The US economist is a leading proponent of modern monetary theory, which challenges conventional ideas about government debt, inflation, and pretty much every other aspect of monetary policy. Her views have attracted plenty of attention - and not a few critics.
Unlike households, governments don't need to worry about accumulating debt because they can pay the interest by printing money. The only constraint on government spending is inflation. Inflation, furthermore, should be controlled by fiscal policies that reduce the spending capacity of the private sector, rather than by monetary policy and interest rate hikes.
Really?
These, in essence, are the central claims of modern monetary theory (MMT), an unorthodox school of economic thought that's been around for some time, but is now enjoying a significant revival as economic inequalities continue to widen.
Thanks to a best-selling book and her prominent public profile, Stephanie Kelton, a professor of economics and public policy at the State University of New York, Stony Brook, is perhaps MMT's best-known voice.
MMT is plainly a left-leaning idea - and Kelton's credentials are firmly progressive. After a stint as chief economist on the US Senate Budget Committee (Democratic staff) she became a senior economic adviser to the 2016 and 2020 presidential campaigns of US Senator Bernie Sanders, a self-styled democratic socialist.
Kelton has written articles criticizing economic orthodoxy and promoting MMT as an alternative approach in publications as influential as The New York Times, the Los Angeles Times, and the Financial Times. She is also a regular guest on US television and radio, including NPR and the popular late-night talk and satirical news programme, The Daily Show.
Kelton's 2020 book, "The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy", which according to her website "empowers readers to break free of the broken thinking and fictitious constraints that have been holding our nation back," swiftly became a New York Times best seller.
MMT, however, is considered highly controversial, even by some liberals and Keynesians. The post-Keynesian economist Thomas Palley, for example, thinks that proponents of MMT are prone to oversimplification and understate the risks of its policy implications.
Paul Krugman, recipient of a Nobel Prize in Economics, has accused MMT advocates of ignoring the inflationary implications of maintaining deficits when the economy is growing. With government debt soaring - in the USA it now tops 34 trillion USD - the criticism resonates with many mainstream economists.
After all, they would argue, if governments simply print money to pay their debts, hyperinflation will inevitably kick in. Some, including members of the conservative Austrian school of economics, have gone so far as to suggest that MMT's support for printing money to cover deficits amounts to "counterfeiting".
MMT's roots, in any event, are deep and diverse. They originate in debates about so-called fiat currencies, which are not backed by precious metals (like gold) or other tangible assets, that date back to the era of classical economics. The notion started to take theoretical shape, however, in the early 20th century, although the term MMT was not used until 2008.
It all began in 1905, when the German economist Georg Friedrich Knapp founded the "chartalism" school of monetary economics, which argues that money's value derives from its issuance by government, rather than as a medium of exchange.
Knapp's chartalist ideas appear to have had a powerful influence on John Maynard Keynes, whose advocacy of government spending to mitigate downturns in the business cycle was widely adopted after 1945, as nations struggled to rebuild their war-shattered economies.
More recently, however, Keynesianism has been eclipsed by the free-market principles of neoliberalism: deregulation, privatization, and of course, austerity. Not surprisingly, MMT appeals most strongly to those on the political left who blame austerity for the current cost-of-living crisis.
Kelton has leveraged her scholarly credentials - she holds post-graduate degrees from Cambridge University in the UK and from New York's New School for Social Research - to explain (and defend) MMT with arguments that are both clear and robust.
Of course, deficits matter, she has declared, but not in the way we've been taught to think. Among the deficit "myths" that her best-selling book seeks to debunk is the idea that they burden future generations. If deficits are used to build a more just economy by boosting supply, they can be a force for long-term good, she argues.
Instead, she complains, by selling Treasuries to fund the federal deficit, the US government continues to put money into the pockets of people who already have it, via higher bond yields. Using interest rates to address the mismatch between demand and supply that underpins inflation has a similar effect. Besides, she claims, inflation has dropped despite the actions of the Federal Reserve, not because of them. And that's because when it comes to ensuring financial stability, monetary policy is a "sideshow".
Kelton does concede that MMT's position that governments can print money to cover interest payments on their debt only applies to governments like the US (plus, for example, those of Japan, Canada, and Australia), which control their own sovereign currencies.
The countries of the eurozone, as users of a common currency, are clearly in a less favourable position - until, as she proposes, the eurozone establishes a proper fiscal union and introduces a new budgetary framework.
Kelton would also like to see governments invest in public jobs programmes that maintain and upgrade skills to ensure that no one ever becomes fully unemployed. As she told the Financial Times in an extensive recent interview, she believes such programmes "would truncate downturns, provide income support where it's needed, and enhance price stability."
While advising Sanders, Kelton urged him to revive Franklin D. Roosevelt's second bill of economic rights, which asserts that everyone should have the right to a job at a decent wage. She called that aspiration "the unfinished business of the Democratic Party".
Even if, as one sceptic has suggested, MMT is merely a "policy polemic for depressed times," the theory is now part of an ongoing debate about how best to manage complex modern economies. Only time will tell if it can prevail.
