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In the first six chapters of The Deficit Myth, Stephanie Kelton discusses the six misconceptions about the deficit I have covered in my last two posts. The last two chapters of this rather short but provocative book are called “The Deficits That Matter” and “Building an Economy for the People.”
The deficits that matter
According to Kelton, the gap between the number of dollars the federal government takes from the economy in taxes and the dollars it puts into the economy with spending doesn’t matter as much as most people think it does. For a government with monetary sovereignty, deficits are part of the normal functioning of the economy, and in fact are a useful way of developing its untapped resources. The deficits that really matter are the gaps between our current economy and the economy we could have if we made better use of our natural and human resources.
The good jobs deficit is the gap between the jobs we are creating and the jobs we could create. For the past few decades, “job growth has been overwhelmingly concentrated in low-skill, low-paid occupations.”
The savings deficit is the gap between what Americans need to save for such purposes as college education and retirement and what they are able to save out of their existing wages. Non-mortgage household debt rose by a trillion dollars between 2013 and 2019.
The health-care deficit is the gap between the health care that is possible and the health care Americans can afford. Compared to other developed countries in the OECD, the United States has the lowest average life expectancy.
The education deficit is the gap between the education today’s good jobs demand and the education Americans can pay for. The cost of college has risen much faster than incomes, one of the biggest reasons for the surge in household debt.
The infrastructure deficit is the gap between the state of the nation’s infrastructure and what it should be, according to the American Society of Civil Engineers. ASCE graded the difference as D+ vs. B, and put a price tag of $4.59 trillion on the task of bringing it up to standards.
The climate deficit is the difference between the global temperature change expected under current policies and the much smaller change permissible if we are to avoid a climate catastrophe. “To hit the [smaller] target, the world will need to cut its fossil fuel use in half by 2030 and eliminate all fossil fuel consumption by 2050.”
The democracy deficit underlies all of the other deficits. Consistent with the logic of Modern Monetary Theory, every deficit is someone else’s surplus. For Kelton, an excess of power for the few is the counterpart of a shortage of power for the many. She then cites the kinds of statistics that have become familiar: The wealthiest 10% own over 70% of the wealth, and the richest three billionaires own more than the entire bottom half of the population. She also cites research showing that when the policy preferences of the rich conflict with those of the majority, it is usually the rich who have their way. The obvious example is that tax cuts for those who pay the most taxes take precedence over spending increases for things that Americans say they want.
An economy for the people
Like many economic theories, Modern Monetary Theory has a descriptive side and a prescriptive side. My favorite passage in the section on the descriptive side was this one:
As an analytic framework, MMT is about identifying the untapped potential in our economy, what we call our fiscal space. If there are millions of people looking for paid work and our economy has the capacity to produce more goods and services without raising prices, then we have the fiscal space to bring those resources into productive employment.
This, of course, is very different from treating the economy as a self-balancing machine that functions fine as long as government does as little as possible. MMT represents a fundamental shift of philosophy that may or may not appeal to enough policymakers to make a difference.
On the prescriptive side, MMT aims to give precedence to fiscal policy, despite calling itself a monetary theory. It has a strong monetary premise—the monetary sovereignty of nations like the United States—but it sees that condition as potentially liberating the nation to spend in more constructive ways. It is not at all like the monetary school inspired by Milton Friedman, who recommended limiting inflation by strictly controlling the growth of the money supply, and had little use for fiscal policy at all. MMT gives fiscal policy a major role in growing the economy.
To some degree, fiscal policy already revs up automatically when the economy contracts. When incomes fall, so does tax revenue, while federal spending for things like unemployment insurance and food stamps rises. The federal job guarantee recommended by MMT would be “a powerful new automatic stabilizer,” employing more people whenever jobs are scarce. Kelton describes it as a “highly decentralized Public Service Employment (PSE) program that offers paid work at a living wage (we recommend $15 per hour) with a basic package of benefits that include health care and paid leave.” She estimates that about 15 million people could be employed. The Department of Labor could fund and administer the program, but local communities would have a lot to say about the specific work to be done. The work could address the “deficits that matter” described above, by such means as adult education and training or environmental projects.
As I said at the start, this is a more optimistic economics that emphasizes real resources instead of artificial budget constraints. Kelton’s final thought:
In the United States, where we have an abundance of resources and labor, there is no reason we cannot embark on a policy agenda that results in provisioning our entire population with quality health services, providing each worker with adequate and appropriate advanced education and job training, upgrading our infrastructure to meet the demands of a low-carbon world, and ensuring adequate housing for everyone while redesigning our cities to be clean, beautiful, and nurturing of community spirit….
With the knowledge of how we can pay for it, it’s now in your hands to imagine and to help build the people’s economy.