Modern Monetary Theory in a pandemic: Stephanie Kelton’s ‘The Deficit Myth’ has added significance in the Covid-19 era

CHANCELLOR Rishi Sunak had broken decades of Conservative orthodoxy with his free-spending budget, analysts claimed in the aftermath of his £65billion announcement.

It was a far cry from the days of Margaret Thatcher, who treated public finances like a household budget – the government must balance its books by raising taxes or cutting spending.

But Mr Sunak appears to be wiser to how monetary and fiscal policy really works than the ‘Iron Lady’.

Stephanie Kelton shook up Congress in 2014 when she was appointed Chief Economist for the Democrats on the Senate Budget Committee. There, Kelton, who wrote her famous paper ‘Can Taxes and Bonds Finance Government Spending?’ in 1998, was shocked at the lack of fiscal literacy of many politicians.

Their problem was largely similar to Thatcher – they treated the US economy like a household budget. Any large infrastructure project suggestion was met with questions over how the federal government would pay for it.

It’s this flawed misunderstanding over how government spending and taxes work that Kelton admirably tackles in ‘The Deficit Myth’.

“The economists behind MMT recognise that there are real limits to spending, and that attempting to push beyond those limits can manifest in excessive inflation,” she writes.

“MMT is about harnessing the power of the public purse to build an economy that lives up to its full potential while maintaining appropriate checks on power.”

So the limiting factor when spending is NOT the so-called deficit, but the overall activity in the economy. Deficits aren’t objectively terrible, when controlled. It’s not quite a ‘Magic Money Tree’ – an accusation used against the Labour Party under Jeremy Corbyn.

In fact, every dollar the government puts into the economy leads to a ‘nongovernment surplus’. There’s no need to ‘balance the budget’, as many deficit hawks put it.

Originally tweeted by Stephanie Kelton (@StephanieKelton) on 8th Mar 2021.

Central banks in any currency-issuing nation can instantly wipe out this debt, if they so wish. For example, Kelton says, the Bank of Japan have already essentially retired half of the nation’s skyrocketing debt through their aggressive bond purchasing programme. They could go further and clear the debt altogether – as any nation can – but swapping bonds for newly-conjured government cash wouldn’t have an impact on the private sector, so why bother?

The main narrative that runs throughout is simple; running up deficits is not a catastrophe, providing the money is invested efficiently into the economy. Spending comes before tax and borrowing, instead of the other way round.

We’ve seen the Bank of England finance the furlough scheme for an entire year in Britain. But none of this needs to be paid back to anyone. When necessity hits – such as the risk of millions unemployed and thousands of businesses shutting their doors – governments can use fiscal and monetary policy to help shore up the livelihoods of the least fortunate.

Tax certainly has its role; controlling inflation, redistributing wealth and altering consumer behaviour. But its role isn’t to pay off the debt.

When a Chancellor warns that massive public spending needs to be followed by future taxes, they’re either being wilfully dishonest or fundamentally misunderstand economics.

As MMT advocate Thomas Fazi wrote: “Now, we must assume that Sunak understands all this. If he doesn’t, and he truly believes that the UK’s public finances are ‘exposed’ because the government owes some money to itself (or to others for that matter), then he’s grossly incompetent. If he does, however, as I’m inclined to believe, then it means he’s being dishonest in order to justify future austerity and to prevent people from grasping how government spending really works – which is arguably even worse.”

Kelton’s wonderful tome is digestible for most, even if one needs to comb through it a few times to get to grips with the terminology and utter shock about the state of economic discussion in the media.

The Deficit Myth by Stephanie Kelton is now available as a paperback on Amazon in the US. You can also purchase the hardback edition by using our exclusive link on BookShop.

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