More holes in the MMT "Deficit Myth" theory

Stephanie Kelton just gets it wrong. Leftists want inflation since they benefit from it.

Modern Monetary Theory (MMT) thinks of the economy as two buckets, one being government and one being the people being governed. In MMT the government issues currency and the people receive it, and pay taxes which returns some of the money to the government. When government runs a deficit, the people necessarily have a surplus.

Kelton confuses that surplus with wealth. It is not. Wealth is created by altering the shape of matter at or near the Earth’s surface. Money is no more than a medium of exchange.

If through fiscal policy the government spends more than it takes in, it simply creates the difference either through printing more or altering the entries on the balance sheet at the Fed. If the government runs a deficit, Kelton sees that deficit as stimulating demand. Since when did “demand” need stimulation? Everyone wants more.

Her idea is that a shortage of money in the hands of consumers is a constraint on economic activity and a deficit in the government’s fiscal accounts eases that shortage, economic activity can then expand to its full potential, and there is no risk the government “debt” - that is, its overspending its receipts - can never lead to default since the government can create as much money as it wants.

In her various books Kelton, a far-left economist and advisor to Democrat presidents, promotes the idea that government deficits are a myth, that the only limit to government spending is inflation if it gets out of control, and that taxes are simply a mechanism to control inflation. Wrong.

Take an economy operating more or less at its full potential (a bit like the U.S. today with unemployment very low). Now add money. Since the economy cannot operate at more than its full potential (i.e., everyone has a job, everyone is working full-time, unemployment is near zero, productivity is at its highest possible level for the installed base of equipment and technology). So what happens? What happens is that more dollars chase the same goods and bid up the prices of those goods. We call that “inflation” and in its essence it is a tax.

Why is it a “ tax”? It is a tax because consumers pay more for the same goods. It is about the same as HST in Canada, a tax on everything that everyone pays. But the lowest income people pay more of their income on that “tax” since the spend all of the money they get to make ends meet. In that sense, it is a “regressive” tax, burdening the poor more than the wealthy.

Now ask youself why a progressive government that claims to be trying to narrow the so-called “wage gap” or “wealth gap” would enact policies that tax the poor more than the wealthy? It is pretty obvious when you think about it - it is because a regressive tax is a transfer of wealth to the elite in power from those in society incapable of defending themselves.

HST and inflation are not the only regressive taxes under left wing regimes in U.S. or Canada. Corporate taxes do the same thing - they increase the cost of whatever businesses produce, those cost increases are passed on in price, and by now you guessed it, the poorest members of society bear the greatest burden.

Do the rich understand how this works? You bet. In United States, 230 billionaires donated to Joe Biden’s campaign in 2020.

That list comprises about one third of all American billionaires. The other two thirds are not all Republicans, some are apolitical and don’t make donations at all and some donate to both parties seeing it as their civic duty. But by far, the largest segment of the billionaire class that donates to Democrats are in finance, investments, and technology (Silicon Valley).

By contrast, only 135 billionaires donated to Trump in the 2020 election, and the largest group of that list included not only finance and investment billionaires but also those in the energy industry, a group almost absent among the Democrat donors.

Trump’s appeal to the energy billionaires is that he is willing to challenge the leftist orthodoxy that CO2 causes climate change, which is demonstrably impossible. The “climate change” hoax is uniquely socialist dogma, devoid of adherence to laws of physics. Trump’s appeal to the owners of goods producing industries is his commitment to low taxes and to strengthening U.S. competitiveness. Those are sensible motives to support him. They are also consistent with economic growth and low inflation.

Billionaires pride themselves on their wealth and their political ideology is reasonably inferred to be motivated by increasing or at least protecting their wealth. Yet more of them support Democrats than Republicans, and those supporting Republicans are primarily in goods producing industries while those supporting Democrats are predominantly in the service sector (including services we call “technology”).

The obvious conclusions - to me at least - are that rich people who benefit from inflation support Democrats and those whose businesses ease the rate of inflation through efficient operations and passing on tax cuts in price support Republicans.

Leftists argue businesses don’t pass on lower taxes in price but over 100 years of data debunk that concept. The return on capital employed of American goods producing industries has been essentially flat since the industrial revolution began despite corporate tax rates than ranged from as low as 1% to as high as 58%. Contrary to Kelton’s leftist theories, the U.S. government operated entirely without income taxes until 1914, funding government through tariffs that followed the Tariff Act of 1789, a period of 125 years when there was strong growth and virtually zero inflation.

While they preach equity, equality, narrowing the wealth gap, protecting the weak, etc. the reality is the left does just the opposite. There is cash involved and they know where it comes from. There is clear evidence of corruption on both sides of the aisle.

Biden, Pelosi, and almost all members of Congress, became wealthy despite being paid relatively low salaries. Some wealthy members were rich before they ran for office. Ask yourself why they ran? Altruism or self-interest?

The goods-producing billionaires supporting Trump benefit from economic growth, from low corporate taxes and from low inflation. The services-providing billionaires supporting Democrats benefit from high inflation driving up the price and margins for the services they sell and transferring wealth to them from the lower and middle classes. Both groups of very rich people act in their own interests, but the interests of society at large align with the Republicans.