I was asked this question in an email this morning:
I came across your MMT videos and really enjoyed them and have become really intrigued by MMT.
I had a couple of questions if you were able to help as I must admit some of the complexities have let me a little confused!
As I'm sure you are aware we are in a cost of living crisis with high inflation (over 3%, well above the central bank target) which hurts the poor proportionally far more than the rich.
Is it correct that in order to get this inflation back down MMT would prescribe raising taxes currently? If so wouldn't that just add to the cost of living crisis?
Also if you massively increase spending as per MMT theory given we already have high inflation, wouldn't that just make it go up further (I,e we clearly do not have real resource space for say big increases in benefits)?
I thought it was worth sharing this answer, which was:
These are fair questions to ask, and the confusion is understandable because MMT is often misrepresented.
First, MMT does not say “raise taxes whenever inflation is above target”. Inflation is not a single phenomenon with a single cure. The key MMT question is what is causing the inflation.
If inflation is being driven by excess demand across the economy – too much spending chasing too few resources – then yes, higher taxes can be part of the response, because they withdraw spending power. But that does not mean raising taxes on people already struggling. Taxes would need to be targeted at those with surplus income or wealth, not those facing a cost-of-living crisis.
Much recent inflation, including in the UK, has not been demand-led. It has been driven by energy prices, supply shocks, profiteering, rent extraction and broken supply chains. In those cases, broad tax rises or interest-rate hikes mainly hurt the poor while doing little to address the cause. Regulation, price controls, excess-profit taxes, and direct public provision are often more effective.
Second, MMT does not advocate “massively increasing spending regardless of conditions”. Spending must always be judged against real resource capacity. If there is no spare capacity, untargeted spending can be inflationary. But targeted spending that relieves bottlenecks – housing, energy efficiency, childcare, transport – can actually reduce inflation over time by expanding supply and lowering household costs.
So the MMT position is not “spend more, tax later”. It is:
• diagnose the source of inflation
• protect the poorest from price shocks
• tax excess income, wealth and profits where needed
• spend to expand capacity and reduce future inflation
MMT is about using the right tools for the right problem, not ignoring inflation or hardship.
I hope that helps.
Clearing MMT confusion seems to be part of my job these days.
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Excellent overview. I personally think job guarantee is over ambitious and a difficult sell to the electorate. I can see you on TV with this though really nailing it. I hope you get chance to do so.
A UBI is a far more difficult ‘sell’ than a job guarantee.
Simply because the latter ensures participants contribute to society, whilst the former provides no such assurance.
Just getting most people to stop thinking money grows on the rich is a major effort. This is a backward country!
Questions and clarification are a win, if it shows interest is growing
Agreed
I came across an exchange between Jonathon Portes and a couple of MMTers on Blue Sky yesterday
https://bsky.app/profile/jdportes.bsky.social/post/3mag3palimc2l
Portes was asked to comment on the ‘Self Financing State’ paper. His comment?
“It’s mostly just accounting. So my reaction is “so what”? The idea that (from an economic perspective) it is interesting/useful/meaningful to say “it’s spend and tax, not tax and spend!” just seems absurd to me. But when it comes to economics/policy, it’s either vacuous or wrong. …. Of course it wasn’t about “solvency risk”! Who said that? Not me or any other serious economist. But it *was* about crazy fiscal policy (as well as the LDI stuff). This is where MMT meets Trussonomics. Not serious”
Asked “What about the observation that government creates money through its spending and its borrowing drains reserves already put into the system by that spending? Doesn’t that upturn endless arguments about where the money is going to come from? ” Portas replies “No. I don’t think the constraints on fiscal policy have anything to do with that and neither does any serious economist.”
Further query: “Doesn’t it change the nature of the public debate, at least in the media, which is constantly framed by the idea that the government has to find money from taxpayers and the markets to fund its spending? Or are you talking only about debate between economists?”
Response “I don’t think the fact that politicians misuse the household budget/credit card fallacy justifies arguments that say there’s no fiscal constraint/governments don’t need to worry about market interest rates on their borrowing, no. ·(this paper is arguing explicitly that the Truss borrowing wasn’t in itself a problem, because government doesn’t “need” to borrow long term from markets. That’s dangerous BS just as much as the household fallacy, isn’t it?)”
I have a questions
Firstly. How does one counter the ‘It’s just accounting’ judgement?
Secondly. If Portas (and, presumably, his ‘real economist’ colleagues) recognise that ‘household budget’ and ‘the credit card’ are fallacies why do they allow it to be perpetrated? Is it the Grace Blakely ‘people are too thick to understand anything else’ syndrome or is it a truth too dangerous to be revealed?
These are good questions to ask.
First: how do you counter the “it’s just accounting” dismissal?
You counter it by pointing out that in this case the accounting describes reality. Saying “it’s just accounting” is like saying thermodynamics is “just physics”. The Self-Financing State argument matters because it clarifies where monetary constraints really lie. It shows that governments do not face a cash-flow or solvency constraint in their own currency, and that borrowing is a policy choice tied to interest-rate management and asset provision, not a funding necessity. That does not remove constraints; it relocates them to inflation, capacity, distribution and institutional design. Those are precisely the constraints economists should be debating. Calling that vacuous avoids engaging with the implications. What Portes is saying is either i) he wants to duck the issues, or ii) he does not know at the issues are, or iii) he has no clue that accounting reflects reality here or iv) he’d rather dicuss make believe, or maybe several of these.
Second: if orthodox economists accept the household fallacy is wrong, why tolerate it?
There are two reasons, neither flattering.
One is institutional convenience. The household analogy supposedly disciplines politics. It limits democratic ambition without requiring explicit arguments about power, distribution or who should lose. Allowing a false metaphor to circulate does political work.
The other is fear of misuse. Many economists worry that if you clearly say “the state cannot run out of money”, politicians will hear “spend without limit”. So they prefer a “useful lie” to what they see as a dangerous truth. That is a paternalistic position, whether acknowledged or not.
But this is where Portes’ argument collapses. You cannot simultaneously say “the household analogy is wrong” and then object when someone explains why it is wrong, on the grounds that the explanation might be misused. That is not economics; it is narrative management.
MMT is not Trussonomics. Truss ignored inflation, capacity and institutional stability. MMT insists those are the real constraints. Refusing to explain the monetary mechanics because politicians might abuse them is not seriousness; it is denial.
So the issue here is not accounting. It is whether economists are willing to be honest about how the system works, and then argue openly about how it should be used. Portes does not seem to want to do so.
Jonathan Portes is a very distinguished economist and has had a very successful career.
And he’s wrong on MNT, and a lots else as a result, by seeking to deny reality in a very small minded way.
Hi Richard. This points to a question I’ve been thinking about recently which is: Given the household analogy doesn’t just constrain spending but also provides a simple (if wrong) decision-making heuristic ie “We can’t afford it”, what replaces that heuristic when we acknowledge the state’s actual monetary capacity? How do we avoid both (a) pointless austerity and (b) genuinely reckless spending that would create real resource bottlenecks and inflation?
We accept that the government can create money but who then decides what to use that capacity for, how do they decide, and how do we make sure it is in the public interest?
The “we can’t afford it” line is a lazy shortcut, but it does two jobs: it ends the argument and it disguises power. Once you drop it, you do need a replacement rule of thumb – not to enable recklessness, but to force honesty.
Here is the better heuristic:
“Do we have the real resources to do this without causing inflation – and if not, how will we create them or free them up?”
That one sentence replaces false financial scarcity with the real constraint: people, skills, materials, energy, land, time, and ecological limits.
From that follow three practical tests that stop both austerity and madness:
1. Capacity test
What labour, skills, supply chains and infrastructure are required? Are they idle or already stretched? If stretched, what is the plan to expand capacity (training, imports, substitution, sequencing)?
2. Inflation test
Will the spending compete with the private sector for scarce resources and bid up prices? If so, what offsets are proposed: targeted taxes, regulation, price controls in strategic sectors, public procurement, or phasing?
3. Purpose test
What public purpose is served, and how will success be measured in real outcomes (homes built, waiting times reduced, carbon cut), not money spent?
Who decides? In a democracy, elected government must decide, but it should not do so on whim. We need transparent fiscal rules that are resource-based, not debt-based: publish capacity assessments; require distributional and inflation impact statements; create independent resource and climate audits (not just OBR-style financial ratios); and build in parliamentary scrutiny.
That is how you avoid (a) austerity justified by lies and (b) spending that ignores bottlenecks. The discipline is real – but it is the discipline of reality, not the discipline of markets. We do not have fully worked models for this as yet, I admit.
Great reply Richard. That’s just the kind of direct extremely-grounded messaging that Zack Polanski sorely lacked when being sneered at by Rory Stewart and Alastair Campbell, Andy Haldane etc.
Such a shame the Greens appear to have taken fright at the onslaught against Zack and run to exactly the ‘grown-up’ economics that you so eleoquently skewer above.
Thanks for this simple and clear explanation. I know this, but i can’t tell you how many time i hear this question, couched in different ways, by commentators who should know better. The argument is always MMT is “..print money…” or “..spend, spend spend”.
It’s bloody annoying, isn’t it?
The best response is to remind those using that cheap shot is that the government also ‘unprints’ money every second of every day (aka taxation!)
🙂
I quite like Jim Byrne’s “MMT economics in 5 Boxes: Why Governments Spend the Way They Do
“A simple way to understand government spending decisions using the five boxes of Modern Monetary Theory: Currency, Resources, Choice, Opportunity Cost, and Values.”
Source: https://mmt101.substack.com/p/mmt-economics-in-5-boxes-why-governments
Your blog posts and answers to related comments are really helpful in explaining MMT. A couple of questions: 1) please could you explain how you would measure the surplus in your statement “Taxes would need to be targeted at those with surplus income or wealth, not those facing a cost-of-living crisis.”, and 2) what do you refer to by the term “real resources” – I note that the U.K. is not self sufficient in most if not all physical resources? I’m interested in hearing more about political issues, economic risk mitigations and policy choices arising from the practical implementation of MMT. Merry Christmas to you are your family.
Thank you, and let me address your issues:
1) What do I mean by “surplus income or wealth”?
I am not using a moral or abstract definition when using this language.
A surplus exists where:
– spending power is not required for a decent standard of living, and
– where additional income or wealth is primarily saved, speculated with, or used to extract rents rather than meet needs.
In practice, this is observable. Indicators include:
– High savings rates.
– Ownership of multiple assets.
– Low marginal propensity to consume, and
– The ability to absorb shocks without cutting essential spending.
That is why taxes on higher incomes, accumulated wealth, land, monopoly profits, and excess corporate margins can reduce inflationary pressure far more effectively than taxing wages close to subsistence. The test is behavioural and macroeconomic: does taxing here reduce demand without causing hardship?
2) What are “real resources” in an open economy?
Real resources are not just raw materials. They include:
– Labour
– Skills
– Time
– Energy
– Infrastructure
– Technology
– Land
– Ecological capacity, and
– Organisational capability.
The UK’s lack of self-sufficiency does not remove fiscal space; it changes its shape. Import dependence creates inflation risk if spending increases without expanding domestic capacity or securing supply. That is why MMT places such emphasis on what spending is for. Spending that reduces import dependence (energy efficiency, renewables, housing, transport, skills) increases real resource space over time.
On risks and politics
The important point is that MMT does not deny risk; it relocates it. The risks are:
– Inflation.
– Supply bottlenecks.
– Distributional conflict, and
– Institutional failure.
What they do not include is insolvency.
Managing those risks requires democratic choices about:
– Taxation.
– Regulation.
– Industrial strategy, and
– Central bank coordination.
That is political economy, not technocracy.
I expect this will be a blogpost in the morning.
“I expect this will be a blogpost in the morning”. Just what I was thinking half way through the questions and comments and your answers! I was also thinking that maybe you’re getting and bit frustrated and bored with constantly repeating yourself. All I can say is that every time I read what you write around MMT it enables me to more clearly explain to others
Thanks
As a minor aside – relating to how these ideas are or are not discussed in the media – Andy Verity who is the sole BBC economics correspondent who explicitly questions the household budget analogy, and who, presumably as a consequence , is not seen very often, was on Newsnight – but no longer dubbed an economics correspondent – just ‘a correspondent ‘talking and reporting about other issues
A shame.
He seems like a good guy.
Richard, could you please explain sometime how the Turkie economy has got itself in such an inflationary situation. Could be good to examine a practical example as opposed to just the theory in isolation.
I do nit consider myself sufficiently 3xpert on Turkey to do that. Sorry.
Jonathan Portes isn’t foolish and he is decidedly mainstream imo. His comments about MMT are the usual ones.
MMT is’nt some breakthrough it is a description of what happens & for personal income or political reasons it is disliked by some.
We just need to keep calmly explaining that believing in MMT’s description of govt spending, taxing and borrowing is a useful way of thinking about the role of govt in a time of profound changes due to climate, biosphere, demographics and international tensions.
It is not a panacea.
Many difficult decisions/choices etc remain to be tackled.
If those with surplus income/wealth have a “low propensity to consume”, will increasing their taxation have much effect on the consumer price index?
Taxing those with surplus wealth/income can reduce CPI pressure in ways the simplistic “they don’t spend much anyway” story does not highlight.
Two points matter.
First, it is true that the very wealthy usually have a low marginal propensity to consume: if you take £1,000 off someone on £40,000, they cut spending; if you take £1,000 off someone on £4 million, they mostly don’t. So if your only aim is to reduce day-to-day demand in supermarkets, taxing the rich is not the fastest lever.
But that is not the whole picture.
Second, the wealthy still consume a lot in absolute terms, and much of it is concentrated in scarce, price-setting sectors: premium housing, land, private rents, school fees, private healthcare, luxury travel, cars, energy use, imported goods, and high-end services. Those are areas where demand from the top can push up prices for everyone directly (housing and rents) or indirectly (energy, transport, supply chains). And because this consumption is resource-intensive, it can worsen the very bottlenecks that translate into inflation.
So higher taxation on surplus wealth and income can restrain inflation by:
• reducing bidding wars in housing and land markets (which feed into rents and CPI components),
• dampening demand in carbon- and import-heavy sectors where capacity is tight,
• shifting resources (labour, materials, energy) away from luxury consumption and back towards essentials,
• and limiting speculative asset inflation that spills into the real economy.
That is why taxing the rich is not just about fairness. It is part of inflation management and environmental management too. The aim is not to punish consumption; it is to stop a small group using disproportionate claims on scarce resources and then leaving everyone else to deal with the price consequences.
Thanks for all the clarification . I find it extremely helpful and, no doubt, it will gradually permeate into and inform the wider debate.
Can you please say a word about the effect MMT might have on the exchange rate – a potential “currency crisis” is a convenient bogeyman for opponents to raise.
Thanks for your prodigious work. Season’s greetings to you and your family.
This is a common concern, and it is often raised precisely because it sounds alarming while remaining vague.
MMT does not deny that exchange rates matter. What it challenges is the idea that a government using its monetary and fiscal capacity responsibly is somehow inviting a currency crisis.
The exchange rate is influenced by many things: relative inflation, interest-rate differentials, trade balances, geopolitical risk, speculation, and confidence in institutions. Fiscal policy is only one part of that picture. There is no automatic link between government spending and currency collapse.
A genuine currency crisis usually arises when a country:
• borrows heavily in a foreign currency it cannot issue,
• runs persistent trade deficits without domestic productive capacity,
• or pegs its exchange rate and then loses reserves trying to defend it.
MMT explicitly warns against all three.
In fact, MMT-style policy can strengthen currency resilience if spending is directed toward expanding domestic capacity: energy security, housing, food supply, transport, skills and productivity. That reduces import dependence, which is one of the biggest sources of exchange-rate vulnerability.
What opponents often imply is that markets will “punish” governments for abandoning austerity. But markets react to inflation risk and external balance, not to whether a government understands its own monetary system. Countries like Japan show that high public debt does not automatically produce currency collapse when institutions are credible and policy is coherent.
So the real safeguard is not pretending we are financially constrained. It is spending well, taxing appropriately, managing inflation, and investing in the real economy. A currency crisis is not triggered by honesty about money; it is triggered by ignoring real resources and external constraints.
Thanks, the currency issue is one I’ve not known how to counter. It strikes me that it would be helpful to put together a number of your replies to questions in a Guide to Arguments against MMT. This would serve as a campaign tool for those of us who are generally convinced but find some comebacks hard to neutralise.
Best wishes
In the New Year….
Over the past couple of months I read George Monbiot’s ‘A Secret History of Neoliberalism’. It was a fairly dense read, so, when I came across his video based on tge book I was intrigued. Watching it (about 90 minutes) was easier than reading it (it wasn’t a word-for-word reading, more a paraphrase) and it made me wonder if you and this community were familiar with it. Modern Monetary thinking gets a near explicit mention about 53 minutes in, but it avoids being ‘theoretical’ in its critique of neoliberal capitalism, and your community may find it worthwhile.
Thanks
No, it is NOT a duplicate, it’s a >supplement<.
I think that I forgot to include a link to the video for the convenience of people wanting to have a look!
https://youtu.be/gR4eSEetKP0?si=7uJ7v_qz596tmir-
Ta much for the link Denis. George Monbiot is always worth listening to.