On re-reading Chapter 2 of Stephanie Kelton's "The Deficit Myth" (part 2 of 2)
James Keenan
This is the second of two postings I'm making as I'm re-reading Chapter 2 of Stephanie Kelton's 2020 book, The Deficit Myth." The first posting is here.
Yesterday my comments fell into two broad categories:
Talking about inflation is difficult because macroeconomics is difficult.
Explaining the MMT approach often requires wading through the mainstream approach.
Both of these mean that Chapter 2 of Kelton's book is more difficult than other parts of the book. Today I want to address one further topic.
The world has changed -- somewhat -- since The Deficit Myth was written
Modern Money Theory emerged in the mid-1990s. In the MMT perspective, from then until 2020, the primary macroeconomic problem faced by monetarily sovereign countries like the U.S. was the underutilization of human resources -- not inflation. MMT advocates consistently criticized central banks and capitalist governments for austerity programs that used higher unemployment to strangle the slightest inflationary pressures in the cradle. They argued that governments could take much more vigorous steps toward eliminating involuntary unemployment by offering a Job Guarantee at a wage fixed to anchor prices. With a Job Guarantee in place, there would be little upward pressure on prices until and unless the economy came close to maxing out utilization of both human and non-human productive resources. Only at the ceiling of full employment of the labor force would the inflationary constraint kick in.
While the initial impact of COVID-19 was a sharp increase in the unemployed portion of the labor force, the longer-term impact has been a contraction in the overall size of the labor force. The ceiling has come down lower.
Example: I know a woman who was employed as a pediatrician and whose husband works in television. They were expecting a second child and expected to place that child in the same daycare center as their first. When the COVID crisis hit, the daycare center closed. The woman had to quit her medical job to care for two children. According to the categories defined by the Bureau of Labor Statistics, she's not unemployed because she's no longer actively looking for work. Rather, she would be classified as having left the labor force entirely. That translates to a loss in the capacity of the U.S. economy to provide medical services.
That's not unlike the case of, say, a woman working in a garment factory in Vietnam. Faced with a government unable to afford to vaccinate its population quickly, she might leave the factory and return to her rural native village. That translates to a loss in the capacity of the Vietnamese economy to produce clothing for export to the U.S.
Multiply this by the tens of millions and you see that we're now suffering not just from underutilization of economic capacity but from a contraction in the overall level of economic capacity as well. In this situation, why would we not expect upward pressure on prices?
Hence, the economic problems which the monetarily sovereign economies face have changed somewhat since Kelton was preparing The Deficit Myth for publication at the start of 2020. I emphasize the "somewhat." The U.S. is still a capitalist economy. The distribution of income and wealth is still skewing toward the top 1% and away from the working class. The Federal Reserve has changed its approach to monetary policy somewhat. The U.S. Congress -- or at least its Democratic caucuses -- is a little less uncomfortable with deficit spending than it used to be. But the need for a critique of the prevailing myths about Federal spending and the deficit is still as strong as when The Deficit Myth was published.
A final note
By now you will have noticed that in this posting I have generally been putting the term 'inflation' within quotation marks. That was deliberate. I don't like to use the term "inflation" to be synonymous with "an increase in prices" and I particularly dislike the term "asset inflation." I totally reject Milton Friedman's reduction of "inflation" to being "always and everywhere a monetary phenomenon." I'm more inclined to agree with Jonathan Nitzen: "Inflation is always and everywhere a phenomenon of structural change" (quoted in Blair Fix, The Truth about Inflation.