The Deficit Myth – Banishing the ghost of Weimar

#books #nonfiction #economics

“There is no magic money tree” is the stern injunction invoked by politicians, central bankers and economists to explain to a fiscally imprudent public why it cannot have nice things. Fiscal rectitude is now the primary virtue of government, perhaps nowhere more so than in the United Kingdom where the Treasury has shackled itself to the need for approval from an ‘Office for Budget Responsibility’. Running deficits or printing money, we are told, is only one tiny step away from Weimar Republic levels of financial calamity.

But what if it wasn’t thus? That is the alluring promise of Modern Monetary Theory (MMT), which first gained prominence in the wake of the Great Recession and argues that not only can governments print money to cover expenses, but they should do so to fully realise a nation’s productive capacity. It is a provocative and controversial theory that repudiates the need for permanent austerity in the name of balanced budgets, and finds one of its most ardent advocates in Stephanie Kelton, erstwhile chief economist to US senator Bernie Sanders. In her book The Deficit Myth, she takes her argument for a ‘people’s economy’ built on the insights of MMT to a wider audience.

The Deficit Myth faces the triple challenge of any non-fiction book that assails an existing orthodoxy. It must set out a compelling argument, be intelligible to a lay audience, and dispel hegemonic common sense. This is a daunting task, and the meagre evidence base, weaknesses in Kelton’s writing style, and a different perspective on political economy meant I was left unpersuaded by the book’s stronger claims. Nonetheless, it is a thought-provoking read that provides ample critique of economic orthodoxy, and left me receptive to exploring more rigorous defences of MMT in future.

MMT is based on the chartalist premise that any government operating a freely floating fiat currency can create money to fund its expenditure. Governments can do this because they are the monopoly issuer of their own currency, which means they can never ‘run out’ of it. This money then flows into the economy, from which it can be removed through taxation, to avoid an excess supply of money driving up inflation. I had come across this view before in David Graeber’s Debt: The first 5000 years, although Graeber did not explore the economic consequences as thoroughly as Kelton.

MMT pre-empts the obvious counterargument that governments creating money will simply lead to inflation by positing that the additional money will be absorbed by unutilised productive capacity in the economy instead. In essence, MMT argues that it is not the relationship between money and goods and services available to purchase that drives inflation, but the relationship of money to the productive capacity of an economy to produce goods and services. As long as increased government expenditure results in a commensurate increase in things available for purchase, by stimulating economic activity, inflation will be kept at bay. It is only when the economy is running at full capacity that increasing the money supply further will cause inflation.

This argument will sound familiar to readers acquainted with (post-)Keynesian theories advocating countercyclical spending to dampen the negative effects of the business cycle, and my impression is that different views on the nature of money notwithstanding, MMT advocates and Keynesian economists are at least fellow travelers. It is an intriguing and logically coherent hypothesis, but unfortunately The Deficit Myth does not offer much evidence to buttress the initial premise. Kelton references a number of other heterodox economists, but unless the reader is already predisposed to agree with the argument, the appeal to authority does not work if the reader is unfamiliar with the sources cited, yet still aware that they are not universally accepted.

This lack of evidence and a failure to address any of the obvious critiques or counterexamples to MMT leave the central argument in a precariously weak position after the first two chapters, and The Deficit Myth does little to shore it up in the remainder of the book. Instead, it applies the core premise to a range of policy issues, such as the national debt, trade imbalances and social security commitments. The Deficit Myth’s prescriptions follow logically from the core premise, which Kelton repeats somewhat overmuch, but they do not offer further proof for its truthfulness. If one does not accept MMT’s core tenets, the whole argument immediately falls apart.

Avoiding substantive engagement with critiques of MMT also leads Kelton into a dead end when explaining why her theory isn’t universally accepted. Discounting competing views on MMT’s validity, she resorts instead to ascribing the failure of policymakers and mainstream economists to accept MMT to either an almost delusional psychological investment in the myth that government finances work similarly to a household budget, or to bad faith ploys for continued austerity. I certainly don’t dispute that hegemonic dogma constrains how people think, but it is not persuasive as the only reason why so many economists, including from heterodox traditions, remain stubbornly unconvinced of MMT’s validity.

All this leaves Kelton’s account of MMT exposed to numerous lines of attack. There is no account of how MMT would explain or manage crises such as the 1970s stagflation or the hyperinflation seen in Weimar Germany or contemporary Zimbabwe or Iran. The chapter proposing a jobs guarantee, does not work through how a strengthened bargaining position for labour might cascade through the economy. The chapter on international trade explains the dangers of governments restricting their monetary sovereignty by linking their own currency to that of another country (usually the dollar), but does not address the risk of increases in the money supply or trade deficits causing currency devaluation, making imports more expensive. This chapter also suffers most from the US-centric perspective in The Deficit Myth, because while Kelton notes the exceptional position of the United States as the issuer of the world reserve currency, there is little exploration of the advantages this confers on the US, and the disadvantages it poses for everyone else. No other country can rely on a near-infinite demand for its own currency to maintain favourable exchange rates despite running structural trade deficits. The lack of consideration for higher-order effects certainly makes the book more readable, but on the flipside also makes it feel so too simplistic to remain persuasive.

The last couple of chapters are dedicated to policy problems that Kelton argues are far more important ‘deficits’, such as crumbling infrastructure, inequality, the atrocious healthcare provision in the United States, and imminent environmental collapse. It is these chapters where The Deficit Myth cannot cash the cheques it wrote for itself at the start of the book. Kelton reminds us that it is the productive capacity of the real economy, not the supply of money, that is the real constraint on what is achievable. Yet as we near the end of the book, we are no wiser on what this capacity is, how we would know what it is, and how it is constituted. It is plausible that MMT could solve any of the problems identified by Kelton individually, but it is doubtful it can solve them all at the same time. The Deficit Myth offers no evidence that simply increasing the money supply would enable us to pay for better healthcare and environmental restoration and a jobs guarantee and infrastructure repair and any of the other things Kelton cares about. Instead, Kelton has to concede that other policy measures, such as progressive taxation, environmental legislation, universal healthcare and industrial policy will also be required.

And so we find ourselves back at the political in political economy. The allure of MMT is its promise of a technical fix to a political problem, and Kelton repeatedly stresses that MMT is not ideology but monetary reality. But in the end, until we achieve fully automated luxury communism, we cannot escape political struggle over our societies’ limited productive forces. Kelton falls into the same trap as Rutger Bregman in Utopia for Realists by proposing an ostensibly objectively positive policy as a shortcut to avoid class conflict, but with class antagonism itself standing in the way of the policy being implemented. As Cory Doctorow reminds us, if something is good for workers, the bosses will hate it. The reason why we cannot have nice things is not because of a mismatch between the money supply and productive forces, but because it is not in the interest of the capitalist class to let us have them. Universal healthcare and a jobs guarantee may well benefit society in the abstract, but the bosses know that insecure, desperate workers are much easier to discipline and exploit.

Jane McAlevey said it best. There are no shortcuts. MMT may well be a useful tool in the hands of labour, but if so, it will still require a powerful working class to wield it.

In the end, I was not persuaded that MMT is the gamechanger that Kelton propounds it to be. But The Deficit Myth remains a valuable and critical intervention in public debate on how we run the economy, and a powerful argument for removing artificial constraints on our welfare and prosperity. The book could be read as a first step on one’s MMT journey, rather than the final word, and I expect more in-depth MMT works would address the critiques I’ve raised. As we discovered to our collective detriment following the Great Recession, there are dangers in having a monoculture of economic theory. It will however take more robust defences and sharper arguments if Kelton wants to see MMT emerge victorious.

Notes & Suggestions

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