Testing Economic Theory

A couple of weeks ago, after speaking to a group at North United Methodist Church, I was approached by a couple who handed me a book and accompanying materials on Modern Monetary Theory. I explained that economics is definitely not one of my strong suits–far, far from it– but they insisted that the book, a New York Times bestseller titled The Deficit Myth, written by economist Stephanie Kelton–was clear and accessible.

So I took the book, and I read it. All the way through. And I found it very persuasive.

Modern Monetary Theory (MMT) begins with an undeniable fact: government budgets in countries with sovereign control over their currencies are very different from household budgets.  Not all countries have “sovereign control”–in the EU, for example, countries that have adopted the Euro cannot issue currency. They are “users” not issuers, and thus are constrained in much the same way as our household budgets are.

The United States, however, is not. Our government is not revenue-constrained in the same way as our households or our businesses. That doesn’t mean there are no constraints; it just means the constraints are different. As the book persuasively argued, budget hawks and public officials wringing their hands over the size of the budget deficit are still operating under economic paradigms that were appropriate when we were on the gold standard (and/or Bretton Woods), but the country today operates within a very different fiscal reality, one that requires that we change our previous assumptions.

MMT doesn’t dispense with fiscal responsibility; it redefines what responsible behavior looks like.

MMT advocates argue that the government can use its currency-issuing power to guarantee full employment, as it can fund necessary public sector jobs during economic downturns without worrying about running out of money. Governments can use fiscal policy more effectively to stimulate demand and support economic growth. MMT emphasizes the importance of managing real resources (labor, materials, technology) rather than focusing on budgetary ones.

The real constraint on government spending, according to MMT, is inflation.

If government creates too much money, it can fuel a speculative bubble; if it creates too little, it promotes stagnation. Taxation thus becomes an important tool–both for controlling aggregate spending and for altering the distribution of wealth and income–i.e., addressing and reducing the gap between the rich and the rest. (As the author notes, it’s important to determine when taxes should be raised or lowered, and especially which ones and on whom.)

I obviously cannot reduce the book’s lengthy and lucid explanations to a blog post. I strongly encourage you to read the book, or other explanations of MMT. I will note, however, that there are a growing number of economists, many cited in the text, who have adopted MMT because it is based upon an accurate description of the way our current economy functions.

Something that wasn’t in the text, but occurred to me as I was reading, was that both FDR’s New Deal and Joe Biden’s “Bidenomics” appear to have adopted some of the major tenets of MMT, by using government spending to boost wages and employment. I know that many people attribute FDR’s economic successes to wartime anomalies, but the data on Biden’s flourishing economy cannot be so easily dismissed.

As Heather Cox Richardson recently reported:

Data from the Bureau of Economic Analysis released today showed inflation continuing to come down. In November the Personal Consumption Expenditures (PCE) price index was 2.6% over the previous November, down from 2.9% in October. The Federal Reserve aims for 2%. Falling gas prices meant that overall, prices actually dropped in November for the first time since April 2020.

In a statement, President Joe Biden reminded Americans that “[a] year ago, most forecasters predicted it would require a spike in joblessness and a slowdown to get inflation down. I never believed that. I never gave up on the hard work, grit, and resilience of millions of Americans.” In addition to the falling inflation rate, he noted that “the unemployment rate has stayed below 4 percent for 22 months in a row, and wages, wealth, and the share of working-age Americans with jobs are higher now than they were before the pandemic began.” …

The administration is highlighting economic numbers not just because they are good—and they are: real gross domestic product (GDP) grew by an astonishing annual rate of 4.9% in the third quarter of 2023; under Trump it was 2.5% before the pandemic knocked the bottom out of everything—but also because they illustrate the administration’s return to an economic theory under which the U.S. government operated from 1933 to 1981.

Unfortunately, we have too many lawmakers and pundits who cling to outmoded paradigms even more fiercely in the face of empirical evidence to the contrary.


  1. “ it’s important to determine when taxes should be raised or lowered, and especially which ones and on whom.)”…
    “ we have too many lawmakers and pundits who cling to outmoded paradigms ”…
    I would suggest rather, we have too many lawmakers who see that they -and more, their donors- are the very ones for whom taxes should be raised. Rather than working for the good of the people, they work for their own enrichment.

  2. John wants us to believe an article by a libertarian conservative think tank that denies the negative impact of smoking, let alone denied climate science. Who would have guessed they would hate an economic theory that is contrary to their “let them eat cake” ideology

  3. As a grocery cashier, customers often come through my line, see how much their purchases are, and complain “inflation is real.” When I point out to them what the inflation rate is currently and that the cost of their purchases have little if any reflection of inflation, they look at me like I just sprouted another head. (Chicken is expensive because of bird flu outbreaks, which also affect the price of eggs, etc.)
    As for John S…well, Joe said it.

  4. This book should be required reading for all gop members of Congress and red state legislatures. Oh, and MMT should be taught in all high school economics classes.

  5. Gasp.. A politician that has no grasp (or chooses to ignore) reality!?!

    There are some fundamental shifts happening in the field of economics right now. The old Joe everyman model is being replaced being replaced by something along the lines of a monte carlo simulation that takes into account the range rational and non-rational behavior among the whole population.

  6. So what are the benefits of being constrained by a budget or being able to print as much money as you need? I suppose they both have benefits, and both have drawbacks. If you’re constrained by a particular budget, that’s an excellent excuse not to allow the currency to work for the average person. Especially the poorest and least privileged among us.

    Universal basic income would be an excellent idea to promote economic growth far outweighing the cost of that universal basic income. But alas it’s much easier to say no, a person does not rate enough, a person is not valuable enough to benefit society.

    Of course that’s actually the opposite of what a so-called Christian leaning country would work.

    America’s financial system is backed up by the full weight and confidence of the government. But how can a government which is dysfunctional guarantee its currency or debts? Eventually the infighting is going to collapse the financial institutions of this country. There is no safety net concerning it.

    We need more money? Just print it, will guarantee it! If that’s the case then, why are there so many poor folks in this country? Why are there so many hungry and homeless people in this country? Why are there so many folks unable to get adequate health care? How can you have faith in a government that allows folks who are insurrectionists to be part of that government. Reading is fundamental until it isn’t! Why do you think it is so important to burn books and ban literature? Because, the history of humanity shows exactly what is going to happen pertains exactly to what has happened!

    We look at Germany and say well, there’s an example of what could happen! Except, what happened in Germany directly correlated to what was going on in the United States. The laziness and the lack of understanding continues to doom humanity. Self-reflection can be harsh, but it also can lead to a path of change. Too bad, change very rarely comes. And, it’s always at the expense of the least of us! Definitely unchristian!

  7. Perhaps as many Reds as Blues accept MMT. They were OK with Trump printing money to pay for his absence of responsible economic management.

    Biden restored responsible economic management by realizing that MMT requires a world view, not a local country view. If just any country prints currency paper with nothing to back it up, it’s soon worth nothing more than the paper it’s printed on.

    Biden projects and protects the US as the economic foundation for all humans and the keeper of liberal democracy, the power of the people, not the tyranny of celebrity individuals. All humans respect that except for individuals who believe themselves entitled to more than their share.

    PS. Someone questioned my Middle East beliefs the other day because Hamas, they realized, attacked Israeli people. While Oct 7 was real and a lynchpin, I consider the total suffering of war. By that measure, Israel is an aggressor, the people of Gaza are suffering, and those few who subscribe to Islamic superiority, of which Hamas is only a piece, are catalysts in the suffering. It’s what they, but not I, want. The honor to die for Allah. Again, in my book, Biden is a hero for his steady hand on the tiller of MMT and liberal democracy.

  8. I think there is much about MMT that builds on Keynesian economics. The argument has been going on for a long time, perhaps MMT will help us resolve it.

  9. Bill Poppen,

    Yes. Keynes got it right. The next step to making it work is to get all that cash now stashed in foreign banks (Over $40 TRILLION) put to work here. By putting that money to good use in OUR country by re-creating our own industry infrastructure for the modern industries, we will fulfill Keynes’ theory and finally put an end to the idiocy associated with Friedman/Regan/Reagan criminality of “trickle-down”.

  10. Economic theory is great for “elites”/top 20% Unfortunately, it is those other folks at the grocery checkout and with rising rents and utilities that will be the majority of voters. And they feel economically “hurtin'”. Most election experts suggest that feelings drive most votes…sorry thinkers… If DEMS don’t acknowledge this and message of something better…here comes 1933…

  11. An interesting memory just popped into my mind. I was watching the “Kinsinger Report” one evening when Milton Friedman was the guest. One of the last points he made, when asked to forecast what he thought would happen in our economy was “I really don’t know.” This was in mid nineties after several years of trickling down. He was probably under the impression that Keynesians wouldn’t be watching.

  12. Economics is way above my pay grade and I can only offer what I’ve observed lately. Inflation was global but very few Americans follow world news so are completely clueless regarding inflation. The Biden recovery was astonishing from my view. The corporations need a profit tax to leverage the price gouging going on.

    If I’ve learned anything from this blog, it’s that you cannot run a government like a business, who’s obliged to make a profit.

  13. I’m so sorry that my friend, Sheila, has run out of topics that she has to invade my turf. MMT is inviting, but it has, as the author clearly but only briefly states, limitations. There must be slack resources and clear understanding of the transitory nature and speed of change. Our institutions are not geared to dealing with change. We know how to expand, but we do not know how to contract, how to downsize.

  14. Sheila;
    I was half of the couple you mentioned. I knew you were very intelligent before our meeting, but your analysis and summary of Dr. Kelton’s book is the most insightful that I have seen / heard. It expanded my understanding by at least an order of magnitude (i.e. x10), and for that I thank you.

  15. I have been a Keynesian since 1947 and took a degree in the discipline before going to law school. Politicians both Democratic and Republican have long told us that government “should be run like a business.” False. Business is in the business of profit making while government (at least in theory) is in the “business” of serving the wants and needs of its “shareholders,” aka its polity, whose will is represented by periodic elections in our constitutional democracy, a polity that, inter alia, deserves truth after our escape from colonial exploitation by English royal brigands who ruled under appointment by God rather than the will of the people.

    The Bretton Woods (New Hampshire) conclave of 1944 was called by the wartime allies to fashion a world economy after the devastation of trades and markets resulting from WW II, a conclave my economic hero (Keynes) attended as the UK representative. The U.S. dollar was established as the world’s reserve currency, a major plus we still enjoy and the continuing target of China and Russia, who would remove such reserve status from our control.

    We don’t need a gold standard or any other backing standard for our fiat currency other than “the Full Faith and Credit of the United States,” a far more reliable backing than gold or any other tangible resource subject to market rather than public control. Taxation up or down sans the real gremlin (inflation) in order to meet the wants and needs of the polity via a more or less money supply is a tricky exercise, of course, and subject to attack from those of the status quo who are greatly profiting from the current chaos occasioned by greed rather than a realistic plan to attend to the wants and needs of all of us in order to help close the rich/poor gap, which is currently widening.

    There are other subplots to MMT as exemplified by successful applications to FDR’s New Deal and Biden’s Bidenomics which I will not discuss due to time and space, but we are well advised to vote for a continuation of such adoptions of theory as policy that works come the fall of ’24.

  16. Morton;
    I have not yet met you, but have respected your economic insights for over 20 years and am a follower of your editorials. That said, I submit the following comments on your comments above:

    Our institutions are not geared to dealing with change…. we do not know how to contract, how to downsize.

    So this is a fundamental function of a government that wants to utilize MMT as part of its policy portfolio. It will have to learn how to handle these. May be extremely difficult for some of out legislators who never paid attention when they were in school.

    As the other half of the couple Sheila mentioned likes to say; “starving or killing your customers seems like a stupid way to expand your business!” Even the first Henry Ford, who was pretty reactionary, acknowledged that the way to expand his business was to pay his employees enough that they could by the product that they were manufacturing.

    Here is a sample game plan:
    1. Establish a minimum wage that a person can survive on. It probably needs to have area gradations to account for different living expense levels. (The Government already knows how and where these are as evidenced by the allowable “per dieum” expense deductions under the IRS code.)
    2. Establish, at the State and County level, a program of useful but not essential jobs that can be done by anybody of varying skill levels. They have an established pay scale of the minimum wage as defined in step one. By policy, anybody working one of these jobs is automatically granted time off to go to job interviews for a better job.
    3. Instead of unemployment benefits, everybody is automatically enrolled in this program if they lose their jobs.
    Everybody has an income, and they are doing something that provides a useful benefit to society. In addition, since they are spending that income to survive, they are also contributing to the tax base by keeping others active in the economy. And, they are staying active which helps them feel better about themselves.

  17. Keynesian Economics and MMT cannot be implemented in the U,S. because of politics. Keynesian worked, but never truly solved the problems of the Great Depression although it helped greatly. It was World War II that finally opened the government pursestrings wide enough (along with a decline in spending due to wartime austerity and overseas troops) to whip the Depression. Because Democrats support Keynesian, conservatives will not allow it for political and existential reasons, not because it won’t help Americans. (If Dems were allowed to try it, it would work because it does work, but it would expose every lie the conservatives have been spewing about supply-side economics and the negative effect of Progressive spending would be proven false and that would mean voters would flee the Republican Party. Biden and Dems applied Keynesian methods after COVID-19. It caused inflation, of which at least fifty percent has been identified as due to profiteering by corporations that have been reporting record profits ever since. Because we have a religious faith in capitalism and can’t mess around with our apostles of profit in a so-called free market economy, inflation persists. The essential part of MMT is that inflation occurs only when the money created and spent doesn’t get earmarked for growth-related efforts. If it is for tax cuts or other political projects, too much money will indeed be chasing too few goods and buying will kick up prices as productive assets are strained to keep up.

  18. Three things – Sorry Pete – Over 10 time more Japanese (mostly civilians) were killed during WWII than Americans in the Pacific. Nobody calls America the aggressor in that war, but Israel has always been judged by different standards. That being said, if the Europeans and Arab nations (later also Iran and Russia) had kept out of things, there could have been peace and two states in 1948. The Palestinian Arabs have suffered too long at the hands of their “brothers” and as for now, Israel should declare a unilateral cease fire and realize that they are the only ones who will ever be condemned. October 7 was reduced to a footnote within weeks. Rape and murder of Jews is the norm. Did you know that the Israeli army, trying to be egalitarian and needing people, originally had women serving on the front lines? That changed because female POWs were routinely raped. More little known history.

    CGH – on old Henry Ford – he raised wages because people were quitting in droves. Only later did he realize that a side effect was boosted sales. He tried, somewhat successfully, to rewrite history to make himself brilliant and/or benevolent.

    On the real topic – People have long fallen prey to the easy and erroneous analogy of the family budget and even then don’t admit the they indulge in deficit spending when they buy a house, and often when they buy a car. We call those mortgages and car loans, but it is spending more than we have in the family budget.

    As for FDR – his application of Keynesian deficit spending eased the effects of the Depression. Later Congress tried to pull back, but the Depression was broken by WWII spending — at over four times the levels of the peace-time spending. We are willing to pull out all of the stops for war. Also compare Obama’s “half is good enough” spending during that recession to Biden’s “full-steam ahead” approach.

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