"The deficit myth" - Money is not keeping us from tackling Climate Change

I recently read “The deficit myth” by Prof. Stephanie Kelton. In her book, Dr. Kelton (a former chief economist on the United States Senate Budget Comittee who teaches economics and public policy at Stony Brook University) describes the main principles and conclusions of Modern Monetary Theory on money and on public financing of - among others - climate action. Here are my core take aways from her book:

1) Governments who can issue their own currency (and who are not owing money in foreign currencies to others) must not be seen like a private household. Contrary to a household, a city or a company, a financially sovereign nation state can never run out of money. If they issue debts, they can always pay it back just by striking a keyboard on their computers. Public debt should be no concern to them. Only inflation should.

2) A public debt is therefore not a sign of overspending. Any federal government deficit is equivalent to a surplus in the rest of the economy. It leaves more money with the economy than what it charges back. It creates growth.

So there is nothing wrong with government debts unless they are spent on consuming more of what we need, instead of producing more of what we need. If government money is utilized to consume the natural resources we are depending on, we have a problem. If it is utilized to preserve or even restore what we are depending on, it is well spent.

Governments spending - like taxes - is how governments stimulate and direct economies into whatever direction they want to direct them to. Resources matter. Tools matter. The integrity of our society matters. Our wisdom and our understanding matter. The health of our planet and of ourselves matters. Money only matters as an instrument to orchestrate and grow our resources.

3) Taxes, in this view, are not financing government spending. Government spending needs no financing, since governments can issue their own currency, creating all the money they need. Taxes are only a tool to redistribute wealth, to create demand for a currency, to prevent inflation, and to incentivize a desired private and business behavior. Governments do not depend on taxes. “How are we going to pay for it?” therefore is not the right question: “In truth, there is only one way to pay for anything. All federal spending is carried out in exactly the same way – that is, the Federal Reserve credits the appropriate bank account(s)” (p. 239).

4) A trade deficit, and foreign nation states holding a piece of national debts in the national currency, consequently do not imply a dependency on other states. Any debt in its currency can be repaid by the stroke of a computer keyboard if a government wants to. In contrast, by running a trade deficit, an economy is in fact receiving goods from another country, and the only return they provide is an entry into a virtual excel-spreadsheet stating that a certain amount of money is owed. If trust in a currency is strong enough to support this, then running a trade deficit is in fact a pretty good deal. There can never be any dependency on money, as any debt can be repaid in a minute. The only real dependency can be on products.

5) The real deficits that matter are therefore not budget deficits. The true challenge – apart from containing inflation – is to possess the real resources to provide for the kind of life a government aspires for its citizens: “The number that falls out of the budget box at the end of the fiscal year isn`t what’s important. What matters is building a healthy economy so that all of us can thrive. … MMT teaches us that if we have the real resources – that is, if we have the building material to fix our infrastructure, if we have the people who want to become doctors, nurses, and teachers, if we can grow all the food we need – then the money can always be made available to accomplish our goals” (p 255).

Kelton later quotes former president John F. Kennedy to summarize this view on public spending: “The deficit can be any size, the debt can be any size, provided they don`t cause inflation. Everything else is just talk” (p. 257).

The predominant view holds that governments depend on taxes to pay for their expenditures. This view is on one hand keeping financially sovereign nation states from adequately protecting their citizens and their economies and from investing sufficiently into a sustainable future. On the other hand, it is creating a dangerous power imbalance between the economy and the rest of societies, and their political representatives: “The myth that Uncle Sam`s [the federal government in the U.S.A.] deficit is cause for concern helps drive our very real democracy deficit: if our elected leaders believe they must either go begging to the rich before they can spend money on the public good – or that they must fight the rich for that same money – then of course the foibles and ticks and quixotic political desires of our richest citizens will become the primary obsession of our governments.” (p. 224)

Having read this book, I like to see every country and their currency like a separate game of “Monopoly”. The money in this game is not coming from the players, it is coming from the central bank. If a player does not abide by the rules, or if he/she doesn`t like them and threatens to leave the game – then let them do it. They can take their money, the central bank has enough of that. But they have to leave their real resources (streets, houses, hotels) behind.

Governments are the conductors in the orchestra of our economies, they do not play an instrument themselves. It is their responsibility to make sure that the overall sound of our society and our economy is in harmony. Surely, when having to purchase products in other currencies, or when having to repay foreign debts, Modern Monetary Theory does not apply. But there is no reason, why the European Union, the USA, China, Japan, Brazil, Indonesia, Australia, India and all the other currency issuers should not create debts in order to pay for the ecological transformation of their economies, and there is no reason why they couldn`t do so for the protection of other countries` natural resources as well.

Debts, money and currencies are tools, not an end in themselves. Their value is based on the amount of trust that we place in them, so they should be handled with great care. But if the planet dies, money has no relevance. "Ecological exploitation is a failure of imagination - a failure to imagine how we can simultaneously improve living standards, maintain a prosperous economy, and transition human activity so that we are protecting people and the planet" (p. 261).

Sometimes this book sounds a bit like a school book in its redundancy of stating that a federal government debt is in no way comparabe to the debt of a private household, since the federal government is a currency issuer, not a currency user. On the other hand, the conventional view to see taxes as the source of government spending, and to see a public budget deficit as a sign of overspending, is so deeply rooted in any kind of public discourse, that "challenging these articles of faith is heretical" (p. 232). The MMT lense on government spending is such a paradigm shift, and it has such a fundamental transformational power, that it probably can not be stated often enough.

I highly recommend reading the book to any politician, climate activist, journalist, business person or interested citizen. The myths we are told to believe about the sources of money are as profoundly anchored in our mindsets as they are detrimental to our communities, our planet, and its climate. They are systemically recreated by ourselves, fuelled by those who benefit most from them. It is high time that we overcome them.