Book Review: The Deficit Myth

Everyone has asked as a child "why can't the government just print more money?" Stephanie Kelton is here to tell you that they can, actually. Kelton is a professor of economics and previously worked on the U.S. Senate Budget Committee. In The Deficit Myth she explains Modern Monetary Theory (MMT), a more recent school of economics.

MMT claims that a government that can issue its own currency need never worry about finding money for spending, because they can print more. After hearing this, most people think of the answer they heard when they asked that question as a child: inflation. Kelton is clear that inflation is indeed an outcome that can happen due to too much spending (government or otherwise), and that it needs to be managed. In fact, MMT focuses more on inflation than other views of the economy.

Excessive spending causes inflation, so the government deficit is used as a proxy to avoid this. We're limiting spending based on this proxy, rather than the actual negative effect we're trying to avoid. This means we're actively harming the economy by not allowing it to operate at the scale it could. We could limit our spending only by the effect on inflation, not the deficit.

This argument seems convincing to me. If the reason we don't print more money is inflation, then inflation is the limit. If we need money for social good, and we can make it without causing inflation, then what is stopping us from achieving the social good?

It might now be clear that I am not an economist. Thankfully Kelton wrote this for the lay person, so it was easy enough to follow. This simplicity made it feel a bit like I was being tricked. I think a little more rigour would have benefited me, but I'm aware Kelton was not writing for people with maths degrees.

The bulk of the book lays out several "myths" about government spending, then debunks them using the power of MMT. The arguments for them all were convincing. As I said above, if we're letting a proxy limit us instead of our actual resources, we should probably stop that. It does seem governments are aware of this, as they've been finding plenty of money to give to banks through quantitative easing without a problem.

One part of this book made me incredibly angry. Economics has a concept called "NAIRU", the non-accelerating inflation rate of unemployment. This is the theoretical lower bound to unemployment before too many people have jobs and can spend money, causing inflation. Monetary policy aims at maintaining unemployment above this level. We deliberately keep people out of work.

You may have noticed we live in a society in which money is exchanged for goods and services. Work is the way we get money. Governments aim to keep some number of people out of work as a sacrifice to the Great God Inflation. We deliberately prevent people from earning the money they need to live. Worse still, the people who are being deliberately kept out of work are treated terribly – nary a day goes by without them being called "lazy" or "workshy". If I hear a Conservative who "understands the economy" telling the unemployed to just "get a job", or threatening cuts to welfare, I'm going to lose it.

I tried to find some criticism of this book, because I'm not well-versed in economics and as I said, it felt like a trick. Most reviews I could find were positive, even from economists. I did find one by one from the Austrian school, but frankly the arguments were "nuh uh" or "that's not how the economy works", with little evidence. Honestly I think a lot of economics is just Pure Ideology.

This was a good read, and definitely changed my view on the deficit. I've long felt that talk about the deficit seems overblown, and now my feeling has a lot more backing. The book was very U.S. centric, especially the final chapters on the real problems faced and how to solve them. I suppose I won't hold that against this U.S. author though.

Recently Andy Burnham ascended to the throne, and announced various things that will Cost Money. It's been very amusing to hear all the pearl-clutching about the deficit. I think this perspective is a gift that will last.