There is a considerable amount of “introduction to MMT” material published on the web. I wanted to write something that was technically correct but also short and easy to understand. I’m not an expert in MMT, though I have been spending time since 2017 to understand its mechanics and approach to macro-economic analysis. This blog post is basically a “single sitting brain dump” of everything I’ve learned since I started my MMT journey. If you have any feedback, please get in touch with me on X @chevan
MMT Overview
- Modern Monetary Theory (MMT) is a macroeconomic theory that begins its analysis from a “statist” perspective. (For a comparison and contrast of popular economic theories, please refer to my other blog post.) MMT assumes the existence of a nation and analyzes production within that structure.
- At the highest level of the MMT model, nations can exchange goods and services with each other. This model divides a nation into two main operating units: the public sector (also known as the national government) and the private sector.
- The national government may consist of multiple different operating units. The organization and structure of any particular national government depend on the political and cultural preferences of the nation’s people and/or leaders.
- The private sector comprises firms and households. Below these entities, there may be other levels of abstraction, such as management, labor, and consumers, until you reach the lowest level—individuals.
- Within a nation, production refers to the process by which goods and services are created and distributed. Money serves as the medium of exchange and the unit of account for production. MMT explores and theorizes the operational linkage between money and production.
- The mechanics of money in the private sector are referred to as microeconomics. However, MMT generally focuses on the macro-level of analysis.
- Although money-mediated production is the central focus of the MMT model, it does not imply that the nation employs a capitalist mode of production. It is suggested that a nation will eventually evolve into capitalism. As a result, the MMT model can also describe a nation’s historical transition from a money-based pre-capitalist mode of production to capitalism. In fact, it might be possible to map and chart a course of development towards capitalism for a nation using MMT, but this is merely my observation.
- In a pre-capitalist stage, a nation’s public sector creates a specific form of money, known as a currency, to procure goods and services from the private sector. A currency is a form of soft money—it is created by the state. Hard money, typically a commodity like gold, is not created by the state but must be acquired. In certain circumstances, it may be desirable to peg the value of soft money to hard money.
- The national government creates demand for its currency through force: it imposes a tax on the private sector. This step aligns all economic actors behind the nation’s currency, regardless of any other money that might be in use.
- The public sector or national government is the monopoly supplier of the currency.
- The private sector (firms, households, and consumers) are users of the currency. They receive currency from the currency creator when they sell goods or services to the currency creator or when they receive transfer payments from the currency creator (public sector/government). The private sector then either spends the money (on investment or consumption) or saves it (creating wealth).
- At a stage of development where the national government is the primary source of currency by procuring goods and services from the private sector, prices in the private sector will tend to align with the value established by the government.
- Currency received by the private sector as payment from the public sector is stored in private sector banks.
- Private banks create loans for the private sector and will lend up to the amount they are required to keep in storage as specified by the public sector. This amount is known as the Reserve Requirement.
- The money used at the intersection of the banking system and the public sector is called Reserve Money and is created by the public sector entity known as the Central Bank.
- In addition to creating money to purchase goods and services from the private sector, the public sector can also issue debt in the form of bonds which can generate interest income for the private sector or be a mechanism for the public sector to stabilize the banking sector
- By issuing bonds, the government creates a benchmark risk-free curve that is used in pricing private sector interest rates. This allows the central bank to attempt to steer the economy with interest rate policy.
- The process of swapping cash for treasuries is essentially a way for the government to control the amount of money in circulation. When the government sells bonds, it effectively removes money from the economy (as the buyers of the bonds exchange their cash for the bonds). Conversely, when the government buys back these bonds, it injects money back into the economy.
- Banks hold Treasury bonds as part of their reserves. These reserves act as a buffer, providing banks with a form of risk-free capital that they can use in times of financial stress.
- Central banks, like the Federal Reserve in the U.S., regularly engage in open market operations, which involve buying and selling government bonds. These operations allow central banks to manage the supply of money (reserve notes) in the economy, influencing interest rates and helping to keep inflation in check.
- Because the national government makes the money, in the MMT model, the Public Sector does not consider taxes and bond offerings as funding sources, but as reserve draining devices to maintain price and interest-rate stability. They are necessary even if a government issues its currency to spend.
- As a result, budget deficits and public debt are not inherently problematic.
- MMT is characterized by a fiscal view of the world, where the fiscal authority (in the U.S., this would be the legislative and executive branches of government) becomes responsible for the traditional monetary policy domain of other macro-theories. MMT holds the view that fiscal policy is a more effective tool for macro-economic stabilization than monetary policy because of its direct impact on the economy.
The Job Guarantee Program
- A central policy proposal of MMT is a job guarantee program, where the government promises to make a job available to any individual who is willing and able to work. MMT proponents argue that this policy can stabilize the business cycle and act as an automatic stabilizer to the economy by ensuring full-employment, encourage employability and peg the value of the currency to the value of labor.
- The Job Guarantee program values the money based on a “labor standard”, similar to how the gold standard expressed the value of money in terms of gold. This means that the value of the currency is anchored to the value of the labor provided in these guaranteed jobs.
- The Job Guarantee program also contributes to price stability. By offering a fixed wage for job guarantee workers, the government effectively sets a price floor in the labor market. This wage acts as a benchmark that private employers must meet, thereby influencing wage levels and price stability throughout the economy.
- From the MMT perspective, the Job Guarantee program “anchors” the currency. By guaranteeing a job to anyone ready and willing to work, the government ensures a certain level of demand for its currency, as workers need the currency to pay taxes and purchase goods and services.
MMT Analytical Approaches
- MMT emphasizes a quantitative approach to analysis called the sectoral balances approach, which is an accounting identity that shows the financial balance of the government sector plus the private sector must equal the financial balance of the foreign sector. This approach is meant to provide directional guidance for macro-economic decision-making and analysis.
- Below is a list of macro- Key Performance Indicators (KPIs) that Modern Monetary Theory (MMT) recommends monitoring:
- Inflation Rate: MMT monitors the inflation rate as it measures the rate at which the general level of prices for goods and services is rising. Controlling inflation is a key goal of MMT as excessive inflation can erode purchasing power and destabilize the economy.
- Unemployment Rate: The unemployment rate is crucial as MMT aims for full employment where everyone who wants to work can find a job. High unemployment can lead to wasted resources and human potential, and can also cause social problems.
- Government Deficit/Surplus: The size of the government deficit or surplus is an important indicator of the fiscal policy stance. MMT views government deficits as normal and necessary to add financial assets to the private sector and stimulate the economy.
- Public Debt: The level of public debt is another key indicator. However, MMT views public debt differently from traditional theories. It sees government debt as private wealth and a record of the accumulated budget deficits that have provided financial assets to the private sector.
- Sectoral Balances: MMT pays close attention to the sectoral balances – the government, private, and foreign sectors – and how they interact. The theory states that a government surplus/deficit must be offset by a deficit/surplus in the private and foreign sectors.
- Wage Levels: Wage levels, particularly the wage set by the job guarantee program, are important as they can influence income distribution and price stability. They also reflect the living standards of workers.
- Currency Value: The value of the nation’s currency in foreign exchange markets can also be relevant, especially for countries that rely heavily on imports or have significant foreign-denominated debt. A stable currency can promote economic stability and confidence.
- Interest Rates: The level of interest rates in an economy can influence borrowing costs and investment. MMT often argues for a zero-interest rate policy to stimulate investment and economic activity.
- Job Guarantee Wage: The wage level set by the job guarantee program is a key indicator as it sets a wage floor in the economy. This can help ensure a fair income for all workers and reduce income inequality.
- Private Sector Net Saving: This is the private sector’s total income minus its expenditure. MMT often emphasizes the importance of allowing the private sector to net save, as this can provide a buffer against economic downturns and promote financial stability.
References
- MMT: Full employment and the Job Guarantee (JG). https://www.mmt.works/mmt-full-employment-and-the-job-guarantee-jg/.
- Exploring the essence of MMT – the Job Guarantee – Part 2. https://billmitchell.org/blog/?p=49546.
- Modern monetary theory – Wikipedia. https://en.wikipedia.org/wiki/Modern_monetary_theory.
- On Price Stability with a Job Guarantee – Jackson Mejia. https://www.jacksonmejia.com/papers/Mejia_Albrecht_MMT_2022.pdf.
- Exploring the essence of MMT – the Job Guarantee – Part 2 – Bill …. https://storytellingco.com/exploring-the-essence-of-mmt-the-job-guarantee-part-2-bill-mitchell-modern-monetary-theory/.
- Mosler economics – https://www.moslereconomics.com/.
- Monetary Policy vs. Fiscal Policy: What’s the Difference? – https://www.investopedia.com/ask/answers/012715/who-sets-fiscal-policy-president-or-congress.asp
- Modern Monetary Theory (MMT) Explained – https://www.economicshelp.org/blog/162341/economics/modern-monetary-theory-mmt-explained/
- Modern Monetary Theory (MMT): A Critique – https://www.econlib.org/library/Columns/y2021/SumnermodernmonetarytheoryPartII.html
- Modern Monetary Theory: Cautionary Tales from Latin America – https://www.richmondfed.org/publications/research/economic_brief/2021/eb_21-12
- What is Modern Monetary Theory? – https://econofact.org/what-is-modern-monetary-theory
- Mastering Important Maintenance Metrics & KPIs – https://flowdit.com/mastering-important-maintenance-metrics-kpis/
- Mastering Maintenance KPIs – https://eworkorders.com/cmms-industry-articles-eworkorders/mastering-maintenance-kpis/
- KPI Examples – https://www.qlik.com/us/kpi/kpi-examples/
- 68 Important KPIs – https://databox.com/important-kpis
- 27 Examples of Key Performance Indicators – https://onstrategyhq.com/resources/27-examples-of-key-performance-indicators/