In this overview by Richard Murphy, we delve into Stephanie Kelton’s groundbreaking work, The Deficit Myth, which provides a fresh perspective on Modern Monetary Theory (MMT). This discussion serves as an entry point for those unfamiliar with economic methodologies, and it seeks to alleviate fears surrounding federal deficits. A key example to consider is Japan, which, despite having the highest debt-to-GDP ratio among developed countries, has only recently emerged from a prolonged period of deflation. Presenting this example may prompt a rethink of the widespread belief that government debt is inherently detrimental.
While Murphy addresses critical questions posed by influential economic thinkers, he overlooks the reasons behind the widespread fear of deficits. For insights into this dilemma, we recommend reading Mikhail Kalecki’s essential 1943 essay on the political challenges to achieving full employment. In summary, Kalecki argues that business leaders are motivated to diminish the notion that government action can yield benefits for citizens. He states:
If the government undertakes public investment (e.g. builds schools, hospitals, and highways) or subsidizes mass consumption (by family allowances, reduction of indirect taxation, or subsidies to keep down the prices of necessities), and if, moreover, this expenditure is financed by borrowing and not by taxation (which could affect adversely private investment and consumption), the effective demand for goods and services may be increased up to a point where full employment is achieved. Such government expenditure increases employment, be it noted, not only directly but indirectly as well, since the higher incomes caused by it result in a secondary increase in demand for consumer and investment goods….
We shall deal first with the reluctance of the ‘captains of industry’ to accept government intervention in the matter of employment. Every widening of state activity is looked upon by business with suspicion, but the creation of employment by government spending has a special aspect which makes the opposition particularly intense. Under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence. If this deteriorates, private investment declines, which results in a fall of output and employment (both directly and through the secondary effect of the fall in incomes upon consumption and investment). This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis. But once the government learns the trick of increasing employment by its own purchases, this controlling device loses its effectiveness. Hence budget deficits necessary to carry out government intervention must be regarded as perilous. The social function of the doctrine of ‘sound finance’ is to make the level of employment dependent on the state of confidence.
Kalecki’s perspective is intricate and profound, and this excerpt may motivate you to read (or revisit) his essay.
By Richard Murphy, Emeritus Professor of Accounting Practice at Sheffield University Management School and a director of Tax Research LLP. Originally published at Funding the Future
Stephanie Kelton offers a rare contribution to contemporary economic discussions. She takes a fundamental accounting principle—that sovereign governments create the currency they spend—and illustrates how misunderstanding it has distorted our political systems and public services. In The Deficit Myth, Kelton provides clarity instead of ideology: governments that issue their own currency operate on different principles than households; public deficits represent someone else’s income; and the true limitations on public spending are rooted in the availability of real resources, not financial constraints.
Kelton’s argument, straightforward yet revolutionary, challenges the prevailing narrative of scarcity that has justified policies of austerity, privatization, wage suppression, and neglect of public initiatives. The question she poses is profound, urging us to reassess our fundamental beliefs.
Thus, the Stephanie Kelton Question: If a monetarily sovereign government can always afford to mobilise the resources it actually has, why do we continue to run societies around the fiction that public spending is financially constrained?
Dismantling the Household Analogy
Kelton initiates her discussion by critiquing a particularly misleading narrative in modern political economy: the household analogy. We are often told that governments must “live within their means,” “tighten belts,” and “balance the books,” akin to families. This comforting analogy, however, is fundamentally flawed. Households depend on the currency issued by governments; they do not create it. Households must earn before spending; in contrast, governments spend to enable earnings.
This misconception serves a strategic purpose. By framing the state as a large household, it cultivates caution, instilling fears of deficits and viewing public investments as threats. Kelton argues that this misleading metaphor has inflicted considerable political damage, constraining our vision of what collective action can accomplish.
Money Creation as a Public Tool
Kelton’s key insight is not that governments should spend without limits but that they can. The true restriction on spending is the availability of real resources—skilled labor, energy, technology, and materials—rather than constraints imposed by money. Currency-issuing governments routinely create money through their expenditures and withdraw it through taxation.
In this paradigm, money becomes a tool for activating productive potential, not a finite resource. Recognizing this shifts the focus from financial barriers to what our society aims to achieve: if we possess the necessary resources, financing ceases to be an impediment.
The Politics of Fear and Scarcity
Kelton illustrates that the narrative surrounding deficits is laden with ideology. When governments claim “we can’t afford” essential services like healthcare, education, or infrastructure, they shift accountability from political choices to illusory financial limitations. This framing renders austerity a necessity instead of a choice, normalizing poverty as a given rather than a consequence of policy.
In this light, deficits transform from economic instruments to political tools—used to control governments, suppress wages, and justify the reduction of public goods. Kelton reveals this issue as a political agenda camouflaged as fiscal prudence.
Inflation, Not Insolvency, as the Real Constraint
Critics often argue that Kelton neglects the risks of inflation. However, her position is that inflation is the only significant limit to public expenditure and must be managed by understanding real constraints, rather than by enforcing arbitrary financial restrictions. The real danger of inflation arises not from excessive spending, but from government investments that exceed the productive capabilities of the economy.
Kelton asserts that effectively managing inflation requires strategic planning, resource allocation, anti-monopoly actions, and a cohesive fiscal-monetary strategy—not indiscriminate austerity. She reframes the discussion, positing inflation as a symptom of resource pressure rather than a reason to shun public objectives.
Deficits as Indicators of Public Contribution
Kelton restores the older view that public deficits are not a sign of fiscal irresponsibility but a record of private savings. When governments run deficits, they inject financial assets into the private sector, creating a linkage between public and private balance sheets. Consequently, the obsession with reducing national debt often translates into a loss of private wealth.
Kelton emphasizes that the moral significance of deficits hinges entirely on their outcomes. A deficit spent on green infrastructure, social services, or education becomes a legacy rather than a burden.
The Constraints on Political Imagination
Kelton’s arguments unveil the deeper implications of our limited political imagination. When governments proclaim that they “cannot afford” fundamental public goods, it leads the public to perceive deprivation as an inevitable reality. The deterioration of social housing, healthcare, and education, alongside the neglect of environmental objectives, are rationalized by a narrative suggesting that financial resources are scarce.
Kelton challenges us to confront a more profound question: if we possess skilled individuals, technology, and materials to fulfill human needs, what does it say about our values that we choose not to act?
Her work transcends technocracy; it is fundamentally a call to moral responsibility.
Implications of Accepting the Stephanie Kelton Question
Embracing Stephanie Kelton’s insights means dismantling some of the core misconceptions in modern economic theory. This would require a shift toward:
-
Reframing public finance, recognizing that government expenditure is limited by tangible resources, not governmental revenue.
-
Planning for inflation through genuine capacity management, not through enforced scarcity.
-
Ending the politics of austerity, understanding that austerity harms societal potential, stunts growth, and is never a financial necessity.
-
Orienting public investment around genuine public needs, encompassing housing, health, education, and climate initiatives, driven by intrinsic requirements rather than financial spreadsheets.
-
Democratizing economic thinking, clarifying that fiscal decisions are political choices, not enforced sacrifices.
These adjustments can shift economic dialogue from mere accounting to true governance.
Conclusion
The Stephanie Kelton Question invites us to confront a central myth in contemporary politics: the belief that money is scarce while human needs are endless. Kelton flips this narrative, asserting that human necessity is tangible, and money is simply a construct we create to organize our resources. When governments assert a lack of financial resources, they are not expressing helplessness but abdicating responsibility.
Kelton’s work shines a light on this neglect, demanding that a society with such abundant capabilities has no justification for failing to address essential human needs. The challenge she presents is not merely to attain greater clarity in public finance but to reclaim a strong commitment to public purpose. If a sovereign government can always harness its own resources, the true deficit we face is not fiscal but moral: a deficit in ambition, courage, and compassion.
