The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy

The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy (2020) by Stephanie Kelton presents a radical reimagining of economic policy and government spending. As a professor of economics and public policy at Stony Brook University and former Chief Economist of the US Senate Budget Committee, Kelton brings both academic expertise and practical policy experience to her explanation of modern monetary theory (MMT). 

The book emerged during a period of growing interest in MMT among politicians and the public, particularly as governments worldwide deployed massive spending programs in response to the COVID-19 pandemic. A New York Times bestseller, The Deficit Myth challenges conventional wisdom about federal deficits, arguing that currency-issuing governments like the United States are not constrained by revenue in the same way households and businesses are. Through accessible metaphors and real-world examples, Kelton explains how common misconceptions about government debt and spending prevent addressing critical social needs like healthcare, education, and climate change. The book contends that by understanding money creation and the true constraints on government spending—real resources rather than financial resources—society can build an economy that serves all people.

This study guide refers to the 2021 PublicAffairs eBook edition.

Summary

The Deficit Myth presents a fundamental challenge to conventional economic thinking through the lens of modern monetary theory. The book systematically dismantles major myths about government spending and deficits while proposing alternative frameworks for understanding economic policy. Central to this work is challenging traditional economic assumptions about public finance and fiscal policy.

The narrative begins with Kelton’s observations during the 2008 financial crisis, when deficit concerns limited US President Barack Obama’s response to the economic downturn. Despite Chair of the Council of Economic Advisers Christina Romer’s advocacy for a stimulus package exceeding $1.8 trillion, fears about public reaction to government spending led to a more modest $787 billion response. This decision, Kelton argues, resulted in a slower recovery that cost each American approximately $70,000 in lost prosperity over the following decade. 

The book establishes the concept of monetary sovereignty as a cornerstone of MMT thinking. Governments that issue their own currency, like the United States, Japan, and the UK, operate fundamentally differently from households, businesses, or countries that use currencies they don’t control. This distinction forms the basis for challenging the common comparison between government and household budgets. Kelton introduces the concept of “S(TAB)” (Spending, then Taxing And Borrowing) to replace the conventional view that governments must collect taxes before spending, demonstrating how taxes serve multiple purposes—creating demand for currency, managing inflation, addressing inequality, and influencing behavior—but do not “fund” federal spending in the way most people believe.

The text explores how government deficits automatically create private sector surpluses, countering the notion that deficits harm the economy. Using economist Wynne Godley’s framework, Kelton demonstrates how government spending flows into and enriches the private sector, while the national debt, rather than being a burden, represents private wealth held in the form of government securities. Kelton cites Japan as an example of how high debt-to-GDP ratios need not create economic crisis when a country controls its own currency.

Kelton’s examination of international trade provides a perspective on global economic relationships. The book argues that trade deficits reflect real benefits in the form of imports rather than economic losses, though job displacement remains a legitimate concern requiring policy solutions. Countries with monetary sovereignty possess greater flexibility in managing their international economic relationships and addressing domestic economic challenges.

Kelton’s advocacy for a federal job guarantee program exemplifies practical policy implications. This program would offer stabilization, providing employment opportunities during economic downturns while helping maintain price constancy. By establishing a base wage and benefit package focused on community needs and environmental protection, the program could lead to innovative solutions for persistent economic challenges.

The book identifies critical deficits deserving more attention than federal budget deficits: gaps in employment, savings, healthcare, education, infrastructure, and democratic participation. Through detailed statistical analysis and case studies, Kelton reveals stark realities about these shortfalls, including declining life expectancy, inadequate retirement savings, and deteriorating infrastructure. The book argues that artificial budget limitations prevent effective solutions to these pressing societal problems.

Throughout the work, Kelton emphasizes that MMT does not advocate unlimited government spending, but rather positions inflation, not federal deficits, as the true constraint on government spending. The book proposes replacing arbitrary budget rules with careful consideration of resource availability and inflation risk when evaluating spending proposals. This framework is particularly relevant for addressing contemporary challenges like climate change, where the primary obstacle is not financial resources but rather a failure of imagination constrained by incorrect beliefs about government finance.

The narrative gains additional depth through Kelton’s personal experiences as Chief Economist for Senate Democrats and interactions with policymakers. A particularly telling moment occurs during her 2010 meeting with Congressman Emanuel Cleaver; the politician privately acknowledged MMT’s logic but feared the political consequences of publicly challenging conventional wisdom. This and similar personal anecdotes illustrate how deeply entrenched traditional views about government finance remain, even when their logical foundations have been questioned.