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So we've now learnt that we're going to make a transition. MMT allows us to make a transition. From thinking in terms of financial limits on government spending to thinking in terms of resource limits - a fundamental shift in the way we think and a fundamental shift in the way we appraise government spending options and the consequences of it and accompanying policies that might have to be introduced alongside government spending.

And so the question we now are asking is if the government has any - has no financial constraints, what constraints does it have?

Well, we've already learnt that it has resource constraints.

Now we're going to dig a bit deeper into what that actually means.

So think about an economy where we've got two scenarios.

And the dimensions of this these two scenarios to help us think through the options and the consequences are - we're going to think about whether the government is sovereign in its currency?

What does that mean?

We've already learnt that that means it issues its own currency. It sets its own interest rate. It doesn't peg its currency to any other currency or any other commodity so it floats it on the international currency markets - is what that means, the exchange rate fluctuates and it doesn't borrow in any foreign currency.

So there are our conditions for a sovereign nation and countries like the US, Britain, Japan, Australia, nearly every country fits that bill and to varying degrees, but fits that bill.

And the second scenario is whether the economy is currently at full employment or not.

Now, what does that mean?

That means that if it is at full employment, all the productive resources that that economy has available are currently being used in whatever use endeavour that they're fulfilling. And the alternative is that, no, that's not fully employed.

So in the pandemic, we have mass unemployment around the world, lots of labour resources, for example, that are not currently being used, lots of shops that aren't open, lots of machinery that's not being used.

So there are the choices.

Now, let's understand the limits on government spending in terms of those two scenarios. So here we've got an example. We've got a country like Australia or Japan or Britain or the United States that's fully sovereign in its own currency.

And it encounters a situation where it's currently at full employment.

So the question is, what are the limits on government spending in that scenario?

Well, let's take an example where the government in that situation wants to introduce, say, a major policy initiative like a Green Transition that's sometimes been referred to, which will require quite a massive shift in resource usage and a lot of resources, at least temporarily, being shifted into the public sector.

Now, the government has no financial constraints in that context. It can go and buy those resources, the use of those resources.

But if they're already currently being used, the problem is the only way they could get access to those resources and bring them into the public sector would be by competing for those resources at market prices. So the government could go and offer higher wages to workers that are currently working elsewhere and could persuade them to shift into the public sector and do jobs there.

But the problem is that it would then cause inflationary pressures in the economy. And so under those circumstances, the government's constraint on its spending are real - real resource availability. It comes up against an inflation barrier, to use the jargon.

So it's untrue to say that MMT economists think that the government can spend whatever without constraints.

It's clearly highly constrained by the scenario that it finds itself in.

Now, in that context, if it wanted to continue to run, say, a Green Transition, then it would have to work out a way to free up those resources that are currently being fully employed so that they would be able to be transferred into public sector use without causing inflation. Now it could do that by legislative dictate.

So just regulate, for example, that the coal export industry in Australia is illegal now. And if that would quickly create unemployed resources in the coal sector, which the government could then bring back into productive use in the renewable sector, for example. But it normally doesn't do that.

That would be seen as being politically quite coercive. What it normally would do and now you're going to learn an additional function of taxation,

what it does is - use taxation as a way of reducing our purchasing power in the non-government sector, which frees up resources that the government can then use productively in the public sector.

And so it's not in this particular scenario. It's not a straightforward thing to say the government can just spend. Yes, it can. But when it's up against a real resource constraint, it's got to work out complementary accompanying policies that make sure that spending in that resource transition is uninflationary.

Now take the other alternative. Where we've currently, for example, got mass unemployment because of the pandemic or during the global financial crisis. We had massive unemployment.

Well, then in that context, what resource constraints exist - none. No financial constraints - so there are no constraints on government spending in that context.

And so a responsible government who is compelled to generate wellbeing for its citizens can spend and spend and bring those unemployed resources back into productive use through its agency.

And it then at some point, would get back into the first situation where it meets its real resource constraint again.

Now, take another example. And this is, for example, one of the 20 member states of the Eurozone because they aren't sovereign in their currency, because they don't have their own currencies any longer, they use the euro, which is a foreign currency to them.

In that case, a government that encounters a fully employed economy has both a real resource constrained, as I explained before, and a financial constraint because it can't spend unless it can get tax revenue. And if it wants to spend more than tax revenue, it has to borrow from bond markets. And that becomes a really important problem for a country like the 19 member states of the Eurozone.

If they encounter a recession, for example, like the global financial crisis, like the pandemic, where it has lots of idle resources and lots in other words, lots of unemployment and business firms that have gone bankrupt. And if it wants to increase government spending, it has to convince the bond markets that the increased debt that it will incur as a consequence of that, will be paid.

And you could get this situation where the bond markets believe that the risk of lending further to a Eurozone government, for example, is too high and so they will stop lending and force that government to then cut back their deficits by imposing austerity when you've still got very high levels of unemployment.

And that's the difference between the policy choices available to a sovereign government and the policy choices available to a government that doesn't issue its own currency.

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