The Deficit Myth:
Modern Monetary Theory and How to Build a Better Economy

By Stephanie Kelton
Published by John Murray 

Review by Lee Humphries

I’ve been eagerly awaiting Stephanie Kelton’s book The Deficit Myth after watching her talks on YouTube for years. Kelton is part of a global alliance of economic thinkers and scholars who come from a broad-church school of thinkers under the name Modern Monetary Theory (MMT).

MMT is a post-Keynesian theory which looks at macroeconomics and more specifically the countries which issue their own currencies (like the UK, USA, etc.), and how those currency issuing countries can use fiscal stimulus to create full employment, address inequality and build social cohesion.

Kelton makes compelling arguments against Conservative/Centrist talk of budget tightening, shrinking the state, private sector over public sector – the language dominating politics and economics over the past 40 years via neoliberal and Third Way advocates.

Kelton breaks down the myth that currency issuing governments can go bankrupt, and that they need to reduce public spending to significantly reduce their deficits. The book highlights that the problem is if you were to achieve a government surplus, there would be much less money in the economy to spend on goods and services and a risk of heading towards depression.

MMT argues for not treating our economy like a household budget, as households cannot create their own money – unlike the Bank of England which can. As households are not currency issuers, we’ve had to live with the disastrous austerity that both the EU and the US have implemented over the past decade. The less a government spends in any given country, the less there is to keep people in jobs and keep businesses open, as one person’s spending is another person’s income. Money is constantly circulating until it is taxed out of existence.

Kelton is keen to turn economics on its head. It’s not a case of ‘we tax people first then we are able to afford to spend’, it’s the other way around. Spending comes first and then taxation follows. Many critics of MMT have argued that if the currency issuing country just keeps printing money without restraint, then we’ll end up with inflation. MMT does not say to print money indefinitely, it states printing money is needed to keep full employment going, to make sure as many jobs are created as possible that have a socially useful purpose to them. Inflation is caused by having too much money in a country chasing too few goods and services. That can be controlled with fiscal policy by taxation. Once we pay tax via PAYE, self-assessment, VAT, etc. that money is taken off the deficit to reduce the debt. It is also taken out of our economy once taxed. Thus new money has to be created to replace the money destroyed.

The Deficit Myth is a fantastic introduction to MMT and to economics generally, and when we all hear the phrases ‘there’s no magic money tree’ or ‘how are you going to pay for it’, Kelton clearly and brilliantly quashes the naysayers who will do their utmost to make sure we don’t live in a fairer and more equal society.

The Deficit Myth is available in store at Printed Matter Bookshop, 185 Queens Road, Hastings. 

We hope you have enjoyed reading this article. The future of our volunteer led, non-profit publication would be far more secure with the aid of a small donation. You can also support local journalism by becoming a friend of HIP. It only takes a minute and we would be very grateful.