Inside Modern Money Theory: Our Route to Full Employment and No Debt

By Rollo Martins
Cross Posted from

America has a tool that millennials can — and should — use to trump all the negatives that are piling up at their doorsteps (the high unemployment, international competition, and all that college debt). This tool is called the U. S. dollar, which aligned with a fiscal policy designed for growth and prosperity, would eliminate their debt and give them full employment for the remainder of their lives.

A sea-change is occurring in economics and the University of Missouri-Kansas City is leading the way. Combining a fiscal policy geared toward prosperity and growth with a new understanding of what fiat currency means for the country, the economists there are touting what is being called Modern Money Theory. MMT turns traditional neoclassical economics on its head: Instead of tax then spend, it’s spend then tax. In other words, we can spend whatever we want. (But I oversimplify: There is still inflation to worry about.) This is all great news for the country, and for the millennial generation in particular.

Let’s just review what the traditional dismal science has told us: We tax, then we spend an amount based on what we want. Deficits are bad, creating a loan that future generations need to pay back. There’s a whole lot of other stuff known as monetary policy which Milton Friedman liked a lot (basically stating that currency amounts are really important), but we don’t need to get into all that. (You can find this information and more at New Economics Perspectives, a blog created to broadcast the Kansas City approach to economics, featuring economists such as Stephanie Kelton, William Black, and L. Randall Wray.)

Americans are told repeatedly that the government is bankrupt, that we are spending too much, and that we cannot afford to borrow endlessly on the backs of our grandkids. But all of this is, in a word, wrong. It is a mythology built upon an economics of gold, but is not nearly as useful in an age of fiat currency.

What the MMT economists teach us is that our taxes do not fund the government. Rather than view our economy as tax-then-spend, we need to see that we spend first, and then collect the taxes from individuals and firms who have used the currency the government had first created. Taxes are necessary to give value to currency in the wake of an absence of gold or silver, as well as to tweak how our economy functions (an element of fiscal policy). They are not necessary to spend money. That is important to understand. After all, it is plain that our government is the sole creator of currency, and can issue/print however much it wishes. If it so dictates it could spend and print 10, 12, or 20 trillion dollars. Eighty trillion. There really is no limit (other than inflation, remember). So how does taxation give value to currency? If the government did not tax any money there would be no value to currency, since currency is not backed by any sort of metal. Because we have to pay taxes (or face imprisonment) then we need to work in order to accumulate enough money to pay those taxes. In the process this transfers currency and value throughout the economy. This work — the goods and services we provide— is what allows our civilization to prosper. The simple measure of taxing by government fiat is the tool, brilliant in its simplicity, that now allows for our relative prosperity. The government taxes, and we spend the bills the government prints and give back some on tax day. We have to work to save those same bills and to pay the taxes. That is really all it takes to give value to money. It is that simple.

OK, so we have a government that can spend based not on tax revenue, but on what we need to do as a country. Remember, are not constrained by revenue. (Those guys on TV saying we’re bankrupt? They’re wrong.)

In our current economy we have tens of millions of people out of work or working too few hours. We have a health care system that is half as efficient as it should be. We have a trillion dollars in college debt with record numbers defaulting. We have so many goods and services standing idle that if we poured trillions of dollars into the economy it is highly unlikely we would have any inflationary pressures. Most economists still regard inflation as merely a given amount of money flooding an economy, without regard to how many resources are unused. If we could fund full employment and still not have inflation, well, that would be very good news to millennials. And we could very well do that.

The reason is this: Our economy is like a sponge. A dry sponge. If we create a lot more jobs through government spending (for example repairing roads, railroads, etc.) the sponge gets wet. It expands. Once we have full employment, with an economy humming, then we risk an overflow of water (money) since the sponge is saturated and can hold no more. Water spilling out onto the counter is our inflation. It’s important to note that we are a long, long way from spilling water onto the counter.

But since these ideas threaten a few powerful accumulators of wealth, this truth is having a hard time being understood, as it directly opposes the existing narrative of scarce dollars. But when properly understood, modern money theory opens up new opportunities and new wealth to tens of millions of people. It is time that the next generation of potential power-brokers, the millennials, understands how economics actually works, and uses it to their advantage. That’s turning the dismal science into a science that is hopeful and downright luminous.

12 responses to “Inside Modern Money Theory: Our Route to Full Employment and No Debt

  1. If inflation is the primary limit on the monetary sovereign’s ability to deficit spend without price inflation then why on earth do we allow the Fed to create new fiat for the banks?

    • WriterandThinker

      As the article states, the actual real limiting factor in the amount the government can spend is the productive capacity of the country. With unused capacity and resources, deficit spending that pushes currency into the economy to utilize those resources is would not cause significant inflation because it is forcing an otherwise inactive potential into use. Once the potential is being utilized without direct government spending, the government can reduce spending and enter a period of tax collection.

      The high inflation danger arrives when the spending occurs at the point where the country is already at full productive capacity because then currency is just entering the market with no productive expansion. This is limited by some natural real limitation. The other way this can happen is if the government pushes currency into use without requiring some productive application in its entry into the market. This could only be done by choice by handing over currency to some entity that does not have to be repaid and is not directed to a certain use (purchasing food for instance).

      As for the Federal Reserve, there are limits placed on how much currency it can push into or pull out of the economy, usually controlled by a mix of government requirements and the base interest rate. As it is an institution owned by the member banks and not a true national bank, it can only create currency in limited ways under what amounts to a government license. This usually takes the form of loans or interest paid on deposits. Loans must be paid back at some point plus interest and thus canceled out. Paying interest on deposits is usually tied into and tracks with inflation and growth and also canceled out further by paying out from the return interest from loans. All of this can occur only when authorized by the government. The idea is the same as direct government spending which is to get underutilized productive capacity into use or pull back once things are stable at or nearly at full capacity. In this case, it is done by the cost of loaning or benefit of depositing. The trick is that it is not as efficient as there is usually an intermediary with preferential treatment (the large Fed Member banks) taking a cut.

    • In the current system in the US, the Fed and the banks alone have the ability to call into existence new fiat money, not the executive or Congress. For the purposes of MMT, the Fed needs to be considered part of the Monetary Sovereign. Banks can create new money, but only as debt. Only the Fed can create truly new money into existence. Under the current laws, the Fed cannot “lend” or “gift” money to the executive, meaning the executive is limited by what it can tax or borrow from the market to spend, much like under a gold standard.

      What MMTers argue is that these limitations are self-imposed and are not necessary from an economic standpoint. Ideally if the prohibition on the Fed from “lending” or “gifting” money to the treasury is lifted and the silly “debt ceiling” done away with, as is the case with most countries, the executive can fund all Congressionally authorised spending by issuing bonds which can be purchased directly by the Fed , effectively one hand of the monetary sovereign (the Fed) creates the money and “lends” it to the other (the executive). However, inertia because of history would mean the money has to pass through an intermediary, the bond market.

    • Because banks don’t spend money, they “invest” it, like in commodities and stocks and airplane leasing and gold and insurance companies in Bermuda and farmland in Africa. Stuff that creates jobs.

  2. Thank you! This is the first time that I have seen the “sponge” analogy when describing the economy and inflation. It provides a simple, intuitive, visual explanation. Are there any limitations to this analogy which I do not see?

    • Bathtub is better. It has a drain. Demand leakages and taxes remove water. Faucet adds new water. (exogenous government spending). And tub has room for sloshing around as water flows to and fro. (endogenous bank lending and credit creation). Bathtub also provides room for splashing and eddies. (Bill Black is really good at pointing these out)

  3. Bravo, and thank you. One footnote: the dynamics of metal-linked money are more complicated than gold-is-over, so now we have chartal (tax-driven) money.

    The two primer chapters that start with the link below are good preparation.


  4. That’s a good post Rollo, and does expound the MMT in a nutshell, so to speak. However, your emphasis, and MMT’s, on “full employment” needs some qualification. The same applies to the issue of taxation. When we realistically look at the employment history of the last 200 years, the whole thrust of progress has been to produce more with less effort – in other words, to put people out of work. One of the aims, perhaps unstated, is to provide people with more leisure time to enjoy the fruits of our inherited progress, but in our capitalist society, the generally accepted principle aim has been to make a bigger profit. So, the reality is that our present day society can really produce all its needs, and services, with a fraction of the work force of past years. From that perspective, we need to define what we really mean when we use the term “full employment.” Rather than “talking trash”, as Professor John Kozy denounces in his article , we should carefully define the terms we use. Do we mean providing a job for everyone who chooses to work? Do we mean providing a job for every able body person within certain defined age limits, e.g. –say 14 to 65 – irrespective of the usefulness of the work? Do we mean that everyone has to have a job if they are to live in the society, because having a job is the only way that can earn enough money to live and pay taxes? That sounds a bit like a form of slavery to me. While there is certainly a genuine avenue for providing a great number of jobs in the maintenance, improvement and upkeep of the nation’s infrastructure, there are limitations in terms of the skills, abilities and numbers required to fill those jobs. Hopefully, the “full employment” job creation program doesn’t revert to Keynes concept of one group of people digging holes and another group filling them in? This brings us to the fundamental purpose of mankind’s existence. It has been said that that purpose is self improvement, which in a generalised sense, would seem a valid statement. How one defines self improvement is up to the individual, but it is obvious that no rational person would deliberately choose to reduce their standing in life. So, what is the difference between a person who chooses to spend their time in improving their swimming, or surfing ability, and one who chooses to use their brains to develop a new type of technology. Both are forms of individual self improvement. The former person doesn’t seek a job in order to improve themselves, and thus, makes that vacancy available to somebody else. The latter person, perhaps not intentionally, could possibly open up the opportunity for many other people to find work.
    In the real world of today, this is the society we have, and it is not one where we can bandy around the term “full employment” without defining what we mean. Everybody doesn’t have to work; many people don’t want to work in boring, uninteresting jobs that provide no satisfaction. Many people do not have the ability to master the increasingly technical skills required for much of today’s workforce. So, what is the solution to address these issues if it is not “full employment”?
    And that brings us to your statement about taxes – “Because we have to pay taxes (or face imprisonment) then we need to work in order to accumulate enough money to pay those taxes”. Surely, that is a complete surrender to the authority of a government to control the lives of every one of its citizens? Governments are created by the society to perform a public purpose – they are created for the benefit of their society and society is not created for the benefit of the Government.
    You are quite wrong in claiming – “In the process this (taxation) transfers currency and value throughout the economy”. The creation of “money” to serve as a convenient and acceptable medium of exchange is one of the many “public purposes” for having a government. While MMT seems to take the position that all “money” in the society is created by the government spending that “money” into circulation, they seem to ignore the fact that the far greater proportion of the “money” in the society is created as interest bearing credit through the private banking system, albeit with the Government’s sanction and approval.
    However, all credit is really the property of the people, because a loan is merely a legal agreement, and in the case of advancing credit, it is simply the ‘monetisation’ of future effort. The borrower promises to repay the loan at a later date from the effort and ingenuity in the way they use the advance. In this respect, all credit is really public property, because only people are capable of producing products and services that will create the ability to repay the advance. The creation of credit should not be the property of the private banks in the open handed manner which applies today.
    This is the reason why publicly owned banks are a totally legitimate part of the “public purpose” for which society creates a Government.
    A publicly owned bank can create a genuinely valuable money supply because it is backed by all the physical assets that are entrusted to a Government on behalf of the people. Every Government is never the “owner” of any of the nation’s infrastructure, in whatever form that infrastructure may take. The Government is always the caretaker on behalf of the society, with the responsibility to manage and maintain that infrastructure in the best possible manner. In this respect, any “privatisation” is a criminal offence in dealing in stolen property, unless, a government has specifically held a referendum to ask the public for their approval to sell the public’s property.
    MMT is correct in stating the limitations on creating a money supply depends on the amount of goods and services available. If the money supply is not correlated with the productive capacity of the nation, then inflation, or deflation, will result.
    However, the whole point of producing any amount of goods or services is that they be consumed. If they aren’t consumed, what’s the point of producing them? That brings us to the problem of providing sufficient “money” in the society to allow the productive capacity to be consumed.
    While the current attitude of many so-called intellectuals, and business leaders, is to denigrate the government’s social responsibilities, especially in respect to social welfare payments, they seem to lack the understanding that those payments go indirectly to the pockets of private enterprise producers. All such government payments represent a significant factor in respect to the consumption capacity of the nation. On the other hand, government subsidy payments to producers, has far less impact on the consumption capacity, and tends more to lead to over production and a dependence on export markets.
    Although taxation is seen as a way to control the level of inflation, if inflation is defined as too much money chasing too few products, then every government has another way to control the “money/credit” supply. They could do this by selling credit access to the private banking system in accordance with agreed national productivity and consumption measures, both for internal and external markets.
    Such a mechanism would avoid the utter stupidity that currently allows the private bankers to create more than a quadrillion dollars worth of virtually worthless paper assets in the form of various derivatives that are now beyond the capacity of the world’s economies to redeem.
    If the governments of every nation were to properly accept their responsibility to serve the public purpose, for which they are ultimately created, they would take total control of credit creation and sell it to the legitimate, registered, private banks in accordance with their nation’s production and consumption capacity. There should be no need for any monetary sovereign government to run up any debts, and every private bank would be entirely responsible for the management of their operation.
    No government would need to be a lender of last resort. The Government would operate a public bank for the purpose of public expenditure and every new addition to the public infrastructure system would add to the asset backing of the public bank, and thereby, the national currency.
    “It is that simple”.

  5. Mark Robertson

    It’s nice to see that the word continues to get out. A couple of minor quibbles if I may…

    [1] “MMT turns traditional neoclassical economics on its head.”

    Not exactly. Traditional economics is intentionally designed to confuse and brainwash the masses. This maintains the gap between the rich and the rest. MMT simply sweeps away the lies to reveal facts, truth, and reality. MTT explains how federal finances actually work in the real world, here and now. To say that MMT “opposes” traditional economics is like saying the theory of aerodynamics “opposes” witches flying on brooms. The former is based on objective, provable facts. The latter is nonsense.

    [2] “Americans are told repeatedly that the government is bankrupt, that we are spending too much, and that we cannot afford to borrow endlessly on the backs of our grandkids. But all of this is wrong. It is a mythology built upon an economics of gold, but is not nearly as useful in an age of fiat currency.”

    It’s a mythology all right, but ithe lies have nothing to do with being “useful” (except being useful to widen the gap between the rich and the rest). The lies are not a “vestige” or “hold-over” from the gold standard days. No, it’s all about power. The lies are used to brainwash the masses into submitting to ever-worsening poverty, inequality, and debt slavery. The lies are psyops, used by the 1% and their toadies to wage war on the 99%.

    [3] “Taxes are necessary to give value to currency in the absence of gold or silver, as well as to tweak how our economy functions (an element of fiscal policy).”

    Gold and silver have never given any value or legitimacy to any monetary system or currency anywhere at any time. (Repeat: NEVER.) The reverse has always been the case. It is monetary systems that give value to gold and silver, not the other way around. Whether the currency is a dollar bill or a gold coin is irrelevant. Both function as part of a fiat money system. If there is no money system at all, and no unit of account, then gold has zero monetary value, and little utilitarian value except as dental fillings. The monetary system rules. Gold and silver do not. They are secondary to the monetary system. So it has been since the dawn of human civilization. Even before there was money, there were accounting systems. Contrary to Adam Smith’s fantasies, there is no proof that any human civilization anywhere at any time has ever been based solely on barter. They all had money systems, or credit systems, or accounting systems. There is / was trade between societies, but no society has ever been internally based on barter.

    [4] “It is plain that our government is the sole creator of currency, and can issue/print however much it wishes.”

    Hold on. Banks also create money in the form of credit that is negotiable, just like government-created money. In fact, one reason why Americans are so poor is that most of the money in our system consists of bank-issued credit (i.e. debt with interest) instead of government-issued money. We are ruled by banks and by Wall Street because not enough of money enters our economy via government spending.

    Some people wrongly think that NO money comes from government spending. They think that all our money is created by banks. They think every dollar in circulation is lent to us by bankers. They say the US government should issue money directly, like President Lincoln did with his “greenbacks.” You can tell them that the US government issues money directly when it credits the bank accounts of Social Security recipients, for example — but they refuse to listen. They’re “smarter than you,” and that’s that.

    [5] “But since these ideas threaten a few powerful accumulators of wealth, this truth is having a hard time being understood, as it directly opposes the existing narrative of scarce dollars.”

    Exactly. Now you’re talking.

  6. With respect to inflation, we live in a global economy. Traditional inflation is caused by too much money chasing too few goods. With a global economy, supply is unlimited, there are never too few goods. We experienced this phenomenon during the housing crisis. The price of housing inflated, but the cost of other goods did not, regardless that people had home equity loans against the increasing value of their homes and cash was flying out their wallets. Everyone was rich. Only the cost of building supplies inflated. We ran out of drywall, requiring the importation from China.
    Look at today, the cost of money is low but loans are difficult. Thankfully, the 1% are transferring most of the new wealth to themselves as excess savings, searching for yield, while suppressing wages and employment, ensuring inflation stays low. In fact, they are imposing stealth price increases (smaller packaging, service charges, healthcare cost increases, commodity speculation) to make sure wage earners don’t over-consume and the sponge stays slightly damp.

  7. As a primer, “never assume for malice that which may easily be explained by stupidity.” I think this assumption that elites want to keep people poor when full employment and a living wage means consumable income rises at a higher rate than the cost of producing goods, or that full employment and a living wage means much higher profit margins, is more of a conspiracy theory than fact (though we can debate financiers’ incentive in raising the value of debt obligations). The simple truth is that balancing a household budget is the form of financing most people are familiar with, and explaining how sovereign currency works is incredibly difficult if they have no personal experience that it can tie into. This leads us into an inevitable conflict, as debate easily leads to argument and it’s natural to “outgroup” opponents, assuming malicious intent, which in turn hardens their resolve and makes us appear both hair-brained and haughty.

    On the topic of full employment, someone had pointed out that the purpose of progress is to reduce and eliminate the need for labor; in fact, there’s been a good comment on how the purpose of progress being unemployment leads to more leisure time, or ought to at any rate. In fact, there are different studies on zero-marginal (ZMP) product as a component of the jobless recovery, being that ZMP had been growing for a decade before relatively unnoticed until the recession forced layoffs and companies noticed the lack of need of those workers; the extent of this is probably even less than what it would be w/ a living wage scenario allowing for greater investments in automation by companies. However, to what extent ZMP or even negative-marginal product occurs in our workforce is debatable, and I wouldn’t mind seeing an article on it at some point in the future. What we can point out are unemployment statistics; U5 is 9.2% nation-wide while U6 is 14.3%, leading to the assumption that 5.1% of the workforce is part-time employment. Reducing the workweek (assuming for comparable expendable income, the need for a separate policy to increase hourly wages non-withstanding) to 35 hrs/week would increase full-time employment (@ 85.7% currently, it seems) by 1/7, to 97.9% (not adjusting for changes in demand and operating under the principle that part-time work would remain relatively steady as increase in demand for full-time workers shifted U5 down [even w/ preference for the underemployed, their acceptance of full-time employment would open a part-time position for the unemployed] until the demand for full-time workers overtook the demand for part-time work). It might be easier to make the sell for a jobs guarantee under those conditions if we reflect on the political reality of fiscal policy, although 1) a higher minimum wage, and 2) tax credits for automation both would have an impact on employment w/ a raise in ZMP as a result. I would go further, though, and say that the bottoms-up focus on higher wages would require a formal industrial policy and skilled training set in order to “validate” higher wages, i.e. focusing on industries where higher wages can be more competitive in the global market.

    Also would like to reflect on some questions about inflation- the line that inflation only occurs during full employment seems a bit nonsensical since we’ve seen a rise in the cost of living during the jobless recovery and near-austerity conditions. Perhaps because of “pump-priming” measures, yet I’m not sure what argument to make in how inflation now differs from under a labor-focused recovery. The second question is, is inflation itself necessarily bad in a post-full employment scenario? Yes, bubbles increase risk, but they can be regulated and wouldn’t investment in physical capital offset the inflation? I guess what I mean is, could inflation in a full-employment scenario not be funneled into wages and physical capital rather than credit?