The book is right in arguing that the Central Bank with monetary sovereignty need not be thinking like a household.


The Modern Monetary Theory (MMT) has been rearing its head from time to time in various avatars for almost a century which makes one wonder what is modern about it. The book, The Deficit Myth: How to Build a Better Economy claims to blow many myths and dogmas surrounding the existing economic theories governing us in fiscal and monetary space. The book is the latest addition and its author Stephanie Kelton, a former (under Democrats) Chief Economist on the US Senate Budget Committee is its latest adherent.
The book seeks to convince the readers that countries with monetary sovereignty like US, UK, Japan (power to print currencies without restriction imposed by pegging to gold or other currencies) can print notes to support full employment and social security payments without any risk of default. Inflation is the only risk, which will manifest itself and can be tackled by raising taxes.
If MMT, the theme of the book, has to be summarised for an Indian context it would run roughly as follows:
1. Guarantee MNREGA to everyone seeking it—urban or rural—right through the year without any maximum days’ restriction. Full employment at all times is the dominant economic goal.
2. Old age pension and Medicare to all. All pensioners to be covered with defined benefit plan (as opposed to defined contribution plan, which India adopted with great difficulty).
3. No fiscal deficit targets or agreements like FRBMs. So long as RBI has power to print notes, there is no risk of default.
4. The only risk from the above is inflation, which will manifest itself by signalling limits to MMT.
5. Fiscal, not monetary policy to be tasked with full employment, growth, etc.
Alan Greenspan’s testimony to Congress, which the book quotes in support, perfectly illustrates MMT’s futility as well. “There’s nothing to prevent the Federal Government from creating as much money as it wants and paying it to somebody”. The more important thing is “How do you set up a system which assures that the real assets are created which those benefits are employed to purchase”
Which nails MMT. The crux is how do you find so many economically feasible and viable jobs for 3-4% of the unemployed workforce (may be more in Indian context)? If not, the resulting cash transfers without asset creation will fuel inflation relentlessly.
Best way to test any social theory is to put it in practice. Within a generation or two all its shortcomings bubble forth, leading to some newer theories emerging from its ashes, only for the cycle to repeat. From Keynes to Friedman, from Marshall to Modigliani that has been the fate. If MMT had been administered this reality therapy, it would perhaps have faded into insignificance within a single generation.
The book is right in arguing that the Central Bank with monetary sovereignty need not be thinking like a household. Deficits do put money in private hands and help increase demand. Sure, the Government needs to run deficits to support issue of fiat currencies by their Central Banks just as US has to run trade deficits to put the dollar in others’ hands to sustain its currency hegemony. But to say “The only thing we (US) owe China (which owns the largest percentage of US treasuries) is a bank statement” seems amateurish brashness.
Despite all the critique, it would merit a Must Read recommendation.
It rightly demonstrates the pernicious effects for several countries in Eurozone like Greece who have surrendered monetary sovereignty.
It rightly warns against the pitfalls of free trade. “The IMF, WTO, and WB often run by bankers and diplomats from wealthy countries have no commitment to full employment around the world” and the western discourse and practice is likely to keep the developing countries forever developing. Agreements arbitrated outside home countries are only for protecting corporate bottom lines not for welfare of the affected.
The book traces how the bogie of deficit evil has been raised by the rich in the US leading to deteriorating inequality within that country.
Some bombardment of the orthodoxy is definitely called for and this book does that effectively by many forceful arguments. The Maastricht Treaty and India’s FRBMs are thoughtlessly self-constricted. With their safeguards, they make the host governments even more risk averse than the private sector when they are most required to offset private sector’s extreme risk aversion during recession.
This reviewer firmly believes that had an academician economist been Treasury Secretary instead of Hank Paulson, a private sector banker by profession, the response to 2008-09 meltdown would have been far less creative, far too slow and impeded by dogmas and guided excessively by many guardrails. Luckily, he had a willing cohort in Fed’s Mr Bernanke. It had the makings of a 1929 like Great Depression and we may have been grappling with its after effects for several years—perhaps even Covid would have been a sideshow a decade later. But their boldness tamed the wily demon fairly quickly—all due to their breaking the shackles.
The reviewer is author of “Making Growth Happen in India” (Sage)