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

In Chapters 5 and 6, Kelton undertakes a comprehensive examination of two critical economic issues: international trade relationships and social program sustainability. Through meticulous analysis of historical precedents, political discourse, and economic theory, Kelton constructs a critique of conventional economic wisdom while presenting an alternative framework based on MMT.

Through her analysis of international monetary relationships, Kelton illuminates The Government’s Unique Power as a Currency Issuer by examining how countries like the United States, Japan, and the United Kingdom possess distinct advantages in the global economy. As she explains, “Nearly 90 percent of currency trade involves the US dollar” (171), highlighting America’s unique position in the global financial system. The text demonstrates this through careful examination of historical examples, including the evolution from the Bretton Woods system to the current floating exchange rate regime. Kelton points out that “many countries weaken their monetary sovereignty by continuing to peg their currencies to the US dollar” (175), creating unnecessary constraints on their economic policies. This analysis extends to developing nations’ struggles with foreign-denominated debt, contrasted with the United States’ ability to issue debt in its own currency, leading Kelton to observe that “Uncle Sam never has to borrow in anything but his own currency, and he doesn’t even have to do that” (174).

Kelton argues that traditional economic thinking about deficits has constrained policy options and limited social progress. She demonstrates how Challenging Conventional Wisdom that Deficits are Bad requires understanding the evolution of economic thought and policy making. She cites Alan Greenspan’s remarkable testimony before Congress, where he acknowledged that “there’s nothing to prevent the federal government from creating as much money as it wants and paying it to somebody” (215). The text examines how figures like Pete Peterson, who “funneled as much as $1 billion into a public relations campaign whose agenda included undermining support for popular social programs” (208), have shaped public discourse around deficits and social spending. Kelton particularly focuses on the impact of this narrative on Social Security, documenting how Roosevelt’s decision to link the program to payroll taxes created unnecessary constraints that continue to threaten the program’s political sustainability.

In examining both trade relationships and social programs, Kelton emphasizes Real Resource Constraints versus Financial Constraints through careful analysis of productive capacity, labor force participation, and demographic trends. As she explains, “Over the next 18 years, an average of 10,000 Americans will turn sixty-five every day” (222), highlighting the real challenge of providing services to an aging population. The text provides specific examples of resource constraints, noting that “a 70-year-old consumes more healthcare and less childcare than a 35-year-old. That means the economy will need to produce more of some things and less of other things” (222). This distinction becomes particularly important in Kelton’s discussion of Social Security’s future, where she emphasizes that the real challenge lies not in finding money to pay benefits but in ensuring sufficient productive capacity to provide goods and services for retirees.

Kelton bolsters her arguments with historical context by tracing how various presidential administrations, from Franklin D. Roosevelt to Barack Obama, have approached issues of trade and social security. She documents how President Bill Clinton’s welfare reform “aspired to help people get back to work” but “what it really did was force people off the assistance rolls, reducing many families to poverty” (211). The text examines specific policy decisions, such as Obama’s deficit commission, which relied on Peterson’s foundation for funding and resources, demonstrating how political considerations often override economic realities. Particularly significant is Kelton’s analysis of the “greedy geezer” (191) rhetoric employed by deficit hawks like Republican Senator Alan Simpson, who used inflammatory language to stigmatize social program beneficiaries. Kelton argues that such derogatory rhetoric serves a specific political purpose: to divide younger and older Americans while obscuring the fact that the government, as the currency issuer, can afford to support both generations simultaneously.