Summary
In today's video, I emphasise the importance of understanding Modern Monetary Theory (MMT) if you want to engage in macroeconomic discussions. MMT explains how governments fund their expenditure by creating new money through their central banks without the need for prior taxation or borrowing. It then argues that taxation primarily controls inflation, rather than interest rates. But most of all, the message is that if the economy is to be run to deliver full employment, then the understanding that MMT supplies is essential.
I this morning's video, I argue that you can't discuss macroeconomics without knowing about modern monetary theory. So, what is it all about? In this longer-than-usual video, I offer my explanation.
The audio version is here:
This is the transcript:
What is modern monetary theory?
You cannot take part in discussion about economics these days without hearing the term modern monetary theory come up, and it's important to understand what it is because a great deal that is said about MMT, as I will refer to it throughout this video, is complete nonsense.
Some of its supporters don't help MMT by making claims about it which are entirely unfounded and even untrue. And almost everything that is said about it by its opponents is, let's be honest, largely a work of fiction, because they want to, for reasons that are not apparent to me, deny the truth implicit within it.
There is, in fact, very little about MMT that is either very radical, new, or unusual. It is simply a description of the way in which money is created and used by central government in a modern modern fiat currency economy.
Now I am aware that I've already used a number of terms that are quite complicated. For example, ‘how money is used'. We must remember that money is debt, and debt is created by bank lending.
We must also remember that fiat currency is not backed by any form of asset. It is not linked to gold or silver or anything else. It is simply a government promise to pay that gives a fiat currency its value.
And what we're talking about is how money of that type is created by the government and how that money created by the government functions within the economy of which we're all a part.
Most of the time, most of economics tries to ignore this issue. It pretends, in many cases, that money hardly exists, which is quite absurd.
Because, of course, money does not only exist, but the existence of money and the management of money is a major part of the management of the economy. So, to have a theory which explains how money works is really important, and that's what MMT does, and that is why I think it is core to the understanding of macroeconomics.
So, having said all that, as a preamble, let's talk about how this thing works.
MMT says that a government that has its own central bank and its own currency, which in a country like the United Kingdom would be the Bank of England and the pound sterling, and with that currency being internationally acceptable, which we know the pound sterling is, then that government need neither tax nor borrow before spending because its entire government expenditure can be funded by new money creation by its central bank acting on its behalf with the government then being indebted to its central bank for the sum that it's expended.
Let me put that another way. The government can simply tell its central bank, “please make a payment” to whoever the government wishes, and the central bank is required to mark up the government's overdraft to make the payment, and there does not need to be any money there to allow the payment to take place, because the mere process of increasing the overdraft does in itself create the money that the government wants to spend into the economy.
And that is the core idea at the heart of MMT.
Now, a government that borrows in this way from its own central bank need never repay the debt it owes to that central bank for one very good reason, and that is because it owns the bank in question and therefore the bank in question has no effective claim against the government.
But there's a much better reason why it need not make the repayment of at least some of that money which has been created, because the money made in that way then becomes the money supply of the jurisdiction for which the government is responsible. And one of the ways in which we can even identify that a jurisdiction or state exists is that a government is able to put into place in that geographic location the currency that it declares to be legal tender.
So, of course, it has to make sure that if it's declared a currency to be legal tender, there must be enough of it available. And by the process of spending money into existence to support its programmes, hopefully mandated by a democratic election, then a government can create the money supply that allows that economy to undertake the transactions which will sustain it.
So, it does not have to repay all that debt. And this is a critical point to understand.
That said, it cannot obviously not clear some of that debt. The reason why is that if you kept on making new currency forever, you would end up with hyperinflation. That obviously is totally unwise. And modern monetary theory, MMT, clearly understands that fact.
And so, it says there is one fundamental tool that exists to make sure that the government can control inflation. Anybody who says that MMT is not interested in inflation has clearly missed the point about the theory, because in fact MMT is obsessed by inflation and how to control it But what it says is that the major control instrument that we have to stop inflation occurring is taxation because tax takes the money that the government has created as a result of it spending it into existence and brings it back into the central treasury where it is cancelled.
If you look at a banknote, it says on it, I promise to pay the bearer on demand the sum of five pounds, or whatever. That promise is fulfilled by accepting that note in settlement of your tax liability. When the tax liability is paid, it is finished. It is complete. It is cancelled. You haven't got another liability.
So, so the fact is that paying tax cancels your liability to the government and in exactly the same way as repayment of a bank loan cancels the money that was created when a bank loan was advanced, so paying tax cancels the money that the government has put into existence by reason of its spending.
This is fundamental to the understanding of MMT. The primary tool for the control of inflation is not the interest rate, which you would believe if you listened to neoclassical economics and neoliberal economics and its belief in the use of interest rates through independent central banks to achieve this role. Instead, taxation is the fundamental tool to control inflation, and therefore fiscal policy is primary in modern monetary theory.
The secondary role of tax in the government's funding cycle is to provide the government-created money of a jurisdiction with value in exchange. Now, this is a little more complicated to understand, but let's be honest, if you were given a five-pound note and you had no idea what it was, or you were in Fiji at the time with no opportunity to exchange it into local currency, then that £5 note would, for all practical purposes, be entirely worthless to you.
But, if you're in the UK, that £5 note, which would be worthless somewhere else, does have value. And the value is created by the fact that the government will accept your money in exchange for tax liabilities owing.
Now, in the UK at present, well over a third of most people's income is, in some way or other, going to eventually be paid in tax. It won't all be paid in income tax, some will be paid in national insurance, some will be paid in VAT, some in alcohol duties, or tobacco duties, or car duties, or road fund licences, or whatever else it might be. But ultimately, significant amounts of money are going to be paid in tax.
And because trade gives rise to tax liabilities, those undertaking trade in the UK will always use the pound as their chosen instrument for trading, because they don't want to take the exchange risk of waiting with dollars or whatever it might be, to not know what those dollars or whatever else they might be will be worth on the day when they have to pay their tax and, therefore, they will trade using pounds because that way they minimise their exchange risk. But that means that by requiring that tax be paid the government forces its currency into use in the economy so that people use it. As a corollary the government gets control of the economy by having management of the currency.
This is fundamental to macroeconomic control of an economy by a government. And MMT is the only economic theory that really has an explanation of how that value is created.
Once those roles of tax have been fulfilled, then tax can have other roles. It can, for example, deliver economic, social, regulatory, and inequality agendas on behalf of the government. And that is something that every government around the world usually wants to undertake. They wish to promote some activities, they wish to discourage others, and tax is incredibly useful for that. But what I stress is that that is a further role of tax, which has nothing to do with revenue raising. It has everything to do with supporting other government agendas, which is a quite different objective. And this has to be fully understood. But it does make tax one of the most powerful instruments for delivering policy by any government anywhere, and in my opinion, MMT explains this.
So what else does MMT say? Most importantly, what it says is that if the situation that I have described exists, then the government does not need to balance its income and expenditure. In fact, what it also says that in most situations, that balance would be thoroughly undesirable.
For example, if the government has a growing economy, and a modest but controlled inflation, then the expansion of its money supply is essential. And that expansion of the money supply is best delivered by running government deficits.
It follows, like night does day, that this is what a government should do to make sure there is sufficient money in existence to let the economy grow. But that shortfall is not something that creates a risk to the economy as a whole. In fact, it is essential to ensure that there is cash in existence.
What is more, there is no reason to why the government then has to borrow any money back. It could just run an overdraft at the Bank of England or whatever its central bank might be if we're talking about in another country and that would meet the purpose just as well. In in other words, a government in this situation never needs to borrow from financial markets.
That is because a government of this sort can always borrow instead from its central bank. It has no dependency on financial markets as a consequence. For anyone to pretend that there is such a dependency is claiming a falsehood. It does not exist.
And we know it doesn't. In the case of the UK, when we faced crises in 2008/9 and in 2020/21, the government created hundreds of billions of pounds of new cash to meet its own needs. It did it by effectively borrowing from its own central bank using the quantitative easing process, which does end up with this situation arising. And it did not need to go to the financial markets to say “please fund furlough” or whatever else it might have been. That didn't happen. The government does not need to borrow from financial markets.
But, having said that, the government might well wish to offer a savings facility to banks and to other financial institutions within the jurisdiction who wish to save with the safest investment. institution that is available within the country as a whole, and that is the government. The government is always the safest place to save money in a country like the UK, and that's for one very simple straightforward reason.
The government can always repay its debts. It is the one and only organisation that can do that, and as a consequence, large companies banks, pension funds and others are very keen to save using government bonds because that is the one asset that they can rely upon to always be repaid when nothing else is guaranteed in that way, including, in their case, any deposits that they might hold at a bank because only the first £85,000 of the sums that they hold on deposit are guaranteed, which in the case of many of these organisations will be a totally insignificant amount. Therefore, the government can, and very often does, provide this facility, but it has to be understood for what it is.
It's a savings facility. It is not in any shape or form a borrowing facility. Because it doesn't need to borrow from these organizations, it is providing them with a safe place to save.
So, where are we? We have a government which is in the position to control inflation without the use of interest rates. We can, instead, use tax rates to control inflation, or we can vary the scale of the deficit because that stimulates or reduces the scale of economic activity, which in turn has a consequence for the level of inflation within it, and the government could also, if it wished, reduce it. use credit controls to commercial bank lending to control inflation, but MMT does describe a situation where if inflation is a priority and inflation management is always a matter of concern in macroeconomic thinking, then this can be delivered without the use of interest rates because MMT suggests that it would be wise to run a low effective interest rate policy within any economy.
There are a number of reasons for doing so. Firstly, that of course minimizes the interest rate obligations that the government will incur by providing a savings facility to whoever uses its banking facilities. In other words, the interest paid on government bonds, or on National Savings and Investments accounts, will be reduced to the minimum possible, which the government would appreciate.
Secondly, of course, to provide a low interest policy provides the best possible environment for investment, because investment is not funded by savings, it is funded by borrowing, and if borrowing is cheap, the amount of money that will be invested in productive capital within an economy will rise, and the result is that we will get growth if that is the government's objective.
So whether growth is the objective or not, low interest rate policies still pay. And third, having a policy which minimizes the interest rate paid within an economy reduces the amount of money that is reallocated upwards by the payment of interest on things like mortgages, and that reduces inequality, which must be a government goal in any sensible environment where an economic balance is sought as an outcome from macroeconomic policy.
All of this then means that a government can have one other objective, and that is full employment. This is possible inside an MMT environment because what a government that is planning for inflation can do, which any government that is subscribing to MMT will be doing, will be to say that if there are underused resources within its economy it can seek to put those resources to use without the risk of inflation arising.
So if, for example, there are people who are underemployed or unemployed in the country, a government can pursue full employment, which would put those people to work in a way that could not create inflation because they are at present sitting out of work. Putting them to work cannot create inflation.
But this policy, if properly understood within the context of MMT, means that if there is no capacity to put extra resources to work and the government still tries to spend, it cannot achieve that objective unless one of two things happens. One would be inflation, because it would bid up the price of labour or other assets, or alternatively, it must increase taxation.
Now, it doesn't increase taxation in that situation to actually raise revenue, and that is an incredibly important point to make. What it does do is increase taxation to make sure that these resources are not going to be bid for in the private sector, because the state wants to use them in the public sector. And this, as a matter of fact, is another use for taxation. It effectively removes resources from use within the private sector so that the state may buy them at a reasonable price. And that is part of macroeconomic management because we know that the state and the private sector must work together to achieve all economic outputs and, therefore, this balancing act is essential, but it is a balancing act that has to be carefully planned to make sure that inflation does not result.
There could be a guarantee of full employment within an MMT economy. I am not wholly convinced that is necessary, nor do I see it is a necessary balancing act to say everybody must have work if they want it. I think that that is a desirable outcome. I don't see it as an essential outcome. I will differ with some MMT economists on that point. They call this a job guarantee. I think it is something that a government may wish to do as a policy objective. I do not see it as core to MMT. Every single other thing that I have described within this video is, however, I think core to MMT.
Now, I am well aware that this has been quite a long and quite complicated video. There is a whole written version of this available as well, and we will provide the link below this video so you can download it from the Funding the Future website, because I have addressed this issue in several ways over quite a long period of time.
But understanding MMT is really important if you are to get your head around the way in which the macroeconomy really works. There is nothing that I have said that is either particularly radical, or unusual, or even challengeable.
In other words, this is the way that central banks agree that money works within the economy.
This is the way that every economist of any repute now agrees that money is created.
This is a way in which everybody knows inflation can be managed.
It does challenge the idea of independent central banks and their control of interest rates, and their control of inflation using interest rates, but that apart, MMT does very little which is radical, or different, or unusual.
It is simply a form of post Keynesian economics that says that with careful management of money, we can achieve the goal that any economy should try to fulfill. And that is full employment. If ensuring that the well-being of people is delivered by guaranteeing them work to the greatest possible degree that a government can, and that becomes the aim of any government, then MMT makes sense for it to follow.
If you want to run an economy without guaranteeing full employment, by all means, run the central bank using interest rates to control inflation and take the risk that there will always be unemployment as a buffer whilst it overheats or underheats the economy through the use of interest rate policy.
But, if people come first, so does MMT, and that is why it is so important.
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Richard Murphy, the 20th Century Joseph Goebbel
(“Repeat a lie often enough and it becomes the truth”)
I guess the only way you have of trying to push your viewpoints is to lie about the alternatives. Very sad.
That kind of amusing.
You might not be aware of it, but we’re in the 21st century now.
And you can’t spell Goebbels.
But, what the heck? You carry on with your deeply profound argument if you so wish.
There are actual academic papers that show the truth of Richard’s excellent exposition.
Educate yourself:
https://www.ucl.ac.uk/bartlett/public-purpose/sites/bartlett_public_purpose/files/the_self-financing_state_an_institutional_analysis_of_government_expenditure_revenue_collection_and_debt_issuance_operations_in_the_united_kingdom.pdf
Jeff, please could you identify which parts of this piece you disagree with and why. Then perhaps we can have a productive discussion. But perhaps you are more interested in throwing insults than reaching any understanding.
Forget it. Mr Cole is simply issuing an easily repeatable lie. He offers no argument. He wouldn’t, would he? I am constantly amused by the desire of trolls to make such an obvious fool of themselves.
@ Jeff Cole. (Football player or boxer? Can’t be bothered to Google you.)
You’re an idiot. Can’t recognise fundamental truth when it is presented to you.
What hope is there for humanity?
What’s in it for you to deny the reality of the economic world we live in? I don’t get it.
In the video on MMT you comment that inflation can be controlled by taxation, effectively taking money out of the economy, this sounds similar to monetarist theories that targeted money supply to control inflation . I understand that the monetarist experiment by Thatcher was seen as a failure and was dropped in favour of using interest rates. Have I misunderstood Monetarism as I know they made claims about controlling growth as well , but in respect of controlling inflation are there similarities between the two theories.
They are similar in all ways except they make fundamentally different assumptions, serve different purposes and deliver different policy prescriptions.
Look at the precis if you can it has errors.
‘Bit most of all, the message is that if the economy is to be run to delover fiull employment, then the undertsanding that MMT supplies is essential.’
You are right that ‘full employment’ is not essential as it is not possible, some in our society have never worked because they cannot (the NI system I think still ignores these from its conception) but MMT can still fund a decent life for them if only wicked politicians stopped picking on them.
Corrected
Apologies
Feeling totally shattered this morning
I need coffee and a river walk
The sort of events that you attended yesterday tend to do that to you.
‘Just thought you needed to know that’s all.
No need to apologise.
Hope you get the coffee.
Great walk
A lot of discussion was had
Some tweets that found their way into existence as a result of our conversation over the second coffee of the morning might appear here soon
But, this afternoon, I need time to read, reflect and think ‘what next’
Full employment in the 60’s was defined as 2% unemployment to allow for turnover of people between jobs.
William Beveridge defined “full employment” as where the number of unemployed workers equaled the number of job vacancies available
What happens Richard if as seems to be in the UK that we have a high tax burden; but the government appears reluctant to create ‘new money’. Does this then lead to a situation whereby the money supply becomes inadequate for the economy to function properly ? This seems to be the case to me.
In my opinion the asset striping of the national infrastructures by neoliberalism has reached the point where the economy is not functioning in the way it should in a rich nation.
That seems to be the direction of government policy
@Angus Geddes
We have a high tax burden?
You think so? Compared to where?
And for that matter when if you are thinking of the UK?
“Full employment” means a multitude of things.
It used to be 6 days a week at 10 or 12 hours a day. Covid and its consequences showed that “full employment” at 4 days a week doesn’t mean 18 hours a day, or even 8 hours a day.
And “employment” and “productivity” can be measured against different indices – Bobby Kennedy’s list of community, health and happiness could be a useful one.
A person without a job in the private sector yet wishing to work; to enhance society’s chosen index; can always be fully-employed (for a “National Working Week”) at a National Living Wage by local Job Guarantee organisations.
I believe that once one accepts the fluid nature of “full employment” one necessarily understands the idea of “constrained only by available resources”, because the greatest resource of a State is its labour, and that should not be, should never be *compulsorily* under-employed.
Recent Governments to control inflation have used high taxation (the tax take is at an all time high) as well as restricting the money supply through stopping and reversing QE as well as using high interest rates to make credit more expensive. So it isn’t really “either or” they have used all mechanisms at their disposal.
The tax rate has specifically not been used for this purpose
The overall rate might be modestly high for a country like the UK but the measures used have not been aimed at inflation.
“The tax rate has specifically not been used for this purpose
The overall rate might be modestly high for a country like the UK but the measures used have not been aimed at inflation.”
What on earth do you mean?
We pay lower taxes than most equivalent countries
Tax rates have not been used to control inflation in this country
That is what I mean
@ Andrew
“…(the tax take is at an all time high)”
Is it? Who is telling you this. I remember basic rate income tax at 30+ percent. And there was surtax too (at 90+ percent on high earners)
I suspect you are being influenced by false prophets. Admittedly there was no VAT but there was purchase tax.
Thanks for this Richard, it’s very helpful, but it has raised a question in my mind about inflation.
You said in your ‘Why are we obsessed with inflation?’ piece the other day that:
“Inflation is always caused by some form of shock.” And: “…when inflation happens it goes away of its own accord, without having to change interest rates”.
My question is, if inflation goes away of its own accord, why does it have to be controlled by tax? Or does it go away BECAUSE it’s controlled by tax?
It makes sense to me that when government spends money into the economy it has to control how much it spends in relation to the resources available in the economy. And that taxing money back ensures the government can keep putting new money into the economy without running out of resources to spend it on.
But is inflation inevitable if the government fails to tax money back? Does your MMT explanation mean that when a government cuts taxes it inevitably means it has to cut spending because otherwise we will have inflation? Do we no longer fall into deflation after an inflationary period because governments use fiscal policy to prevent it?
I would really welcome an explanation of this as I find it pretty confusing!
Great question
You expose the fact I have not stated an assumption, explicitly. I said MMT is obsessed with inflation. That’s because money creation without control – which any government can do – will deliver inflation when resources to buy run out.
Historically, governments rarely spent enough to deliver inflation – except in time of war or when new gold and silver was found. When that happened there were shocks. Shocks always ten to create inflation, and when the market corrected fur the shock the inflation went.
In a fiat currency system it’s technically possible to create money without limit. So tax has to exist to correct for that.
Will inflation go away then? Yes with enough tax, and yes if the government recognises the limits to what can be done in an economy and plans for them.
But shocks still happen, but almost none are due to overspending or b money creation by government. Shocks will go away if routine control of the economy ensures there is no more base underlying inflation than desired – as now.
I hope that is clearer.
Richard, excellent answer by an excellent academic!
Thanks
Pauline, excellent question from an excellent journalist!!
The problem I see with the Job Guarantee is that it would be so easy for an authoritarian political party (which is most of them these days) to twist it into a “workfare” style scheme and use to to squeeze the workers to the benefit of capital.
As such I would prefer Universal Basic Income with the state supplying free training and equipment specifically for re-wilding and other green projects.
I think MMT is a good explanation of how the economy works
But I prefer UBI to a job guarantee
“[I]t would be so easy for an authoritarian political party to twist it into a “workfare” style scheme and use to to squeeze the workers to the benefit of capital.”
* An authoritarian political party wouldn’t need JG legislation “to twist” to achieve those ends.
* Just as an authoritarian political party could reduce a UBI to just Universal Basic Services and not pay any money at all to any worker.
All it needs is an Enabling Act.
And that JG at a National Living Wage could include paid-for training and anything else needed to adequately utilise the State’s resources.
When I worked in mental health, we found people would change because of a crisis, from boredom, by force of circumstance but often because they see a new and different way forward. Every day posters attack neo-liberalism but we need more. We need a new path out of the dark forest.
MMT is kryptonite to neo-liberalism.
Thanks
MMT is using lies to hoodwink and deceive people – Richard Murphy’s raison d’etre.
Go one then, Angela
Tell me one thing I said that is not true
Angela – you’re a reactionary and maybe beyond help.
You are being lied to now for sure – but out there – in your newspapers, social media, main stream media and the government and in your universities and the writings of von Hayek, Friedman, Buchanan etc.
The quantity theory of money – as well as most of what calls itself economics these days – is well known for not really looking at very important part – the supply side – or even the ‘origination’ side – where money comes from. This is noted by people like Prof. Steve Keen and others.
Do you know why the money origination issue is not really addressed Angela? Why there is such a lack of intellectual curiosity?
Because (1) it is convenient to the reductionist bullshit theories that dominate but also (2) because to delve into the origination of money reveals the involvement of the clear sovereignty of the very thing that von Hayek and his funders etc., abhor:- the idea and concept of the State.
The State has a key role in the supply of money and as guarantor of it as legal tender etc. Your state owns the currency and is its absolute banker – the banker of bankers. It underpins everything really.
And the people you seem to look up don’t like that. They pretend money ‘just exists’ (Yeah, right).
So THEY lie to you about it Angela – not Professor Murphy.
Anyhow, I’ll leave you to your delusional world.
Angela, you so not have the hang of this commenting idea. “MMT is using lies to hoodwink and deceive people” isn’t an argument. It is an assertion. Nobody is interested in assertions. You need proof. you have to come here armed with something more than an empty accusation. It has no purchase on anything; and you just look very, very silly. Nobody here buys that sort of guff. Must try, much much harder.
Make a case, if you have one; and be prepared to defend it. If you are any good, and there is any substance to you, you can do it. If not you will just become even more ridiculous than you appear now. Good luck, or goodbye.
Angela you are another idiot who can’t tell black from white.
What, I wonder is your agenda(?)
I note from later contributions that you believe you understand something about economics. Ah Well! You are not alone there and it is a cause of great pain and suffering to so many people.
Compared to other economic theories, mmt is quite easy. It takes a good hour to go through the mathematics of an endogenous growth model and requires a whole month of lectures to explain.
Most economic analysis that I see in the media sticks to exogenous classical assumptions, like the solow growth model, that population growth reduces wealth.
It seems to me that to the eye of the public both Old school Monetary economics and post war Keynesian economics are dead. Instead the government is constantly forgiven to repeat debunked rubbish that wouldn’t pass John Stuart Mill, Alfred Marshall or even Adam Smith.
The government talks as if GDP is our money and that GDP is required before we tax which is required before we spend. MMT shows that this is all nonsense.
The only way out is by MMT.
My fundamental assumption is that the economy ought to exist to serve people, rather than the reverse, where people exist to serve the economy.
I think, possibly wrongly, that MMT has this underlying principle as a fundamental..
And as we know, most current economies primarily serve capital, which is divorced from the desired personal outcomes of many, if not most people, except for cultivated consumerism. I see MMT as providing an alternative.
Unemployment has almost always been traumatic for its victims. It used to threaten starvation, and still does. It dramatically decreases standards of living, social standing, and self-respect. There are adverse health impacts, family dissolution, and suicide.
Unemployment also entails considerable costs to society such as sacrificed output, increased crime and drug use, dilapidated neighbourhoods, and political unrest.
Collectively, human capital is wasted.
Fascism rises in times of high unemployment and social anomie.
Hitler would not have achieved power without the mass unemployment engendered by the US Wall St based banking and finance crisis of 1928/9 which then triggered unemployment of 6m+ in Germany.
In my opinion government has a duty of care to mitigate the adverse effects of social and economic circumstances wherever possible, and this includes facilitating employment opportunities for those unable to secure these opportunities themselves, and protect those living in deprived areas.
Under conventional theory, market forces and unicorn like perfect capital and labour mobility automatically correct for geographic inequality. Workers move to better-paying jobs in growing cities and employers move to communities where labour costs are low. That this theory has never actually materialised, except in dribs and drabs, has not altered the stubbornness with which it is held.
As is not an obligation of the private sector provide employment for every willing worker, the responsibility then falls upon the state to reduce unemployment.
The job guarantee basically aims to create full employment and price stability by having the state promise to hire unemployed workers, if necessary, as an employer of last resort.
Unemployment rightly has a high priority under MMT thinking, that directly contrasts with the high interest rate policy of the BoE that aims to create it as an alleged tool of inflation management.
Given that some $15 trillion world wide has been dumped on to public accounts through subsidising private bank and financing failures from 2007 onwards, much caused by excessive risk taking via moral hazard, then the state directly assisting its citizens at basically a minimal level, is a considerably smaller compensatory commitment.
A lack of agency and ability to help oneself is the basis of true poverty, according to Amartya Sen.
The ability to find suitable employment is a key indicator of such lack of agency.
Poverty and social deprivation go together with being able to provide a livelihood, and this usually requires employment of some sort.
As certain groups of people are more vulnerable to economic vagaries than others, and unable to provide for themselves., then a jobs guarantee provides one option for enabling people to restore agency and self respect, and an ability to provide a livelihood.
The socio-political and personal benefits are crucial, and I see a job guarantee reducing poverty more quickly, and providing more benefits than a UBI, an associated option.
I think the jobs guarantee thinking is an absolutely essential component of MMT, and not merely in support of the wider macroeconomic management involved.
I think MMT undoubtedly supports full employment.
I think the job guarantee deeply socially difficult. It seeks far too much like workfare to me to be acceptable.
It does not need to be compulsory. But the option needs to be on offer.
It might work with the partial alternative of a UBI, and/or retraining options through lifelong education policies, for those seeking to adapt to changing employment patterns and skillsets.
One of the beneficial side effects of the job guarantee is that it undermines the use of interest rates by the BoE, independently of any government controls, to deliberately seek to deflate demand, by increasing employment insecurity and then loss of jobs.
NAIRU would disappear too.
Cutting the ground from under the BoE MPC’s ability to deflate the economy at will, has to be a useful impact imo.
May be I will be persuaded one day
No one has succeeded as yet
@ Tony
“…Hitler would not have achieved power without the mass unemployment engendered by the US Wall St based banking and finance crisis of 1928/9”
Maybe it was the spark, but the treaty of Versailles was the root cause if my reading of history is remotely correct. The American-British-French alliance behaved as if Germany had surrendered defeated when in reality there was supposedly an armistice.
This was a travesty of justice with dire consequences. It is necessary to be gracious in victory as well as in defeat.
Richard I note your preference for UBI over full employment,
What is your opinion on universal basic services?
baring in mind that these basics are usually essential to our modern lives and est up such a large chunk of everyone’s income and virtually all the income for people on low wages and benefits.
I believe they are very important
I also believe in progressive charging of basic services
“..I also believe in progressive charging of basic services”
Hmmm… not sure about that, but certainly no discounts for excessive consumption of scarce resources. Discounts for gross usage of gas and electricity?. What nonsense is this?
So why not progressive charging?
That should read “eat up”
Whoops
There you go Richard, how about this claim:
“Most of the time, most of economics tries to ignore this issue. It pretends, in many cases, that money hardly exists”
Economics does no such thing. You are lying.
The Quantity theory of money is a fundamental basis of economic work, concerning the impact of the money supply and inflation, to name just one.
With respect, the DSGE models used by most macroeconomists, including the BoE, do not include money.
I did not, and do not lie.
But you are making a false claim for a discredited theory.
Who was it said ‘a little learning is a dangerous thing’?
Sorry I was being lazy or rhetorical. It was Alexander Pope more than three hundred years ago; and he was not wrong.
Angela clearly has ‘a little learning’ and lacks critical appraisal skills. Is this post “A’ level economics. (or, heaven forfend banking ?) I hope not or we really are in a mess. It’s the sort of shite* I’d expect my nephew to come up with on the basis of studying economics as an ‘A’ level option. Fortunately he majored in music at university and discovered something he does seem to understand. (Heaven knows, he may even have talent.)
* I use ‘shite’ here in the Scots vernacular sense to mean ‘not as good as it could be’. As a Yorkshireman I would never normally use such language in mixed company, but when in Rome…… 🙂
Another great article. Have you managed to get the thoughts of the BoE and HM Treasury on MMT? I’m effectively trying to do this at the moment but without any great success. If MMT is actually the way in which government spending is self funded then why are the BoE and Treasury so loathed to tell us the truth about it, and instead keep on banging on that government spending comes from taxes and borrowing, when it clearly doesn’t.
No, in a word
Richard, I agree with most of your content – on its own merit, and on the fact that MMT is based on Keynes, and is considered part of the Post Keynesian school.
One picky point and one big one.
On the picky side, I think MMTers should always use federal or national government in lines like this “government need neither tax nor borrow before spending”
On the big side, MMT should address the fact that the banking system has prevented the money system from improving its service to the people while improving profits. That process has obstructed MMT’s efforts to better serve the people and to alleviate the true fiscal deficits like infrastructure, health, education, housing, and a sustainable planet.
In this link we see the system still has the banks gaining every time the CB injects money, and in the latest win by bankers – get interest on the reserves, robbing the public of valuable revenue. Similar spending occurred in WW2 without interest on reserves to further pad shareholders dividends.
https://youtu.be/CvRAqR2pAgw?t=175
Noted
Brilliant and clear. Will share widely.
However I do think there are assets underpinning the system so I’ll comment here to get your opinions. The asset is working hours. Say 1800 a year. Per person of working capability. These are taxable & have a value in the marketplace. Especially in mmt. A job guarantee goes both ways.
Going further along this route, we could call this real capital. Not the hours themselves but the capability to deliver them. Then comes social capital, the firms with capability to exploit (sorry utilize) human and built capital, (the tools and buildings, fixed assets) and finally natural capital. Of course, valuing all this in money is insufficient to grasp the system, but is necessary I guess.
Interesting, and worth musing on
I will do so
I like the thinking on the asset side being working hours – input/output over time but I will open up the can of worms when we even look at how our current economic thinking works and how we allocate so much of that to the management and banking class – they won’t like it.
But the risk is that we are tying a fiat currency (hard enough to get over as concept now to the greater public) to something tangible – and that is bit awkward, considering.
In my humble opinion, your clearest explantation of MMT yet
Thanks
PS. Especially when there has been no actual victory!!
Distracted, as I was, by contributions welcome or otherwise, I have not said, Richard that this is a cogent piece of writing. File it for future use. If I knew how to use this infernal machine* I certainly would. I know a lot of people who should read this (and hopefully grasp its importance)
I’ve been shanghaied into Mac-land when I used to be a Linux baby. Why don’t the computer savvy people I know use linux? It’s fabulous. And truly internationally co-operative. Where the best brains work, I think, judging by what I have experienced of Apple and Micros**t.
Thanks
I am fraud I live in Mac land…
It’s easy to say someone is lying, but, unless you expand and elucidate it meaningless.
Hello Richard,
Could you please recommend one or more books (perhaps one of your own?) that explain, in layman’s terms, what modern monetary theory means and how it works? There are dozens of such books on the market, but I don’t want one that has been written by a neo-liberal or pro-capitalist. So, do you have any suggestions for someone who definitely isn’t an economist?
Regards,
Frank
Stephanie Kelton’s ‘The Deficit Myth’ is the best.
She is an economist and I don’t agree with her 9n everything, but we seem well able to agree to differ.
Many thanks, Richard. I will purchase Stephanie Kelton’s book today.
Regards,
Frank
It makes sense that the Government creates money by spending into the economy but has to tax it back out to avoid inflation. The important question though is surely where that money ‘ends up’ and where it is taxed back from? During furlough, for example, the Government ‘gave’ new money to those who weren’t allowed to work but those people spent it immediately buying food, paying rent or mortgages etc. So, that money is no longer with the furloughed workers but in the accounts of the supermarket owners, landlords, bankers who granted the mortgages etc. Increasing general taxation will just make things worse for those ordinary people who no longer have the money so how do you target those who ended up with the money?
I think it might be worth you reading chapter 16.5 here. https://taxingwealth.uk/wp-content/uploads/2024/04/Taxing-Wealth-Report-2024-Full.pdf
A report which is always just a few inches below Richard’s fact on every page of every blog!! 🙂
What benefit to people and society is there from maintaining an unemployed buffer stock? Richard, you don’t appear convinced by a government program to achieve full employment? Could you help me by explaining please?
Since that is my whole argument in the video what the heck are you talking about?
If you want to write nonsense why do it here?
Sorry Richard, I thought you said in your video that you aren’t convinced by MMT’s suggestion of a job guarantee?
I am not
But who on earth said that’s the only way to deliver full emplpyment
I’m sorry – but the JG is not economics – it’s not very good politics that is as poor in its economic conceptio0n as most of neolberal thinking by assuming zero time communciation mechanisms and no cost to transitions based on perfect data
I do real world economics. That is why MMT is good when talking about money but the JG is simply not key to it – whatever Bill Mitchell says
And I don’t care if people disagree
“…And I don’t care if people disagree”. [about JG]
Job guarantee may well be a very good idea and in fact we used to have a degree of it with local councils being the employer of last resort. But intrinsic to MMT it ain’t.
Tories know how to use MMT and they use it very effectively, but only for very limited advantage of a very limited sector of the population.
There is a parallel (or perhaps at’s a corollary) in my mind with Scottish Independence: the belief that Scottish independence will be a good thing even if it is managed by economic incompetents. It won’t. It won’t even rank with Brigadoon.