Prescription for a free lunch

"Stephanie Kelton's new book, The Deficit Myth, promises to explode the “myth” that governments need to worry about debt or overspending"

Juliet Samuel

Stephanie Kelton wants you to know that she is not—absolutely, definitely not—guaranteeing anyone a “free lunch”. Her new book, The Deficit Myth, promises to deploy the modish left-wing economic model known as “Modern Monetary Theory” (MMT) to explode the “myth” that governments need to worry about debt or overspending. MMT, Kelton declares, is the economic equivalent of Copernican astronomy or Jesus’s revelation of divine truth—but it is definitely not “a free lunch”.

The book starts off with some useful correctives to the way we usually think about public finances. A government with the power to issue its own currency is not the same as a household trying to balance the books, she argues, because a government has the ultimate weapon at its disposal: a money printing press. What’s more, a national budget is not some sort of isolated decree that should be judged on whether it generates a big negative or positive number. It is just an economic management tool and we should measure its success by whether the economy is in a healthy balance of full employment and low inflation.

So far, so reasonable. Then things get wacky. The problem with fiscal debates, she argues, especially in the US, is that our politicians mistakenly imagine that an overspending government runs the risk of national bankruptcy. This, she claims, is impossible. Currency-issuing governments face no shortage of money because they can always just print more to pay their bills. Their only real limit is the possibility that this will generate inflation, but governments consistently overestimate that risk, leading to systematic under-stimulation of the economy.

This is where the book could have become interesting. Kelton presents the beginnings of a potentially compelling case that the US Federal Reserve has repeatedly overlooked the amount of economic resources lying idle in the economy and wrongly assumed that the US has reached its “natural rate” of unemployment, when in fact there are still millions of would-be workers who cannot find a job (many not included in the most common measure of unemployment). The implications of such a mistake would be that the Fed has been too hasty to raise interest rates and the US government far too cautious in its stimulus packages since 2008—all because of a premature fear that Uncle Sam will go bust.

Rather than presenting evidence to this effect, Kelton quickly veers away from the core of the argument and instead embarks upon an extravagant, fantasy spending spree. Most of the book consists of a fiscal wish list: a universal employment scheme, generous social security, free university, a “green new deal”, new infrastructure and so on. The cost of these projects is not estimated, but conservatively, it would run into many trillions.

Despite it being core to her argument, however, Kelton fails to engage seriously with the idea that her policy prescriptions may generate inflation, or even hyperinflation. Such fears are unfounded, she claims, because people have been worrying about inflation for a decade and it still hasn’t surged. What she tellingly omits—despite upbraiding Margaret Thatcher for her monetary conservatism—is any discussion of the Seventies runaway inflation and economic ruin that resulted last time these sorts of policies were tried.

Instead, Kelton asserts that currency-issuing governments can never run out of money and it is therefore perfectly safe to spend trillions and trillions on new projects. Yet even she has to admit that “there are limits”. The main limit is that the government must be careful not to print more money than there are “real resources” to “absorb” this cash, because that could produce inflation. The government can’t run out of money to service its debts, you see, but it can run out of resources. If this sounds like a meaningless distinction in the real world, that’s because it is.

There are other gaping holes. Kelton does not explain, for example, why anyone would be willing to hold onto US dollars in a world where the US government has stated its intention to print trillions in new currency and pay back its debts with funny money. Ask a central banker, such as former deputy governor of the Bank of England Paul Tucker, how you keep up people’s confidence in money and there is a clear answer: “Credible constraints.”

The dollar’s reserve currency status may give the US some leeway in this regard, but there is no reason to think it is a permanent feature were Washington to embark upon the scale of spending and money creation Kelton desires. As for smaller countries, such as the UK and Canada, they would no doubt discover the downsides to this fiscal doomsday experiment rather quickly.

Mainstream economists want to engage on the substance of MMT, but have so far struggled to understand what its advocates actually believe and what new discovery they have made about how the economy functions. Kelton could have written an interesting book laying out the tenets of MMT, marshalling evidence to support it and arguing the case as to why it means the US and other democratic governments can afford to spend much more than they have so far realised. Instead, she promises Copernican revolution but delivers muddle and guff.


The Deficit Myth: Modern Monetary
Theory and How to Build a Better Economy
By Stephanie Kelton
John Murray, 336pp, £20

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