supported people with a future.Buy it and spread the word. It's worth a go. We can't go on like this.

Thank you Stephanie. Beautifully clear for the lay person (that’s me!), this potentially confusing subject is made abundantly clear. Money can work for us in completely new ways, and if we all decide, globally and in our own countries that we want to approach money in society in this logical and succinct way that MMT allows, then we are at the birth of a new egalitarian society where everyone has a chance regardless of colour, race, creed, country of origin, sex....everyone can have equal opportunities in the world that MMT describes. Now it’s up to us to ask for this from our leaders wherever we are. 👍😀 Peter of Peter and Sandria

-In einem Diktum der Premierministerin Thatcher hieß es 1983:*Es gibt kein 'öffentliches Geld*, es gibt nur das Geld das die Staatsbürger selbst verdienen. Wenn der Staat mehr Geld ausgeben will, muss er es sich ausborgen oder die Steuern erhöhen.Diese Aussage - *There is only taxpayer money* - ist ebenso knapp und apodiktisch wie der Sager: *There is no Society, just Individuals*.Eine Dekade vor diesem Ausspruch wurde von President Nixon die Goldbindung des Dollars aufgehoben. Der Dollar wurde zu einem frei floatenden Fiat-Geld. Das Bretton-Woods-System war zu Ende.Die Welt, die Wirtschaft und die Finanzwirtschaft haben sich seither grundsätzlich geändert. Aber die meisten Staatsbudgets folgen immer noch der Logik von Lady Thatcher.Immer noch wird von den meisten Regierungen der Staat wie ein privater Haushalt gesehen der das Geld erst verdienen muss, etwa durch Steuereinnahmen, bevor er es ausgibt. Mit dem TINA-Wort *There is no alternative* wird auch die Beschränktheit der Staatsmittel immer begründet, unter anderem durch Kanzlerin Merkel mit ihrem schon sprichwörtlichen Hinweis auf die besonders sparsame 'schwäbische Hausfrau', die sich der Staat als Vorbild nehmen sollte. Regierungen sehen nach wie vor ihre wichtigste Aufgabe darin, das Budget ausgeglichen zu machen - ob die Wirtschaft 'ausgeglichen' ist, ist nachrangig. Geschaut wird nach der Schwarzen Null. Es müssen schon kräftige Einbrüche erfolgen wie während der Covit-19-Pandemie, dass man die Ideologie vergisst, aber auch dann nur mit dem Hinweis, so bald wie möglich zu Diktum der Lady Thatcher zurückzukehren.Wer oder was ist MMT? MMT steht für Modern Monetary Theory und ist eine Geldtheorie die oft als Postkeynesianismus bezeichnet wird. Die Autorin des Buches, Stephanie Kelton, ist eine US-Ökonomin die durch ihre Arbeit in verschiedenen Institutionen mit dem Kreis von Ökonomen in Kontakt kam die diese Theorie entwickelten und die selbst aktiv an der Entwicklung und Weiterverbreitung teilnimmt.Die MMT macht klare Ansagen: ein souveräner Staat mit eigener Währung kann immer seine Rechnungen zahlen, er schöpft Geld per Knopfdruck, er muss weder die Wirtschaft dem Kurs von Goldreserven anpassen, noch muss er ein ausgeglichenes Budget als prioritäres Ziel haben, sondern er passt das Defizit dem an was die Volkswirtschaft braucht um 'ausgeglichen' zu sein.Die Staatsfinanzierung erfolgt gemäß der MMT nur zum geringeren Teil über Steuern. Steuern sind eher eine Hilfe bei der Bekämpfung von Inflation, entweder um diese einzubremsen, oder, mit Steuersenkung, um die Wirtschaft anzukurbeln.Und wenn der Staat 'Schulden' macht, dann müssen das doch unsere Kinder und Enkelkinder zurückzahlen, oder? Keineswegs: die profitieren von dem, wofür mit dem Geld vorgesorgt wird: Bildung, Krankenfürsorge, Infrastruktur. Außerdem wird nichts 'zurückbezahlt'. Geldgeber und Geldnehmer sind ja identisch. Und es steigt auch das BIP durch bessere Ausnutzung vorhandener oder neuer Ressourcen, wodurch die Schuldenquote relativiert wird. Mit der MMT gibt es kein: *Sorry, das können wir uns nicht leisten*, wenn wichtige Investitionen bevorstehen. Aber die Zinsen, die müssen doch steigen, oder? Die Zinsen werden von der Zentralbank festgesetzt je nach Nützlichkeit für die Wirtschaft. Zinsen sind ein Lenkungsinstrument der Wirtschaftspolitik. Aber wenn der Staat sich verschuldet, werden doch die Bürger ärmer?! Im Gegenteil: die Bürger profitieren von dem Geld das vermehrt in Umlauf gebracht wird - solange die Inflation kontrolliert bleibt.Und die Arbeitslosigkeit? Die gibt es nicht mehr mit der MMT: mit der Geldschöpfungsfähigkeit des Staates kann jeder in Arbeit gebracht werden, womit ungenützte produktive Kapazitäten besser genutzt werden als wenn man von vornherein akzeptiert, dass ein Teil des Volkes von der Teilnahme an der Wertschöpfung ausgenommen ist.Denn: Wenn es in einer Volkswirtschaft ungenützte produktive Kapazitäten gibt, können diese ohne nachteilige gesamtwirtschaftliche Folgen durch die Geldschöpfungsfähigkeit monetär souveräner Staaten aktiviert werden.Fazit: Nicht Defizite im Staatsbudget und 'Staatsschulden' sind gefährlich für souveräne Staaten mit eigener Währung, sondern Defizite im Sozialsystem, im Bildungssystem, in der Infrastruktur, bei Forschung und Entwicklung, beim Klimawandel.Also eine Theorie die das Füllhorn für alle verspricht? Nein, die Möglichkeiten, finanzielle Mittel einzusetzen, werden zwar ausgeweitet, aber die Sorgfalt, diese sinnvoll einzusetzen, bleibt gegeben. Mehr Geld als eine Volkswirtschaft ihren Voraussetzungen nach sinnvollerweise aufnehmen kann - sei es personeller, technischer oder sonstiger Art – kann und darf ihr nicht als Investitionen zugeführt werden. Das wichtigste Kontrollinstrument ist und bleibt die Inflationsrate, die auch bei MMT knapp unter 2 % liegen sollte.Die Autorin unterstreicht mehrmals, dass MMT nicht unbedingt eine neue Ideologie ist. Es ist eine Veränderung der Perspektive. Es kommt darauf an, eine Situation nach der Möglichkeit zu beurteilen, und nicht sofort nach der vermeinten Unmöglichkeit.Hört sich also gut an und hat für Europäer nur einen Haken: Die Staaten in der EURO-Gemeinschaftswährung sind nicht souverän. Sie haben keine selbständigen Notenbanken, ihre Währung ist nur bedingt die eigene, und sie stecken in einem Korsett wirtschaftspolitischer Regeln, die eher der schwäbischen Hausfrau entsprechen, weil die wirtschaftspolitische Ideologie des Euro noch aus der Zeit stammt, als Mrs. Thatcher ihre oben zitierten Statements abgab und sie wurden seither nicht geändert. Sie wurden inzwischen nur durch Tricks umgangen, indem die EZB durch massiven Ankauf von Staatsanleihen das Verbot der monetären Staatsfinanzierung aushebelt. Die Gemeinschaftswährung wurde also vorläufig durch das gerettet was ihren Regeln widerspricht.Das Buch ist gut und flott geschrieben, geeignet für Leser die erstmals mit dieser Theorie konfrontiert sind.Am Beginn werden die gewonnen neuen Kenntnisse vielleicht etwas zu sehr im Stil von Erweckungsberichten geschildert. Das mag aber die Einführung erleichtern. Der englische Text ist auch für Anderssprachige leicht lesbar, die im Berufsalltag mit Englisch zu tun haben.Gut für einen Perspektivenwechsel!-

This is a mind-bending book, which tears up conventional economics.However, her evangelical belief in MMT does wear a bit thin.Anyone who disagrees with her on anything is called "misguided thinking".She glosses over the reality that rampant money printing has ALWAYS ended in disaster in the past, blithely saying that once inflation takes off, you just stop money-printing. Of course that ignores the reality that by that stage it's too late! Govts become addicted to money-printing, and can't stop once they've started doing it excessively.Nobody knows where that tipping point is.Another flaw, is that her left wing agenda falls over because QE actually creates asset bubbles - benefiting the rich only!Nevertheless, a brilliant, albeit dangerous, book.Rishi Sunak clearly believes in it, having printed £450bn since March 2020, enough to fund the entire Govt deficit this year.