Stephanie Kelton’s The Deficit Myth: Modern Monetary Theory and How to Build a Better Economy (2020) is a provocative challenge to the macroeconomic paradigm of the past century that sees persistent elevated budget deficits as a failure of fiscal management.

Kelton, a former economic advisor to progressive US Senator Bernie Sanders, argues that the political aversion to deficits is based on a fundamental failure to understand that economies with sovereign currencies can simply print more money. She advances the case for the radical post-Keynesian framework of Modern Monetary Theory (MMT), where deficits are a vital tool for governments to help build a more just economy.

Deficits are not to be feared, she writes. A government can spend all it needs for the good of its people and can use taxation as a tool to cool spending and damp down any inflation that arises. She writes: “The debt isn’t the reason we can’t have nice things. Our broken thinking is”.

Kelton structures her argument around six core “myths” that she aims to dispel in order for us to undergo a Copernican shift in our perspective. These include the notion that a government must balance its budget like a household, that deficits are inherently harmful or unsustainable, and that future generations could ever bear the burden of government debt.

Her central claim is that a government that issues its own currency by fiat cannot run out of money in the same way a household or business can. She argues for a reframing of the debate from the notion that deficits are harmful, to the idea that inflation is the real constraint of spending. She describes herself as the opposite of a monetarist-like ‘deficit hawk’, being instead a ‘deficit owl’.

The book is at its most compelling when it debunks the idea that deficits are, by definition, dangerous. Kelton persuasively argues that fiscal policy should be judged not by arbitrary debt-to-GDP ratios but by its real-world effects on employment, infrastructure, and public well-being.

She draws on historical examples, such as Franklin Delano Roosevelt’s expansionary New Deal to help tackle the Great Depression, as well as his wartime spending, to show that major public investment can drive economic growth, and even induce private investment, rather than stifle it.

The worldwide response to the COVID-19 pandemic since she published the book could be seen to be an endorsement of her argument. Governments around the world engaged in massive fiscal stimulus with little immediate concern for deficit reduction, from the US’s Inflation Reduction Act to the surge in spending in the UK which led its deficit to spike at 15% of GDP. Economies did not collapse as a result.

However, Kelton’s treatment of inflation – the Achilles heel of MMT – is too optimistic. The surge in consumer price inflation to over 9% in the US and more than 11% in the UK in the two years after their COVID stimulus packages, and the painful rise in long-term interest rates that persists even now, proved that there is no such thing as a free lunch.

Kelton acknowledges that inflation can become a problem if government spending outstrips productive capacity but does not fully address how policymakers should respond in such a scenario. While MMT proponents suggest taxation or spending cuts could be used to cool inflationary pressures, in practice, such adjustments could be politically unpalatable and difficult to time effectively.

Furthermore, her Keynesian concept of ‘idle capacity’ in the economy, whereby spending wouldn’t be inflationary, is far from watertight. According to Mises’s theory of the business cycle, such policies will only lead to more severe periods of boom and bust in the future.

The fundamental argument of MMT and The Deficit Myth, that governments or central banks need only fear price inflation, not insolvency, has been acknowledged by other economists, and even monetarists, for decades. But her claim that printing money only carries an opportunity cost when the economy is at full employment must be taken with a grain of salt.

The Deficit Myth bites off more than it can chew at times but its engaging and accessible call for a reframing of budget deficits makes an important contribution to a public debate. One that all policymakers and students of economics should understand. Even so, it is an argument that has been tested to its limits by recent history and found sorely lacking.