Monetary Myth-Busting: An Interview With Stephanie Kelton

Monetary Myth-Busting: An Interview With Stephanie Kelton

The author of The Deficit Myth on why national debt is not an obstacle to progress—and why the government can afford to fund its priorities.

Booked is a series of interviews about new books. For this edition, Mark Levinson spoke with Stephanie Kelton, author of The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy (Public Affairs).

Mark Levinson: Stephanie Kelton’s The Deficit Myth: Modern Monetary Theory and the Birth of the Peoples’ Economy is a foundational book on economic policy. If we don’t get the issue of the deficit right, we get almost nothing else right. This book couldn’t be timelier. Almost 50 million people have applied for unemployment insurance since the COVID-19 pandemic started. There has been a $3 trillion government response, much of which is expiring. The virus is still spreading in the United States, which will lead to more shutdowns and more unemployment. We are on the verge of catastrophic state and local government cutbacks. And we’re heading into an election where polls indicate that much of the American public believes that we have to address an unsustainable national debt and budget deficit. What does your book have to say to the current moment?

Stephanie Kelton: You captured the backdrop. Before the coronavirus pandemic, the Congressional Budget Office (CBO) was forecasting deficits in excess of a trillion dollars a year for the foreseeable future. To a lot of people that seemed alarming. Now look where we are. Since March, Congress has committed roughly $3 trillion to deal with the economic fallout related to the pandemic—all of it will add to the deficit—and they’re getting ready to add even more. This is happening on the heels of a Democratic presidential primary, where we spent the better part of a year listening to candidates put forward their agendas and, at every turn, getting dogged by the question, “How are you going to pay for it? Where is the money going to come from?” Every presidential contender—from Bernie Sanders to Amy Klobuchar—bent over backward to show how they would “pay for” their proposals without adding to the deficit. We spent a year arguing about where the money would come from, and then suddenly the world opened to a new reality. The coronavirus came, and Congress started spinning out multi-trillion-dollar spending bills, without any of these so-called “pay fors.” We had to act! And that meant adding to the deficit to fight the pandemic. That’s a perfect entry point for a book like this that speaks to the fears and anxieties that we have about deficit spending and adding to the national debt, both of which we are doing on an almost unprecedented scale right now.

Levinson: In your book you debunk a number of myths that are associated with the deficit. One widely held belief is that since households have to balance their budgets, so should the government. In 2010—when Democrats controlled the presidency and Congress, and unemployment was almost 10 percent—Barack Obama went on national television and said that, like most American families, the federal government had to tighten its belt. It was a defining moment, and the premature austerity led to an excruciatingly slow economic recovery that probably contributed to Trump’s victory in 2016. Talk about the myth of the government as a household.

Kelton: I had the same reaction, and I remember the speech. It was the State of the Union address. Even before that speech, in 2009, just shortly after taking office, when we were staring down the worst economic downturn since the Great Depression, [Obama] was asked in an interview, “At what point do we run out of money?” And he said, “Well, we are out of money now.” That was like a punch in the gut for me. Because I sensed that what we were facing was not a garden-variety economic recession. That this was going to be orders of magnitude more severe, and that what Congress needed to do was step in to provide the fiscal support that was going to be necessary to prevent a very protracted and deep downturn. To hear him use those words was definitely not a good sign.

You ask why we analogize the federal government’s finances with personal finances. I think politicians want to be able to communicate with people effectively. And they think that the best way to communicate about complex issues, like the federal government’s finances, is to talk in ways that resonate with us. So, the framing becomes mom and dad at the kitchen table, working to balance the budget; just like you, the federal government needs to start getting its spending in line with its income. You know you can’t spend more than you take in year after year; it’s risky to pile on debt; you can go broke.

Levinson: Why is that a myth? 

Kelton: The simplest way to say it is that government issues the currency, and households and businesses don’t. If you have the sole legal authority to issue the U.S. dollar—it could only come from you—would you ever worry about running out? Would you ever worry about bills coming due that you couldn’t afford to pay? Would you worry about being forced into bankruptcy? No, you wouldn’t; you’re the issuer of the currency. It’s the rest of us who have to worry. It couldn’t be clearer in this moment what makes us different from the federal government. The federal government is the one propping up the airlines (and other industries), sending out $1,200 checks to most Americans, topping up unemployment insurance with an extra $600/week (if you are fortunate enough to get the system to recognize you are unemployed), helping small businesses cover some expenses and keep their workers on payroll, and so on.

If all of us had the currency-issuer power of the federal government, then small businesses would look after themselves. The airlines would look after themselves. That’s obviously not how it works. State and local governments are begging the federal government for assistance. Governors and mayors across the country have been saying to Congress, “We need your help.” The reason is that state and local governments—like households and private businesses—can’t issue the currency. We’re all trapped in the same position, vis-à-vis the currency. We are all users of the dollar. The federal government is in an elevated position; it’s the issuer of the currency. It can do what the rest of us can’t do.

Levinson: Why isn’t the fact that the U.S. government is going to accrue trillions of dollars of debt a burden on future generations?

Kelton: The deficit hawks try to convince us that at some point, it has to be paid back, and that the bill is going to fall on the rest of us. That’s not the case at all. Calling this thing the national debt is a big problem. What’s really happening is that the government is basically making some of its payments with interest-bearing dollars. We call those dollars U.S. Treasuries. Unfortunately, we call the entire stockpile of these financial instruments the national debt. And the word “debt” creates all sorts of unnecessary anxiety in people. It reminds people of their credit card debt, their car payment, their student loan debt, their mortgage, and they say, “Well, debt can be dangerous. I don’t want to be in debt. I don’t want too much debt. My country is in debt, so that’s bad.”

Levinson: Are there limits to the deficit? Can the government just spend in an unrestrained manner? 

Kelton: There are limits. If I had to describe the Modern Monetary Theory (MMT) project in a single sentence, I would say it is about replacing an artificial revenue constraint with a real inflation constraint. So there are limits. But the limit is not a predetermined numerical level or a percentage of the budget. There is no strict financial constraint. A currency-issuing government can afford to buy whatever is priced and available for sale in its own currency. The limit is the impact of the spending. Not the spending itself, and not the deficit—the limit is inflation. That is central to MMT.

I would go further and say that no school of macroeconomic thought treats inflation more seriously than MMT. We place it at the center of the analytic framework. Inflation is the binding constraint. We also face ecological constraints. Just because we can extract fossil fuels and other forms of carbon-emitting, polluting sources of energy doesn’t mean we should do that. No one who has studied MMT can claim that MMT advocates unlimited spending. MMT is about identifying the real limits, and not cowering in fear of running out of money or adding to the deficit. 

Levinson: In your book, you claim that misplaced emphasis on the fiscal deficit covers up other deficits that we should be really concerned about. What do you mean by that? 

Kelton: Today, there is a yearning to return to normal. But what did normal, before the pandemic, look like? Several trillion dollars of needed repairs in our crumbling infrastructure. Normal was 87 million Americans who either didn’t have health insurance or were underinsured. Normal was 500,000 medical-related bankruptcies every single year in this country. Normal was 40 million people living in poverty. Normal was millions of people who aren’t prepared for retirement; who can’t afford to send their kids to school or can’t pay back their student loan debt. Normal was 40 percent of families not having $400 set aside to handle an unexpected financial emergency. Normal was a great city like Flint, Michigan, not having safe water. These are the deficits that matter. Those are the kinds of shortfalls that I wish that we were all worried about.

Levinson: Explain MMT and why you become a supporter.

Kelton: When I first started writing about and researching government finance, public money, and the deficit, there was nothing called MMT. That label emerged later.

I was in graduate school, studying economics in the mid-1990s at Cambridge University, when I won a fellowship to the Levy Economics Institute. An economist named Randall Wray was there, and he was someone I had studied under, briefly, before starting my program at Cambridge. He was working on a book called Understanding Modern Money, and that’s when I really started to dig into a lot of this stuff. I found the ideas both jarring and fascinating. It was very different from what I had learned as an undergrad studying economics, and what I had learned as a graduate student at Cambridge. Reading early drafts of Wray’s work, and also the writings of Warren Mosler, led me to begin my own research into the mechanics of monetary operations. I wanted to get down in the weeds and understand exactly how the Treasury and the Fed coordinate their payments. I started reading and researching and talking to people at the Treasury and Fed, and [after] maybe six months or so, I came to understand how government finance really works.

At that point, I realized that some of the more jarring parts of MMT—like the claim that the federal government doesn’t spend “taxpayer money”—were sound. I worked through the mechanics and I could see that Wray and Mosler had the sequencing right: the government spends first and then taxes or borrows. Taxes weren’t paying for anything! That was totally new to me. I had been trained to believe that the government needs our money, and that the purpose of taxing and borrowing was to help the government raise revenue to pay its bills. That’s how I was trained to think about these things. But once I persuaded myself that the sequencing that I had been taught was wrong, that the government (or one of its agents) has to spend or lend the dollars into existence before anybody can use them to pay taxes or buy government bonds, then it just flipped my worldview around. I started seeing the federal government as the issuer of the currency, and everything follows from that.

Levinson: Within the progressive economic community there is a debate between progressive, or left, Keynesians and some adherents of MMT. Many progressive economists argue that they arrive at the same policy conclusions as you but they don’t need MMT to get there.

Kelton: It’s one thing to be right. It’s another thing to be right for the right reasons. Because if you’re right for the right reasons, there’s a higher probability that you will continue to get things right, because you’re operating with the correct analytical framework. You can be right accidentally, with a traditional neoclassical economic framework. You can also use conventional macro to demonstrate what should be intuitively obvious, like showing that austerity in the midst of a depression is bad policy, as people like Paul Krugman did during the Great Recession. Of course, MMT economists were also pressing lawmakers to embrace larger deficits. That wasn’t exactly a difficult call. But what about getting the harder things right? For example, the euro. MMT economists were in a distinct minority, warning years before the euro was officially launched that giving up sovereign currencies in favor of a common currency would create default risk and raise the potential for a debt crisis—exactly what happened in countries like Italy, Spain, and Greece. Krugman’s model didn’t help him see that coming, because it didn’t account for the importance of currency regimes in analyzing the limits on government borrowing.

Or what about the budget surpluses during the Clinton years? Or the Bush tax cuts? Or the Trump tax cuts? While MMTers warned that the Clinton surpluses were unsustainable and that the tax cuts posed no risk to the government’s finances, Krugman was talking about deficits driving up interest rates and warning that that the United States could end up like Greece. He wrote about being puzzled by the fact that Japan could borrow at extremely low interest rates, despite having the world’s largest public debt, while the Italian government faced rates that were five times as high, even though their debt-to-GDP ratio was substantially lower. MMTers were never puzzled by the divergence in borrowing costs. To us, the answer was obvious. One country (Japan) was borrowing its own sovereign currency, and the other (Italy) had abandoned its sovereign currency and was now obligated to repay bondholders in a currency (the euro) that it could no longer issue. That’s at the core of MMT: it is about monetary sovereignty. If you understand the difference, then you understand that countries with a high degree of monetary sovereignty don’t have to be fearful of deficits raising borrowing costs and pushing a country into bankruptcy. Krugman missed all of this stuff. I believe that after he met Mosler (I have a very nice photo of him holding Mosler’s book), Krugman’s views began to shift. A couple of years after writing about the “puzzling” difference between Japan and Italy, he wrote a piece explaining that currency regimes appear to explain the difference. He was adopting more MMT. In his writings you could see him inching closer and closer to where we had been a decade earlier.

I’ll give you one more example of a big policy conclusion that I think MMT economists got right and more mainstream Keynesian economists got wrong. In November 2017, Larry Summers was all over the media warning that if the Republicans succeeded in passing the Trump tax cuts, the United States would end up “living on a shoestring for decades to come.” He warned that Congress would be unable to use fiscal policy in the event of a military crisis or to respond to the next recession. But look where we are. The coronavirus came, and Congress immediately started using fiscal policy to support the economy, adding trillions of dollars to the deficit. This idea that the deficits of the past somehow constrain the ability of Congress to commit to more spending in the present (or future) was just wrong.

Levinson: But it’s not just economists like Krugman and Summers. Many more heterodox economists agree with your policy conclusions but don’t adopt MMT.

Kelton: I have spent literally zero hours of my professional career critiquing the work of other heterodox economists. None. That’s not my interest. I’m out to challenge the mainstream, not my heterodox friends, whether they’re Marxists or institutionalists or post-Keynesians. It is true that we often reach similar policy conclusions, but we get there using different analytical frameworks. Sometimes, I think they arrive at the right conclusion for the wrong reasons. But I don’t go around criticizing them for not adopting our framework.

Levinson: The mainstream of the economics profession seems to have moved a lot on the issue of the deficit. Last year the president of the American Economic Association, Olivier Blanchard, gave a speech in which he argued that concerns about public debt have been exaggerated; Summers and Jason Furman wrote an important anti-austerity piece in Foreign Affairs. Yet one of the premier Keynesian economists of our time, Robert Skidelsky, recently wrote in an essay with Mariana Mazzucato that there is “little evidence that any new fiscal thinking is underway.” How would you characterize the current moment?

Kelton: That line about the lack of new fiscal thinking grabbed me as well. I think there’s a lot of evidence! You cite some of it. Skidelsky, for example, has recently become an outspoken advocate for a job guarantee. And Mazzucato has been doing great work on climate change and the importance of public investment as a catalyst for innovation. She has a new book coming out where, I think it’s fair to say, she treats my arguments in a very sympathetic way. In that same essay, they wrote, “The state must be given a permanent, continuing role in guiding, stabilizing, and if need be, transforming economic life. Intervening only in bad times to fix the system guarantees another crisis.” That is exactly the kind of new thinking we need!

Levinson: You were part of the Biden–Sanders unity task force. They just issued their report. How much of your analysis is embodied in those recommendations?

Kelton: Some. You will see in there a couple of paragraphs about reforming the federal budgeting process. This is crucial if we are going to do something big on climate or infrastructure. The way the budget process currently works is that you send the bill over to CBO, and ask them to score it. CBO then tells lawmakers whether (and by how much) it will add to the deficit and increase the national debt over time.

This process is designed to elicit the least useful feedback you could possibly ask for. I think we all understand that the incoming administration is going to be facing numerous crises that are going to require the presence of large fiscal deficits for an indeterminate period of time. We cannot afford to return to the “pay for” game, where lawmakers refuse to do anything that adds to the deficit. And so how do you accomplish that? How do you make sure that the incoming administration isn’t hamstrung by “pay as you go” budgeting rules, or CBO, or whatever? Because it will be much harder to pass legislation if Democrats are only willing to do things that will satisfy the scorekeepers over at CBO. The task force recommendations include some language about how to begin to think about alternative metrics by which to evaluate proposed spending.

Levinson: Is the job guarantee in there? 

Kelton: No, not a guarantee. But there is some language in there about direct job creation of the kind that was undertaken by FDR in the New Deal. That leans—a little bit—into the MMT proposal for public service employment. I think we’re ultimately going to need something as bold as what MMT advocates, but you could fill jars with the sweat that went into getting the language we got into the recommendations document.

Levinson: In the Financial Times, Martin Wolf said this about your book: “In my view, it is right and wrong. It is right, because there is no simple budget constraint. It is wrong, because it will prove impossible to manage an economy sensibly once politicians believe there is no budget constraint.” 

Kelton: I thought that was an extraordinary statement. I believe in democracy. MMT is not granting any new powers or authorities to Congress. Congress knows that it has the power of the purse. The idea that MMT is letting the cat out of the bag and somehow opening us up to new vulnerabilities—I just don’t understand. What I think the book does is attempt to clear away the myths and misunderstandings about deficits and debt. If someone confronts their elected representatives and says, “Why aren’t you doing more to get clean water to this district? Or to get infrastructure repaired?” and their representative responds, “I’d love to be able to help on that, but we’ve got this big deficit. And we have this enormous debt that needs to be paid off,” I want people who read the book to understand that this is an evasion. I want people to understand that the deficit and the national debt are not obstacles to progress and that our government can always afford to fund its priorities. The aim of the book is to empower citizens with a truer understanding of what’s possible and what the limits are. Let’s be honest with the people and then hold the politicians accountable at the ballot box.

Mark Levinson is Chief Economist of the Service Employees International Union (SEIU) and the book review editor at Dissent.

Stephanie Kelton is a professor of economics and public policy at Stony Brook University. She is a leading expert on Modern Monetary Theory, a former Chief Economist on the U.S. Senate Budget Committee, and the author of the New York Times bestseller The Deficit Myth.