56 pages • 1 hour read
Stephanie KeltonThe Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy
Nonfiction | Book | Adult | Published in 2020A modern alternative to SparkNotes and CliffsNotes, SuperSummary offers high-quality Study Guides with detailed chapter summaries and analysis of major themes, characters, and more.
Chapters 7-8Chapter Summaries & Analyses
Chapter 7 Summary: “The Deficits That Matter”
Kelton terms fundamental shortfalls in American society that affect citizens’ daily lives “the deficits that matter.” She identifies six critical areas: employment, savings, healthcare, education, infrastructure, and democracy.
The employment deficit manifests in both quantity and quality of available jobs. Several case studies illustrate this: Rick Marsh lost his position at a GM plant in Ohio; Rocio Caravantes worked multiple minimum-wage jobs in Chicago just to afford basic necessities. Despite low unemployment statistics, post-2008 job growth concentrated in low-wage sectors, with nearly three-quarters of new positions paying under $50,000 annually. The author points out that inflation-adjusted wages for average workers increased only marginally between the 1970s and 2018.
Regarding the savings deficit, Kelton presents stark statistics about retirement preparedness. A significant portion of working-age Americans possess no retirement assets, while those who do have saved inadequate amounts. The author attributes this partly to rising educational costs and student debt, citing examples of couples earning six-figure incomes who struggle with substantial student loans while trying to save for retirement. This deficit, she notes, disproportionately affects racial minorities and women.
The healthcare deficit receives particular attention as Kelton describes how the United States, despite spending more per capita on healthcare than other developed nations, achieves worse outcomes. She cites declining life expectancy and high infant mortality rates compared to other OECD countries. The author highlights significant disparities in health outcomes based on socioeconomic status and race, noting a nearly 20-year gap in life expectancy between wealthy and poor neighborhoods in Baltimore.
In discussing the education deficit, Kelton examines inequities from preschool through higher education. She describes how property tax-based school funding creates vast disparities between wealthy and poor districts. The author uses the example of Des Moines public schools’ consistent losses to wealthy suburban schools in sports as a metaphor for broader educational inequities. She also addresses the student debt crisis, noting its disproportionate impact on students of color.
The infrastructure deficit encompasses various systemic failures in American society, from deteriorating bridges and roads to inadequate housing. Kelton references the American Society of Civil Engineers’ D+ grade for US infrastructure and their estimate that addressing these issues would require several trillion dollars over a decade. She also discusses the housing crisis, particularly its impact on renters and its historical roots in racial discrimination.
The chapter concludes by examining what Kelton terms the democracy deficit: the gap between wealthy and poor Americans in terms of political influence and participation. She presents evidence showing that policy outcomes typically align with wealthy citizens’ preferences when they conflict with those of average Americans. The author argues that extreme economic inequality undermines democratic participation, citing significantly lower voter turnout among lower-income Americans.
Throughout each section, Kelton connects these deficits to MMT, arguing that addressing these issues requires shifting focus from financial constraints to real resource constraints. She maintains that the federal government possesses the financial capacity to address these problems, but artificial budgetary constraints and political choices prevent effective solutions. The author contends that recognizing the government’s true fiscal capabilities would allow for meaningful action on these critical societal deficits.
Chapter 8 Summary: “Building an Economy for the People”
In Chapter 8, Kelton examines how modern monetary theory could transform economic policy and create an economy that serves all people.
The chapter begins with a pivotal meeting in 2010 between Warren Mosler, Kelton, and US Congressman Emanuel Cleaver during the aftermath of the Great Recession. At this meeting, Mosler proposed three solutions to address the economic crisis: implementing a federal job guarantee, reducing Social Security payroll taxes, and providing substantial aid to state and local governments. Though Cleaver appeared to understand and agree with MMT’s principles during the meeting, he ultimately decided not to advocate for these policies, fearing the political consequences of challenging conventional economic wisdom.
Kelton uses this meeting to illustrate how deeply entrenched deficit myths remain in American politics, even when policymakers privately acknowledge their flaws. She explains that politicians and media figures continue promoting the incorrect notion that federal spending must be “paid for” through tax revenue or borrowing. This misconception, she argues, unnecessarily constrains economic policy and prevents effective responses to crises.
The author presents MMT as having two components: a descriptive element that explains how modern monetary systems actually function, and a prescriptive element that suggests policies based on this understanding. The descriptive aspect reveals that currency-issuing governments face no inherent financial constraints, only real resource constraints. The prescriptive aspect advocates for using this knowledge to address social needs and economic stability.
Kelton proposes a federal job guarantee as MMT’s primary solution for maintaining economic stability. This program would offer employment to anyone seeking work, with positions focused on community needs and environmental protection. The jobs would pay a living wage with benefits, and funding would automatically expand or contract based on economic conditions. She cites several historical precedents for public employment programs, including the New Deal programs of the 1930s and more recent initiatives in Argentina, South Africa, and India.
The author emphasizes that MMT does not advocate unlimited government spending. Instead, it suggests replacing artificial budget constraints with more meaningful considerations about resource availability and inflation risk. She points to President Kennedy’s moon mission as an example of successful policy implementation based on resource availability rather than budget constraints. Kennedy focused on marshaling real resources—scientists, engineers, and materials—rather than worrying about finding money to fund the program.
Kelton concludes by addressing current challenges, particularly climate change, arguing that MMT principles could help facilitate necessary large-scale investments in environmental protection and adaptation. She maintains that the primary obstacle to addressing major societal challenges is not financial resources but rather a failure of imagination constrained by incorrect beliefs about government finance.
Chapters 7-8 Analysis
Chapters 7-8 serve as the culmination of the book’s argument, synthesizing previous concepts while introducing new frameworks for understanding economic policy and public spending. Kelton structures these chapters around the examination of various “deficits” in American society—from healthcare and education to infrastructure and democracy—using these concrete examples to illustrate the broader implications of her economic theory.
The Government’s Unique Power as a Currency Issuer continues to be a key theme in Kelton’s detailed explanation of federal spending mechanics. She argues that the government’s ability as a currency issuer fundamentally differs from household or state budgets, as illustrated through President Kennedy’s approach to funding the space program. Kennedy, Kelton notes, never questioned whether America could afford to go to the moon; instead, he focused on whether the nation possessed “all the resources and talents necessary” (298). This distinction highlights how currency-issuing governments can mobilize resources without traditional revenue constraints.
The theme of Challenging Conventional Wisdom that Deficits are Bad runs throughout both chapters as Kelton systematically dismantles traditional objections to government spending. The author presents compelling historical evidence, including the success of New Deal programs which “put hundreds of thousands of men to work building schools, hospitals, libraries, post offices, bridges, and dams” (292). Similarly, she cites Argentina’s Jefes de Hogar plan, which employed two million people and reduced extreme poverty by 25% in just six months. These examples demonstrate how targeted government spending can address societal needs without the catastrophic consequences often predicted by deficit hawks.
Real Resource Constraints versus Fiscal Constraints forms a cornerstone of Kelton’s argument as she shifts the discussion from monetary limitations to actual resource availability. As she pointedly states, “Coming up with the money is the easy part. The real challenge lies in managing our available resources—labor, equipment, technology, natural resources” (301). This perspective reframes political discussions about government programs.
Kelton uses rhetorical strategies to convey her arguments, particularly through the use of metaphors and personal narratives. The account of her meeting with Congressman Emanuel Cleaver serves as an illustration of how deeply entrenched deficit myths remain in political discourse. When presented with MMT concepts, Cleaver experienced what Kelton calls a “Copernican Moment”—a fundamental shift in understanding—yet still felt unable to publicly acknowledge these insights due to political constraints. This anecdote demonstrates how political, rather than economic, barriers often prevent the implementation of MMT-based policies.
The author grounds her analysis in extensive evidence, ranging from historical examples to contemporary economic data. She cites specific statistics about the impact of government programs, such as how “the Works Progress Administration created about 8 million construction and conservation jobs” during the New Deal era (292). International examples, including India’s Mahatma Gandhi National Rural Employment Guarantee Scheme, demonstrate how other nations have successfully implemented elements of guaranteed employment programs. These case studies serve to strengthen her argument that government spending can effectively address societal needs.
modern monetary theory provides the analytical framework through which Kelton examines economic policy and government spending. She challenges traditional economic theories by emphasizing that “the federal government is already paying all of its bills using nothing more than a keyboard at the New York Federal Reserve” (297). This shift in understanding how money works leads to her conclusion that the real limits on government spending are not financial but relate to resource availability and inflation risk. As she explains, “The government’s spending capacity is infinite, but our economy’s productive capacity isn’t” (297). This distinction forms the basis for her argument that policymakers should focus on managing real resources rather than arbitrary financial constraints.
