MMT – The Good, the Bad and the Ugly

Modern Monetary Theory (MMT) has gained significant popularity among non-economists, largely due to its appealing narrative around the expansive possibilities of government spending. Advocates frame MMT as a superior alternative to mainstream economics. However, its framework frequently relies on misconstrued mainstream concepts, vague definitions, and questionable accounting treatments.

While MMT offers a few helpful operational insights, many of its core tenets range from misleading to outright incorrect. Here is a breakdown of what is good, bad, and ugly about MMT.

What is MMT?

MMT is a macroeconomic framework focused on full employment and price stability. Its foundational premise is that the federal government, as the monopoly issuer of its own currency, faces no nominal budget constraint. Because the state can print money, it cannot run out of cash, meaning it does not need to collect taxes prior to spending.

Under MMT, unemployment is viewed as a structural artifact of the state requiring currency for tax payments without spending enough of that currency back into the economy. To solve this, MMT proposes a universal Job Guarantee (JG) to ensure full employment while acting as an inflation buffer. Crucially, MMT does not claim that deficits are irrelevant; rather, it argues that government spending is constrained by real resources (inflation) rather than nominal financial balances.

The Good

1. A Modern Understanding of Banking

Mainstream economics historically relied on the outdated “money multiplier” model, which incorrectly presents banks as passive intermediaries lending out reserves. MMT correctly emphasizes endogenous money: private banks create deposits out of thin air when they make loans, acquiring reserves only as needed for interbank clearing.

2. Prioritizing Fiscal Policy

MMT rightly challenges the mainstream reliance on central banks and monetary policy as primary economic levers. Unrealistic constructs like the natural rate of interest and NAIRU deserve critical re-examination, especially given the clear limitations of monetary policy in low-growth environments.

3. Highlighting the Inflation Constraint Over Solvency

Unlike households, which face strict nominal constraints due to bankruptcy laws, a currency-issuing federal government faces a real resource constraint. Reframing the debate away from household-style solvency and toward real-world capacity helps dispel bad-faith panics about government debt causing immediate hyperinflation.

The Bad

Despite these useful insights, MMT relies heavily on sloppy generalizations and accounting maneuvers that confuse macro-level realities with micro-level operations.

1. The Operational Fallacy of “Taxes Don’t Fund Spending”

MMT advocates frequently assert that “taxes do not fund government spending.” While it is true that a sovereign government does not face a 1:1 nominal constraint and can run persistent deficits, claiming taxes play no role in funding spending is rhetorical overreach.

In a modern credit-based system, money derives value from the real output produced by the private sector. When the government spends, it redistributes value created by private enterprise. Taxation extracts a portion of this endogenous wealth, allowing the state to spend without causing inflation.

Consider two hypothetical economies:

• Economy A: Citizens create no real goods or services.
• Economy B: Citizens build highly productive, valuable enterprises.

The government of Economy B can collect tax revenues and spend trillions of dollars sustainably because the underlying real wealth supports the currency. If the government of Economy A attempts to spend the same amount by printing money, it simply triggers runaway inflation.

The private sector’s capacity to build resources creates the fiscal space for government spending. Saying “taxes don’t fund spending” while acknowledging that “resources constrain spending” is a self-contradictory trick.

2. Misconstruing the Reserve Clearing Process

MMT often creates a fictional consolidation of the Treasury and the Federal Reserve to claim that tax receipts merely “destroy” money while government spending “creates” it. This obscures how the monetary system actually functions and the real-world flow of funds.

Deposit creation begins primarily with private banks and the government operates as an intermediary in redistributing these deposits through the system. When you consolidate the Fed and Treasury you are not only creating a fictional depiction of the real-world institutional structure, but you are misconstruing the actual flow of funds and where it begins in the banking system.

Private Bank Loan Creation ──> Deposit Creation ──> Interbank Settlement via Reserves

• Deposits Precede Reserves: Banks issue deposits independently when they make loans. Reserves exist primarily as a back-office tool to clear transactions between private financial institutions.
• Redistribution, Not Destruction: When citizens pay taxes, they transfer private bank deposits to the Treasury General Account (TGA) at the Fed. The reserve movements used to settle these transfers are an interbank clearing mechanism, not proof that private wealth was erased or that the government spends first.

By treating private bank deposits as mere “IOUs” for government currency, MMT reverses the real-world flow of funds and contradicts their own understanding that the money multiplier is a myth. In capitalist economies, the financial system is built on private banking; the state relies on this private ecosystem to validate its currency, not the other way around.

3. Redefining “Net Saving” Through Fallacious Accounting

MMT redefines private sector net saving as (S – I), netting out private investment (I). They use the tautology (S – I) = (G – T) to claim that the private sector cannot accumulate net savings unless the government runs a deficit (G – T) > 0. This is often depicted with an overly simplified two sector chart depiction to claim that the private sector relies on the government to run a net financial asset position.

This view relies on a flawed two-sector aggregation that ignores internal wealth generation. Corporate investment (I) is the primary engine of long-term economic value, productivity, and savings. Naming government debt as the sole source of “net assets” for the economy ignores the tens of trillions of dollars in real assets, equities, and corporate debt that make up the overwhelming majority of household net worth.

The Ugly

1. The Job Guarantee: An Unproven Core Policy

The core of MMT is the Job Guarantee (JG). MMT frames unemployment as a state-created problem that can only be cured by the state providing a universal job buffer.

Despite being promoted as a complete solution for price stability and full employment, the JG is virtually unproven in developed economies. Limited historical implementations in developing nations (such as India’s MGNREGA or Argentina’s Jefes program) faced significant issues with administrative corruption, structural inefficiencies, and persistent inflation. Promoting an unmodeled, economy-altering policy as a settled fact lacks scientific rigor.

2. A Dangerous Theory of Interest Rates and Inflation

MMT’s inflation theory suffers from severe practical and empirical vulnerabilities:

• 0% Interest Rate Dogma: MMT advocates argue for permanently pegging interest rates at 0%, claiming interest payments on bonds are unnecessary state subsidies. However, managing interest rates remains a vital tool for throttling private credit expansion (particularly in real estate) to keep inflation in check.
• Flawed Inflation Toolkit: MMT proposes using discretionary tax hikes to cool an overheating economy. In practice, using Congress to pass tax increases to fine-tune short-term inflation is politically impossible and structurally sluggish.
• The Post-2020 Inflation Test: The aftermath of 2020 served as a real-world test. Despite trillions in deficit spending and surging inflation, MMT figures routinely misdiagnosed the demand-side pressures, opposed rate hikes, and recommended further spending. Warren Mosler, the founder of MMT, proposed rate cuts in Turkey during Covid at a time when inflation was 19%. The country followed this exact approach just three weeks after his recommendation and the Turkish Lira proceeded to fall 90% in subsequent years. This is the sort of unorthodox and catastrophic idea that should cause concern for any adherent of the theory.

3. Dogmatism and Rhetorical Shifting

When pressed on institutional realities or empirical failures, MMT arguments frequently shift goalposts. A central term like “sovereign currency issuer” is used loosely: if a country succeeds, it is deemed sovereign; if its currency collapses under high debt, MMTers claim it was never truly sovereign. This circular reasoning makes the theory unfalsifiable.

Conclusion

MMT offers useful critiques of legacy monetary concepts like the money multiplier and rigid household-budget analogies. However, these points are largely borrowed from older Post-Keynesian and Institutionalist frameworks.

Where MMT attempts to be original, it relies on misleading accounting consolidations, ambiguous definitions, and unsupported policy prescriptions. As Post-Keynesian economist Thomas Palley famously noted about MMT: “What’s new is wrong, and what’s old is well understood.”

Related:

1. The Monetary and Fiscal Nexus of NeoChartalism, by Marc Lavoie
2. MMT and the Real World Accounting of 1-1<0, by Brett Feibiger
3. A Critique of MMT, by Steve Waldman
4. Tom Palley has written a series of excellent MMT critiques (see here and here for example).