NB – About 10 years ago I wrote an MMT primer after first being introduced to the theory. I initially thought the theory was coherent and operationally sound, but it turns out that I was wrong. In fact, my primer wasn’t a complete primer because MMT is MUCH more complex than I initially thought (and also much more wrong than I initially thought). Unfortunately, that primer was pretty popular because it was succinct. So popular that Paul Krugman picked it up. Oops.
Anyhow, I removed that primer a long time ago and over the course of the last 10 years I still haven’t seen a succinct primer so there is still tons of confusion about the theory. In fact, almost every explainer is absurdly long and most responses (some, by famous economists) are wrong in rather basic ways (probably because they haven’t waded through the 1,00,000 word explainers that exist – hard to blame them). So, here’s my second crack at it. I am sure the MMT people will hate it and start lots of Twitter fights about it. Fun! So, here we go.
Modern Monetary Theory (MMT) is a theory of economics that attempts to explain how sovereign currency issuing nations operate within the scope of the macroeconomy. They start with some fairly simple insights:
- The government is the monopoly supplier of cash, coins, reserves and government bonds.
- Taxes must be paid and settled in these various forms of money. Therefore, all other forms of money (like deposits) are IOUs for the real thing (the things the government issues).
- Since the government is the issuer of these things they do not need to obtain income from the private sector in order to be able to create these assets. In fact, they must make them available before the private sector can use them. In other words, the government spends first and taxes second.
- All of this means the government is not revenue constrained and doesn’t really need taxes or to issue bonds to “finance” its spending. When the government wants to spend it just cranks up the printing press. So, in the eyes of the MMT people the way things are done now is pretty much all wrong and unnecessary.
- So, what constrains the government? It’s not being able to obtain money that is problematic. It’s creating so much money that it devalues existing money. In other words, inflation is the real constraint.¹
- Importantly, if the government does not issue enough of these assets then the private sector cannot pay their taxes and cannot save in “net financial assets”.
- Further, when the government imposes taxes and regulations on the private sector this causes unemployment (involuntary unemployment) because people need to obtain government assets to pay their taxes. For more on this watch this fun imagery of Warren Mosler describing how the tax system is like a room full of government employees threatening to shoot you if you don’t obtain Warren’s business cards.
Regarding some specific terms that cause a lot of confusion:
- “Government” in MMT means the Central Bank is consolidated into the Treasury. In the MMT world the CB is a government entity and mostly a distraction to the real business of government, which is fiscal policy. But if you consolidate the entities you see that the real “money printing” is done by the Treasury and that interest rates are not constraining for government spending. So MMT basically thinks we should stop obsessing with interest rate changes and focus policy on fiscal policy which is the more powerful lever.
- “Sovereign currency issuer” in MMT means a country that doesn’t peg its currency, has no foreign debt, is not resource constrained, has a diverse output base, etc. Basically, “sovereign currency issuer” is the MMT equivalent of a household that is really really rich and won’t likely go bankrupt, which is a useful concept and also a pretty meaningless one since most countries can’t just choose to be “sovereign”.
- “Net financial assets” refers to the fact that, when the government runs a deficit, it issues an asset to the private sector without a corresponding liability. In other words, it is a “net” financial asset. This has been the subject of much controversy over the years as MMT people sometimes imply that a deficit is the only way for the private sector to net save. It is misleading at best and wrong at worst.
That’s the “operational” part of MMT in a nutshell. But it doesn’t end there. This is really just the warm-up for the entire purpose of the theory, which is political policy. If you believe all of the above is right (which you actually shouldn’t, because, well, it’s at least partly wrong) then you arrive at one conclusion – only the government can provide us with full employment by deficit spending sufficiently AND running a Job Guarantee. In other words, the Job Guarantee and government deficits are a necessary conclusion of the THEORETICAL “operational” aspects. The two go hand in hand.
There are all sorts of peripheral distractions and details here and the MMT people will no doubt throw many hissy fits over this post, but that’s pretty much it. If you want to email me with complaints about this please reach me at email@example.com*
* I deeply apologize if this is a real email address and someone has to deal with all the annoying MMT people.
¹ – An interesting follow-up is “how will MMT contain inflation?” That’s a great question. They seem to have lots of theories about this, but nothing all that empirically sound.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.