Review: The Deficit Myth

Review: The Deficit Myth

The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy by Stephanie Kelton

My rating: 3 of 5 stars

Deficits can be used for good or evil.

Robert Skidelsky, in his enormous biography of Keynes, remarks that economics today occupies the same situation as theology did in the Middle Ages—as a complex a priori logic that can be used to reach any number of contradictory conclusions. The more I read in the subject, the more I agree with him. To be taken seriously in politics means being able to use this logic. And yet, despite the seemingly scientific nature of this language, we seem hardly better able to pinpoint the nature of economic reality than the scholastics were able to count the angels.

I am exaggerating, of course. But I am a little distressed to find that, according to Stephanie Kelton, most economists and politicians—who already disagree with one another—are still fundamentally wrong about money, taxes, fiscal policy, and government debt. Here is another perspective to add to the mix: Modern Monetary Theory, or MMT.

Kelton begins the book by taking a page right out of David Graeber’s history of debt. Money was not invented, as so often supposed, to solve the problems of a barter economy. Instead, money and taxes go hand in hand. The argument goes like this: If you introduce a currency into a fully functioning credit economy (where people just keep track of what is owed to one another), then there is little reason why people would adopt it. But if you institute a tax payable only in this currency, and threaten punishment for non-payment, then suddenly everyone must find a way to acquire the new currency, and this means doing some work for the state.

In other words, governments introduced taxes, not to collect money (which it was producing anyway) but to compel work. And Kelton argues that this is still true today: that governments do not depend on taxes. She uses the example of a scorekeeper in a board game. The scorekeeper adds and subtracts points for other players, but they are never in need of points for themselves. Points are simply willed into existence whenever needed. Kelton argues that the US government (and other governments with what she calls “monetary sovereignty”) is in essentially the same position with regard to the US dollar. Since we use a fiat currency, any number of dollars can be willed into existence. Thus, the government does not depend on tax revenue, any more than a scorekeeper must subtract points from other players in order to stay afloat. In short, we do not have to worry about the deficit, since government debt is nothing like the debt you or I may have.

Does that mean that the government can just spend infinite money? No, Kelton says: though the deficit is not a problem, inflation may be. Too much government spending may lead to too many dollars chasing too few resources, which can cause prices to rise. Does that mean that taxes are unnecessary? Also no, according to Kelton, since, apart from compelling work, taxes perform at least two important functions. First, they remove money from circulating, thus decreasing inflationary pressure; and second, they reduce inequality, which leads to a healthier society. Yet if the government cannot spend infinitely, and if we still do need to tax, then what are we doing wrong?

To answer that, Kelton next turns her attention to unemployment. Kelton notes that unemployment is built into our economy, largely via the policies of the Federal Reserve. The Fed aims for an arbitrary level of unemployment (say, 3%) which it considers the “natural” rate. Going below this natural rate would, it is feared, cause inflation to kick in, since demand would outpace supply. But this “natural” rate is little more than a guess, Kelton argues. Even when unemployment has been very low in recent years, inflation has remained low. Indeed, in this argument Kelton seems to have been prescient, since just in August the Fed decided to change its policy of lifting interest rates once employment hits a certain level, thus paving the way for more sustained employment growth.

But Kelton has a fairly dim view of the prospects of using monetary policy to govern the economy. Instead, she thinks that unemployment should be directly eliminated using a Federal Jobs Guarantee. This is the main policy proposal of the book, and Kelton spends a good deal of time selling it. The advantages are compelling. Most obviously, unemployment is bad for people and communities, so it would be highly desirable to get rid of it. And a jobs guarantee would give workers more bargaining power, since the wage floor would rise (the jobs would pay a living wage) and the threat of losing work and health insurance would be eliminated.

Still, I admit that I was not convinced. For one, even according to MMT’s own premises, the huge increase in aggregate demand—caused by increased federal spending, eliminating unemployment, and increasing wages across the board—could cause inflation. Kelton does not really address this potential pitfall.

On a more practical level, I also have trouble imagining the logistics. Kelton describes a program that can employ anyone, anywhere, in socially meaningful jobs. But there is not necessarily the right amount of meaningful work in any given location, nor do the unemployed necessarily have the skills necessary to do this work (and re-training has its limits). I think that a substantial amount of make-work is inevitable in such a scheme. Furthermore, I can hardly contemplate the enormous bureaucracy that would be needed to administer such a program. It seems there would be just as many people making jobs as people needing jobs made for them.

The job guarantee’s major policy rival, universal basic income (UBI), has none of these practical challenges (though of course it could cause inflation, too), since it is merely paid via the IRS. Admittedly, jobs do provide social and psychological benefits that an income does not. But Kelton does not discuss UBI at all, which I thought disappointing.

At this point, the reader may be forgiven for wondering what is so new about MMT. After all, Paul Krugman—an orthodox Keynesian economist critical of MMT—has been writing for years about the mistake of thinking of the federal budget like a household budget, and the desirability of federal deficits in times of recession. The difference, so far as I understand it, brings us into dangerously wonky territory. Krugman avers that when we near full employment, a large deficit may require higher interest rates in order to avoid inflation. Kelton counters that our assumptions that low interest rates boost spending, and higher interest rates constrict spending, are actually incorrect. In other words, Krugman thinks that monetary policy can partly compensate for fiscal policy, while Kelton thinks that monetary policy is not particularly useful.

I have little to add to this, other than to remark that I can never understand why these disputes—like theology—always take the form of high theoretical debates from first principles. It strikes me that the impact of monetary policy is an empirical question that could be answered with a careful look at the historical record. But what do I know?

Well, I have done my best to elucidate this sacred mystery, but I ought to evaluate the book. Like many readers, I found the writing in this book extremely grating. The tone was somewhere between a salesperson and a televangelist—promising instant enlightenment and easy solutions—which immediately put me on edge. In fairness, when Kelton is not selling MMT but explaining it, the book can be quite fascinating. But Kelton’s insistence on treating MMT as blindingly true, and its enemies as either blinkered traditionalists or deceptive politicians, was not charming or effective. And the amount of repetition could even be condescending. By the time I reached the end, I really could not stand to hear another iteration of the central tenets of MMT. I got it the first couple times.

Whatever the flaws of the book, and whether or not MMT is an accurate picture of how the economy works, it at least makes you think about how the deficit is treated in public discourse. Anyone who reads the news cannot help but notice that the swelling deficit is only invoked when we have to pay for, say, healthcare or infrastructure; but, somehow, when tax cuts to the wealthy or defense spending are on the table, nobody seems to worry. Even if the deficit presents more of a problem than Kelton believes, it is obvious that, if anything is worth going into debt for, it is programs that benefit the public, rather than bombs or yachts. I hope that followers of Keynes, MMT, Thomas Aquinas, and William of Ockham can at least agree with that.



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Review: Debt

Review: Debt

Debt: The First 5,000 Years by David Graeber

My rating: 4 of 5 stars

For a very long time, the intellectual consensus has been that we can no longer ask Great Questions. Increasingly, it’s looking like we have no other choice.

Three years ago, I went on vacation in the north of Spain, to the city of A Coruña. There, perched on the jagged rocks below the Roman lighthouse, I read Oswald Spengler’s Decline of the West. The crashing sound of ocean waves just seemed an appropriate accompaniment to Spengler’s grandiose attempt to analyze all of human history.

At it happened, I ended up reading David Graeber’s Debt in the exact same circumstances. And perhaps this coincidence highlighted the odd similarities between Graeber’s book and Spengler’s. On the surface, the two men are quite radically opposed: Spengler is mystical, conservative, and mainly preoccupied with ‘high culture,’ while Graeber is conversational, leftist, and usually focused on more humdrum human affairs. But both The Decline of the West and Debt are sweeping scholarly exercises which attempt to completely alter our view of history. As a consequence, the books have similar merits—a large perspective, unusual connections, an original angle—while suffering from the same basic weakness: the attempt to strap history into a Procrustean bed.

But I am getting ahead of myself, as I should explain what this book is about. Graeber set out to write about debt, partly as a response to the 2008 financial crash, but also to respond to a certain moral confusion he noticed in the general culture. This is the notion that one always ought to ‘pay one’s debts.’ Most of us, I suspect, would agree that this is the right and proper thing to do. But there are many cases in which debt can be morally questionable. Consider a man who had an unexpected heart attack and was taken to a hospital out of his insurance network, or a young student who took out college loans but then had to drop out because her father had a heart attack, or a family who had agreed to a predatory mortgage for a house that the bank knew they could not afford, or a poor country forced to adopt austerity policies by the IMF in order to pay their debts richer countries—in any of these cases, is it moral to pay one’s debts?

As Graeber points out, standard economic theory does not hold that all debts must be repaid. Rather, both the lender and the debtor enter into an arrangement with a certain amount of risk. The loan is, in a sense, an investment like buying stock, and may or may not yield money according to the fortunes of the debtor. But this is not how we typically treat debt. Bolstered by our moral sense that debts should be paid, we accept a moral lopsidedness in the relationship, giving lenders quite extraordinary powers (garnishing wages, confiscating property) to extract money from debtors. Yet Graeber is not an economist, and does not want to restore a balance to the arrangement. Rather, he is disturbed by the very concept of debt. For what sets debt apart from an obligation is that it can be precisely quantified. This means debts require a system of money.

This leads Graeber to examine the origins of money, which for me was easily the strongest section of the book. Most economist textbooks explain money by pointing out that money solves the problem of a double coincidence of wants. That is, if I have some extra boots, and I would like to trade them for some beer, it is quite possible the brewer already has all the boots he needs. But if I can sell the boots for money, and the brewer accepts cash payments, then we are in business. The problem with this story is that there is no historical evidence that such a thing happened. Indeed, this hypothetical situation is rather bizarre—essentially taking a world very much like our own, and then removing the money.

Instead, it appears from the historical record that credit systems developed before actual money. These could be formal or quite informal. As an example of the latter, imagine you are living in a small village. One day, you see your neighbor wearing a nice pair of boots, and you ask if he has any extras. He does, and offers them to you as a gift. Next month, you make a big brew of beer and then give him a jug of it, offering it as a gift. The key is that, using such a credit system, you effectively get around the double coincidence of wants, since there is a very good chance that you will eventually have something your neighbor wants, and vice versa. This is just one informal example of how such a credit system could work with ‘virtual money.’ Graeber, being an anthropologist, is full of fun examples of exchange practices from around the world, all of which fly in the face of our idealized notions of purely economic transactions.

After quite effectively demolishing what Graeber calls the ‘myth of barter,’ he embarks on a grand tour of history. And here is where the book fell off the rails for me. Now, this is not to say I did not enjoy the ride: Graeber is an engaging writer and is full of fascinating factoids and radical notions. But I was constantly bugged by the sensation that either I was misunderstanding Graeber, or that he was not proving what he thought he was proving. To give you a smattering of Graeber’s points, he argues that the use of coinage influenced ancient Greek philosophers’ concepts of matter, that religions emphasizing selfless charity arose in reactions to markets emphasizing selfish acquisition, that our notions of property derive through Roman law from slavery, that money was actually introduced by kings who used it to debt-finance wars, and that the Spanish conquistadores were driven to commit such atrocities because they were in debt.

As you can see, that is an awful lot of material to cover; and this is just a sample. Each of these arguments is, in my opinion, quite interesting (if not always convincing). But, again, I was always unsure as to the larger point that Graeber was trying to make. On the one hand, Graeber seemed to be saying that money and debt are inextricably bound up in an ugly history of violence; but on the other, Graeber demonstrates that debt financing is a remarkably old and persistent practice, and is partly responsible for what we (pretentiously) call ‘civilization.’ At the end of the book, Graeber states that his purpose was to give his readers a wider taste of what is possible, so that we can reimagine our society. However, one of Graeber’s main insights is that history is cyclical: alternating from periods of hard money (like precious metals) and virtual money (like IOUs and fiat currency)—though both of these systems involve debt. If anything, then, this book left me with the impression that debt is an inescapable part of life.

Allow me, if you please, to mention one of my pet peeves here. Graeber is a big fan of etymologies. This book is peppered with words and their unexpected origins, which Graeber often uses as evidence in his arguments. In my opinion, this is a very lazy and unconvincing way of arguing. Do not misunderstand me: I like a good etymology as much as anyone. But the fact that a word once meant one thing and now means another does not, in my opinion, prove that these two concepts are somehow secretly connected. I would have much preferred more detailed examinations of historical evidence; but Graeber actually goes out of his way in the afterward to criticize historians for being overly empirical. This is not a message I can get behind.

But enough of that. I am sorry to be writing even a moderately critical review in the wake of Graeber’s tragic passing. For all of this book’s (perceived) faults, I am very glad to have read it. Like Spengler, Graeber had a mind full of fire, and was always letting off sparks in every direction. He was, in advertising parlance, an idea man; and this book is full of bold new ways of seeing our past and present. And even if Graeber’s grand theories about society and history do not, ultimately, pan out, one can say of Graeber what Walter Pater said of aesthetic theorists:

Many writers have been made by writers on art and poetry to define beauty in the abstract, and express it in the most general terms, to find a universal formula for it. The value of these attempts has most often been in the suggestive and penetrating things said by the way.

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Letters from Spain #14: Public Education

Letters from Spain #14: Public Education

Here is the next episode of my Spanish podcast. This one is about the enormous price differences between Spanish and American universities:

Here is the Apple Podcast:

https://podcasts.apple.com/us/podcast/letters-from-spain-14-public-education/id1469809686?i=1000465633689

For the transcript, see below:


Hello.

I’ve come back to work from a rather pleasant weekend. To celebrate our anniversary, Rebeca and I took a little trip to the Madrid mountains. It’s a beautiful place. The geography is dominated by grey granite formations (a material that also forms many of the local buildings) and the landscape is covered in pine trees. There are endless trails for hiking and lots of cute little villages to visit. The pueblo we happened to be in was populated by a bunch of hippies, eating vegetarian meals and drinking craft beer. It was a nice escape from the city center.

Well, anyways, in this podcast I don’t want to talk about Spain’s many vacation possibilities. Instead, I want to talk about something that is a source of envy for many Americans: public education. Specifically, public higher education. As with the cost of medicine, the cost of university in Europe is strikingly lower than it is in America. To give you an extreme example, going to New York University for one year costs (according to the internet) over $70,000. Now, admittedly NYU is one of the most expensive universities in the world. But even if you want to go to a much more modest college in America, like I did, you can still pay quite a lot. In my case, I went to a public university, Stony Brook, and had to pay well over $20,000 a year.

Meanwhile, my girlfriend went to the Universidad Autónoma de Madrid—one of the best universities in Spain—and paid around 3,000 euros per year. And a chunk of that was covered by a scholarship. Needless to say, she didn’t need to go into debt to get an education. Meanwhile, I graduated with well over $20,000 of debt and I’m still paying it off. So what is the deal with this huge price difference? It’s worth remembering that this wasn’t always the case. Every millenial has heard stories of Baby Boomers working their way through college. Just the other day I heard an economics professor say he paid for college by lifting boxes during the summers. Clearly, that’s impossible nowadays in America, so it’s worth asking what the deal is.

Obviously a big difference is how much the state subsidizes higher education. In Spain, as in many European countries, the government foots the bill. You could make the argument, therefore, that in Europe college isn’t really free after all, since the people pay for it in higher taxes. That’s one side to the story—and, of course, it’s a big one. But I think there is another, less-mentioned aspect to the college cost debate, and that is the culture of college.

In America, going to university is a rite of passage. It has been turned into a basic phase of young adulthood. You live away from your parents for the first time, and you live in a dorm with a bunch of other young people. Suddenly you find yourself in a world of young people with very few responsibilities. It’s a crazy time. People go to parties, fall in love, form close friendships, and very occasionally study. And campuses can be very comfortable places. My campus, for example, had free gyms all over the place, and even a pool to use. I joined an a capella club and volunteered in a local rock venue. The point I’m making is that college consisted of a lot more than just going to classes.

In Spain, college is not nearly such a huge personal step. It’s not mythologized like it is in America. I’ve never met a Spanish person who has a lot of pride for where they went to school, or strong nostalgia for their college days, or who has even really talked about their college experience at all. Meanwhile, I know Americans who dreamed of going to specific schools and whose whole friend group is from their college days. Really, university in Spain—and in much of Europe, I think—is a continuation of high school. It’s going to school. Most students don’t even move out of their parents’ house to get their undergraduate degrees. And if they do, it’s quite rare to move onto a dormitory on a college campus.

So one significant reason that college in America is so expensive, I think, is that it has become so much more than just going to school. Think about college sports. Each university in America has its own mascot, its own spirit band, its own star athletes. This doesn’t exist at all in Europe. My girlfriend doesn’t know her school’s animal. (My school’s animal is entirely fictional: it’s the Seawolf. And we had our own cheer: “What’s a Seawolf? I’m a Seawolf.”) In America, we expect a high profile guest to give a speech at our college graduation, where they praise us for being the best and the brightest the world has ever seen. Leaving college is a major ritual, too, after all. Again, nothing of the sort happens in Spain. There are no viral Spanish graduation speeches.

Since moving to Spain, I’ve come to see the American rituals of college as a bit ridiculous. A lot of it is fueled, I think, by our culture of competition. In the United States there are a handful of extremely prestigious schools with a limited number of spots, and where you go to school is a big determiner of your career. It thus becomes a part of your personal journey (and Americans love talking about their careers as personal journeys) and even your identity. This is partly why we demand so much from our college experiences. We don’t just go for the knowledge, but to take our rightful place in the hierarchy of society. We are supposed to emerge transformed, imbued with the prestige of our institution. If you don’t believe me, just talk to anyone who has gone to an Ivy League school. Either they reject it or it’s a part of who they are.

When universities are responsible for providing such an all-inclusive package—dormitories, food, social life, entertainment, psychological and physical health, and a life-defining education—it is no wonder that they cost a lot. What you are paying for is basically the brand itself. Even public universities in the United States pay huge amounts of money in marketing, in order to bolster the university’s brand. The better the brand, the higher the ranking, the more prestigious the university, and the more money it can charge to bestow its prestige on its clients—I mean students. 

I’m getting a bit carried away here, but I hope you see my point. In Spain, you are paying for your classes and little else. You emerge from university with a degree—more knowledgeable, hopefully, but not transformed into a vessel of prestige. To me, I think it’s a healthier system, not least because people don’t drive themselves crazy competing to get into the best university possible. Where you go to school does not determine your social status.

I have a limited experience going to a Spanish university. Last year, I completed a masters at the Universidad de Alcalá de Henares, in the Instituto Franklin (which specializes in American studies and courses for Americans abroad). The masters took one year to complete and cost me about $4,000. That’s not a bad deal. As an aside, Alcalá de Henares is worth visiting just to see the historic university buildings, which are quite beautiful. The oldest continuously operating university in the country is in Salamanca, which was founded in the 12th century. If you are in Salamanca—a beautiful city—this is also worth a visit.

Anyways, I didn’t want to talk about higher education the whole time. I also want to mention about the Escuela Oficial de Idiomas (the official school of languages). This is an initiative of the Spanish government to subsidize low-cost language classes outside of the university, mainly for adults. This year I began taking classes at one of the official schools in order to revive my atrophying German skills. And it’s been a great experience. I paid a little more than 200 euros for a whole academic year of classes. That works out to—what… about two euros per hour of class? It’s a very, very good deal. And the classes are quality, with properly qualified teachers and a well-established curriculum. I’m learning a lot this year.

There are dozens of official schools in Madrid alone and about half a million students enrolled in Spain. My particular school has a very wide range of languages on offer. Besides German, there are other major European languages like French, Italian, and English. There is Spanish for foreigners—quite useful for immigrants—and there are also the other three official languages of Spain: Basque, Catalan, and Galician. Aside from this, the school offers Dutch, Danish, Arabic, Greek, Gaelic, and Chinese (to give you the short list). If you want to become a polyglot, this is a place to be. And the school’s resources extend beyond the classroom. There are language exchanges, where you can find someone and “trade” languages, and also lots of cultural talks and events. There’s even a choir!

Of course, being run by the government, there are a few things to be desired. The school is in an ugly old building. One of the two elevator’s has been broken for two months, so I have to walk up the five floors to my class. And enrolling is a pain. But for what you pay, it’s really a great deal. In fact, I think that having a public school for language training is a wonderful idea, and one that we should embrace in the States. At the very least, it would be a great resource for immigrants. And it might help us with our famous monolingualism. I’d go even further, and suggest that the model of the Official School should be extended for other sorts of things. Computer coding, for example, or even photography—any kind of skill that adults might need to learn. Even on purely economic terms, investing in education usually pays off. After all, a multilingual workforce can outcompete a monolingual one.

In general, my experiences in Spain have made me a strong believer in public education, as uninspiring and inefficient as it can admittedly be sometimes. I think we lose a lot more than we gain by conceiving of college as a giant competition for limited amounts of prestige and status. Education should be about equalizing opportunities and not exacerbating differences, which it so often does in America.

And needless to say, graduating with tens of thousands of dollars in debt isn’t ideal. Let me give you a concrete example of the difference that debt makes. A few weeks ago I met a man from Scotland living in Germany. He had begun to study German language and literature, but a few years into his undergraduate he decided he didn’t like it—since he didn’t want to work as a translator or a teacher—and he stopped. Now, in America he would have been deeply in debt and without a college degree to help him get a job to pay for it. He would have to start working like mad to try to pay his loans off, and he’d have a difficult time for sure. (Even the loans we get from the federal government in America can have a high interest rate.) But this guy didn’t have to do that. He didn’t sink under the weight of debt since he didn’t have any. A few years later, he re-enrolled as an undergraduate to study music. And now he’s working his way through college—just like we used to do in America—paying for his living expenses with a part-time job as an audio engineer.

To many millenials in America, stories like that seem too good to be true. But are we willing to give up our mythologized college culture and settle into treating university as just additional schooling?—schooling that isn’t necessarily transformative and which isn’t necessarily the right step for every person? That’s hard to tell.

Thank you.