My MMT Top Ten: Modern Monetary Theory’s Best Ideas Explained

Your guide to the most powerful insights from Modern Monetary Theory.

Jim Byrne - Photo by Pat Byrne

In this newsletter I pick what I consider to be Modern Monetary Theory’s ten best ideas, the ones that set me back on my heels when I first heard them. I’m bearing in mind that MMT did not spring from nowhere but draws from a mix of economic traditions and borrows from a range of thinkers, past and present. It also offers something new: a framework that puts us firmly in a world where solutions to even our biggest problems are possible.

MMT reminds us that it’s not money that is scarce, it’s real resources: people; raw materials; factories; knowledge; energy and so on. Additionally it points out that the inputs required to make use of each of these ‘economic units’ are ultimately finite because they draw on, and deplete, the resources of the planet we live on.

Use the comments section to tell me your top ten MMT ideas. And, of course, you can tell me why mine are the wrong choices.

Here are my MMT top ten:

1. Currency-issuing governments are not like households.

2. Tax revenues do not fund government spending.

3. Inflation and finite resources are the real constraints on spending not government finance.

4. Governments create unemployment when they tax their citizens.

5. The job guarantee is an automatic stabiliser for the economy.

6. Selling Government bonds does not provide the government with spending money.

7. Sectoral balances tells us that a government debt is a nongovernment surplus.

8. Monetary sovereignty is a spectrum.

9. Deficits are neither good nor bad.

10. Money did not originate from a barter system.

Ok, let’s dig into these ideas a little further.

Note, that paid subscribers resources are now on this page. Downloadable factsheets, a downloadable dictionary of economic jargon, my book/journal recommendations and more.

MMT’s Best Ideas Explained

1. Currency-issuing governments are not like households

Although the ‘households’ analogy has now reached ubiquity, I have always associated it with Stephanie Kelton and her brilliant book, The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy. I may well have heard it before then, but it was reading Stephanie’s book that made it stick.

“Uncle Sam isn’t like a household or a business. Uncle Sam has something the rest of us don’t—the power to issue the US dollar.”—Kelton, Stephanie. The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy.

Stephanie Kelton was, of course, referring to governments that issue their own currency, like the US, UK, Australia, Canada and others. Phrases like, “balanced budgets are essential to remain solvent” and “you must live within your means” may well be good housekeeping maxims but they certainly don’t apply to currency issuing governments.

In fact, such statements can be dangerous to the the health of the economy; running surpluses (spending less than they bring in in taxes) can mean less money in the private sector and consequently less money in citizens’ pockets. This could ultimately lead to higher private debt: and it is private debt that is dangerous (think, 2018 financial crash), not government debt.

So, governments that issue their own currency, like the UK or the US, are not at all like households. Households have to earn money before they can spend. There are governments that use other country’s currency and those that issue their own. Those that issue their own create new money every time they spend.

How do they do that? Well, they literally type numbers into a computer. It is those numbers that end up in private sector bank accounts. And it’s that money that gets used to make things, pay wages and provide government and non-government services.

2. Tax revenues do not fund government spending

Now that I think about it, maybe I should have put this MMT idea first, because it’s a shocker of an idea for most people. This is the revelation that turns everything on its head. Every day we are taught, through repetition on our TVs and newspapers, that we have to send our taxes to the government or they will have nothing to spend on the services we need. To discover that this is wrong makes us feel as if the ground has shifted under our feet.

It turns out, that for governments like the US and the UK, it is spending that makes taxation possible: governments spend first and then they take some of that money back out of the economy via taxes. That’s not to say that taxes are not needed. They are vital. Taxes can help to control inflation; taxes create a demand for the government’s currency; taxes can help reduce inequality; taxes can encourage or discourage certain behaviours and they can be used to free up real resources (by reducing private sector spending).

But what tax revenues do not do is pay for hospitals, schools, roads and all of the other services we depend on - in currency issuing governments like the UK and US.

As economist Mike Norman writes:

“You can’t drain a swimming pool until you fill it up first.” Economist Mike Norman

That is, you can’t pay your taxes unless money has been spent into the private sector in the first place. Simple.

3. Inflation and finite resources are the real constraints on spending not government finance

If we take politicians out of the equation and just concentrate on the technical stuff: as I’ve pointed out above, it’s not a lack of finances that curtails government spending, it’s a lack of real resources. Here is one thing that both orthodox and MMT economists agree on: buying scarce resources pushes up prices. It’s inflation that is the real enemy of government spending not a lack of money to spend.

So, what MMT does is it makes us concentrate on the real things in the economy: workers, raw materials, factories, skills, healthcare, infrastructure and more. And MMT reminds us that these resources can be expanded through government spending.

If there are not enough people with skills to grow the renewable energy sector then spend money on the appropriate education for that sector. If there are not enough schools to teach them the skills they need then build more schools. Ironically, governments can tackle inflation by spending money: to increase the capacity of the economy.

If you’re finding value in these articles, become a paid subscriber. This is a 100% reader-supported newsletter. Your support allows me to continue to write, teach and to build a community of like-minded individuals—individuals, like you, who understand that MMT offers an opportunity to change the world for the better. Become a paid subscriber now.

4. Governments create unemployment when they tax their citizens

Warren Mosler tells us that it is the act of taxing citizens that creates unemployment. I found the idea hard to get my head around when I first heard it, but I’ve now got the gist of it. Once you impose a tax, you are telling citizens that they must obtain your currency in order to pay those taxes.

And how do they get that money? Well, they have to work for it. They can work directly for the government or they can work in the private sector. If there isn’t enough demand for labour in the private sector, it is the Governments duty to offer unemployed citizens a job. Otherwise they remain unemployed.

We know that the money the government spends to employ workers is not going to cause inflation, because unemployment is the very definition of spare capacity in the economy.

“It’s the government that put the tax on [the people] that created the unemployment. It’s the government that didn’t spend enough to employ all the people that its tax caused all the people to be out of work. This is a deliberate policy. Unemployment is created by government policy. It’s not a natural state. If you go to any society that doesn’t have a government with taxes and money there is no such thing as unemployment.” Warren Mosler’s New Economic Perspectives talk in Chianciano, Italy, January 11, 2014

5. The job guarantee is an automatic stabiliser for the economy

This is known as “MMT’s only policy” and it’s an important one: as I outlined above, it’s the government’s duty to ensure full employment.

A Job Guarantee means the government offers a job with a living wage to anyone who wants one. It is a voluntary scheme, open to all who want to work. It’s a safety net, a price anchor, and a path back to full employment all in one.

And, importantly, it’s an automatic stabiliser for the economy. During a recession, the government will be spending more as it employs people, and less as the recession recedes and workers are absorbed back into the private sector.

Here’s a bullet point summary of the Job Guarantee:

• Everyone who wants a job can have one, at a living wage.

• Jobs are not compulsory; they’re based on local needs, e.g. care, environmental, and cultural work. Funding will come from the central government but it will be administered at a local level.

• A job is a stabiliser for the economy: government jobs, along with government expenditure, expand when there is a downturn and contract as the economy recovers.

• A Job Guarantee puts a floor on wages: a minimum standard for pay and conditions across the economy.

• A Job Guarantee is affordable: the real constraint is not whether money is available, but whether there are workers available and there is useful work for them to do.

• A Job Guarantee is a bulwark against inflation. Employers tend not to be keen to people who have been out of work for a long time, so as the economy recovers, they compete for the best workers by offering higher wages. The Job Guarantee stops this competition and thus stops wage inflation.

6. Selling Government bonds does not provide the government with spending money

Currency issuing governments do not sell bonds in order to raise money. In practice, selling bonds means swapping interest-bearing government bonds for the ‘reserves’ of commercial banks.

What are ‘reserves’? Reserves are the money that commercial banks keep in their accounts at the central bank.

Selling bonds is not about raising funds, in practice, it’s a tool for managing the overnight interest rate, i.e., the rate at which banks lend to each other. In simple language, issuing government bonds is an exercise in swapping one thing for another: money that pays interest for money that doesn’t. Currency issuing governments don’t need to borrow money - they issue it themselves.

“The central bank will replace reserves with a bond, destroying the reserves, and in turn bringing a halt to the competition which threatens its target interest rate.” The Gower Institute for Modern Money Studies

7. Sectoral balances tells us that a government debt is a nongovernment surplus

“The fiscal position of the government cannot be understood in isolation. It is just one aspect of the financial balances of the economy’s three main sectors — the government, the private domestic sector, and the foreign sector — which must add up to zero.” – Wynne Godley, Seven Unsustainable Processes (1999)

The idea of sectoral balances is one of the most powerful ideas that MMT has adopted: it is a simple idea but one with profound implications. I discuss why that is the case in my article about Wynne Godley,

“That may not sound terribly revolutionary—because it’s just simple logic—but consider this: most economic commentary on government spending focuses only on the spending side of the equation, completely ignoring the income it generates. Most commentators also fail to account for where that income goes: it flows into the non-government sector. In practice that means (certainly in the UK and US), primarily the private sector.”

Stephanie Kelton tells us that it was her mentor, economist John Henry, who helped her understand the idea, with the following simple statement, ‘one person’s spending is always someone else’s income’. Translating that into the jargon of economics, ‘a government deficit is always a non-government surplus’, or as Stephanie herself puts it, “their red ink is our black ink.”

I’ll put it this way: when the government spends money, it doesn't vanish, it becomes someone else's income. These are all different ways to say the same thing, but for such an important idea, it’s an idea worth repeating. Because we learn by repetition, repetition, repetition.

When we understand that only one of the sectors mentioned in the sectoral balances model is a currency issuer, we also understand that a government ‘debt’ is just a negative on the government’s side of the spreadsheet. However, we are on the other side of that balance sheet, and what we get is more than just a spreadsheet entry, we get real money; the money issued into the economy.

For one thing, understanding these balances helps explain why budget surpluses (i.e. the government taking more out of the private sector in taxes than it spends into it) can be dangerous. Unless it the foreign sector is running the deficit (because sectoral balances tells us that a government surplus is always someone else’s deficit) , a deficit in the private sector can lead to people taking on more debt. And that’s never a good thing: It was high private sector debt that led to the 2008 financial crash.

“If someone owes, someone must be owed. Put this in the context of deficits and the logic is that if the government is in deficit someone must be in surplus.” Richard Murphy – Funding the Future - Formally Tax Research UK

FRED data graph demonstrating sectoral balances, courtesy of economist Dirk Ehnts

8. Monetary sovereignty is a spectrum

"Well, MMT has been very clear that we have a spectrum of monetary sovereignty and some countries have a very high degree of monetary sovereignty, like the US, Japan, Canada, Australia and some countries have very little or no monetary sovereignty like Ecuador that completely dollarised.” Dr. Fadhel Kaboub

MMT reveals the simple truth that some countries are currency issuers, others are currency users. However, it also tells us that, that in itself is not enough for a country to have autonomy over its spending decisions. For example, if the country lacks the ability to produce its own energy, it will have to import that energy. And for most countries that means it will have to pay in a foreign currency – which in turn means – it needs to earn that foreign currency.

That simple fact shapes the policy choices of the government. It might mean giving tax incentives or investment to grow the tourist trade, or skewing agricultural policies towards export growth, or keeping interest rates high to attract foreign investment, or fixing the exchange rate to grow exports – or whatever else they think is required.

The point is that policies designed to earn foreign currency are policies that are not necessarily designed to meet domestic needs. So, even though the government is a currency issuer, there are limits to how it uses its resources.

So, issuing your own currency is certainly an advantage over those countries that don’t, but in itself that does not always equal, ‘full monetary sovereignty’.

Fadhel Kaboub tells us that monetary sovereignty is a spectrum.

"So countries that enjoy full monetary sovereignty are countries who can issue their own currency, their national currency, tax the population in their national currency, can issue debt denominated in the national currency and only in the national currency. In other words, they don’t borrow and promise to pay back in a foreign currency.” - Dr Fadhel Kaboub

It’s easy to understand that countries that issue their own currency have more power to design their own policies over those that don’t. However, it’s more nuanced than that: monetary sovereignty is a spectrum.

9. Deficits are neither good nor bad

MMT tells us that deficits (i.e. governments spend more than they bring in in taxes and other income) are not inherently good or bad. For governments that issue their own currency it’s not the size of the deficit that is important, it is whether or not the government achieves its economic goals.

So, whatever amount of spending it takes to achieve those goals - within the resource, planet and inflation constraints - is the right amount of spending. So, does the government want an educated workforce, to reduce poverty, move to more sustainable energy sources, build more houses or does it only want to worry about avoiding a deficit?

In the context of a government that issues its own currency, MMT tells us that the size of the deficit is irrelevant. So, what should currency issuing governments be focused on? They should be focused on achieving their real goals.

Stephanie Kelton writes that a balanced economy should be the aim not a balanced budget.

“The point is, not every deficit serves the broader public good. Deficits can be used for good or evil. They can enrich a small segment of the population, lifting the yachts of the rich and powerful to new heights, while leaving millions behind. They can fund unjust wars that destabilize the world and cost millions their lives. Or they can be used to sustain life and build a more just economy that works for the many and not just the few. What they can’t do is eat up our collective savings.” Stephanie Kelton, The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy

Maori bartering a crayfish - Drawings illustrative of Captain Cook's First Voyage (1769), f.11 - BL Add MS 15508.jpg

10. Money did not originate from a barter system

There’s no historical evidence showing that money evolved naturally from barter. MMT advocates do not dispute that people have always used barter and still do. However, there’s no evidence that it was ever a primary mode of exchange.

The available evidence points to an alternative explanation, i.e. money began as a way to record social and economic obligations and debts; which were recorded and enforced by central authorities such as temples, palaces, or governments. As I wrote in one of my recent articles,

“In this view, money isn’t a physical thing like a coin, a pebble, or a carved tally stick – it is a concept that represents a promise or obligation recognised within a community and enforced by an authority. That concept can be represented by physical objects such as coins and paper money or by numbers in a digital spreadsheet.”

This is an important distinction because it tells us that, contrary to the orthodox view, money did not, ‘belong to the people’ and was not ‘stolen from the people by governments’. Money has always been a tool of central authorities and governments: it is social and political creation, not something that naturally sprang from the development of barter or markets.

That’s why this idea sits at the heart of the MMT framework. MMT starts from the understanding that money is issued by the state to serve public purposes. And if money is a public tool, then the government has not only the means but also a legitimate role to play in shaping the economy. It is an idea orthodox economics often try to downplay or even deny because it suits the ‘small government, low tax’ story; MMT puts it front and centre.

That’s my MMT top ten – what’s yours?

So those are my top ten MMT ideas. I have not doubt I have missed some of your favourites. Comment below to tell me what your top MMT ideas are - or if you just want to tell me I’m entirely wrong on any particular point I’ve made, go for it; I’m ready to learn.

That’s all for now. Don’t forget to subscribe to support MMT101DOTORG. Spread the word that a better world is possible.

If you have any feedback or questions or if you disagree with anything I write in this article, I want to hear from you. I value your input whether you agree with me or not. Please add your comments in the discussion area.

Links to some of my most popular newsletters

• Modern Monetary Theory (MMT) in 67 Bullet Points

• My MMT Top Ten: Modern Monetary Theory’s Best Ideas Explained

• Killing the Myth of Government Borrowing Stone Dead: Gilts, T-Bills, Interest Rates and the Truth About Money Printing

• An Explanation Of Why Taxes Don’t Fund Spending—And Why Elon Musk Is Wrong About The US Government Deficit

Become a paid subscribers for access to additional content:

• A Permanent Home for MMT101 Paid Subscriber Resources – Factsheets, book recommendations, academic papers, MMT podcasts and more.

• MMT Factsheet 1: Currency Issuers vs. Currency Users

• MMT Factsheet 2: The Origins of Money

• MMT Factsheet 3: If Taxes Are Not For Spending What Are They For?

• MMT Factsheet 4: What Does Full Employment Mean?

MMT101.ORG Is a Reader-Supported Newsletter: You Can Help by Becoming a Paid Subscriber

If you are enjoying these articles and find them a useful part of your Modern Monetary Theory (MMT) education, please support MMT101.ORG—if you can—via small donation. Your help will allow me to continue this work and reach & teach more people. If you can’t do that, consider sharing the articles and podcasts. By subscribing and supporting, not only will you learn how the economy works but you will also be part of the efforts to change people’s lives for the better. I do not have the power to do that alone but as an ever-expanding group, who understand that there is a better way, we can make a difference.

Thanks,
Jim

Jim Byrne - MMT101