Book SummaryThe Deficit Myth, by Stephanie Kelton

1-Page Summary1-Page Book Summary of The Deficit Myth

In The Deficit Myth, economist Stephanie Kelton—a former Senate Budget Committee staffer and 2016 campaign adviser to Bernie Sanders—writes that nearly all of the public discourse about national debts and deficits gets the facts entirely wrong.

A leading proponent of the heterodox economic school of thought known as Modern Monetary Theory (MMT), Kelton argues that it is incorrect to think of the U.S. federal government as “needing” money to pay for its spending. Because the government is the sole supplier of U.S. dollars, it can simply create them anytime it needs more dollars to pay for something.

This idea of the federal government as a currency issuer instead of a currency user is central to The Deficit Myth, in which Kelton champions more aggressive deficit spending by arguing that the U.S. government could finance any program it wishes to create. Kelton advocates a more holistic view of the economy—arguing that we ought to focus on poverty reduction, combating climate change, and building a more just and equitable society as the true measures of economic success, rather than focusing solely on the narrow budgetary impacts of legislation.

Kelton’s argument rests on these key principles:

1. The federal government doesn’t need to balance its budget like a household.
2. The risk of inflation—not deficits—represents the real threat to economic growth.
3. The national debt isn’t a threat to our society or economy.
4. The trade deficit doesn’t have to lead to job loss and unemployment.
5. Social spending programs like Medicare and Social Security are not in danger of going broke.
6. We should implement a federal jobs guarantee to secure the fundamental right of every person who wants a job to have one.

In this guide, we’ve consolidated some of Kelton’s logical structure and omitted some anecdotal details (many of them related to her experiences working on the Senate Budget Committee) to focus on the main arguments. In particular, we streamlined and eliminated some sections (related to debunking myths about federal borrowing “crowding out” private borrowing and about the need to tackle non-fiscal deficits our society faces) because these were tangential to the main thrust of the book. We’ve also added perspective from other economic experts—including some voices from outside the MMT community who question Kelton’s theories—in order to present a more nuanced and balanced view of the economic ideas in the book.

Criticism and Praise for The Deficit Myth

The Deficit Myth is a controversial book in the economics world and has drawn a fair number of critics and detractors since its publication in 2020.

A Wall Street Journal review claimed that Kelton offers little evidence for her view that there is always slack—in other words, unemployed labor or idle capital—in the economy, and that therefore new federal spending will almost never lead...

The Deficit Myth Summary 1. The Federal Government Is Not Like a Household

Kelton objects to the way politicians often compare the federal government’s finances to that of a household.

These politicians claim that just as a family must be careful of how much it earns in income and how much it spends, so must the government keep careful watch over how much money it takes in in taxes against how much money it spends on social programs, military expenditures, and other programs.

According to this line of reasoning, the government can’t consistently spend more than it earns in taxes, or else it will wind up in the same financial straits as a household would—an endless cycle of debt, escalating borrowing costs, cash shortages, and ultimate financial ruin.

Kelton writes that while this argument sounds intuitive, practical, and reasonable, it is based on an entirely false premise. In reality, the federal government’s finances are nothing like those of a household and operate under an entirely different set of rules.

Some commentators go a step further and note that the “government as a household” metaphor fails even on its own terms [because having a negative net worth isn’t necessarily bad even for most...

The Deficit Myth Summary 2. Inflation Is the Real Limit

Kelton writes that politicians, the media, and the general public take it for granted that large federal budget deficits are clear evidence that the government is spending too much on a yearly basis and living beyond its means.

But, as we’ve seen, any government that has monetary sovereignty (like the United States) has near-unlimited spending power and can sustain large deficits for long periods of time, because they can always create the money they need to meet any spending demands.

However, Kelton does acknowledge that there is a real limitation on how much the government can spend—inflation. Inflation is the constraint on our economy that limits how many goods and services we can produce without generating unsustainable price increases.

Kelton writes that inflation can occur “naturally” in the economy. Often, it doesn’t result from any policy decisions at all, but rather, from external supply shocks that boost prices—like a drought or hurricane that makes certain agricultural products scarce. But it can also come on the demand side, if consumers begin to demand goods and services faster than the economy can produce them.

**Baby Boomers, Demographics, and the Great...

The Deficit Myth Summary 3. There’s No Threat From the National Debt

Kelton writes that fearmongering about the U.S. national debt has long been a staple of political discourse. Politicians from both major parties seem to be constantly hyping the danger from the debt—that it threatens to eat us alive with escalating borrowing costs, that it constitutes a mortgaging of the country’s future, and that we’ll never be able to pay it back without either significant tax increases (Democrats’ preferred solution) or massive budget cuts (Republicans’ preferred solution).

But Kelton argues that this debt hysteria is both factually wrong and counterproductive for the nation’s economic health. In reality, the national debt poses no threat.

Is the Debt-to-GDP Ratio a Threat to the Economy?

Many economists have argued that the threat from the national debt is very real, and can even be precisely quantified. In a famous 2010 paper, Harvard economists Carmen Reinhart and Kenneth Rogoff argued that there was a specific threshold of debt-to-GDP above which a nation’s economy would begin to stagnate. They were particularly focused on...

The Deficit Myth Summary 4. The Trade Deficit Is Harmless

Trade deficits occur when a country buys more in goods and services from one country than it sells to that same country. If the U.S. buys $500 billion from Japan and sells $250 billion in turn, the U.S. would run a $250 billion dollar trade deficit with Japan ($250 billion - $500 billion = -$250 billion). In that same scenario, Japan would be running a $250 billion surplus with the United States.

Indeed, every trade deficit run by one country must be matched by a corresponding trade surplus run by another country as a simple matter of logic and accounting. By that same logic, it’s impossible for every country to run a trade surplus (or deficit for that matter).

Kelton notes that politicians on both sides of the aisle—in recent years Donald Trump most notably—have promoted the idea that trade deficits represent some kind of “loss” or fleecing of the U.S. at the hands of foreigners. But she notes that this idea betrays a fundamental misunderstanding of macroeconomics.

(Shortform note: Although Trump emphasized economic nationalist themes during his 2016 candidacy and his presidency (including the imposition of tariffs on China), [his administration made little headway in...

The Deficit Myth Summary 5. The Phony Entitlement Crisis

Claims that entitlement programs like Social Security, Medicare, and Medicaid are verging on insolvency or about to “go broke” are common in American political discourse. But Kelton argues that these claims are also false and designed to provide cover for a political agenda. The truth, she writes, is that these programs' finances are perfectly healthy, and the federal government will always be able to fund them.

These programs are crucial, as they provide much-needed financial security to society’s most vulnerable members—the poor, children, the elderly, the sick and disabled, widows and widowers, and veterans. Kelton writes that our society’s willingness to provide and care for its most at-risk people is a test of our humanity, compassion, and values that is far more important than these programs’ budgetary effect.

The Moral Case Against Entitlement Programs

Some conservative economists make the opposite moral argument from Kelton—that it is immoral to use the tax code to establish anti-poverty programs that confiscate property from some members of society to compensate others, even if those in the latter group believe themselves to be disadvantaged in some way....

The Deficit Myth Summary 6. Jobs As a Right: The Federal Jobs Guarantee

To use the federal government’s extraordinary fiscal power to create a society that is more equitable, sustainable, and prosperous, Kelton proposes a federal job guarantee.

She positions this as a crucial remaking of the economic order—having the federal government serve as an employer of last resort, guaranteeing the fundamental right to a job for anyone who wants one. As we’ve explored, the federal government can always create the dollars needed to finance the program. She writes that a federal job guarantee would reap important benefits for the economy and society as a whole.

During regular slumps in the business cycle, people who would normally be laid off and remain without jobs for months or even years would instead have the option to be immediately rehired by the federal government. Participation in the program would be counter-cyclical—rising during recessions, shrinking during booms.

It would also help to shore up state and local tax revenues during recessions because participants would now be earning paychecks and paying these taxes. This helps the economy avoid the typical cascading job losses that occur during a recession, when state and local...

Shortform Exercise: Understand the Deficit

Explore your understanding of deficits and debt.

Do you think the U.S. can sustain long-term deficits without sparking an economic crisis? Explain why or why not.

Shortform Exercise: Understand Inflation

Rethink your assumptions about inflation.

How do you think inflation harms the economy? What corrective measures do you think the government ought to take to reduce or prevent inflation?