My MMT Top Ten (Updated): Modern Monetary Theory’s Best Ideas Explained
MMT Economics: Your guide to the most powerful insights from Modern Monetary Theory.
This is an updated version of my Modern Monetary Theory Top Ten. I’m updating it after a chat I had with Warren Mosler (the ‘father’ of MMT). Warren was generous enough to give me some of his time to add additional insights and to explain why certain phrases and ideas, though generally accurate, could also easily be misinterpreted. If you know Warren, you know he’s a stickler for detail.
As I compiled my list, I was bearing in mind that MMT did not spring from nowhere; it draws from a mix of economic traditions and thinkers, both past and present. However, it also offers something new and powerful: a framework that puts us firmly in a world where solutions to even our biggest problems are possible.
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. Contrary opinions are welcome. Note that for anyone new to this topic your can access my economics jargon buster articles here. Paid subscribers can also download my MMT Dictionary.
Here are my MMT top ten:
Currency-issuing governments are not like households.
Tax revenues do not fund government spending.
Inflation and finite resources are the real constraints on spending not government finance.
Governments create unemployment when they tax their citizens.
The job guarantee is an automatic stabiliser for the economy.
Selling Government bonds does not provide the government with spending money.
Sectoral balances tells us that a government ‘debt’ is a nongovernment surplus.
Monetary sovereignty is a spectrum.
Deficits are neither good nor bad.
Our modern monetary system did not originate from a barter system.
Ok, let’s dig into these ideas a little further.
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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 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 — or, if you prefer the more technically accurate ‘Warren speak’, fewer net financial assets in the private sector. This could ultimately lead to higher private debt: and it is private debt that is dangerous (think, 2008 financial crash), not government debt.
Kelton is not saying that governments must always run deficits nor is she saying that deficits are good or bad in themselves. She is saying that the size of the deficit (or surplus) should be determined by what needs to be done to best serve the needs of the country’s citizens.
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 another country’s currency and those that issue their own. Those that issue their own create new money every time they spend — or, as Warren puts it, government spending is just the process of marking up accounts at the central bank.
How do they do that? Well, they literally type numbers into a computer, and those numbers 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.
The operational sequence in relation to government spending is: Parliament (or Congress) → Treasury → Central Bank → Commercial Banks → Private Sector. Note that the private sector is at the end of this sequence not the start. Spending must occur before taxes can be paid or bonds can be purchased, because it is government spending that creates the reserves (state money) that ultimately get used for those transactions.
“After spending is authorised by Congress, the Treasury instructs the Federal Reserve Bank to credit the recipient’s bank account (change the number to a higher number) on the Fed’s books.” MMT White Paper - Warren Mosler
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 (or in ‘Warren speak’ it creates the ‘net financial assets in the private sector which enable taxes to be paid’): governments spend first and then they take some of that money back out via taxes.
That’s not to say that taxes are not needed. They are vital. Taxes help to control inflation; taxes creates 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 it is not tax revenues that 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 puts it:
“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.
It as at this point that I must point out Warren’s insights on the above, seemingly simple, statement. Warren reminds us that it was taxation that enabled the government to resource itself (a civil service, an army, infrastructure and so on) and it was that taxation system which created the conditions that allowed modern markets to evolve. And it was taxation that directly led to the government services we consume today. As Warren puts it in Soft Currency Economics, ‘Taxes function to create the demand for federal expenditures.’
Warren’s point was - that I should be careful not to say that taxes don’t fund spending – as that could be regarded as misleading. And yes, I was aware of that, which is why I always state it the following way: tax ‘revenues’ do not fund government spending. However, I definitely needed to point out that nuance more explicitly in this post, which I have now done. Thanks Warren.
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.
Which takes me to a related idea: Warren reminded me that: money does not create something new, the resources mobilised by money must already exist in the economy. Well, yes, I understand that, and I understand that when we consume the earth’s resource we are depleting those resources: however, for me, it does feel that there is some complexity to this story: a new school is, in common parlance, a new resource - which comes about by mobilising and combining things that already exist: land, raw materials, workers and knowledge. A Covid vaccine is a new resource - developed by university educated workers - employed by a private sector drug company.
So, perhaps I’ve just not found the right vocabulary to explain the difference between the inputs and the creation of something new. That is, something like a school, a vaccine, wind turbine or creativity in the mind of a human. I understand the ‘money doesn’t create new resources’ argument but I’m still inclined to say that government spending does indeed create new resources within the economy - as most citizens understand that term (at the very least, if you don’t want to believe that, you can think of it as adding value to existing resources). Ask someone if that new bridge - that cuts an hour off of their journey to work - is a great new resource and they will tell you that it is indeed.
Granted, at the molecular level it is all just a transfer of energy: and no new energy ever gets created. But that’s us getting into philosophical and metaphysical arguments which could end up with the argument that nothing new can ever be created - including humans and their creative output: and I’m not going down that route.
Having said all of that, it is clearly true to say that: 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 citizens the skills they need, then build more schools.
And, ironically, inflation can be tackled by spending money. That is by spending money to increase the supply side of the demand and supply equation. If widget prices are getting pushed up due to the scarcity of widgets you can clearly invest to make more widgets. There is, of course, an opportunity cost involved when workers and resources are devoted to one activity rather than another; which reminds us that the raw materials available to go into any particular project are indeed finite.
Lastly, for this section, there is one more idea that Warren pressed upon me: the idea that the government, as the monopoly issuer of its own currency, is ‘the price setter’ for the economy. In this view, inflation primarily comes from the government paying too high a price for the things that it purchases (relative to the availability of real resources). The prices set by the private sector businesses and individuals are therefore, set relative to the government’s floor price.
What’s the significance of this? Well, given that the level of unemployment is a key measure of unused capacity in the economy - it means that if the government sets a price for labour in a job guarantee program - not only does it set a floor for labour prices it also controls the level of unused labour in the economy. This allows the government to balance the availability of labour with wage levels; thus helping to control inflation. That’s not to say that labour is the only resource that can be scarce - but it is a good indicator for the economy.
[My insight/opinion: yes, we must be clear that it is resources that are finite, not the spending power of currency-issuing governments. I used the phrase ‘opportunity cost’ earlier in this section, which tells us that this is all about making choices: and who is making the choices about how those resources are used, and for whose benefit?
Understanding this simple idea (it’s about the resources, not money) is not enough. If we want to ensure the planet we live on doesn’t kill us; if we want a fairer, more equal society; and if we want a wellbeing economy where citizens can make the most of their talents, then we need an empowered, educated citizenship. And we need a political system where the powerful and wealthy are not able to use their wealth to game that system for their own profit. As I’ve said many times, MMT, unlike neoliberal economics, is not at its core a political ideology: it is people who bring their own political or ideological biases to the party.]
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4. Governments create unemployment when they tax their citizens
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
So unemployment, from this viewpoint, is evidence that the government has not provided enough currency for its citizens to both pay their taxes and to ‘save for a rainy day’. Unemployment therefore is caused by the government and it is the governments responsibility to ensure that those who are being asked to pay taxes have the ability work to earn the governments currency.
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 blunts this competition and thus helps to control wage inflation.
One thing that Warren emphasises is that these are transitional jobs; when the economy recovers workers will take up private sector jobs.
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 (100% of which originated from 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 pays slightly less interest (because the central bank now pays interest on reserves). 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 - Gilts & Bonds
One thing that Warren Mosler reminded me of is that these actions (issuing bonds to manage rates) are a policy choice and not an economic necessity. Mosler suggests that bond sales could in fact be eliminated altogether, resulting in a zero overnight interest rate. Why does that result in a zero overnight interest rate? Well, because the reserves created bygovernment spending will no longer be soaked up by bond sales. The resulting abundance of excess reserves means banks no longer have a need to borrow from each other (to settle their interbank accounts), meaning the overnight interest rate falls to zero.
Removing the income from bonds does, however, create issues that the government then has to deal with. For example, retirement funds that currently depend on the risk-free income they get from government bonds.
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
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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.” Interview with 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 or find (perhaps by borrowing) 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.” - Real Progressive Interview with 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.
Mosler has not necessarily bought into Dr Fadhel’s ‘monetary sovereignty is a spectrum’ idea, preferring instead to stick to the mechanics of monetary processes: issuing, taxing, and spending. That is, there are countries that issue their own currency and those that don’t. However, he acknowledges that some countries face real constraints that limit their policy space. If I’m wrong about that Warren, I apologise — please put me right.
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
10. Our modern monetary system 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.
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Resources
MMT White Paper - Warren Mosler
The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy by Stephanie Kelton
The Gower Institute for Modern Money Studies - Gilts & Bonds
Seven Unsustainable Processes: Medium-Term Prospects and Policies for the United States and the World - Wynne Godley
Funding the Future - Formally Tax Research UK - by Richard Murphy
Soft Currency Economics by Warren Mosler
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MMT Factsheet 3: If Taxes Are Not For Spending What Are They For?
A useful summary. I'm inclined to think that 2 & 6 should actually be 1 & 2. All the commentary we hear about the economy, from politicians and journalists, is always framed in the terms of "taxpayers' money", "cost to the taxpayer", "crippling govt debt" etc. The whole household budget notion is deeply ingrained in the language. The most essential thing to cut through that way of thinking is to keep emphasising that taxes and borrowing don't fund the government. It's counter-intuitive, so needs endlessly repeating. We won't get out of the rut as long as the trope "government can't afford to spend" rules everyone's thinking.
Jim, I would like to add two more Insights to the list:
1. Fiat money is not a finite commodity, it’s a measurement—like points on a scoreboard. To say that a sovereign government can run out of money is like saying to the basketball star Stephen Curry—Sorry, that three-pointer you just made can’t count because we ran out of points!
2. What is tallied as a “COST” to government is, in fact, a PAYMENT TO the government’s citizens. The “COST” of mitigating and adapting to climate change, for example, is more usefully understood as what the world citizens will be PAID to do the mitigating and adapting.