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The Deficit Myth

Modern Monetary Theory and the Birth of the People's Economy

By Stephanie Kelton
15-minute read
Audio available
The Deficit Myth by Stephanie Kelton

The Deficit Myth (2020) lays out the basic tenets of Modern Monetary Theory. This unconventional approach to economics asks us to reexamine how we think about budgets, scarcity, and even money itself.

  • Political junkies seeking a hot new take
  • Amateur economists looking to learn more
  • Anyone who has ever asked, “But how are we going to pay for it?”

Stephanie Kelton is a writer, political advisor, and professor of economics and public policy at the State University of New York at Stony Brook. She served as the chief economist for the US Senate Budget Committee and has written for the New York Times, the Washington Post, and the Los Angeles Times.

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The Deficit Myth

Modern Monetary Theory and the Birth of the People's Economy

By Stephanie Kelton
  • Read in 15 minutes
  • Audio & text available
  • Contains 9 key ideas
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The Deficit Myth by Stephanie Kelton
Synopsis

The Deficit Myth (2020) lays out the basic tenets of Modern Monetary Theory. This unconventional approach to economics asks us to reexamine how we think about budgets, scarcity, and even money itself.

Key idea 1 of 9

The federal government shouldn’t budget like a household.

Imagine a typical political ad starring everyday, patriotic Americans. There’s a waitress, a businessman, and maybe an affable construction crew. The ad shows each of these stand-up citizens hard at work. Then, it shows them back at their kitchen tables planning the family finances.

Over these wholesome scenes, a voice poses a question: “You and your neighbors are responsible with your spending – shouldn’t the government be as well?” It seems like common sense. If a family can create and stick to a budget, so can the government. 

However, Modern Monetary Theory, or MMT, argues that this analogy is a little too simple. While your everyday household uses money, the government actually makes it. It’s a subtle distinction that makes a huge difference.

The key message here is: The federal government shouldn’t budget like a household.

Traditional economics treats the government like a big, complicated family household. So if a family wants to buy something, like a new couch, it has to either make money from work or borrow money from the bank. Similarly, if the government wants to buy something, like a public health system, it needs to make money by taxing citizens or borrow money by issuing bonds. This is called the taxing and borrowing precede spending, or TABS, model.

But consider this: Where does money come from? In many countries, including the US, Japan, and Canada, money is made by the government. In the US, the Federal Reserve either prints it as bills or issues digital dollars directly into bank spreadsheets. Since only the government has this issuing power, it has monetary sovereignty – a monopoly – over its supply.

Being a currency issuer is important because, unlike a family, a government doesn’t need to earn money. It can simply make more of it. In fact, MMT says that money only exists in the first place because governments began spending it into existence. 

Therefore, the TABS model is backwards. If the government wants to buy something, it must issue and spend the money first. After all, collecting taxes and borrowing only become possible after the money is already circulating. This is called spending before taxing and borrowing, or the STAB model.

So does MMT mean governments can just print as much money as they want? Not necessarily. However, it does mean they have fewer fiscal constraints than the average family. They don’t need to worry about deficit spending or going broke. But they do need to consider inflation. We’ll look at this issue in the next blink.

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