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.
As you say the 'whole household budget notion is deeply ingrained' - it's ingrained to the extent that I have persuded individuals that it's nonsense and then a few weeks later I hear them coming out with the same nonsense once again. I think you need a strong will to not just 'go with the flow'. Every day the media come out with the same rubbish as if it's gospel.
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.
I'm struggling with 4 a bit. Do you mean tax creates the very idea of employment because in order to pay taxes you need a job, and therefore must create the idea of unemployment as well? Or is it more literal - taxing people increases the unemployment rate?
Taxation creates unemployment, government spending eliminates it. Introducing a tax means the government creates a pool of people looking for work in the governments currency. The definition of unemployed in this scenario just means people seeking paid work in that currency but not yet working. Unemployment in this scenario, is defined as the evidence that the government has not spent enough currency to allow everyone who needs it to obtain it. If the government has - after imposing a tax - then failed to provide enough work so people can pay that tax: that tells us that unemployment is the governments responsibility to fix.
1. People exist, they owe the government nothing, maybe live off the land for arguments sake
2. Government levies a tax, must be paid in the government's currency
3. These people are now 'unemployed' - they must find work to be paid in the currency in order to pay their taxes
4. It's the government's responsibility to put enough money into the economy to create those jobs
I'm guessing this is where people come up with the "governments are a criminal protection racket" narrative? Demanding people pay taxes in a currency only they can create so you have no choice but to work for them. Not saying I agree but seen from one angle you could make a case.
Though, I wouldn't say "governments are a criminal protection racket". It is transactional. Apart from creating/underpinning the private sector market by the introduction of a state currency (and providing the legal framework within which it can operate) the government also has the role of being able to provide the things that the private sector does not provide (things that are not profitable).
There is no private sector without a government currency. There is no financial sector - to the extent we know it today - without the government issuing bonds. When commentators say 'bond holders are dictating to the government' - they say that because they think the government needs to earn money from selling bonds. We know that is nonsense. The power lies with the government. It could stop issuing bonds tomorrow.
Great! Thanks for the replies, I only discovered mmt a few days ago so on a bit of a learning binge. From what I understand government legitimacy is crucial - a government needs to be able to say 'look, you voted for us in fair elections, we are delivering what we said we would using your labour, this is a partnership creating a better society for everyone'. If it can't say that then accusations of it being a criminal enterprise start to hit home. That may not come under the heading of mmt as it's not strictly economics but it underpins everything.
Currently the UK government is on a bit of a sticky run of form with this. The bonds thing is a perfect example. Government could simply create money and spend it on public services to benefit everyone. Instead we have this roundabout system of bond sales which benefit the rich, increase inequality and force us into ideas like austerity. However the problem here isn't government per se, it is neoliberal dogma which we are continuing to follow even as it leads us to our own destruction.
This AI list below aims to tell a more sequential story, starting with the nature of money and building to the policy implications.
It incorporates your points but reorders and reframes them for pedagogical clarity.
The MMT Top Ten: A Logical Progression
1. Money is a Public Monopoly. A monetarily sovereign government has the exclusive right to create and issue the currency.
It is the sole supplier, and we are all users.
This is the foundational premise.
2. Taxes Drive Money. The primary reason the state's currency has value is that the state imposes a tax liability that can only be extinguished in that currency.
To get the currency to pay taxes, people must sell real goods and services to the state (sector), creating demand and value for the state's otherwise worthless tokens.
3. Government Spending is Logically Prior to Taxation. The government must first spend its currency into existence (via spending or lending) *before* it can collect it back in taxes.
You cannot pay taxes in a currency that does not yet exist in your possession.
4. A Sovereign Government is Not Revenue-Constrained. Operationally, such a government does not need to collect taxes or sell bonds to "pay for" its spending. It can create the money at the click of a button. It chooses to tax and borrow for other reasons.
5. The Purpose of Bond Sales is to Manage Interest Rates, Not to Fund Spending. In the current system, bonds are sold to drain excess bank reserves created by deficit spending, which helps the central bank maintain its policy interest rate.
It is an asset-swap (reserves for bonds), not a borrowing operation to finance purchases.
6. The Real Limit is Inflation, Not Solvency. The only meaningful constraint on a monetarily sovereign government is the availability of real economic resources (labour, materials, factory capacity).
Spending beyond this limit causes inflation. Spending below it leaves resources idle.
7. Sectoral Balances: Government Debt is Non-Government Savings. This is an accounting identity.
A government budget deficit *necessarily* adds an equal amount of financial assets (money and bonds) to the non-government sector.
The national "debt" is the non-government's financial wealth.
8. Unemployment is a Political Choice, Not an Economic Necessity. Since the government is the currency issuer, it can always offer a Job Guarantee to anyone willing and able to work, effectively defining "full employment" and eliminating involuntary unemployment.
9. The Job Guarantee is a Superior Inflation and Stabilization Anchor. Replacing the policy of using unemployment (NAIRU) to control inflation, the Job Guarantee stabilizes the economy by employing people in public-purpose jobs during downturns and releasing them to the private sector during booms, all while setting a de facto minimum wage that anchors the price level.
10. Functional Finance: The Budget Should Serve the People, Not Arbitrary Goals. The government's budget should be judged on its outcomes: Does it achieve full employment, price stability, and a sustainable environment?
It should not be judged on arbitrary financial metrics like the size of the deficit or debt-to-GDP ratio, which are largely irrelevant for a sovereign issuer.
*
This refined list AI starts with the theory of money, explains the operational reality, identifies the true constraint, and finishes with the powerful policy implications that make MMT both revolutionary and controversial.
Thanks Dan. Commercial banks also create money when they issue loans but when the loan is repaid, no net new money has been created. Only the government has the capacity to create 'net' new money in the non-government sector.
Yikes! I am more confused than ever. Warren cautions not to say taxes don't fund spending. But say tax 'revenues' do not fund spending. This is too nuanced for me to understand. MMT teaches taxing and borrowing do not finance govt spending. The govt does not need our money since it create its own currency. What does Warren want us to understand? What happens to all the tax collected in the Treasury's General Fund and how is it reconciled within the monetary system so that it is not used in any way to finance any kind of spending.
The government does not have tax revenues: in the same way that when you pay off a bank debt you are not giving the bank money, when you pay your taxes you are paying off your debt to the state. Your debt to the state has gone down to zero. There is no money that the government can use to pay for services, i.e., tax revenues do not pay for services. What Warren is saying is that by the government forcing people to pay taxes created a system where people needed to work for the governments money to pay their taxes. So, they either need to work for the goverment (in the civil service, as a worker creating the countries infrastructure, in the army and so on) or you need to find a job in the private sector. The tax system was a way for the government to get the stuff done that it wanted done - because it forced people to do them - to get paid in the government currency - so they can pay their taxes. Those are services: the tax system created that situation - but tax 'revenues' don't pay for those services. Every time a person working in the army or some other government service gets paid: that government marks up their bank account - via the central bank. It wasn't a transfer of money from one pile to another: the money did not exist at all - until that bank account was marked up.
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.
As you say the 'whole household budget notion is deeply ingrained' - it's ingrained to the extent that I have persuded individuals that it's nonsense and then a few weeks later I hear them coming out with the same nonsense once again. I think you need a strong will to not just 'go with the flow'. Every day the media come out with the same rubbish as if it's gospel.
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.
Thanks John, every way that makes these insights easier to understand is a good way. :-)
I'm struggling with 4 a bit. Do you mean tax creates the very idea of employment because in order to pay taxes you need a job, and therefore must create the idea of unemployment as well? Or is it more literal - taxing people increases the unemployment rate?
Taxation creates unemployment, government spending eliminates it. Introducing a tax means the government creates a pool of people looking for work in the governments currency. The definition of unemployed in this scenario just means people seeking paid work in that currency but not yet working. Unemployment in this scenario, is defined as the evidence that the government has not spent enough currency to allow everyone who needs it to obtain it. If the government has - after imposing a tax - then failed to provide enough work so people can pay that tax: that tells us that unemployment is the governments responsibility to fix.
Great, thanks. I think I've got it now:
1. People exist, they owe the government nothing, maybe live off the land for arguments sake
2. Government levies a tax, must be paid in the government's currency
3. These people are now 'unemployed' - they must find work to be paid in the currency in order to pay their taxes
4. It's the government's responsibility to put enough money into the economy to create those jobs
I'm guessing this is where people come up with the "governments are a criminal protection racket" narrative? Demanding people pay taxes in a currency only they can create so you have no choice but to work for them. Not saying I agree but seen from one angle you could make a case.
You've got it!
Though, I wouldn't say "governments are a criminal protection racket". It is transactional. Apart from creating/underpinning the private sector market by the introduction of a state currency (and providing the legal framework within which it can operate) the government also has the role of being able to provide the things that the private sector does not provide (things that are not profitable).
There is no private sector without a government currency. There is no financial sector - to the extent we know it today - without the government issuing bonds. When commentators say 'bond holders are dictating to the government' - they say that because they think the government needs to earn money from selling bonds. We know that is nonsense. The power lies with the government. It could stop issuing bonds tomorrow.
Great! Thanks for the replies, I only discovered mmt a few days ago so on a bit of a learning binge. From what I understand government legitimacy is crucial - a government needs to be able to say 'look, you voted for us in fair elections, we are delivering what we said we would using your labour, this is a partnership creating a better society for everyone'. If it can't say that then accusations of it being a criminal enterprise start to hit home. That may not come under the heading of mmt as it's not strictly economics but it underpins everything.
Currently the UK government is on a bit of a sticky run of form with this. The bonds thing is a perfect example. Government could simply create money and spend it on public services to benefit everyone. Instead we have this roundabout system of bond sales which benefit the rich, increase inequality and force us into ideas like austerity. However the problem here isn't government per se, it is neoliberal dogma which we are continuing to follow even as it leads us to our own destruction.
Your list is great.
This AI list below aims to tell a more sequential story, starting with the nature of money and building to the policy implications.
It incorporates your points but reorders and reframes them for pedagogical clarity.
The MMT Top Ten: A Logical Progression
1. Money is a Public Monopoly. A monetarily sovereign government has the exclusive right to create and issue the currency.
It is the sole supplier, and we are all users.
This is the foundational premise.
2. Taxes Drive Money. The primary reason the state's currency has value is that the state imposes a tax liability that can only be extinguished in that currency.
To get the currency to pay taxes, people must sell real goods and services to the state (sector), creating demand and value for the state's otherwise worthless tokens.
3. Government Spending is Logically Prior to Taxation. The government must first spend its currency into existence (via spending or lending) *before* it can collect it back in taxes.
You cannot pay taxes in a currency that does not yet exist in your possession.
4. A Sovereign Government is Not Revenue-Constrained. Operationally, such a government does not need to collect taxes or sell bonds to "pay for" its spending. It can create the money at the click of a button. It chooses to tax and borrow for other reasons.
5. The Purpose of Bond Sales is to Manage Interest Rates, Not to Fund Spending. In the current system, bonds are sold to drain excess bank reserves created by deficit spending, which helps the central bank maintain its policy interest rate.
It is an asset-swap (reserves for bonds), not a borrowing operation to finance purchases.
6. The Real Limit is Inflation, Not Solvency. The only meaningful constraint on a monetarily sovereign government is the availability of real economic resources (labour, materials, factory capacity).
Spending beyond this limit causes inflation. Spending below it leaves resources idle.
7. Sectoral Balances: Government Debt is Non-Government Savings. This is an accounting identity.
A government budget deficit *necessarily* adds an equal amount of financial assets (money and bonds) to the non-government sector.
The national "debt" is the non-government's financial wealth.
8. Unemployment is a Political Choice, Not an Economic Necessity. Since the government is the currency issuer, it can always offer a Job Guarantee to anyone willing and able to work, effectively defining "full employment" and eliminating involuntary unemployment.
9. The Job Guarantee is a Superior Inflation and Stabilization Anchor. Replacing the policy of using unemployment (NAIRU) to control inflation, the Job Guarantee stabilizes the economy by employing people in public-purpose jobs during downturns and releasing them to the private sector during booms, all while setting a de facto minimum wage that anchors the price level.
10. Functional Finance: The Budget Should Serve the People, Not Arbitrary Goals. The government's budget should be judged on its outcomes: Does it achieve full employment, price stability, and a sustainable environment?
It should not be judged on arbitrary financial metrics like the size of the deficit or debt-to-GDP ratio, which are largely irrelevant for a sovereign issuer.
*
This refined list AI starts with the theory of money, explains the operational reality, identifies the true constraint, and finishes with the powerful policy implications that make MMT both revolutionary and controversial.
Thanks Dan. Commercial banks also create money when they issue loans but when the loan is repaid, no net new money has been created. Only the government has the capacity to create 'net' new money in the non-government sector.
Yikes! I am more confused than ever. Warren cautions not to say taxes don't fund spending. But say tax 'revenues' do not fund spending. This is too nuanced for me to understand. MMT teaches taxing and borrowing do not finance govt spending. The govt does not need our money since it create its own currency. What does Warren want us to understand? What happens to all the tax collected in the Treasury's General Fund and how is it reconciled within the monetary system so that it is not used in any way to finance any kind of spending.
The government does not have tax revenues: in the same way that when you pay off a bank debt you are not giving the bank money, when you pay your taxes you are paying off your debt to the state. Your debt to the state has gone down to zero. There is no money that the government can use to pay for services, i.e., tax revenues do not pay for services. What Warren is saying is that by the government forcing people to pay taxes created a system where people needed to work for the governments money to pay their taxes. So, they either need to work for the goverment (in the civil service, as a worker creating the countries infrastructure, in the army and so on) or you need to find a job in the private sector. The tax system was a way for the government to get the stuff done that it wanted done - because it forced people to do them - to get paid in the government currency - so they can pay their taxes. Those are services: the tax system created that situation - but tax 'revenues' don't pay for those services. Every time a person working in the army or some other government service gets paid: that government marks up their bank account - via the central bank. It wasn't a transfer of money from one pile to another: the money did not exist at all - until that bank account was marked up.
Got it!