MMTery

Action 1: The Government Spends

When the government buys something from a citizen, it injects new net financial assets into the private sector.

• Government/Central Bank Ledger: Credits the Commercial Bank's reserve account (increasing a liability for the Central Bank).

• Commercial Bank Ledger: Debits its own reserves at the Central Bank (+Asset) and Credits the citizen’s bank account (+Liability).

• Private Citizen's Ledger: Debits their cash/bank account (+Asset). The Private Sector’s Net Worth goes up.

Action 2: The Government Taxes

Taxation is the exact structural reverse. It does not "fill a vault" to fund future spending; it destroys circulating money.

• Private Citizen's Ledger: Credits their bank account (-Asset). Their net worth falls.

• Commercial Bank Ledger: Debits the citizen's account (-Liability) and Credits its reserves at the Central Bank (-Asset).

• Government/Central Bank Ledger: Debits the Commercial Bank's reserves (-Liability), subtracting money from existence.

Action 3: Private Bank Lending (Endogenous Money)

MMT emphasizes that when a private commercial bank issues a loan, it does not use government reserves to do it. It creates "inside money" by expanding its ledger on both sides simultaneously.

• Commercial Bank Ledger: Debits "Loan Receivable" (+Asset) and Credits the borrower's deposit account (+Liability).

• Borrower's Ledger: Debits "Cash/Deposits" (+Asset) and Credits "Loan Payable" (+Liability).

• MMT Core Takeaway: Because a liability was created for every asset, private bank lending increases the money supply but adds exactly $0 to the Private Sector’s overall Net Worth. Only government deficit spending can increase private net worth.

Taxes?

According to MMT proponents, a government that issues its own fiat currency (like the U.S.) cannot run out of money. Therefore, when the economy faces high inflation, MMT suggests increasing taxes to pull money out of the economy, reducing private spending and cooling off rising prices.

U.S. policy handles inflation through a completely different framework:

The Actual U.S. Framework for Inflation

• Monetary Policy (The Federal Reserve): The U.S. relies on the Federal Reserve to manage inflation. The Fed actively targets a 2% inflation rate over the long run. It tries to hit this target by raising or lowering the federal funds rate, not by changing tax rates.

• Fiscal Policy (Congress and President): Tax rates are legislated by Congress via the tax code. Adjusting taxes requires passing a bill, a slow process heavily delayed by political debates. Because of this lag, tax rates cannot be adjusted quickly enough to act as an agile, real-time inflation stabilizer.

Practical Challenges of the MMT Tax Approach

While MMT relies on tax adjustments for economic stability, mainstream economists point out several functional hurdles to this approach:

• Legislative Lags: Passing tax hikes through Congress can take months or years, whereas the Fed can adjust interest rates in a single day.

• Political Resistance: Raising taxes on citizens during an inflationary period (when living costs are already high) is politically unpopular and difficult for lawmakers to pass.

• Granular Targeting: To cool inflation effectively without hurting the vulnerable, lawmakers would need to know exactly which income brackets or industries to tax to reduce demand without triggering a recession.

Automatic stabilizers are built-in economic mechanisms that automatically slow down growth when the economy overheats, or boost the economy during a downturn. They operate instantly without needing new laws or votes from Congress, acting as a natural shock absorber.

During a strong economic boom or growth period, these stabilizers naturally "cool" the economy through two main channels: rising tax receipts and falling government benefits.

1. The Revenue Side: Progressive Income Taxes

When the economy is growing rapidly, hiring increases, wages rise, and corporate profits surge. In a progressive tax system, this growth triggers an automatic cooling mechanism:

• Moving Up the Brackets: As individuals earn more, their extra income pushes them into higher marginal tax brackets.

• The "Tax Drag" Effect: Total tax revenue increases at a faster rate than the growth of the economy itself.

• Reducing Disposable Income: By pulling a higher percentage of cash out of the private sector and into the government treasury, individuals have less disposable income to spend on goods and services. This directly lowers aggregate demand and prevents prices from spiraling out of control.

2. The Spending Side: Declining Government Benefits

Economic expansion means more people find employment, and fewer people need financial assistance. This automatically scales back government injection of cash into the economy:

• Lower Safety Net Outlays: Expenditures on safety-net programs like unemployment insurance, Supplemental Nutrition Assistance Program (SNAP/food stamps), and welfare naturally decrease.

• Shrinking the Deficit: As the government automatically spends less on these benefits, it injects fewer dollars into the consumer market.

• Curbing Excess Demand: Lower overall government transfer payments mean less competing purchasing power in the marketplace, helping to keep consumer demand in check.

Why Stabilizers Exist: Budget Balances in Booms vs. Recessions

Because of these two forces, the government budget balance changes automatically based on where the economy sits in the business cycle:

• During a Boom: Tax revenues rise while welfare spending falls. This automatically shrinks the federal deficit (or creates a surplus), draining excess money supply out of the public square to cool inflation.

• During a Recession: The opposite occurs. Tax revenues plunge while welfare spending spikes. This automatically expands the deficit, injecting much-needed cash back into consumer pockets to stimulate a stalling economy.

If Not Taxes...

Beyond using tax rates, Modern Monetary Theory (MMT) views inflation as a reflection of physical resource scarcity rather than a purely monetary phenomenon. According to MMT, inflation occurs when total spending (public and private) exceeds the real capacity of the economy to produce goods and services.

To control inflation without relying solely on painful tax hikes, MMT architects propose a multi-layered framework aimed at managing resource limits, curbing corporate power, and designing structurally stable spending bills:

1. The Federal Job Guarantee (The Primary Anchor)

The cornerstone of MMT’s inflation control framework is a permanent, federally funded, but locally administered Job Guarantee.

• The Concept: The government offers a job at a fixed baseline wage (e.g., $15/hour) with standard benefits to anyone who wants one.

• How it controls inflation: This establishes a stable price anchor for labor. During an economic boom, private employers must compete for workers by offering wages above this baseline. If the private sector overheats and starts driving a wage-price spiral, the Federal Reserve usually fights this by raising interest rates to intentionally cause unemployment. Under MMT, workers laid off from the private sector naturally drop back down into the fixed-wage Job Guarantee pool.

• The Result: Instead of utilizing a "reserve army of the unemployed" to cool inflation, MMT uses a "reserve army of employed workers" earning a fixed baseline wage, which naturally stabilizes wage growth across the entire economy.

2. Ex-Ante Resource Budgeting

Mainstream governments score bills based on their financial cost (how many dollars they add to the deficit). MMT completely replaces this with real-resource accounting before a bill is ever passed.

• The Concept: Before Congress passes infrastructure, healthcare, or green energy spending, it must audit the economy's physical capacity.

• How it controls inflation: If the government wants to build a high-speed rail, lawmakers do not ask "Do we have the money?" Instead, they ask: "Do we have the steel, the concrete, the engineers, and the construction workers available?"

• The Result: If the physical resources are already fully utilized by the private sector, the government must deliberately pass legislation to free them up—such as delaying private projects, creating targeted regulations, or introducing specific taxes to reduce private demand for steel and concrete—before spending the new money. This prevents government bidding wars against the private sector, which is a primary driver of inflation.

3. Direct Regulatory and Anti-Monopoly Actions

MMT argues that a significant portion of modern inflation is driven by corporate market power and "sellers' inflation" (companies raising prices simply because they have the monopoly power to do so).

• The Concept: Instead of using broad interest rate hikes that hurt small businesses and consumers alike, MMT advocates for aggressive, targeted structural interventions.

• How it controls inflation: The government deploys strict price controls on systemic bottlenecks (like healthcare, prescription drugs, or energy costs), uses antitrust laws to break up corporate monopolies, and regulates predatory pricing tactics.

• The Result: By tackling the specific sectors causing the price spikes, the government cools inflation at its source without choking off economic growth in healthy sectors.

4. Credit Controls and Banking Regulation

MMT notes that the vast majority of the money supply in modern economies is actually created by private banks when they issue loans, not by the government printing cash.

• The Concept: Rather than the Federal Reserve raising the cost of borrowing for everyone via interest rates, MMT favors qualitative credit controls.

• How it controls inflation: The government directly regulates bank lending practices. If the housing market is overheating and driving up inflation, regulators can mandate higher down-payment requirements or restrict banks from issuing highly speculative loans.

• The Result: This directly cools off asset bubbles and excessive private credit expansion without slowing down productive business investment.

Comparing Monetary Policy vs. the MMT Framework

The table below highlights how the standard U.S. framework differs fundamentally from MMT when handling inflation: