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Saturday, June 13, 2020

"The Deficit Myth": Impressions/Review

 Stephanie Kelton's the Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy (affiliate link) has been a long-awaited book from a Modern Monetary Theory (MMT) proponent that was the Chief Economist for the Democratic Party on the Senate Budget Committee. The book provides a clean introduction to MMT, and how it fits in with fiscal policy and the political process.

So far, the book has sold well, and generated discussion and reviews. This is welcome, as by putting MMT on the map, we might see something resembling a debate around it. There has been fairly intense criticism of MMT in traditional and social media as well as financial market commentary for over a year now, and my estimate that over 90% of those critiques were based on beliefs that were largely made up, and quite often the opposite of the MMT view. Other than the old MMT/post-Keynesian internecine conflicts, almost no citations are made of any texts written by academic MMTers.

Book Audience

(Note: I am mainly focusing on discussing the audience for this book, and not attempting to do a formal review. I expect that I will have pieces later discussing the contents of the book in detail.)

The Deficit Myth is aimed at a wide audience, which means that it is largely non-technical.  It uses footnotes to cover digressions. As such, it will not help the handful of people who want mathematical models to summarise MMT. The Deficit Myth is probably one of the best introductions to MMT, particularly when compared to the alternative -- relying on summaries prepared by critics of MMT (which is the basis of most critiques). The concern I see is that many people will balk at reading a book, and thus drift towards summaries, which can be unreliable.

The book is not a dry discussion of theory (which is how my writing is structured). Professor Kelton fills in the story with stories about her personal career. One of the key stories was how she was drawn into the MMT orbit -- a meeting with Warren Mosler, who explained his ideas. Kelton writes:
When I first encountered this way of understanding how taxing and spending work in actual practice, I recoiled. It was in 1997, and I was midway through a PhD program when someone shared a little book called "Soft Currency Economics" with me. The book's author, Warren Mosler, was a successful Wall Street investor, not an economist, and his book was about how the economics profession was getting almost everything wrong. I read it, and I wasn't convinced.
(Needless to say, Kelton changed her attitude later.)

Another set of observations involved her involvement with the budget committee. For those who insist that MMT offers nothing new, one needs to look at the reality that conventional analysis of fiscal policy is hopeless. Existing frameworks need to be burned to the ground, and rebuilt from scratch. Even if the specific answers of MMT proponents are wrong, they are better than sticking with procedures that we know are misleading.

Content Summary

There are eight main chapters to The Deficit Myth. The first six chapters are aimed at myths about governmental finance, and much of it might overlaps other MMT primers.
  1. Don't Think of a Household. The core MMT discussion of why a central government is not like a household from a budgeting perspective.
  2. Think of Inflation. Explains that taxes are used to control inflation. One complaint of MMT critics is that MMT academics deliberately use misleading prose to suggest that taxes can be abolished.  The story is that activists misunderstand MMT, and push an overly utopian world view. The book covers the explanation well; the only reason someone would believe that taxes can be abolished with no side effects is that they only read out-of-context quotes. 
  3. The National Debt (That Isn't). Points out that we (or our grandchildren) are not personally on the hook for the national debt.
  4. Their Red Ink Is Our Black Ink. Accounting identities for national savings; government dis-saving matches private sector saving. Uses buckets as device to explain accounting identities. 
  5. "Winning" at Trade.  Takes aim at the belief that deficits are a sign of "losing" at trade. Discusses the issues posed by offshoring. Also, discusses how "monetary sovereignty" is a spectrum, with some countries facing more of an external constraint than others. Also has a section on the problems faced by developing countries. (This is an area that many online primers skip over.) 
  6.  You're Entitled! Discussion of entitlement programmes. This chapter is written from the U.S. perspective, but some principles are likely generalisable to other countries.
  7. The Deficits that Matter.  Argues that the good jobs deficit, savings deficit (retirement provision), health-care deficit, education deficit, infrastructure deficit, climate deficit (to be fixed by the Green New Deal), and the Democracy deficit (inequality strangling the democratic process) matter more than the fiscal deficit. Once again, this chapter leans toward an American standpoint -- the U.S. health-care system is an outlier in terms of dysfunction -- but there are similar concerns elsewhere.
  8. Building an Economy for the People. Discussing policies like the Jobs Guarantee.


Since I am in the MMT camp, it is no surprise that I have no major objections to what Professor Kelton writes. I have some minor disagreements, which may come up if I write longer articles discussing topics of interest. (For my MMT primer, I am building my text around texts written by MMT proponents, so that readers have a good idea where to continue reading in particular topics. My primer is supposed to be short, aimed at readers who want a minimal-length introduction to MMT.) I will now discuss some of the criticisms of the book that I have seen.

The first thing to realise that Professor Kelton is a Democrat, and so the policy proposals are written from that perspective. She notes that there is a descriptive and prescriptive side to MMT in Chapter 8, and there is no necessary reason to argue that MMT is inherently a liberal-left project (although MMT activists appear to be overwhelmingly left wing). One could follow a pro-free market stance and analyse fiscal policy from a MMT viewpoint. However, MMT does not fit with pre-Keynesian fiscal conservatism, nor beliefs that money ought to be back by gold. This means that the libertarian wing of free market believers are anti-MMT. However, these are the people who regularly lose money shorting the JGB market. Very simply, I cannot understand how an attachment to capitalism should lead me to vapourise my capital. However, free market parties understand that pretending to care about the fiscal deficit is a good way to attack benefit programmes, and I doubt that they will change their tactics any time soon.

As such, there are a number of entirely useless "reviews" by free market believers. My personal favourite is the deep thinker on Twitter who argued that everything in the book is wrong -- without having read it, of course. 

A more reasonable variant is that Professor Kelton's policy wish list is too expansive. I have not read the full John Cochrane review of The Deficit Myth, but I saw an excerpt that made the charge that the policies would be too inflationary. This is exactly the sort of topic that should be debated -- and it is exactly what MMT says that the debate should consist of. The question is not meaningless 75 year projections of debt service, rather we are hitting real capacity constraints. 

Another complaint is whether it is necessary to invoke MMT to get the policy arguments that Kelton makes. Can we not get the same conclusions from neoclassical macro? This seems to be the preferred take of neoclassicals. There are two rather obvious issues with it.
  1. The initial rise of MMT involved objections to consensus mainstream views about fiscal policy. The mainstream was terribly wrong about Japan, and the rating agencies, international agencies, financial commentators, as well as Ivy League professors were a laughingstock for decades. The fact that they have been quiet recently about fiscal sustainability does not address the fact that neoclassical theory can be used to generate obviously wrong predictions as well as correct ones. 
  2. This is a popular book, with very little text wasted on theoretically controversies. MMT is part of the post-Keynesian tradition, and in that tradition, almost every single component of neoclassical models is critiqued in a very convincing fashion. (Only the accounting identities are safe.) The fact that one can arrive at similar policy views from a variety of approaches does not mean that all approaches are equally valid.
Finally, I expect that there will be the usual complaints from post-Keynesians, who have been the longest-running source of MMT criticism. (They even read the source literature.) Since I am not a fan of post-Keynesian internecine quarrels, I am not too interested in such diversions.

Concluding Remarks

The Deficit Myth is a strong introduction to MMT, and covers most of the interesting topics associated with policy debates. To the extent it helps turn MMT debates towards actually policy debates rather than making up stuff about "printing money," it will be very welcome.

(c) Brian Romanchuk 2020

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