Why Governments should budget like a household
The laws of economics do not change simply because politicians wish them to.
Written by: Econ Bro
Stephanie Kelton is perhaps the most effect advocate for Modern Monetary Theory (MMT) today. Her “Deficit Myth” book is regarded by many as the MMT Bible. For what it’s worth, unlike many economists who tend to write books that can be painful to read, Kelton’s bestseller is very easy to read and understand, and with that, I have run out of positive things to say about the book.
In it, she criticises detractors who rightly point out that deficits are harmful to the economy, by pointing out “myths” about deficit.
The household myth
The “household myth” is the first of six in her book. She argues that unlike households and businesses which run out of money, governments need not budget with the fear of running out of money, as nations who own and control their currency (i.e. monetary sovereigns) can always create more money and never run out, and that deficits are not a problem if inflation is controlled. To her, the myth that government should budget like households is “undoubtedly the most pernicious”.
To Kelton, governments cannot “go broke” as households and businesses do, because they can always issue more currency to fund whatever they desire.
As much as I wish Kelton and her ideological ilk were correct, I cannot but turn from their proposal for the simple reason that it is counter to reality. Here are some problems with Kelton’s MMT proposal.
MMT misunderstands wealth
Very much like the layman, MMTheorists fail to grasp that true wealth isn’t money, but rather the commodities for which we exchange them. Most people who have lots of money today, earned it by producing actual goods and services (i.e. real wealth), and in exchange for their productivity, they earn money, which is used in exchange for other commodities they desire but don’t produce. Johann Rupert’s wealth reflects how much more productive he is than the average South African. He isn’t rich because has $13.8 billion, but because he created $13.8 billion worth of products. Rupert can’t go broke by running out of cash, but by ceasing to produce as many commodities as he now does.
This reasoning applies to nations as well; nations aren’t rich because they print pieces of paper, or type up numbers on a screen, but because they produce actual goods and services.
If 100 men are shipwrecked on an island with nothing but their labour, the resources provided by the land and the time to produce what is required for their survival, printing pieces of paper would do nothing to improve their condition. If five of the men decide that the other 95 should the work in exchange for pieces of paper, those five would be thieves, stealing the productivity of the 95, but according to MMT, this is how society should function.
Printing money does not create wealth but redistributes it
Kelton and other MMTheorists suggest that since governments control their own currency, they can always print more money to fund spending. But printing money does not create new goods or services. If increasing the money supply made us richer, Zimbabwe and Venezuela would be the wealthiest nations on earth.
Just as the counterfeiter’s fake currency does nothing but steal from those from whom he purchases goods with the fake currency, printing money, even when done by the government doesn’t conjure up new resources but steals from those from whom the government makes purchases.
If governments follow Kelton’s MMT proposal and budget imprudently, all they do is take resources from the general population and redirect them towards their accomplishing their own goals - it’s redistribution.
Everyone else must create value by selling some good or service before they can demand goods and services from other people, but according to Kelton and MMT, those who wield state power need not do this. All the state need do is print up some currency and that way, they can demand goods and services without having served anyone beforehand. Though I politely label this “redistribution”, it’s actually theft.
Austrian economists explain that wealth is created through production and voluntary exchange, not by increasing the number of currency units in circulation. Printing money only leads to inflation, which reduces the purchasing power of every unit of money, hurting savers and those on fixed incomes the most. In the end, the government’s money-printing scheme is just a hidden tax on its citizens.
Inflation is always a threat
Kelton believes that if inflation is kept in check, governments can spend freely. However, history shows that inflation is difficult to control once it starts. Governments always claim they will stop before it gets out of hand, yet inflation spirals because political leaders have little incentive to reduce spending. The tendency of men who wield state power to abuse it will not disappear because MMTheorists wish it.
Also, inflation is not just about rising prices. It distorts economic calculation, misallocates resources, and creates booms and busts. Even if somehow we’re strong-willed enough to resist the temptation recklessly issuing currency, there are still other negative side-effects, no matter how conservative we are with the money printing.
Conclusion: Sound economics apply to everyone
Kelton’s argument that governments should not budget like households is a dangerous illusion. The principles of scarcity, value, and economic calculation apply to everyone, including governments.
The laws of economics do not change simply because politicians wish them to. Far be it from me to advocate for taxes or government spending, but if they must spend, they should do so only out of what they collect in taxes. This – although also redistributive and harmful – will not come with the other side effects of inflation and other economic distortions.
Econ Bro (@EconBreau and @EconBreau2 on Twitter/X) is a Nigerian Austrolibertarian economist and an apprentice at the Mises Institute. Under the organisation name “The Freedom Institute” he teaches individual liberty, personal responsibility, private property rights, free markets, and sound money to mostly young people across Nigeria. Econ Bro is an Associate of the Free Market Foundation.