If you want to be at the cutting edge of economic policy-making, listen to Stephanie Kelton. She explains how a government spends, and how confusion about debt and deficits have held America back. Shaking up democrats and republicans alike, she shows there is nothing inherently dangerous about a large budget deficit. We should aim for a balanced economy, not a balanced budget.
Her encouragement of ambitious fiscal spending is rooted in Modern Money Theory, which reveals the true nature of money as a creature of the state (discussed in detail here). So long as a government is sovereign and has its own central bank, Kelton shows, it is the sole issuer of its currency. Being the sole issuer of its currency, it can never run out of money, and it will never fail to meet its debt obligations. It’s completely able to spend as needed.
Kelton is always quick to respond to the most common points of critique. Is she arguing for the government to run infinitely large deficits forever? No. She is advocating for the government to determine its spending level based on the state of the economy. Spending should be high enough to facilitate full employment, and low enough to keep inflation in check. The spending level should be chosen based on the impact it has on the economy. Not based on whether it allows for two columns to sum up nicely in Excel.
Over the past couple of decades, this school of thought has gained significant momentum. Kelton, who teaches at the University of Missouri Kansas-City, gained traction in the world of finance and more recently broke into Washington, where she served as Bernie Sanders’ chief economic advisor during his campaign. Providing the economic backbone behind Sanders’ plans to raise the incomes of the 99%, the vast potential of Kelton’s approach to fiscal policy gained recognition. Kelton still works with Bernie to further his movement and mobilize support across the globe.
It is worth keeping Kelton’s message in mind as the Trump presidency unfolds. Judging by this article in Politico, Trump plans to cut taxes on the wealthy, and “make the deficit great again.” Considering Kelton’s stance on the matter, such a move should be recognized as problematic because it worsens income disparities, not because it worsens the budget deficit. We should judge Trump on the impact he makes on the economy, not on his ability to balance the books.
Kelton’s message can also provide a powerful weapon against the republican majority that the democratic party will soon be up against. Her advice for democrats is as follows:
“Democrats face a difficult road ahead. Having failed to recapture the Senate, there may be few opportunities to advance progressive goals — e.g. raising the minimum wage or boosting infrastructure spending — without compromising other core values. Democrats may be tempted to give Republicans a taste of their own medicine by hollering about budget deficits as cover for obstructionism. That would be a mistake. Instead, they should stand firm against cuts to programs like Medicare and Social Security, exposing the truth about the government’s ability to sustain these programs indefinitely. And when they fight efforts to deliver huge tax cuts for those at the very top, they should make it clear that their opposition is not based on the budgetary impact but rather on the social and economic effects of widening income and wealth disparities.”
If you’re curious for more, be sure to follow Kelton on Twitter, and keep track of the blog she runs with Bill Black. You should also have a look at her crystal-clear presentations. Click here for a talk on the role of government, here for her ideas on inequality, and here to hear about her thoughts on the Bernie Sanders movement. And if you want to know how all this applies to the Euro-zone, this piece she wrote with Randall Wray is a great resource.