Stephanie Kelton is a widely listened to and much followed economist, especially in the democratic field who begins to think seriously about the White House and control of the Capitol. Kelton, a student of Hyman Minsky (a now legendary thinker) and former economic advisor to Bernie Sanders, was called by Joe Biden to co-chair his economic task force.
Many have seen in this choice of the Democratic candidate his escape from a centrist approach to the electoral campaign to veer towards the themes of the left wing of the Democratic Party.
The weekend supplement of the “Financial Timesof April 17, 2020 dedicated an entire page to Kelton. The economist was able to detail his very unconventional point of view on the crucial issues of debt and public support for the economy. The London newspaper, which headlined the story Stephanie Kelton: 'They're going to have massive deficits. And it's fine' he wondered if his time hadn't really come. And perhaps he has really come.
Recently Kelton – Professor of Economics and Public Policy at Stony Brook University – has published a book entitled The Deficit Myth, which Mariana Mazzucato reviewed very positively, calling it a "game-changing book". We present an essay below.
If we wanted to brush up on a lucky slogan about Kelton's book, we could use this: "the limit to money is only our imagination". Let's hope he's right. It would be nice if he had it.
The River of Red Ink
Recently, a bipartisan group of 60 members of the US House of Representatives sent a letter to congressional leaders, expressing concern about the increase in debt and public deficits to combat the pandemic crisis. “We cannot ignore the pressing issue of the national debt,” they wrote.
The letter warned of "irreparable damage to our country" if nothing is done to stem the tide of red ink". Senator Mike Enzi, a Republican from Wyoming, chairman of the Budget Committee, echoed the concerns of these lawmakers.
This is a dangerous position for small businesses and for the millions of unemployed whose survival in the crisis also depends on continued economic support from the government.
The myth of the deficit
Democratic and Republican lawmakers calling for immediate austerity measures demonstrate that they have fallen prey to what I call "the myth of the deficit": that is, that a nation's debt and deficits are unsustainable and that a alternative plan to deal with the crisis.
As an advocate of what is called Modern Monetary Theory (MMT) and as a former Democrat chief economist on the Senate Budget Committee, I am somewhat familiar with how public finance works. And I say with equanimity that I'm not worried about the recent multi-billion dollar surge in government spending.
There was a time when concern about an excessive deficit shook my beliefs about economics.
I understand the myth of the deficit well, because in the early part of my career as an economist I too embraced conventional thinking. I was taught that the government should manage its finances in a similar way to the good old family man, keeping expenses in line with income and avoiding going into debt whenever money needs to be found.
The two "classic" ways of finding money
British Prime Minister Margaret Thatcher — a key player with President Ronald Reagan in the Conservative revolution of the late XNUMXth century — described this mood of its own. in a seminal 1983 speech. He stated:
The state has no other source of money than the savings of its citizens. If the state wants to spend more, it can only do so by borrowing their savings or by taxing them more.
There is no third way.
This thought seems reasonable, even to me. But Mrs Thatcher's version of the deficit myth hides a crucial reality and possibility. It is the power of a government to issue money. Governments of nations that retain control of their currencies — such as Japan, Britain and the United States, unlike Greece, Spain and Italy — can increase government spending without having to raise taxes or borrow money from other countries or from investors.
This doesn't mean they can spend without limits, but it does mean they don't have to worry about "finding the money," as many politicians say, when they want to spend more.
Politics aside, the only constraints that money-issuing states face are the rate of inflation, the availability of labor and other material resources within the real economy.
The end of the gold standard
It is true that in a bygone era the US government was not in full control of its currency. This was because the US dollar was convertible into gold, forcing the federal government to limit its spending to protect the stock of its gold reserves.
But President Richard Nixon famously ended the gold standard in August 1971, freeing the government from the constraint that it could not take full advantage of its money-issuing powers. Yet nearly half a century later, prominent political leaders in many countries still speak like Mrs Thatcher and legislate as if we, the taxpayers, were the ultimate source of government money.
In 1997, during my early training as a professional economist, someone pointed me to a little book called Soft Currency Economics. Its author, Warren Mosler, a successful Wall Street investor, argued that when it came to money, debt and taxes, our politicians (and most economists) got it all wrong.
Money is a public monopoly
I read that book and was convinced by it. One of Mosler's claims was that the money the government raises is not used directly to pay its bills. I had studied economics at Cambridge University with world-renowned economists and none of my professors had ever said such a thing.
In 1998, I visited Mosler at his home in West Palm Beach, Florida, where I spent hours listening to him explain his thinking. He began to speak of the US dollar as "a mere public monopoly". Since the US government is the sole issuer of the currency, he said, it's foolish to think of Uncle Sam as someone who needs to get money from the rest of us. Just issue them with the laws.
The “history” of the Mosler children
My head was spinning. Then she told me a story: Mosler had a beautiful beachfront property and all the comforts of life anyone could hope to enjoy. He also had a family with two teenagers, who didn't want to help with the household chores. Mosler wanted the grass in the yard mowed, beds made, dishes rinsed, cars washed, and so on. To encourage her children to contribute to these jobs, she promised to pay for their work with her business cards. But he didn't get much.
“Why should we work for your business cards? They are worthless,” the children told him. So Mosler changed tactics. Instead of offering a reward for their help with the housework, he demanded payment, each month, for 30 of his business cards for some of the property's amenities. Failure to pay would result in the loss of privileges: no more TV, use of the pool, or shopping trips to the mall.
Mosler had essentially imposed a fee that could only be paid with his monogrammed business card. And he was ready to enforce it. So these business cards started to be worth something. In a short time, the boys hurried to tidy up their bedrooms, clean up the kitchen and the courtyard. They started working to maintain the lifestyle they wanted to have.
The law legitimizes the new money
This, in general, is also how our monetary system works. It is true that the bills in our pockets are, in a physical sense, just pieces of paper, as are Mosler's business cards.
It is the state's ability to enforce its tax laws that underpins its value, that makes this money valuable.
This was how the British Empire, and other empires before it, were able to govern effectively: conquer new territory, reset the legitimacy of a given people's native currency, impose imperial currency on the colonized, then begin to rotate the entire local economy around the imperial currency, the interests and power of the conqueror.
Taxes exist for many reasons, but they exist primarily to give value to otherwise worthless government tokens.
Modern Monetary Theory
Coming to terms with these discoveries was hard for me, a real Copernican moment. When I developed this argument in my first published and peer-reviewed academic paper, I realized that my hitherto understanding of public finance was wrong.
In 2020, the US Congress and other governments showed us — in fact — exactly how Modern Monetary Theory (MMT) works.
This spring, billions of dollars and euros were pledged that, in a conventional economic sense, governments have never received from either taxpayers or lenders. They have neither raised taxes nor borrowed from China or some other investor the dollars and euros needed to prop up struggling economies.
Instead, lawmakers have simply passed laws and commissioned billions of dollars from central banks, such as the Federal Reserve. This is how all public spending is paid today, that is, with the pure and simple issue of new money.
The real limits that matter
Modern monetary theory simply describes how our monetary system works. His arguments do not depend on ideology or a political party. Rather, the theory focuses on what is economically possible and shifts the political debate out of the "debt yes, debt no" context. Instead of worrying about the number that comes out of the balance sheet magic box each year, modern monetary theory focuses on some limitations.
At some point, every economy is faced with a sort of "speed limit", regulated by the availability of its real productive resources - the state of technology, the quantity and quality of its land, its workers, its factories, of its machines and other resources.
If a government tries to overspend in an economy that is already running at full throttle, it gets overheating, accelerating inflation. So there are limits. However, the limits are not in our government's ability to spend money or sustain large deficits. Modern monetary theory tries to distinguish real limits from those arising from bad policies or unfounded concerns.
A matter of political will
Understanding the principles of modern monetary theory could mean a lot now. It could free politicians from certain preconceived ideas and push them not only to act courageously in the midst of crises, but also to invest courageously in times of greater stability. It matters because to get economies out of their current slump, governments and parliaments don't need to "find the money," as many say, to spend more. They just need to find the votes and the political will to do it.
Source: Stephanie Kelton, Learn To Love Trillion-Dollar Deficits. Our country's myth about federal debt, explained, The New York Times, June 9, 2020
