The Deficit Myth by Stephanie Kelton

I know very, very, VERY little about economics, and I pretty much hated every math or numbers based class I ever had. My wife does all of our banking (thanks, honey!), I never, ever, have cash on me, and I basically hate spending money on anything other than protein bars, toothpaste, Gin, and yes, books. That said, I’ve always wondered how the federal government actually paid for stuff, you know? Like, we just ended a 20-year war in Afghanistan, and magically there was 3 TRILLION dollars just readily available and at our disposal to use as we saw fit. We also just passed two massive COVID-related spending bills in the past year or so, so the money must come from somewhere, right? Does a whole mess of cash sit in a massive vault, a la, Ocean’s Eleven? Are there a whole bunch of nerdy dudes and dudettes sitting in a basement somewhere in Manhatten pushing decimal places around to make everything even out? Where do my taxes go? Why do I even have to pay taxes? And if we can “afford” certain things, like wars, tax cuts for the wealthy, and increased military spending overall, why can’t we “afford” to lift people out of poverty, send people to Mars, or figure out a way to suck all of the harmful CO2 out of the sky? Turns out, Modern Monetary Theory has the answers, and guess what? We can do whatever we want to do! Seriously! Congress has the power of the purse, the U.S. can never run out of money, deficits are good (and necessary) for the economy, and, oh yeah, unemployment is a policy CHOICE, not a reality we have to accept. This book blew me away, and I spent a good two hours or so taking notes to make sure I didn’t miss anything. Highly recommend for the next time we hear a politician ask, “That sounds great, but how are we going to PAY for it?”

  • fiscal policy — free money — is a big reason why we’ve propped ourselves up after the pandemic
  • also wasn’t enough, initially
  • only congress can authorize money that airlifts financial aid directly into the bank accounts of targeted recipients — fed can’t lend money directly to individuals, can’t just give people money
  • deficits don’t pose a risk to national finances or to future generations and larger deficits are part of the solution to the current crisis
  • MMT teaches that unemployment is a policy choice
  • deficits are good for the economy — necessary
  • harnessing public money so that prosperity is shared and not concentrated in the hands of a few
  • government is a currency issuer, and they, not the taxpayer, finance government expenditures
  • MMT focuses on broad impacts of change
  • limits to spending are inflationary and the resources within the real economy
  • federal government can always fund its priorities as long as the votes are there
  • congress has the power of the purse
  • spending should never be constrained by arbitrary budget target or obedience to so called sound finance
  • Obama lost his nerve in 2009 — was basically a fiscal conservative 787B wasn’t nearly enough
  • federal government should not be run like a household or private business — they have the power to issue the US dollar — Uncle Sam will never go broke
  • most important constraint on spending is inflation
  • most of the time deficits are too small, not too big — budget deficit on one side = matching surplus on another side
  • deficits are not left for future populations — they increase private savings and crowd in private investment
  • not really borrowing from china so much as supplying china with dollars and then allowing them to trade those dollars in for a safe, interest bearing asset called a US treasury
  • social security should never ever face cuts
  • Trumps cuts in 2017 used the deficit to provide help to those who needed it least
  • most fiscally responsible way to manage crisis is with higher deficit spending
  • constitution grants the federal government exclusive right to issue currency — can’t come from anywhere else
  • everyone else is merely a currency user
  • when a country issues its own non controvertible currency and only borrows in its own currency, that country has attained monetary sovereignty — don’t manage budgets as a household would
  • US can’t end up like Greece, because they gave up their monetary sovereignty when it stopped issuing the drachma in order to use the euro
  • conventional thinking = government relies on two sources of money — raise taxes or borrow your savings
  • government almost never collects enough taxes to offset spending
  • your taxes don’t actually pay for anything — at least not at the federal level
  • government doesn’t need our money — we need their money
  • Warren Mosler — father of MMT — spending must have come first, otherwise where would anyone have gotten the dollars they needed to pay the tax?
  • government is the sole source of dollars — simple public monopoly
  • “tax isn’t there to raise money. it’s there to get people working and producing things for the government”
  • taxes are there to create a demand for government currency — turn litter into currency
  • government doesn’t want our tax money, it wants our time — to get us to produce things for the sate, the government invents taxes or other kinds of payment obligations
  • scholars of the ancient world have found little evidence that societies were ever organized around barter exchanges
  • government funding the taxpayers
  • In Monopoly (the game) — the bank can never run out of money, it’s a rule
  • congress doesn’t need to “find” the money — it just needs votes — then it can authorize spending — the rest is just accounting
  • MMT describes the fed as the scorekeeper for the dollar — scorekeeper can’t run out of points
  • Uncle Sam doesn’t lose any dollars when he spends, and he doesn’t get any dollars when he taxes — Uncle Sam doesn’t need dollars, when he collects taxes from us, he’s just subtracting away some of our dollars
  • reasons for taxation, according to MMT: taxes enable governments to provision themselves without the use of explicit force; inflation, spending of money that matters; taxes are a powerful way for governments to alter the distribution of wealth and income; governments can use taxes to encourage or discourage behaviors, or incentivize
  • government doesn’t need to borrow, we do because we don’t have it; government spends first, supplying dollars that can then be used to buy government bonds
  • government can afford to purchase whatever is for sale in its own currency, although not a free lunch
  • self imposed constraints are politically useful — feign empathy while claiming hands are tied because of the deficit
  • MMT prioritizes human outcomes while at the same time recognizing and respecting our economy’s real resource constraints
  • deficit is only evidence of overspending if it causes inflation
  • fiat currency — government no longer promises to convert dollars into gold, which means it can issue more dollars without worrying that it could run out of the gold that once backed up the dollar
  • governments budget isn’t supposed to balance — our economy is
  • government has historically almost always kept the deficit too small
  • if prices start rising faster than most peoples incomes, means a widespread loss of purchasing power
  • what matters is if average earnings rise fast enough to keep up with rising prices
  • cost-push inflation = acts of god or power; demand-pull inflation occurs when businesses raise prices due to changes in buying habits, or when people are spending faster than economy can churn out new goods and services
  • fed is directed to pursue maximum employment and stable prices — duel mandate from congress
  • problem is that the natural rate of unemployment (if it exists at all) is something the fed or anyone else can’t observe or calculate
  • fed’s estimates of level of unemployment that can be achieved without causing inflation are consistently wrong — no reliable theory of inflation guiding day to day actions
  • they choose their own definition of full employment — level necessary to achieve inflation target
  • no matter how many people are unemployed, the fed can claim they have done their best, simply no way to reduce unemployment further without causing inflation (theory, they believe)
  • outside of WWII, we have never sustained anything close to full employment
  • MMT recommends shift away from reliance on central banks to deliver goals of full employment and price stability
  • we shouldn’t tolerate mass unemployment or underemployment — need to worry about the real economy rather than the budget
  • taxes and spending should be manipulated to bring the overall economy into balance — accept any budget outcome that delivers broadly balanced conditions in the economy
  • what matters is government using budget to achieve good outcomes for the rest of the economy
  • federal job guarantee, creates a non discretionary stabilizers that promote both full employment and price stability — job that is established by the federal government, way to get through hard times
  • transition from one form of employment to another — stabilizer for economy as a whole — bottom up approach
  • convert unemployed labor into improved public amenities and facilities — spring new jobs in public service, stabilize inflation with a wage floor
  • minimum wage available to the unemployed is $0
  • we maintain a steady pool of employed people from which businesses can hire when they are looking to expand — employers don’t readily hire people that have been out of work for a while
  • Uncle Sam can’t go broke, can commit to spending money he doesn’t have, has the power to do so
  • taxing rich = redistribution of the concentration of wealth, reasoning why it should be done
  • debt clock in NYC is simply a display of how many dollars the federal government has added to peoples pockets without subtracting (taxing) them away — those dollars are being saved in the form of US treasuries
  • really a US dollars savings clock
  • the debt is really yellow interest bearing dollars called US treasuries — we don’t need to fix the debt
  • borrowing from chia involves an accounting adjustment, whereby the fed subtracts numbers from china’s reserve account (checking) and adds numbers to its securities account (savings) — we supply china with dollars and then allowing those dollars to be transformed into a US treasury security
  • no national credit card, no real debt obligation
  • by running trade surpluses, China is really allowing the US to take its stuff in exchange for an accounting entry that says we’re keeping track of how much of its output we took
  • Buffet: “We can’t have a debt crisis of any kind as long as we keep issuing our notes in our own currency” (not like Greece, who went from the drachma to the euro)
  • US won’t be forced into default by creditors
  • we (individual citizens) are not liable for a portion of the debt
  • ratio of debt relative to the size of our economy (debt vs. GDP) that matters
  • have to keep the debt ratio from heading north in perpetuity
  • in our history, each time we reduce the national debt we fall into a depression — currency users can’t sustain deficits — eventually, private sector reaches the point where it can’t handle the debt it has accumulated, and when that happens, spending grinds sharply lower and the economy falls into a depression
  • Clinton surpluses weakened private sector balance sheets, magnifying Great Recession
  • dollar is no longer tied to gold
  • taxes are important because they help to prevent a government spending from creating an inflation problem
  • if we want to let the debt disappear, simply let the central bank buy up government bonds in exchange for bank reserves — make peace with the national debt
  • every payment the government makes has only one place to go — only one place any payment received by the government could have come from
  • for every deficit that exists in one part of the economy, there is an equal and opposite surplus in some other part
  • government deficit = nongovernmental surplus
  • Uncle Sam’s deficit is our financial surplus
  • the right size deficit is the one that provides just enough support to keep the economy humming along without rising inflation
  • surpluses eat up our financial savings — rip financial wealth from us, leaving us with less purchasing power to support the spending that keeps economy going
  • governments own deficit supplies the dollars that are needed to purchase bonds
  • deficits lead to a dollar for dollar increase in the supply of net financial assets held in the nongovernmental bucket
  • no preordained relationship between fiscal deficits and interest rates
  • a trade deficit is not in and of itself something to fear
  • Godley: “Everything must come from somewhere, and go somewhere.”
  • government must run budget deficits that exceed the US trade deficit
  • structural reform — driving down labor costs (wages and pensions) to increase competitiveness by reducing costs of production — how we try to “win” at trade
  • MMT views tariffs as largely counterproductive — imports are real benefits — Trumps tarif’s are really a tax on US benefits
  • MMT wants a guaranteed federal job — full form of employment by immediately rehiring the unemployed into public service work, income and training required when there are trade shocks
  • free trade is no longer a threat to full employment, trade wars no longer necessary
  • Nixon suspended dollars convertibility to gold — but we still think in this gold standard thinking on trade policy
  • by running trade deficits, US allows developing countries to build up their US dollar reserves — much of the world must simply run trade surpluses with America
  • rest of the world has a desire for surplus of US currency
  • as long as the rest of the world refuses to accept the currencies of developing countries in payment for critical imports, developing nations will be forced to borrow US dollars and other foreign currencies they don’t control
  • monetary soverignty is key — when countries sacrifice it but can’t acquire sufficient foreign currency to defend exchange rate, currency pegs collapse, can’t repay debts denominated in foreign currency
  • comparative advantage — countries should in fact specialize in producing whatever goods and services they are most adept and efficient at — opposite of what the US does
  • trade is not about competition, but about power relationships among specific interests
  • US government can provide dollars the world needs to build up reserves and protect trade flows
  • “free trade” agreements mostly entrench global divisions between rich and poor
  • developing countries can’t continue to import basic needs — they will stay developing
  • “entitlement” programs can always be there if we want them to — they are federally funded
  • entitlement — if you meet the criteria, you are in
  • Rooosevelt’s problem was the at he tied payment for social security to a payroll tax to show how it would be “paid for” — there is also a “trust fund” with trustees, and the “money” will run out by 2035
  • not finances, but the legal authority to pay, to keep it going
  • Medicare B and D are fine though, because Congress granted the legal authority to make payments no matter what happens — political, not an economic choice
  • as long as we have health providers and facilities to meet demand, medicare will be sustainable in the only terms that matter — our nations real productive resources
  • used to be “earned entitlements”, but “earned” was dropped in the 70's
  • Reagan = “social safety net” turned into entitlement — stigmatized people, welfare queens
  • Clinton’s welfare reform bill forced people off assistance rolls, reducing many families to poverty
  • financial ability to pay, legal authority to pay benefits, our economy’s productive capacity to deliver real program benefits
  • Greenspan: “Nothing to prevent the federal government from creating as much money as it wants and paying it to somebody.” “How do you et up a system which assures that the real assets are created which those benefits are employed to purchase?”
  • deficit is merely a gap between what we have and what we need
  • disappearance of defined benefit pension plans is a huge problem — 401K’s are not the answer for many
  • even under Obamacare, millions still uninsured
  • infrastructure deficit is massive, D + rating currently
  • Black homeownership in the US is nearly the same as it was during times when housing discrimination was legal
  • self justifying feedback loop
  • far more empty homes than homeless Americans!
  • America’s per person emissions are double China
  • Gini coefficient — measure of income inequality; we are the highest among developed long term countries
  • taxes can curb astronomical wealth — important because the wealthy use money to amass power and influence over politics — rig the tax code in favor
  • put a cap on the amount of money any one person or family could extract from the shared and interdependent economic activity of all Americans (taxes)
  • if you increase the income of poor people they consume more, which is the opposite of increaseing the income for the rich, as they save — money doesn’t trickle down
  • Sanders: “Change never comes from the top down. It always comes from the bottom up.”
  • money is conjured into existence from a computer keyboard each time the Fed carries out an authorized payment on behalf of the Treasury
  • congress has unfettered access to the public purse — never have to ask where the money is coming from
  • discretionary budget (which can change) non discretionary (mandatory, like social security, medicare)
  • 70 percent of federal budget on autopilot, which means that 30 percent under discretionary control of lawmakers
  • somehow, always money for war or tax cuts
  • automatic stabilizers — during Great Recession for example, deficits, mainly the result of automatic stabilizers rather than discretionary policy, saved us from the Great Depression again — automatic support through safety net programs
  • federal job guarantee could be another automatic stabilizer
  • Public Service Employment program with health care and paid leave
  • community, communal jobs to build a care economy
  • maintain a pool of employable people from which the private sector can readily hire at a modest premium over the program wage
  • creating jobs for the unemployed works — happened in Argentina
  • Bernacke: “It’s not taxpayer money. We simply use the computer to mark up the size of the account.” — how we pay bills
  • federal government is already paying all of its bills using nothing more than a keyboard at the NY Fed
  • Kennedy: “The deficit can be any size, the debt can be any size, provided they don’t cause inflation. Everything else is just talk.”
  • he made no mention of taxes or how to pay for it in his Moon speech — PC computers came out of that, tech, smart phones
  • a failure of imagination on our part

I love books, I have a ton of them, and I take notes on all of them. I wanted to share all that I have learned and will continue to learn. I hope you enjoy.