MMT Basics: You Cannot Consider the Deficit in Isolation

Stephanie Kelton Associate Professor of Economics University of Missouri-Kansas City

People tend to get very emotional about the size of the government's deficit.

MMT tries to calmly examine changes in the size of the government's budget by focusing on the big picture.

The following graphs reveal some important facts about the government's budget.

The Following Graphs Show The US government is almost always "in the red".

The BIGGER the government deficit, the BIGGER the non-government surplus.

Because the United States runs a trade deficit with the rest of the world, the US government must run a deficit in order for the private sector to achieve a surplus.

The Clinton surpluses occurred at the expense of the domestic private sector, which went deeply into negative territory for the first time in post-WWII history.

Clinton Surpluses

19521 19544 19573 19602 19631 19654 19683 19712 19741 19764 19793 19822 19851 19874 19903 19932 19961 19984 20013 20042 20071 20094

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

Domestic Private Surplus Govt Surplus

private sector sur-plus/deficit as %

GDP

public sector surplus/deficit as

% GDP

Clinton sur-pluses

Unprecedent private sector deficits Government

goes “down”

We go “up”

The so-called "Clinton Boom" was driven by an unsustainable increase in private sector debt. Extreme leverage made possible by a bubble

economy. It ended in recession.

195211954319571195931962119643196711969319721197431977119793198211984319871198931992119943199711999320021200432007120093

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

0

0.5

1

private sec-tor balance

(% GDP)

grey bars indi-cate recessions

We achieved this big surplus because of the

big government deficits after the crisis

Read and Return to Previous Slide

Notice how the private sector’s balance (blue line) declines in the period leading up to each

recession.

It takes government deficits to prevent the decline in private balances (or to repair private balance sheets

after a recession).

This is why MMT is not hostile to deficit spending.

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www.neweconomicperspectives.org