The Deficit Myth

24 Jun, 2020 at 10:41 | Posted in Economics, Politics & Society | 15 Comments

keltonSoon after joining the Budget Committee, Kelton the deficit owl played a game with the staffers. She would first ask if they would wave a magic wand that had the power to eliminate the national debt. They all said yes. Then Kelton would ask, “Suppose that wand had the power to rid the world of US Treasuries. Would you wave it?” This question—even though it was equivalent to asking to wipe out the national debt—“drew puzzled looks, furrowed brows, and pensive expressions. Eventually, everyone would decide against waving the wand.”

Such is the spirit of Kelton’s book, The Deficit Myth. She takes the reader down trains of thought that turn conventional wisdom about federal budget deficits on its head. Kelton makes absurd claims that the reader will think surely can’t be true…but then she seems to justify them by appealing to accounting tautologies. And because she uses apt analogies and relevant anecdotes, Kelton is able to keep the book moving despite its dry subject matter. She promises the reader that MMT opens up grand new possibilities for the federal government to help the unemployed, the uninsured, and even the planet itself…if we would only open our minds to a paradigm shift …

Precisely because Kelton’s book is so unexpectedly impressive, I would urge longstanding critics of MMT to resist the urge to dismiss it with ridicule. Although it’s fun to lambaste “magical monetary theory” on social media and to ask, “Why don’t you move to Zimbabwe?” such moves will only serve to enhance the credibility of MMT in the eyes of those who are receptive to it.

Robert P. Murphy / Mises Institute

Can a government go bankrupt?
No. You cannot be indebted to yourself.

Can a central bank go bankrupt?
No. A central bank can in principle always ‘print’ more money.

Do taxpayers have to repay government debts?
No, at least not as long the debt is incurred in a country’s own currency.

Do increased public debts burden future generations?
No, not necessarily. It depends on what the debt is used for.

Does maintaining full employment mean the government has to increase its debt?

dec3bb27f72875e4fb4d4b62daebb2fd161b36392c1a0626f00cfd2ece207d84As the national debt increases, and with it the sum of private wealth, there will be an increasingly yield from taxes on higher incomes and inheritances, even if the tax rates are unchanged. These higher tax payments do not represent reductions of spending by the taxpayers. Therefore the government does not have to use these proceeds to maintain the requisite rate of spending, and can devote them to paying the interest on the national debt …

The greater the national debt the greater is the quantity of private wealth. The reason for this is simply that for every dollar of debt owed by the government there is a private creditor who owns the government obligations (possibly through a corporation in which he has shares), and who regards these obligations as part of his private fortune. The greater the private fortunes the less is the incentive to add to them by saving out of current income …

If for any reason the government does not wish to see private property grow too much … it can check this by taxing the rich instead of borrowing from them, in its program of financing government spending to maintain full employment.

Abba Lerner


  1. Of course, sometimes that private wealth ends up in the hands of trading partners like Japan, Saudi Arabia, and China. So there’s that.

    • We get the real goods and services; they get the fiat currencies in return.

  2. The desirability of “maintaining full employment” is a myth too. Did Keynes believe “idle hands are the devil’s workshop”? Full employment seems to be a normative prescription arising out of a desire to impose a morality on others, knowingly using spurious economic assumptions. The Deficit myth is very similar. (Please don’t shadow-ban again; huge fan!)

    • A prescription for un-full employment is just as normative. A policy that provides 97 bones per 100 dogs gives 3 dogs the “choice” of no bone, but of course it denies those 3, whoever they turn out to be, the opposite choice. The nice thing about the Job Guarantee is that it really does leave the choice with each individual who’ll be affected.

      • I’m worth more digging holes and filling them up again at the whim of a government official, than working on my own projects with a basic income?
        You could guarantee jobs and pay a basic income. Whether you classify basic income as voluntary unemployment is semantics. One main point of basic income is to disconnect employment from income. Just as MMT disconnects government income from taxes …

        • No one is recommending digging holes.

          The Social Enterprise Sector Model for a Job Guarantee in the U.S.

          “The non-profit and social enterprise sectors produce original, innovative and sustainable solutions to seemingly intractable socio-economic problems, which the private sector has failed to solve. Their mission and reason for existence is to create social value and address very specific problems like poverty, hunger, homelessness, environmental degradation, community blight, inadequate care and education for all, and other. The work of this sector is perhaps the one bright spot in our economy today. Yet delivering large-scale solutions to these problems remains a challenge for two reasons: 1) its work is always underfunded and 2) it is always understaffed. The Job Guarantee solves both problems—it provides funding and labor.”

        • “One main point of basic income is to disconnect employment from income.”

          It disconnects income from the need to provide something in return. People on a UBI would consume their own labor, and then consume the labor of other people that produced the products purchased with UBI money. UBI ignores the importance of reciprocity.

        • larrykaz: “Their mission and reason for existence is to create social value and address very specific problems like poverty, hunger, homelessness, environmental degradation, community blight, inadequate care and education for all, and other.”
          I deliver more social value on my own, maintaining forest roads and trails and dispersed camping sites. I don’t do well around others. I don’t respect bosses merely because they have a title. Job Guarantee does nothing for me.
          Allan: “UBI ignores the importance of reciprocity.”
          MMT assumes I can only reciprocate if a government boss tells me what to do? MMT is distrustful.
          Also: an MMT government benefits from my labor, and reciprocates by giving me notes it produced by costless seigniorage? What sort of reciprocity is this? I am to trust my MMT boss, but he is not to trust me to reciprocate labor I bought with the tokens it cost him nothing to create? Basic income is more honest …

          • “Basic income is more honest”

            It’s theft. Being honest about it doesn’t make it any better.

            • Basic income is compensation for theft of the commons. Enclosure means I can only survive with money. Until you re-establish a commons in which I can self-provision, you are in violation of the Lockean Proviso. You stole from me first; you owe me a basic income.
              @ Nanikore:
              Country leaders with bluster get away with printing: Hitler, Erdogan, Assad, Mugabe never went bankrupt. North Korea and other pariah states issue bonds to raise dollar reserves. Currency swaps are also used to borrow foreign reserves, at away from market rates if you go through a central bank.

  3. The Murphy quote is legitimate, but it is from a long review that is on the whole critical of the book – and it deserves your breakdown of his criticisms

    • OT where did the Von go and why.

  4. “Can a government go bankrupt?

    Can a central bank go bankrupt?

    Do taxpayers have to repay government debts?

    The answer to all these questions is yes. During the Asian Financial Crisis countries were on their knees to IMF. The conditions they had to accept for assistance were Draconian – including a fire sale of public assets leading to further dispossession and assets further enriching international capital. Ultimately tax payers and future generations do pay for it. In that way it is not unlike having your house possessed.

    Ultimately what you lose is your sovereignty.

    True, the cause of this was not directly because of high budget deficits, it was a combination of factors of which government borrowing was a part, especially borrowing in foreign currency . But these countries simply needed hard currency to industrialise – something small countries just can’t print. It all underlies the point that depending on how powerful you are in the international system, there is a limit to how much printing money will help you and get you out of problems.

    • Yes, you are correct when a country needs foreign currency – something to which MMT brings attention. When people do not specify the currency (or whether the country is a currency-issuer), they get confused and tolerate very bad economic policy.

      • If you are not a hegemonic power you need capital controls – controls over the access and allocation of foreign credit. Also helpful is a current account surplus and a largely self-sufficient economy.

        Britain is somewhere in between. Any more annoyance from Johnson in a post-Brexit world and the ECB could play hardball (unlike it did during the Covid19 STG crisis when it gave a credit line – freely agreeing to the purchase of sterling for Euros in a coordinated central bank action with the BOJ and Fed). This would make Britain even more dependent on the US, which if Trump is reelected, is something that could be unpredictably awful.

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