Bookshelf: The Deficit Myth

The Deficit Myth with yellow and green monopoly money
Before the personal computer, there were minicomputers and mainframes. I understood them as large machines housed in refrigerated rooms and guarded by stern, but good, wizards (system administrators). The personal computer changed that. With a PC at home and sitting on my desk, the internals -- cpu, memory, graphics card, and disk drive -- became accessible. It was a revelation.

Reading The Deficit Myth gave me that same revelatory feeling, although in the field of economics. Before Dr. Stephanie Kelton's book, I understood that deficits were bad, while balanced budgets were good. That is, the government should manage its money like a household: spend only what you can afford, and avoid debt. The household budget approach was relatable, and sounded right. But there were nagging inconsistencies that a household budget approach could not explain. If deficits were bad, how did they successfully fund the space race to put a man on the moon? Or pay for wars (necessary or not)? How did a $700 billion deficit manage to bail the U.S, out of the Great Recession of 2008 without triggering inflation?

Kelton argues that deficits aren't inherently bad. Rather, deficits are better seen as an investment into the U.S. economy. The real limit of what the U.S. can spend is not what can be raised in taxes, but what can be measured by available resources -- people (skills, education, health), factories, technology, natural resources -- and limited instead by inflation.

Kelton's reference to the game of Monopoly took me back to a childhood memory and offered a helpful insight. I remember four of us playing, and well into the game, the bank ran out of money. But we didn't need to stop. We could continue playing because, as Kelton notes, the rules allowed the bank to create more money by writing it on ordinary paper. So we continued to play until we ran out of the green little houses and the red plastic hotels. That was the game's real limit.

Had we continued to play, we probably would have modified the rules to charge a lot more rent. We might trade houses and properties to build hotels, but at higher and higher prices. Welcome to inflation. And to fight it, the bank might raise taxes to get some money out of the system. A dire scenario, Kelton knows that the U.S. cannot print money ad infinitum. She writes that we need levers, models, and instrumentation to determine a level of inflation we can live with.

Another name for money printed as resources allow is fiat money. Only countries with a sovereign currency can do this, such as the U.S., the U.K., Japan, Canada, and Australia. In contrast, countries in the eurozone are tied together by the Euro, and therefore cannot print money without affecting one another. Countries that peg their currency to the dollar, or developing countries that borrow dollars, also lose flexibility in their ability to print money.

In the end, the budget deficit isn't a threat at all. It's just a form of measurement. There are, however, other deficits that matter greatly to society, and Kelton devotes a chapter to them. What she describes, we can all easily relate to today: deficits in good jobs, savings, health-care, education, infrastructure, climate, and democracy. These are the deficits that we should be worried about. These are the deficits that threaten our children.

I'm a bit-head, not an economist. I would need Google to sort out the functions of the World Bank, the WTO, and the IMF. I know monetary policy is practiced by the Fed, while fiscal policy is practiced by Congress, but I wouldn't be able to tell you what those policies are. And I'm only vaguely aware that U.S. Treasuries are a form of securitized debt. Nevertheless, Kelton's book is remarkably approachable; it's written for people like me. I learned a lot, and if more and more of us understand the deficit myth, I have hope for the future.


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