On re-reading Chapter 2 of Stephanie Kelton's "The Deficit Myth" (part 1 of 2)
James Keenan
Lately I've been re-reading Chapter 2 of Stephanie Kelton's 2020 book, The Deficit Myth." I've been re-reading this chapter -- entitled "Think of Inflation" -- for two reasons.
First, so that I'm ready to participate in a study group devoted to this book being organized by group member Britte.
Second, with recent spikes in consumer prices, "inflation" has become the dominant topic in the media and blogosphere. Everyone has an opinion about it. At a recent meeting of the New York Deficit Owls, one member reported being taunted by friends who were insisting that rising prices "proved" that MMT "is wrong." While I doubt that these people have taken the time to study Modern Money Theory, it is nonetheless true that people expect MMT advocates to have something to say about recent price increases.
So what should we say? In this post I am going to discuss some limitations of Kelton's discussion in the "Think of Inflation" chapter. I'm not going to be arguing that anything Kelton says is outright wrong. Rather, I'm going to address three topics:
The difficulties which Kelton -- or anyone else -- has in talking with general audiences about "inflation."
The difficulties Kelton -- or anyone else -- encounters when trying to present a critique of an aspect of orthodox economics which, though mistaken, is deeply embedded in public consciousness.
The ways in which the economic situation facing the U.S. when The Deficit Myth was being prepared for publication in 2019 have changed, and what that might mean for Kelton's arguments.
I'll handle the first two bullet points in today's posting. I'll handle the third bullet point in a day or two.
Talking about inflation is difficult because macroeconomics is difficult
Here is a list of some of the concepts which Kelton introduces or uses in Chapter 2 of The Deficit Myth:
- fiat currency
- cost-push inflation
- demand-pull inflation
- monetarism
- Federal Reserve dual mandate
- natural rate of unemployment
- aggregate demand
- functional finance
- federal job guarantee
- automatic stabilizer
Is your head spinning yet?
That's not surprising. These are the kind of concepts you might study over the course of several weeks in a college-level macroeconomics class. They're not "rocket science" but you can't simply turn tail and run away when you first encounter them. Kelton is a master communicator, but this chapter, more than any other in The Deficit Myth, demands that the reader or student really dig in. You can't sit back passively as if you were watching one of Kelton's YouTube videos.
Moreover, the terms above have what I would characterize as different degrees of ... reality. "Fiat currency" and "automatic stabilizer" describe clearly defined phenomena. "Federal Reserve dual mandate" points to specific legislation passed by the U.S. Congress. "Monetarism" and "functional finance" are distinct and opposing schools of macroeconomic theory and policy. The "federal job guarantee" is a policy advocated in the MMT approach that has yet to be tried in the U.S. The "natural rate of unemployment" is a concept which has been central to macroeconomic policy in the United States for more than fifty years -- and is simultaneously completely bogus.
Explaining the MMT approach often requires wading through the mainstream approach
Kelton's book is structured as a refutation of six "myths" about our economy and national economic policy. "Myths" not in the sense of symbolic representations of human emotions. Rather, "myths" in the sense of distorted descriptions of social reality which, while superficially plausible, serve to reinforce the power of vested interests and ruling classes. To be able to expose the six concepts as "myths" in the latter sense, we have to understand them enough to see why they are plausible -- and then go the extra mile to understand why they are wrong.
This is a problem which I myself encountered when studying economics at the graduate level and teaching it at the undergraduate level more than four decades ago. Take the "natural rate of unemployment" for example. It comes down to saying, "There's a certain level of unemployment that can never be eliminated unless you want inflation to take off. So the federal government should basically give up attempting to deal with it, even if that leaves millions of people unemployed." My students would have to learn the concept, not just because they had to answer questions about it on the final exam, but because politicians and pundits were basing policy recommendations on the concept. But only once I had taught the students the concept of the "natural rate of unemployment" could I start to provide a critique of the concept from a post-Keynesian or Marxist perspective.
In general, the concepts of orthodox or mainstream economics dominate not just the teaching of economics in college but also policy discussions in the press, on the internet, on Wall Street and in Washington. So those of us who are presenting a heterodox perspective like MMT are always fighting an uphill battle.
To be continued
Britte Marsh
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