The document discusses Modern Monetary Theory (MMT) and its views on unemployment and job creation. MMT believes unemployment is socially and economically harmful and supports policies to achieve full employment. It argues that budget deficits by the government are necessary to offset private sector surpluses and allow the private sector to accumulate financial assets. MMT advocates for transition jobs or an employer of last resort program to absorb workers and reduce indirect social costs of unemployment."

1. It's What You Know for Sure
That Just Ain't So
Stephanie Kelton
Associate Professor, Economics
UMKC

2. A New Brand of Macro
• The Washington Post, The New York
Times, The Economist, CNBC and
many more
• Discovering an emerging school of
economic theory
• Modern Money Theory (MMT)
• Exposes the fallacies in
conventional economic theories
• Views unemployment as socially
harmful and economically inefficient
• Supports a full employment
economy

3. The High Price of Unemployment
• Direct Costs
• Loss of output/income
• Indirect Costs
• Social exclusion and the loss of freedom
• Skill degradation
• Psychological harm, including increased suicide rates
• Poor health and reduced life expectancy
• The loss of motivation
• The undermining of human relations and family life
• Loss of social values and responsibility
• Can be hard to quantify
• But there are estimates

4. The Annual Social Costs

5. The Lifetime Social Burden

6. The Aggregate Loss of Output

7. The Daily Losses Due to
Unemployment
"[E]very day the US government is allowing $9.7 billion to go down the drain in lost income just
because it is too stupid it implement sensible job creation strategies." ~Bill Mitchell

8. What is Sensible Job Creation?

9. ECON 101
• Sales Create Jobs
• Income Creates Sales
• Spending Creates
Income
• Cutting the Deficit
Will:
• Reduce Income
• Reduce Sales
• Destroy Jobs

10. Every Government Must
Choose Which One to Accept
• Pure Unemployment
• Labor Buffer Stock with zero wage and no tasks
• Unemployment Compensation
• Labor Buffer Stock with a wage and no tasks
• Transition Job/Employer of Last Resort
(ELR)
• Labor Buffer Stock with a wage and a task

11. MMT Favors the Transition Job
• ELR provides a transition job, something useful to do until
the private sector is ready to reemploy people
• Performs the job of a true automatic stabilizer
• Absorbs workers into the ELR pool when the economy turns
down
• Releases workers from the pool when the economy
improves
• Reduces losses borne by the private sector (indirect costs)

12. Other Benefits
• Maintains wages and benefits for those who
lose jobs in a downturn
• Helps support aggregate demand
• Prevents skills from degrading
• Makes workers more employable
• Gives people a sense of purpose

13. The New Deal
• Roosevelt’s WPA, CCC, NYA and other job
programs
• Built hospitals, schools, parks, bridges, roadways,
airports, stadiums, etc.
• Employed millions in productive and socially
useful jobs (roughly 4.3 million per month or
8-9% of the labor force)
• Hired builders, architects, engineers, painters,
poets, actors

14. A Deficit Hawk
• Opposes deficit spending on principle
• Often favors “sound money”
(e.g. Gold Standard or 100% reserve backing)
• Would legislate rules to mandate balanced budgets at
all times
• Believes that there is no such thing as a “good deficit”
• Supports immediate austerity to sharply reduce budget
deficits

15. A Deficit Dove
• Supports limited deficit spending in tough
economic times
• Wants government budget balanced over the
business cycle
• Supports rules to limit the size of the deficit
(e.g. Stability and Growth Pact)
• Prefers to wait until after the economy recovers
to impose austerity

16. Why Do They Worry?
• The hawks and the doves both worry about the
negative consequences of running a deficit
• They are convinced that at some point markets
will refuse to lend at reasonable rates
• They think governments will face a rising debt
burden
• And they believe that spending financed by
issuing money will lead to inflation

17. MMT Knows Better
• If the government takes advantage of its status as the issuer of the
currency, the government can finance its deficit without borrowing at all
• This means no discipline from bond markets
• No solvency problem to deal with
• Interest rates will be lower, not higher
• What about inflation?
• MMT advocates deficits only when there is slack in the economy
• As long as resources are available, demand-pull inflation should not
become a serious problem

18. The MMT Deficit Owl
• Would allow the deficit to
expand as needed to
maintain full employment
• Assigns no arbitrary limit
to the size or duration of
the deficit
• Accepts that it is the
government’s
responsibility (as
monopoly issuer of the
currency) to offset a rise in
unemployment

20. Stadium Analogy
• Suppose you’re watching a football match
• Think of the government as the scorekeeper
• Question: Where does the scorekeeper get the
points he gives out when one team scores?
• Answer: The points don’t come from anywhere
• Spreadsheet entries created by fiat

21. How Does a Government with
a Sovereign Currency Spend?
• By directing its bank (usually the central bank) to
credit someone’s account
• This frequently happens without even a writing a
check
• In the Modern Money era, government spending is
accomplished through keystrokes (Bernanke)
• The monopoly issuer of the currency can never
run out of money (Greenspan)

22. Becoming an Owl
• You cannot examine the government’s budget in
isolation
• The government is only one sector
• It’s useless to focus on a single sector when the
economy is multi-sectoral
• We need to understand how the government’s
budget is related to the rest of the economy
• A basic understanding of sectoral balances is all
we need

23. What They Show
• In any given period, sectoral balances show
whether a particular part of the economy is:
• Spending more than its income
• Running a Deficit
• Spending less than its income
• Running a Surplus
• Spending just equal to its income
• Balancing its Budget

24. Three Sectors
• Internal Sectors
• Domestic Private
• households and businesses
• Domestic Public
• local, state or province, and national governments
• External Sector
• Foreign
• foreign governments, foreign households and foreign
businesses

25. Two Rules
• Three Sectors
• Domestic Private
• Domestic Public
• Foreign (Rest of the World)
• Two Rules
• They can’t all be in surplus
• They can’t all be in deficit
• Cannot have 3 “Heads” (Surpluses) or 3
“Tails” (Deficits)

26. The Laws of Accounting
• Instinctively, we probably tend to think it’s
“better” to be in surplus
• But there is no way to put all three sectors in
surplus at the same time
• It defies the laws of accounting!
• At least one of them must be in deficit

27. A Simple Rule

$$$$$$ Non-Government
Government Sector
(Public) Sector
$$$$$$ (Households, Firms,
International Trade)
Government Surplus = Non-government Deficit
Government Deficit = Non-government Surplus

28. Two Options
• Two Heads, One Tail
• Two Sectors in
Surplus, One in
Deficit
• Two Tails, One Head
• Two Sectors in Deficit,
One in Surplus
• Which is better?

29. The Private Sector
Needs to Be in Surplus
• As a general rule, the private sector needs to be in surplus
• Households and firms cannot continually borrow more
than their income
• At some point lenders will run out of creditworthy
borrowers who are willing to spend
• Private debt levels may become unsustainable (Minsky)
• When an expansion driven by private sector debt reaches
an end, sales soften, jobless claims trend higher, and
economic activity falters
• Government revenues soon fall short of expenditures and
the government's budget eases

30. The Private Sector Cannot
Put Itself in Surplus
• If we just take households and businesses – what
we call the ‘private sector’ -- it is clear that one
persons’ asset is another person’s liability
• Assets and liabilities cancel each other out
• For example, my bank loan is cancelled by a bank
asset
• The private sector cannot create its own net
financial assets
• Net financial wealth must come from outside the
private sector

31. Where do Surpluses
Come From?
• Private Sector = Public Sector + Current Account
Surplus
Deficit
Surplus
(S – I)
(G – T)
(X – M)
• If the Government (Public) sector is running a deficit, and
the current account is in surplus, the private sector will be
adding (net) financial assets to its balance sheet
• The private sector’s net holding of financial assets will
increase

32. Possible Outcomes
• We have three sectors
• Domestic Private, Domestic Public and Foreign
• We can look at the income flows and spending
flows of each sector
• No reason for any individual sector to balance its
income and spending flows each year
• Three Possible Outcomes
• Surplus: Income > Spending
• Deficit: Income < Spending
• Balanced Budget: Income = Spending

33. Deriving the Sectoral Balance
Identity
• Y = National Income
• Sources of Income
Y=C+I+G+X
• Uses of Income
Y=C+S+T+M
Sources = Uses
• C+S+T+M=Y=C+I+G+X
• S+T+M=I+G+X
• (S – I) = (G – T) + (X – M)
• Private Surplus = Gov’t Deficit + Current Account
Surplus

34. Compare Domestic Public
and
Domestic Private Balances
Notice how increases in the government’s deficit
Help the private sector accumulate a surplus
And notice what happens to the private sector’s surplus
When the government shrinks the size of its deficit

35. Italy
15%
11%
8%
Percent of GDP
4% Government Balance
Private Balance
0%
-4%
-8%
-11%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

36. Ireland
40%
30%
20%
10%
Percent of GDP
Government Balance
Private Balance
0%
-10%
-20%
-30%
-40%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

37. Greece
10%
5%
0%
Percent of GDP
Government Balance
Private Balance
-5%
-10%
-15%
-20%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

38. Spain
8%
4%
0%
Percent of GDP
Government Balance
Private Balance
-4%
-8%
-11%
-15%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

39. Germany
10%
8%
5%
Percent of GDP
3% Government Balance
Private Balance
0%
-3%
-5%
-8%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Year

40. United Kingdom
11%
8%
4%
Percent of GDP
0% Government Balance
Private Sector Balance
-4%
-8%
-11%
-15%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Year

41. Japan
15%
11%
8%
4%
Percent of GDP
Government Balance
Private Balance
0%
-4%
-8%
-11%
-15%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Year

42. United States
11%
8%
4%
Percent of GDP
0% Government Balance
Private Balance
-4%
-8%
-11%
-15%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Year

44. The Previous Slide Shows
• That the private sector (blue) is almost always in surplus
• That the US has been running current account deficits
(green) for the last three decades as the rest of the
world ran trade surpluses against us
• That the government's deficits (red) have usually been
big enough to keep the private sector in surplus, despite
our negative trade position
• That the private sector went into deficit in the late 90s,
when the government's budget moved into surplus

45. The Next Slide Shows
• That every post-WWII recession (indicated by
grey bars) was preceded by a sustained
decline in the private sector's budget position
• Stated differently, every post-WWII recession
was preceded by a sustained upturn in the
government sector's budget position
• MMT puts the government's budget balance in
its proper context

46. Private Sector Balance with Recessions

47. www.NewEconomicPerspectives.org
Twitter @deficitowl