Yves here. This Richard Murphy recap of Stephanie Kelton’s The Deficit Myth is an opportunity to introduce friends and colleagues to Modern Monetary Theory, or alternatively, to try to put a dent into hysteria about federal deficits. A simple rebuttal to the claim that deficits or the alternative of direct monetization, aka “printing” produces runaway inflation is Japan. So if you get a knee-jerk rejection to this article, please ask them to explain how Japan has the highest debt to GDP ratio of developed economies yet has only recently begun to pull out of deflation. You won’t persuade them but you might throw some sand in the propagation of the “government debt is ever and always bad” myth.
Having said that, perhaps as a result of framing his series around questions posted by important economic thinkers, he skips over why deficit paranoia has been so widely embraced. Again, we urge you to read the seminal 1943 Mikhail Kalecki essay on the barriers to achieving full employment for an answers. The short version is that businessmen want to secure their primacy, and that means undermining the idea that state action can benefit citizens. From Kalecki:
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 powerful 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 argument is complex and nuanced, but the extract above will hopefully entice you to read (or re-read) 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 has done something very rare in modern economic debate: she has taken a basic accounting fact, that sovereign governments create the currency they spend, and shown how its denial has warped our politics, our public services, and our imagination. In The Deficit Myth, she does not offer ideology but clarity: governments that issue their own currency are not like households; public deficits are someone else’s income; and the true limits to public spending are not financial, but real.
Kelton’s argument is as simple as it is destabilising. If the government cannot “run out of money,” then the entire narrative of scarcity that has justified austerity, privatisation, wage suppression, and the abandonment of public purpose begins to collapse. The question she poses is therefore profound, not technical.
Hence, 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?
The household analogy that never belonged
Kelton begins by dismantling the most powerful and misleading story in modern political economy: that of the household analogy. Governments, we are told, must “live within their means,” “tighten belts,” and “balance the books”, just like families must do. It is a comforting metaphor, but entirely false. Households use the currency; governments issue it. Households must earn before they spend; governments spend before anyone can earn.
This misunderstanding is not accidental. It has been cultivated because it limits public ambition. If the state is imagined as a large household, it must behave timidly. It must fear deficits. It must view public investment as a threat. Kelton’s point is that this metaphor has done immense political harm, shrinking our sense of what collective action can achieve.
Money creation as a public instrument
Kelton’s core insight is not that governments should spend without limit, but that they can. The true limit to spending is the availability of real resources — skilled labour, energy, technology, materials — not the availability of money. Currency-issuing governments create money as a matter of routine when they spend. They delete, or cancel, money when they tax.
Money, in this framework, is a tool for mobilising productive capacity, not a scarce commodity. Once we understand this, the supposed trade-off between public purpose and public finance evaporates. The question becomes: what do we want to achieve, and do we have the resources to do it?
If the answer is yes, financing is never the barrier.
The politics of fear and the manufacture of scarcity
Kelton shows that the deficit narrative is not neutral. It is ideological. By insisting that “we can’t afford” healthcare, housing, green investment, social care, education, or infrastructure, governments transfer responsibility away from political choice and onto imaginary financial constraints. Austerity becomes a necessity rather than a preference. Poverty becomes a natural condition rather than a policy outcome.
In this sense, deficits are not economic tools but political weapons — used to discipline governments, suppress wages, and justify the erosion of public goods. Kelton exposes this as a political project masquerading as prudence.
Inflation, not insolvency, is the real constraint
Critics accuse Kelton of ignoring inflation. She does nothing of the kind. Her point is that inflation — the only meaningful limit to public spending — must be managed by understanding real constraints, not by restricting public investment through arbitrary accounting rules. The dangers of inflation arise when governments spend beyond the economy’s productive capacity, not when they spend “too much money” in the abstract.
For Kelton, inflation management requires planning, resource mapping, anti-monopoly measures, and coordinated fiscal-monetary strategy — not blanket austerity. She reframes the issue: inflation is a signal of resource strain, not a reason to fear public purpose.
Deficits as records of public contribution
Kelton restores an older understanding: public deficits are not signs of irresponsibility but records of private saving. When governments run deficits, they inject financial assets into the private sector. Public balance sheets and private balance sheets move together. The obsession with “reducing the debt” does, therefore, mean reducing private wealth.
Kelton insists that the moral significance of deficits depends entirely on what the spending achieves. A deficit that builds green infrastructure, improves care, houses people, or expands education is not a burden but a legacy.
The deflated imagination of modern politics
Kelton’s argument highlights something deeper than accounting: how profoundly we have shrunk our sense of political possibility. When governments claim they “cannot afford” basic public goods, the public begins to accept deprivation as natural. The collapse of social housing, the decay of healthcare, the underfunding of education, and the abandonment of climate goals — all are rationalised by a narrative that pretends money is scarce.
Kelton asks us instead to face the real question: if we have the people, the skills, the technology and the materials to meet human need, what does it say about us that we choose not to?
Her work is not technocratic. It is moral.
What answering the Stephanie Kelton Question would require
To accept Stephanie Kelton’s insights would mean dismantling some of the deepest fictions in modern political economy. That would require:
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Reframing public finance, recognising that government spending is constrained by real resources, not by revenue.
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Planning for inflation through real-capacity management, not through voluntary impoverishment.
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Ending austerity politics, acknowledging that austerity damages capabilities, undermines growth, and is never a financial necessity.
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Designing public investment around public purpose, whether that be housing, care, climate, education, health, all guided by need, and not by spreadsheets.
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Democratising economic imagination, making clear that fiscal choices are political decisions, not inevitable sacrifices.
These changes transform economic debate from bookkeeping to statecraft.
Inference
The Stephanie Kelton Question asks us to confront the fiction at the heart of contemporary politics: that money is scarce but human need is limitless. Stephanie Kelton reverses this. Human need is real; money is not. Money is a tool we create to organise resources. When governments claim its scarcity, they are not confessing helplessness; they are abandoning responsibility.
Kelton’s work exposes this abandonment and insists that a society rich in capacity has no excuse for failing to meet basic human needs. The task she sets is not simply to understand public finance more clearly, but to reclaim public purpose more boldly.
If a sovereign government can always afford to mobilise what it truly has, then the real deficit we face is not financial but moral: we face a deficit of ambition, courage, and care.
