The Deficit Myth

us. MMT radically changes our understanding by recognizing that it is the currency issuer—the federal government itself—not the taxpayer, that finances all government expenditures. Taxes are important for other reasons that I will explain in this book. But the idea that taxes pay for what the government spends is pure fantasy.

If the government tries to spend too much into an economy that’s already running at full speed, inflation will accelerate. There are limits. However, the limits are not in our government’s ability to spend money, or in the deficit, but in inflationary pressures and resources within the real economy. MMT distinguishes the real limits from delusional and unnecessary self-imposed constraints.

Suppose the government spends $100 into the economy but collects just $90 in taxes. The difference is known as the government deficit. But there’s another way to look at that difference. Uncle Sam’s deficit creates a surplus for someone else. That’s because the government’s minus $10 is always matched by a plus $10 in some other part of the economy.

A deficit is only evidence of overspending if it sparks inflation. Since prices weren’t accelerating, the deficit couldn’t possibly be too big.

Evidence of a deficit that is too small is unemployment.

The equation looks like this: Government financial balance + Nongovernment financial balance = Zero

Every fiscal deficit makes a financial contribution to the nongovernment bucket.

Employment should be a human right as envisioned by the United Nations’ Universal Declaration of Human Rights, not something that just floats in the winds of global market forces.

Paul Krugman wrote: That’s an interesting way to think about what has happened—and it also suggests a startling conclusion: namely, government deficits, mainly the result of automatic stabilizers rather than discretionary policy, are the only thing that has saved us from a second Great Depression.20