Stephanie Kelton: ‘They’re going to have massive deficits. And it’s fine’

Kelton is to modern monetary theory what Milton Friedman was to American conservatives for a half century — conversational, fierce, relentless. She belongs to a group of academics who emphasise the role of banking and finance in the economy. In 2008, when the Queen asked at the London School of Economics why no economists had seen a global financial crisis coming, Kelton thought, “Wait a minute, you know, not all of us.”

.. Minsky, her academic grandfather, died in 1996, but his work enjoyed a renaissance after the global financial crisis. He had ways to explain why investments naturally get riskier when times are good. And he was unafraid to pick at what economists call, with some trepidation, “the money question”.

.. Kelton and her clan, with considerable support from historians and anthropologists, believe that money started out not as barter, but as debts. People tracked debts on sticks or tablets, and then began to trade the sticks. Empires, too, decided that their subjects owed them the obligation of taxes, and paid their own subjects in credits — the same ones they accepted to pay off the taxes.

The history of money matters, she argues, because if you see money as inherently a credit, one that states have always created at will, you have licence to think about what a state might do with the money it creates now. When a government spends without taxing, it doesn’t have to be committing a sin. It could be filling a void.

I have always wondered why Kelton ties modern monetary theory explicitly to the policy of a federal jobs guarantee — a minimum pay cheque, for anyone who wants one. “It’s all in Minsky,” she says. A job guarantee is an “automatic stabiliser”, she explains. It stabilises growth by pushing money into the economy during a downturn in the most straightforward way: as firms cut staff, people still have a salary to spend.

“Even now, in this environment where you don’t have actual work for many people to do because you want them sheltering in place, you could define their job as ‘stay home and help us flatten the curve’,” she says. “‘We’re going to pay you to help us save lives by staying home.’ So that job guarantee, even if we had it in place today, could absorb people, restore income with no time limit.”

.. She has taken from this work some measure of empathy for what members of Congress have to do. “I don’t think politicians spend a lot of time thinking, ‘Gee, I wonder if I understand money,’” she says. Instead, they reach for clear words that voters understand: the language of personal finance.

Get your fiscal house in order,” she says. “Belt-tightening. Tough choices. Living within your means.” When politicians use these phrases, even if they don’t know it, they are choosing a theory of money: the Robinson and Crusoe story. Governments become just another household, borrowing shells like Robinson, and face what economists call an “intertemporal budget constraint”: money borrowed now must be paid back later.

“I think that the Democratic party is not as comfortable with the idea of utilising the budget to deliver on their goals as the Republicans are,” she says. “Why not kind of play Santa Claus? Right? I mean, the Republicans did.”

.. When she still travelled to give talks, Kelton would try to use the language of money circling around an economy, rather than in and out of a house. “I always say capitalism runs on sales,” she says. “One person’s spending is another person’s income, right? And every dollar that’s taxed away from me is a dollar that I don’t have, I can’t spend and some business here in the US can’t capture.”  Anyone who saves, in this language, is draining money out of circulation. Paying down government debt, she argues, isn’t a virtue. It’s a leak. It’s how money leaves the economy. “It’s a lost sale,” she says. Who could want that?