Book Review: The Deficit Myth: A Modern Monetary Theory Primer

Hot off the press is Stephanie Kelton's The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy. Although an economics manifesto, the writing style makes it easy to read. Nevertheless, it's a difficult book about a difficult subject: Modern Monetary Theory [MMT]. After finishing it, and rereading everything I highlighted, I still can't wrap my head around it. I bought the book wanting to learn more about our deficit, not only how it affects my investments, but my future as a whole. Instead, I got a narrative about MMT, and yes, the deficit is discussed in length. However, in the traditional macroeconomic sense, the only solution to the mounting deficit is for Uncle Sam to utilize MMT. At the outset, I believed that MMT would be an alteration to our current capitalist economic system, but it's not. It upends everything that's been taught in universities, and practiced by economists and politicians for eons.

Dr. Kelton has great credentials in her area of expertise, and currently teaches economics and public policy at Stony Brook University. Back in 2015, she was hired by Bernie Sanders to be the chief economist for the Democrats on the US Senate Budget Committee. Kelton is a crusader for MMT, not just a run of the mill maverick economist. Her beliefs are so far-flung, that Bernie Sanders is considered conventional in her eyes. His Robin Hood approach of tax the rich and give to the poor is yesterday's thinking. Not that she doesn't want to help the poor, she does, it's just the way you go about doing it. This, along with balancing the budget is antiquated in the era of fiat currency, which has been around since the early 1970's. Too many decision makers still have the mindset of the gold standard. According to Kelton, "It's got a folksy, kitchen table feel to it.".

Financier Warren Mosler, who is not an economist, is considered the father of MMT with his seminal book Soft Currency Economics, published in 1995. He believes that with the advent of sovereign nation fiat currency, such as the US Dollar, the government can just keep the printing presses running. This is in the form of hitting a keystroke on the FED's computer to create more money. According to MMT, there's no such thing as a deficit too large, unless inflation grows too fast. Then you have to pump the breaks until you get inflation under control. You do this by increasing taxes and/or decrease government spending. In addition, MMT advocates believe balancing the budget means full employment to insure price stability. Currently, congress looks at balancing the budget as a zero sum game. You need to tax more to offset expenditures. Because the government spigot is usually open in the MMT world, the mantra is spend first, tax later. In our current system, it's just the opposite.

In the MMT model, you always have full employment by creating government jobs when the private sector begins layoffs. The type of jobs Dr. Kelton suggests are in the health care sector for Senior Citizens, infrastructure and anything that helps society. In our current system, there is the FED dual-mandate framework where a certain amount of unemployment is considered beneficial to society as a whole. It's a balance between too much employment and too little to ward against inflation. According to the author: "The FED uses unemployed human beings as a primary weapon against inflation.". With the kinder, gentler MMT, nobody is on the dole, everybody that wants a job will have a job buttressed by a generous federal minimum wage.

There's an old Wall Street quip that astrology was invented so economics would seem like a more accurate science. Ninety-nine percent of economists didn't see the 'Great Recession' of 2008-2009 coming. They didn't forecast the bull market that began in March 2009, either. One economist that benefited from the 'Great Recession" was Hyman Minsky. Considered an outlier for 40 years, until his economic theory was utilized by the Ben Bernanke FED. However, Minsky didn't blow up an entire economic system, he built upon it. Minski believed in the free market economy until asset prices collapse, then you utilize government intervention. What MMT disciples are suggesting is a whole new way of looking at things. It's all government intervention. It's a tough sell.

According to Dr. Kelton, "About half of Americans say that reducing the federal budget deficits should be a top priority for the president and Congress. The book aims to drive the number of people that believe the deficit is a problem closer to zero.". She didn't convince me. A big problem she has is that she is equally critical of both sides of the political aisle. President Obama didn't get it, and President Trump doesn't either. If they don't understand the radical concept, then the masses don't have a clue. The only way you can make changes is through Congress. That's a body elected by the populace. The only elected official that seems to be on the same page as Kelton is Congresswoman Alexandria Ocasio-Cortez. In Philosophy 101 they submit a question to you: If a tree falls in the woods and nobody hears it, does it make a sound?

One thing I liked about The Deficit Myth is Dr. Kelton's stance on social issues. She believes in more assets allocated to healthcare, education, climate change, and infrastructure. One suggestion she has is a "Green New Deal" where we would have a 21st Century Civilian Conservation Corps. A practical solution to a very complex set of problems. What she doesn't address is all the displaced workers coming down the pike in twenty years from the roll-out of Artificial Intelligence. The government can only hire so many people to mow lawns and take care of the elderly. In addition, our current government is inundated with Milton Friedman disciples such as Larry "Lawrence of America" Kudlow and his minions of free market economists. For her ideas to come to fruition, she has to go through Congress, and the Republicans aren't going to have anything to do with MMT. Even if Kelton is correct, it's going to take decades for her ideas to be accepted, if at all.

If we go back a few generations of technology, there was the VHS vs Sony Betamax debate. Although Betamax was the superior product, VHS tapes won the war. Why? Betamax recorders cost more, so people opted for the less expensive product. In the public's eyes, traditional macroeconomic teachings will be perceived as the less expensive option. That's because our current system makes a fleeting attempt to balance the budget. It doesn't matter if intellectually her ideas are sound, it matters what the voters think. Kelton and the MMT crowd needs Congress. They won't get it. Personally, I lean left of center politically, and am still not sold on the idea. That said, I think it's a book about a concept that merits discussion.

It took a lot of courage to go out on a limb and write this. Dr. Kelton, the current public face of MMT, is probably going to get a lot of flak for it, too. It comes off as a Utopian ideal, an economic Shangri-La. Nevertheless, it's very well researched and written. Clear and concise, you will be informed by the plethora of economic statistics throughout the work. If you watch financial networks such as CNBC, and want to understand what talking heads such as Steve Liesman are talking about, this is a good place to start.