The trillion-dollar woman

A conversation with the economist Stephanie Kelton about the "deficit myth," Modern Monetary Theory for dummies, and why the age of capital may finally be ending

Joe Biden is president of the United States, but he lives in Stephanie Kelton’s world.

An economist and champion of so-called Modern Monetary Theory, Kelton has long agitated against what she calls “the deficit myth,” which is also the title of her bestselling book on the subject.

At the most basic level, Kelton believes the United States government is capable of investing far more than it ordinarily does, or than most people think it should, in making people’s lives better. And she argues that much of the resistance to doing so is grounded in outdated, gold-standard thinking that has no place in reality today.

Whatever you think of her ideas, which have a rapidly growing number of adherents, and which tend to make Larry Summers cry, there is no question that they are carrying the day in the American public debate. Indeed, it is hard to understand the comfort the new Biden administration has had with significant government spending — contrary to Biden’s own past nature — without understanding how much the terms of the debate have shifted, and how much Kelton herself has to do with that shift.

So I’m excited to bring you this interview with her today.

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“We’re closer than we’ve been in a long time”: a conversation with Stephanie Kelton

ANAND: In the wake of the passage of the American Rescue Plan, we’ve heard every manner of reaction. Joe Biden is a dangerous socialist. Joe Biden is putting lipstick on the pig of austerity politics. Joe Biden is the second coming of FDR. Or maybe LBJ. How would you assess what happened and what it tells us about where this presidency is headed?

STEPHANIE: I served as one of eight members on the Biden-Sanders “unity task force” on the economy. Some of the other members are now in the administration. I’m not sure exactly what I expected to see from Biden in his first 100 days, but the $1.9 trillion American Rescue Plan Act went beyond anything I would have anticipated.

And they’re not done. Later this week, we’ll get the details of a multi-trillion-dollar infrastructure package. It will almost certainly be too small, given the enormous challenges we face, and it isn’t clear how much of the proposed spending they will try to “pay for” with higher taxes. If they insist on raising a slew of taxes to offset all (or mostly all) of the spending, it could make it more difficult to hold all 50 Senate Democrats together. Any slippage risks paring back the price tag and, thus, delivering an even smaller package.   

But it’s encouraging to see the president recognize that temporary relief wasn’t enough. I think he knows that he can’t afford to preside over the kind of “recovery” we experienced after the Great Recession of 2007-2009. That’s what the “Build Back Better” agenda is about.

Biden is no socialist, but he does seem to understand that his presidency will be judged, in large part, on the degree to which his policies deliver material improvements in people’s lives. 

It’s way too early for comparisons to FDR and LBJ. I think Harvey Kaye, who has written several books on FDR, has this right. He tweeted that Biden will be less like FDR or LBJ and more like Dwight Eisenhower if Dems succeed in passing an infrastructure bill but can’t bust the filibuster and pass the PRO Act and the For the People Act

ANAND: The dog that didn’t bark during the rescue plan debate was deficit anxiety. You’ve devoted years of life to training that dog to stop barking. Can you explain what you observed in this debate regarding deficit angst fading from the culture, and why that matters?

STEPHANIE: Back in March 2020, I said, “It took a virus to kill the deficit myth.” It’s not dead, but you’re right. It’s been dormant for the last year. Angst over the deficit faded as soon as Covid became a national emergency. Congress spun out multiple packages without so-called “pay-fors.” The biggest — the CARES Act — was a $2.2 trillion spending bill. We got another one ($900 billion) in December and one more ($1.9 trillion) about a month ago. All of it added to the deficit.

Occasionally, the deficit still came up. Remember, the bipartisan group that worked out the $900 billion package in December openly worried about the “price tag” and whittled the survival checks down to $600. But Biden defended the $1.9 trillion by invoking the founding fathers, who he explained had given the federal government the ability to do what state and local governments can’t do — deficit-spend! He publicly embraced the deficit in a way I haven’t seen any president do in my lifetime. 

What I’m watching for now is where the administration goes next. The Treasury secretary, Janet Yellen, raised concerns about debt and deficits in her confirmation hearings, and she has a long history of worrying about a phantom debt crisis. She has talked about the need to “pay for” the parts of the Build Back Better agenda that are permanent, “to not raise long-term deficits.” The Obama administration’s pivot to deficit reduction remains an open wound in my heart. I hope the Biden team will turn a blind eye to the deficit and stay focused on healing the real economy. 

ANAND: You are a leading champion of what’s called Modern Monetary Theory. It’s a domain with a devoted fan base and many people who don’t understand a thing about it. Give me the explanation you’d give to a 10-year-old about what the old thinking was and what MMT seeks to replace it with.

STEPHANIE: The first chapter in my book is called “Don’t Think of a Household.” I open with a Sesame Street reference, so this is an explanation that most 5-year-olds can grasp. For those who grew up watching the show, a frequent segment was aimed at helping kids distinguish things that are alike from things that have some fundamentally different characteristics. 

“One of these things is not like the other,” the song went. So think about these four things: A household, a business, state and local governments, and the federal government. The first three share something important in common: none of them can issue the U.S. dollar. In order to spend, they must first come up with the money. 

The federal government is completely different. It has the sole legal authority to issue the currency. Biden was right! Article 1, Section 8, of the U.S. Constitution enshrined that power. Unlike the rest of us, the federal government can spend money it doesn’t have. New dollars are created every time the federal government spends. 

Take the Covid relief package. Congress didn’t go out and “find” $1.9 trillion before passing that legislation. It didn’t have to, because it has something the rest of us don’t — the power of the purse. The bill effectively ordered up $1.9 trillion new dollars from a bank called the Federal Reserve. The Federal Reserve carries out payments on behalf of Treasury, using nothing more than a computer keyboard to change the appropriate bank account numbers. 

If you received one of those $1,400 stimulus checks, that money was keystroked into existence to help your family. If you’re unemployed, and you’re getting an extra $300 a week in unemployment benefits, you’re also receiving newly created dollars, courtesy of the federal government.

If households, businesses, governors, and mayors had this power, they would plug any holes in their budgets on their own. But they can’t. They are financially constrained. The federal government isn’t.

MMT is about providing an accurate description of the monetary system that exists today and government finance mechanics. In other words, MMT describes how things work. We’re not on a gold standard anymore, but we haven’t come to terms with what that means. 

We still have this idea that the federal government needs our money in order to pay its bills. That is wrong. Could Congress spend too much? Absolutely! But the punishment for overspending is inflation, not insolvency, contrary to what Ron Paul, Ted Cruz, and Lindsey Graham would have us believe.

At its core, MMT is about replacing the (flawed) concept of a government budget constraint with a natural resource (inflation) constraint. It’s not that there aren’t any limits. There are! But they’re not on the financing side (as we have been trained to believe). Our government cannot run “out of money,” as President Obama once falsely claimed. We cannot end up like Greece, and, contra these economists, we were never facing a fiscal crisis. 

MMT teaches us to ask not, “How will you pay for it?” but “How will you resource it?” The politics are hard, but coming up with the money for Medicare for All, tuition-free college, or a huge infrastructure package is the easy part. Managing the use of our productive resources, and respecting our ecological constraints, is the defining challenge of our time.

ANAND: How significant is the new child benefit, and do you think it creates the rudiments of a basic income in American life?

STEPHANIE: It’s significant. Anytime you can cut child poverty in half with a stroke of the pen, it is, as Biden says, “a big f-ing deal.” It is life-changing and significant for millions of families. It shows that poverty is and always has been a policy choice. But it’s also, potentially, a temporary improvement in their economic station. 

It’s also the case that the aid is targeted to a particular group of people based on specific identified needs (i.e., child-related expenses), so in that respect, it is not like a universal basic income. It does get us closer to a point where every person has a guaranteed minimum income. However, it is also being considered in concert with an expansion of pre-K and a buildout of other care-related infrastructure, so it’s not just “give them cash and let the market sort it out.” 

ANAND: What do you think about many of these most significant — even philosophically significant — elements of the American Rescue Plan being temporary and requiring renewal before long? Is this a dangerous way of going about things, or perhaps a clever way of whetting the public appetite for change and then pushing it through when that appetite has grown?

STEPHANIE: Remember that Democrats passed the latest rescue package through a process known as budget reconciliation. And remember that the Senate is currently bound by the Byrd Rule, which, among other things, prevents lawmakers from using reconciliation to pass legislation that increases the deficit outside the 10-year budget window. 

So it’s a bit like when Republicans passed their tax cuts in December 2017. They used reconciliation as well, and they had to sunset specific provisions to comply with Byrd. Specifically, they made the corporate tax cuts permanent, but the individual income tax cuts temporary. 

There was just no way for Democrats to get a package through a standalone bill with the filibuster in place. To have the kind of freedom to do bold, FDR-like stuff, they need to get rid of a whole suite of self-imposed budget rules and constraints. I think you’re right, though. The public’s appetite has been whetted. Unlike the GOP tax cuts, Biden’s rescue package was enormously popular, and that should make it easier for lawmakers to turn some of the temporary measures into longer-term commitments.

ANAND: I wanted to ask you about the minimum wage. The increase to $15 was famously removed from this rescue plan. But the same legislators like Senator Joe Manchin, who didn’t like that provision, didn’t have a problem with $1.9 trillion of government spending.

If I’m generous, it makes me wonder if the concern is the pain on small businesses. Is there any way to raise the minimum wage but spare small businesses the burden — via some public support that would, in essence, make the society pay that increase, not individual firms? Is that a terrible idea?

STEPHANIE: I think there is a way, but it’s not really about making society pay. Lawmakers could negotiate a tax cut for small businesses to get the votes needed to raise the minimum wage. It’s basically how Congress did it the last time the minimum wage was increased. 

In 2007, Congress amended the Fair Labor Standards Act of 1938 to gradually raise the federal minimum wage from $5.15 per hour to $7.25 per hour. How did it happen? The bill was introduced in the House on January 5, 2007, and passed on January 10. All 233 House Democrats voted “aye.” Eighty-two Republicans joined them in voting “aye.” 

A cloture motion — to stop debate and move to a vote — in the Senate failed after President George W. Bush said he wanted tax cuts for small business owners who might be adversely impacted. The Senate included the tax cuts, and the amended bill sailed through with a vote of 94-3. I don’t see why we couldn’t do something like that again. 

ANAND: So here’s confusion I hear a lot. Modern Monetary Theory proposes that we should stop thinking about what programs we can do in terms of what taxes we can raise.

Yet there are these important calls for raising taxes on the ultra-rich — and whether it’s Elizabeth Warren or Bernie Sanders, they justify them in large part because of what can be paid for with the revenues. Is this a problematic way to pitch it?

Should we do a wealth tax? And if not for paying for things, then why?

STEPHANIE: First, the economics behind the conventional way of thinking about taxes is simply flawed. As the New York Federal Reserve's former head observed way back in 1946, “Taxes for Revenue are Obsolete.” The conventional wisdom derives from outmoded, gold-standard thinking, and we should stop debating tax policy as if we have a monetary system that is no longer with us. State and local governments need tax revenue to operate. The federal government does not. To have a fruitful discussion about federal tax policy, the word “revenue” should never come up.

In addition to getting the economics wrong, I believe it is politically harmful to pretend that we cannot afford to fix our crumbling infrastructure, or care for our people, unless and until we successfully wrest part of Jeff Bezos’ fortune away from him. 

I mean, come on. Congress just did something that will halve child poverty, and it didn’t raise a single tax to do it. So, of course, we don’t need to tax the rich in order to be able to spend trillions on programs that benefit the majority of the population. As I argued here, we’ve had that power all along. 

Here’s how I put it in “The Deficit Myth”:

We can, and must, tax the rich. But not because we can’t afford to do anything without them. We should tax billionaires to rebalance the distribution of wealth and income and to protect the health of our democracy.

But we don’t need to crack open their piggy banks to eradicate poverty or to have the federal job guarantee with a living wage that Coretta Scott King fought for. We already have the tools we need. Feigning dependence on those with incredible wealth sends the wrong message, making them appear more vital to our cause than they are.

I think every MMT scholar strongly favors substantial tax increases on the wealthiest people in our society — not so much because they’re not paying their fair share but — because they have been taking more than their fair share for too long, something you’ve written about yourself. We have dangerous levels of income and wealth inequality, and that is all the justification I need to support many of the tax increases Senators Warren and Sanders have proposed. 

But we must go further. Senator Warren admits that the uber-wealthy will barely feel the pinch of her 2 percent wealth tax (escalating by another 1 percent on fortunes over $1 billion). Why? Because, she admits, their wealth tends to grow at an annual clip that far exceeds 2 or 3 percent, meaning it doesn’t get us to a place where we’re dealing with extreme concentrations of wealth. 

Ironically, I think this has to do with the fact that the wealth tax is being touted primarily as a way to “pay for” parts of the progressive agenda. It’s almost as if the goal is to peel off just enough to claim that it will “pay for” universal pre-K, some student debt cancellation, etc., rather than to aggressively deal with the concentrations of wealth that have been undermining our democracy.

That may be changing. I noticed last week that Senator Sanders seems to be inching closer to the MMT view. As Niv Elis wrote in the Hill, “Sanders also made it clear that he sees the issue not so much as a matter of paying for favored policies, but in creating a more equitable society.”

ANAND: Given the historical residue of the Cold War and the lingering American fear of big government and communism around the corner, how can those who want what you want in terms of economic policy do a better job of pitching their ideas to those millions of members of the public who are skeptical, if not hostile?

STEPHANIE: I think Biden is a pretty terrific messenger. He sold the population on the need for a nearly $2 trillion rescue package, and he’s on the verge of barnstorming the country to build support for another $3 to $4 trillion for his Build Back Better agenda. He could go even bigger, and I think he could do it without giving the other side any rope to hang him with. 

It’s not communism or socialism but a kind of protectionism that he could successfully lean into to build support for a more progressive suite of economic policies. 

Donald Trump successfully pushed a protectionist narrative. A typically racist and ugly kind of protectionism, but protectionism nonetheless. Much of it was purely racist. It was about protecting “us” from “them.” But he also spoke of the economic system's failures and the way he intended to protect workers from raw trade deals and the like. 

“Help is on the way,” he bloviated, pretending to understand the pain of working-class voters who had seen their towns and communities become shadows of their former selves, hollowed out by decades of neoliberal trade, labor, and environmental policies. 

Biden wouldn’t be selling communism or socialism, but he could sell America on a different kind of protectionism. 

And now we come full circle. FDR’s Economic Bill of Rights was a protectionist document. It enumerated a set of essential protections that should be afforded to every person in this country. The right to a job and a decent wage, the right to operate a business free of unfair competition and monopolies, the right to an education, to housing and health care, and to a secure retirement. 

We all want the sense of security that comes from knowing that whatever the vagaries of capitalism may throw our way, there are certain safeguards in place to protect all of us from poverty and deprivation. 

Biden could even one-up FDR, presenting us with a 21st-century version of an Economic Bill of Rights. Something along these lines.

ANAND: For years, my plea has been that we have to end the age of capital — this neoliberal era — and launch an age of reform. Where do you think we are at this moment in time on that long arc?

STEPHANIE: I’d say we’re closer than we’ve been in a long time, but it could well get much worse before it gets better. I hope I’m wrong, but climate change is going to confront us with some very bad circumstances. If we can’t rebuild basic levels of empathy and communitarian commitment, those bad circumstances are going to make us meaner, more scared, more selfish, and ultimately more violent than we already are. 


Stephanie Kelton is an economist, professor, and former advisor to Bernie Sanders'  2016 presidential campaign. You can order her latest book, “The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy,” here. This interview was edited and condensed for clarity.


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Photo: Courtesy of Stephanie Kelton