Pardon Me, Myth...

Chief Economist Scott Brown discusses current economic conditions.

In her recent book, “The Deficit Myth,” Stephanie Kelton, a professor at Stony Brook University, writes about many of the common misperceptions surrounding government debt and deficits. Kelton is a proponent of Modern Monetary Theory, an approach widely rejected by academic economists, and was an advisor to Bernie Sander’s 2016 and 2020 presidential campaigns. However, her rebuff of popular deficit myths does not run counter to the mainstream view of most economists.

Modern Monetary Theory (MMT) is a non-standard theory, meaning that it is not widely accepted by economists, especially in academia. That doesn’t make it wrong, but mainstream macroeconomics is built on a more solid foundation (that doesn’t make it perfect). The mainstream view is that monetary policy should be used to guide unemployment and inflation over the long term, with fiscal policy (government taxation and spending) the main tool in digging out of recessions. Neither is a tool to fine-tune the economy. In MMT, fiscal policy is used to control inflation. Interest rates are still important, but higher rates are seen as expansionary and lower rates are contractionary – exactly opposite to how monetary policy is conducted around the world. Kelton likens herself to Copernicus, changing the way economists and the general public look at the world. Well, isn’t that special?

The first myth Kelton tackles is whether we should think of the government budget the same way that we view household budgets. “Living within our means,” is a common political platitude, but the government is nothing likely a household. The government does not have to pay off its debt

– indeed, we wouldn’t want it to. Our kids and grandkids can easily pass the debt along to their kids and grandkids. We never paid off the debt from WWII. The key issue is whether we can make interest payments and roll over existing debt.

Another myth is that deficits are a sign of overspending. It seems self-evident that one could just as easily argue that deficits are caused by insufficient taxation, but Kelton takes it further in arguing that spending and taxation decisions are completely independent. That should also be self-evident, although one wouldn’t know that from hearing politicians speak. Republicans are serious about the deficit when a Democrat is in the White House, not so much when the president is a Republican. Democrats have long held to the view of paying for additional spending (either through tax increases or through spending cuts in other areas) – exhibit A is the Affordable Care Act, which was funded. In tough economic times, as we are seeing now, both parties have supported fiscal expansion, but more so in an election year. Kelton argues that, in normal times, the focus on the deficit has prevented us from making important investments. Without the self-imposed budget constraint, the U.S. could spend more on infrastructure, education, and public health.