In late March, as COVID-19 spread, Congress passed the largest federal bailout in modern American history. Despite adding $2 trillion to the already $25 trillion national debt, the bill received unanimous support—even from well-known deficit hawks like Mitt Romney and Nancy Pelosi.
But how is it that, after decades of warnings about the dangers of running up a deficit, by conservatives and liberals alike, it became possible to conjure trillions of dollars overnight?
"The Deficit Myth" by Stephanie Kelton, available June 9
Here’s the thing: The panic over deficits is a hoax. The federal government could fund a massive social welfare program like universal health care tomorrow without a hitch, no matter what the politicians say.
Or at least that’s how Stephanie Kelton, the former chief economist to the U.S. Senate Committee on the Budget, sees it. In her new book, The Deficit Myth, Kelton methodically debunks one of the most pervasive and ingrained truisms in the American consciousness: the belief that the national debt is a problem and that it is always a good thing to try to pay it off.
Kelton, who served as Bernie Sanders’s economic adviser during his 2016 and 2020 presidential campaigns, is a proponent of Modern Monetary Theory (MMT), a macroeconomic framework for understanding how governments produce, spend, and trade money now that currencies are no longer tied to the gold standard.
Using MMT as a “diagnostic toolkit,” Kelton argues that abandoning a shiny metal-backed currency has had enormous—but deeply misunderstood—consequences. “For the currency issuer, money is no object,” she writes. “It doesn’t exist in some scarce physical form—like gold—that the government needs to ‘find’ in order to spend. It is conjured into existence from a computer keyboard each time the Federal Reserve carries out a payment to the Treasury.”
In other words, the government’s budget is not the same as your household ledger, because it—unlike average schlubs like you and me—will never go broke.
Throughout The Deficit Myth, Kelton argues that the fear of adding to the U.S. national debt should not be an excuse to avoid creating a more humane economy.
The political debate about debt arises, Kelton writes, because most Americans, elected representatives included, are convinced this couldn’t possibly be true, that there must be some limit to the amount of money the government can produce. After all, doesn’t the government rely on taxes to stay afloat? Even if the Federal Reserve is a bottomless ATM, wouldn’t we end up footing the bill for overzealous money printing?
The short answer, according to Kelton, is no. As strange as it sounds, taxpayers are not propping up the government. In the MMT view of money, the federal government does not use taxes to fund anything, as it could always create funding to supply its needs. Taxes, instead, are levied as an incentive to earn money in whatever currency a government issues and to spur economic activity.
Of course, while a currency-issuing government can never by definition run out of money, that does not mean there is no limit on spending. Kelton does set an end-point, but it isn’t the ever-shifting debt ceiling. In her view—one once shared by former Federal Reserve Chair Alan Greenspan—overspending is only a problem when there’s more cash floating around than goods or services to spend it on. And we, as Kelton highlights, are nowhere near that tipping point.
Throughout The Deficit Myth, Kelton argues that the fear of adding to the U.S. national debt should not be an excuse to avoid creating a more humane economy. For instance, since the onset of the COVID-19 pandemic, more than thirty million people have filed for unemployment, amounting to the largest spike in joblessness since the Great Depression. While the federal stimulus bill expanded unemployment insurance, a much surer way to address joblessness would be for the government to simply offer a job to anyone who needs one.
Now that we know that Congress has been sitting on a magic money pot this whole time, it becomes clear that the failure to fix problems like unemployment (through a federal jobs guarantee policy), a lack of health care (Medicare for All), and climate change (the Green New Deal) has always been a matter of political will, not whether or not we can afford it.