The Deficit Myth
Positively redefining the well-known concept of budget deficit
In The Deficit Myth: Modern Monetary Theory and How to Build a Better Economy, Stephanie Kelton - a leading advocate of Modern Monetary Theory (MMT) - debunks six key myths that have shaped the conception of the state budget deficit as negative, arguing instead that the deficit can actually strengthen the economy. This is true for countries with monetary sovereignty, for which the state budget is very different from an ordinary household budget, since the state has the power to issue its own currency. With its revolutionary vision, MMT redefines the way to use public resources in order to maximise a society’s potential and imagines a politics and an economy based on opportunity rather than scarcity.
Many useful tips to:
- Counteract the principle of scarcity and enter into a mindset of financial abundance.
- Understand why the budget deficit can help strengthen the economy.
- Imagine economic and political systems which prioritise people’s needs and public interest.
Modern Monetary Theory is the revolution of the financial relationship between governments and contributors
There are more ways than we might think to increase public well-being, but in order to do so, we need to look beyond the limits that have held states back for a long time: this is what Modern Monetary Theory (MMT) does, a macroeconomic school of thought of post-Keynesian tradition.
According to the MMT, instead of focusing on self-imposed budget constraints, the state should use inflation and real resource limits as a measure of public spending. Rather than chasing the misleading goal of a balanced budget, it should pursue the promise of leveraging public money to balance the economy so that prosperity is shared and not concentrated in ever fewer hands. The MMT arguments apply to any monetary sovereign state, that is, to countries such as the United States, the United Kingdom, Japan, Australia or Canada, where the government is the monopoly issuer of a "fiat currency", which is an inconvertible paper currency. The MMT reverses the way we view politics and the economy by showing that in almost all cases, budget deficits are positive and necessary for the economy.
According to the conventional economic view, the government has no money of its own and this puts the taxpayer at the centre of the monetary universe, since the only money available to finance the government must come from the people. MMT radically changes this assumption by recognising that the government, not the taxpayer, is the issuer of currency, which finances all expenses. Basically: taxes don't pay for what the government spends. In fact, according to the MMT, there is no real limit to the ability of the US government - or any other sovereign monetary state - to finance expenses, since it can create the money itself. A state that issues its own currency has no budgetary financial constraints. However, this does not mean that there are no real limits to what the government can and should do. Every economy has its own internal speed limit, and if the government tries to spend too much in an economy that is already running at full speed, inflation will surge.
The limits, in essence, are not in the government's ability to spend money or the deficit, but in inflationary pressures and resources within the real economy. There are six key myths that have shaped the conventional view of the deficit as negative. Rather than arguing that deficits can strengthen economies and lead to faster growth, we will analyse them, one by one.
The key ideas of "The Deficit Myth"
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