The Currency Issuer Distinction
The first lesson in understanding these new grades is the difference between a currency issuer and a currency user. You are a currency user. Businesses are currency users. Even local governments are currency users. You all have to earn money or borrow it before you can spend it. If you spend more than you take in, you eventually go broke.
The federal government is different. It issues the currency. It cannot run out of dollars any more than a scoreboard can run out of points.
When we hand out Mmt grades, we do not deduct points for a budget deficit. A deficit for the government is actually a surplus for the private sector to the penny. If the government spends 100 dollars and taxes back 90, that remaining 10 dollars stays in the economy. It becomes our savings. Traditional economics treats this as a problem. MMT treats it as a necessary accounting identity.
Real Constraints vs Financial Constraints
So does this mean the government can spend infinity dollars? No. There is a limit. But the limit is not financial. The limit is real.
Imagine the government wants to build a new high-speed rail network. A traditional economist asks where the money will come from. An MMT economist looks at the real resources. Do we have enough steel? Do we have enough engineers? Do we have the construction workers?
If we have the workers and the steel, the government can afford to buy them. It really is that simple.
However, if all the construction workers are already busy building private skyscrapers, then the government has a problem. Trying to hire them away by offering higher wages will just drive up prices. That is inflation.
In the system of Mmt grades, inflation is the sign of a failing grade. It means the government is trying to buy more than the economy can produce. The goal is to spend right up to the limit of full capacity without breaking through into inflation.
The Role of Taxes
This brings us to a controversial topic. If the government does not need taxes to pay for spending, why do we pay them?
Taxes serve several crucial functions in this framework. First, they create a demand for the currency. You need dollars to pay your tax bill, so you are willing to work and sell things to get dollars.
Second, taxes are a tool to control inflation. Think of the economy like a party with too many people trying to buy a limited number of drinks. Taxes are how the bouncer removes some spending power from the room to cool things down.
Third, we use taxes to discourage bad behavior, like pollution, or to reduce extreme inequality.
When we evaluate policy through Mmt grades, we do not ask if a tax will fund a program. We ask if the tax will release enough real resources to allow the program to happen without causing inflation.
The Job Guarantee
One of the most important metrics for our new scorecard is employment. In the standard model, some unemployment is considered natural or even good for keeping prices stable. MMT rejects this.
Unemployment is evidence that the deficit is too small. It means the government has not supplied enough currency to cover the tax bill and the desire to save.
A core component of Mmt grades is the Job Guarantee. This is a federally funded but locally administered program. It offers a job to anyone who wants one at a basic wage.
This acts as an automatic stabilizer. When the private sector crashes and lays people off, the Job Guarantee payroll expands. This pumps money into the economy exactly when it is needed. When the private sector recovers and hires people back, the program shrinks. It anchors the currency and ensures that anyone willing to work can contribute to society.
Interest Rates and the Central Bank
We also need to rethink interest rates. For decades, the central bank has used interest rates as a brake pedal. If the economy gets too hot, they raise rates to make borrowing expensive. This is supposed to slow down spending.
The problem is that interest rates are a blunt instrument. Raising rates might stop a business from expanding, but it also pays out more interest income to people who already have money. This can actually be inflationary.
Under our Mmt grades system, we prefer to leave the base interest rate at zero. We stop paying people just for having money. instead, we rely on fiscal policytaxing and spending to manage the economy. It is more direct and more democratic.
Exports and Imports
Trade is another area where the grade card gets flipped upside down. Most people think exports are good and imports are bad. We want to “win” at trade by selling more than we buy.
But think about it in terms of real stuff. Exports are things we work hard to produce and then send away for others to enjoy. Imports are things others produce and send to us.
Real wealth is the pile of stuff we get to keep. Therefore, the benefit of trade is the imports. The exports are just the cost we pay to get them.
A country that issues its own currency does not need to export to pay for imports. It can afford to buy anything available for sale in its own currency. The only constraint is the exchange rate and the willingness of foreigners to hold our assets.
Grading the Private Debt Bubble
While public debt is usually safe for a currency issuer, private debt is dangerous. You and I cannot print money. If households and businesses take on too much debt, the system becomes fragile.
Traditional economics often ignores private debt until the bubble bursts. We saw this in 2008. The government had a “good” grade because the deficit was low, but the private sector was drowning in mortgage debt. The economy collapsed.
Our Mmt grades prioritize private sector health. We want the private sector to be in surplus. But as a matter of accounting, the only way for the private sector to save money overall is for the public sector to be in deficit. The government’s red ink is the private sector’s black ink.
Conclusion
It is time to throw out the old grade book. We have spent too long worrying about numbers on a spreadsheet while ignoring the real world.
A healthy economy is not one with a balanced budget. It is one where everyone who wants a job has one. It is one where our infrastructure is strong and our people are educated. It is one where we use our resources wisely without destroying the planet.
That is the standard of Mmt grades. It is a tougher test to pass because you cannot fake it with austerity. You actually have to build a better world.
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