This is the third of the three reviews I promised, and when I made my promise, I said I hoped I was up to the task on this book. There’s a lot in it I don’t understand, but I’ve never let that stop me.
As I’ve mentioned in the previous reviews, Stephanie Kelton taught at the University of Missouri-Kansas City for many years, and what is now known as Modern Monetary Theory (MMT) was once referred to as the Kansas City School of Economics. Alas, she got an offer she couldn’t refuse and UMKC was unable or unwilling to match to move to Stony Brook University on Long Island.
Kelton’s book, The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy, was written before the coronavirus pandemic started, although she inserted a few paragraphs in the introduction advising that we were facing even larger deficits as a result of it, that we would be facing many issues as a result of the virus, and we should not pile on additional concerns over our nation’s fiscal condition.
To give this book and Modern Monetary Theory (MMT) a fair chance, we’re going to have to ignore the, for the lack of a better term, bullshit we’ve heard all our lives and pay attention to observable facts. I mentioned in a previous review that the Manhattan Project went from theory to Hiroshima in about three years. Our space program went from Sputnik to the moon in twelve years. In neither case did we pause and ask ourselves if we could afford it. Unfortunately, the same is true of military adventures in Afghanistan and Iraq and massive tax cuts for the wealthy enacted every time a Republican gets control of the White House. Our government has already admitted deficits don’t matter. Except when the deficits will be incurred to help Americans. Then the Greek chorus kicks in with predictions of inflation and various and sundry other negative consequences and assorted moral hazards.
It sounds counterintuitive to say deficits don’t matter. If you’re new to MMT, a voice in your head will scream, “This can’t be true.” But if we look back just a few years to the response to the financial crisis of 2008, we can observe that the government incurred a massive deficit, which in spite of predictions of doom and gloom, preceded the longest bull market in history. Unfortunately, that market lifted yachts and left those in rowboats to sink. We can hope the government has learned its lesson, but as I write this, Senator Lindsay Graham is railing against the extension of $600 weekly benefits for the unemployed. According to the senator and his crowd, those people need to get back to work, and if they can’t find a job, well, let them wait in line in their cars for donated food.
We can go back further in history to the aftermath of World War II, when returning (primarily white) GIs were given free education and no down payment loans on homes, which led to a historic economic boom, which actually lifted many boats of all sizes. And, of course, we can look back a little further to the New Deal, which also gave benefits to the little guy. So we have to ask ourselves what do we believe—conventional wisdom or observable results?
Kelton points out that the U.S. and a few other countries enjoy monetary sovereignty--the ability to issue their own currency. European Union countries (think Greece) do not have that ability. All the U.S. has to do is hit some keys on a computer, and—voila—more money. It would be possible to overdo it, but, as Kelton points out, Japan’s deficit is 245% of GDP, and Japan is still going strong.
She points out that Alan Greenspan, when questioned by fellow Ayn Randian Paul Ryan, who asked if Social Security is sustainable (and expected a different answer), said, “[T]here’s nothing to prevent the federal government from creating as much money as it wants and paying it to somebody.”
Kelton argues that deficit reduction has historically led to economic downturns as far back as 1819. The national debt was completely gone just in time for the Panic of 1837, and it declined 36% just before the Great Depression. Even Bill Clinton’s much touted surplus preceded the dot.com recession of 2000. She also points out that if there were no government debt, there would be no U.S. Treasuries, and a source of safe income would be eliminated. No less a founding father than Alexander Hamilton called the national debt a “national treasure.”
Kelton says that it is possible that inflation could result if deficits grow too large, but she also points out that is unlikely for the U.S. (As I write this, 30-year Treasury Bonds are yielding 1.33%, so the smart money does not anticipate inflation for the foreseeable future.) In order to fight the probably nonexistent threat of inflation, the current method is to maintain the “right” amount of unemployment in the system, which was recommended by Milton Friedman. In other words, a certain number of people must be unemployed for the good of society. No one knows how many people that is. At one time it was believed 7% unemployment is necessary; we’ve seen unemployment well below that with no inflation. In other words, this is yet another example of conventional wisdom trumping observable facts. Perhaps there is no “natural” rate of unemployment.
Kelton observes that, while we don’t need to worry about fiscal deficits, there are many deficits we do need to address. One of them is unemployment, for which she proposes a jobs guarantee. When people lose their jobs, they’d be guaranteed a job paying no less than $15 an hour plus benefits. I was resistant to this proposal at first, envisioning a jobs bureaucracy, but then I realized it could be as simple as working through a service such as Kelly or some other temporary agency. It could work, but I can see mounds of paperwork no matter which route it takes. I’d prefer to see a universal basic income.
When Kelton gets into the plight of retirees, it kind of makes me wonder why these people aren’t out marching with other protesters. As she says, retirement was once envisioned as a three-legged stool comprised of Social Security, savings, and pensions. She points out two of these legs have been sawed off. Savings are hard to accumulate and interest rates are low. Pensions are few, far between, and not secure. She gives an example of a McDonnell Douglas plant in Tulsa that was closed because many workers were nearing retirement, and McDonnell Douglas could walk away from all but a fraction of what they would have paid had employees been allowed to work until retirement age. And most people don’t have pensions. They have 401(k) or similar plans that sometimes pay off but other times wind up being a means to divert employee savings into fund managers’ or other hands. My partner Dan, for example, is part of a class action suit against a local employer that mismanaged his 401(k). He lost $12,000. It looks like he’s going to wind up with about $2,000 of it, but even that’s not certain. And many employers are using the pandemic as an excuse to discontinue contributing to these plans. So two of the three legs are gone, and now Social Security is under attack (again). It seems those in power can’t stand when the little guy winds up with anything. Kelton says 40% of middle-class Americans will experience downward mobility in retirement and argues for Social Security to be larger. After all, it has to take the place of savings and pensions.
Kelton criticizes Bill Clinton’s welfare reform, and that gives me another chance to assert my belief that Clinton was a closet Republican, for all the good that did him.
In a chapter titled “The Deficits that Matter,” in addition to the good jobs benefit I discussed above, Kelton addresses the savings deficit, for which she suggests we build an economy that will enable people to save. Next is the health care deficit. We need, and under MMT can afford, universal health care. Much has become obvious in the months since this book was written and the pandemic has taken hold, but the most obvious is the flaw of depending on employers for health care. As I’ve written before, this was an accident. During World War II wages were frozen. Health care was added as a benefit to get around frozen wages and compete for employees during a labor shortage. It no longer makes sense, and a conservative case could certainly be made for relieving employers of responsibility for health insurance. The education deficit addresses deficiencies in K-12 and higher education levels. The debt college students graduate owing detracts not only from their lives but from the economy, and therefore, from the well being of everyone. College grads are delaying their lives—getting married, having children, buying homes, and all the stuff their parents and grandparents took for granted. There’s a good conservative argument for wiping out student debt—it’s the economy, stupid.
When Kelton gets to the infrastructure deficit, I’m sure she’s preaching to the choir. Infrastructure is one of those things that, as Will Rogers said about the weather, everyone talks about but no one ever does anything about. Before the rescue of banks took priority in 2009, President Obama said several infrastructure projects were “shovel-ready.” When the orange buffoon took office, he promised infrastructure repairs. The shovels must still be in good shape, and as for infrastructure under the buffoon, well… crickets. Kelton goes on to discuss the climate deficit and the democracy deficit. The latter requires some action to address income inequality, which is now greater than it was in the age of the robber barons or the Great Depression.
There is a great deal to think about in this book. I’ve read two reviews—one in The Wall Street Journal by John H. Cochrane of the Hoover Institute and Cato Institute, which was titled “Years of Magical Thinking” and was pretty much what you’d expect from a reviewer representing these “think tanks.” Frankly I doubt he read the book. The other was in The Baffler by Dave Denison, the senior editor, who obviously took the time to read the book and do some research. He begins by pointing out that Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, in a March 2020 interview with Scott Pelley on 60 Minutes, said there is no end to the Federal Reserve’s ability to flood the system with money. As Denison concludes, Congress’ greatest con is “We can’t afford it,” and there is no economic theory that can, for example, justify a federal response to rescue a banking behemoth but not a group of rural hospitals. It is simply a matter of priorities.
Remember that next time you hear that we can’t afford universal health coverage, free education, or any of a myriad of other social benefits citizens of most first world countries take for granted.
Denison’s article is at https://thebaffler.com/salvos/the-money-printers-denison
I’ll be taking a breather to read some mindless brain candy for a few weeks, and I plan to enroll in an online literature class that starts next month at UMKC, so I won’t be posting to this blog for a while unless I see something really worthy of writing about. Let’s all hope that by the time I get back to you, life has gotten back to normal.