The MMT view of sectoral balances.

In every nation, there are three sectors in the economy: public, private, and foreign. The government alone is the public sector. Everyone and everything else in the domestic economy is the private sector (that’s us!). The foreign and private sectors together are called the non-government sector. This is related to the concept of sectoral balances as developed by British economist Wynne Godley. Here is the Wikipedia entry on sectoral balances.

This post features a summary of the MMT view of sectoral balances by original MMT developer L. Randall Wray. At the bottom you will find some additional sources to learn more.

You should also read Wray’s written Congressional testimony, as submitted in November 2019. It describes, through a mainstream lens, that if one wants to reduce the deficit of the government sector (or for it to have a surplus), then you must decide which other sector will be affected by that decision. However, because the United States almost always runs a trade surplus, it means that the brunt of that sacrifice will almost always be endured by the private sector.


These resources were created by Activist #MMT, the podcast (Twitter, Facebook, web, please consider becoming a monthly patron). This post was last updated October 11, 2020.

Disclaimer: I am a layperson who has studied MMT since February of 2018. I’m not an economist or academic and I don’t speak for the MMT project. The information in this post is my best understanding but I don’t assert it to be perfectly accurate. In order to ensure accuracy, you should rely on the expert sources linked throughout. If you have feedback to improve this post, please get in touch.

The MMT view of sectoral balances, by L. Randall Wray.

The below is an unabridged excerpt from the 2020 paper by original MMT developer, L. Randall Wray, The “Kansas City” Approach to Modern Money Theory:


Wynne Godley arrived at the Levy Institute in the early 1990s. He began building a model of the US economy using his sectoral balance approach, with his first Levy publications coming in 1995. When I arrived for an extended stay that began in late summer of 1997, I began circulating chapters of my new book manuscript to the Levy scholars, including Wynne. At that time, Wynne was warning us about the growing deficits of the US private sector—what he would highlight in his “Seven Unsustainable Processes” paper of 1999. MMT had already included a recognition that government deficits produce surpluses for the nongovernment sectors, and government debt represents net financial wealth for the nongovernment sectors. This was a major point of Minsky’s “big government” approach (discussed in the next section).

What Godley provided was a stock-flow consistent model that explicitly treated the foreign sector and that used the flow of funds accounts. This was soon added to MMT. Wynne and I collaborated on some op-ed pieces in the Financial Times and on a Levy Policy Note (Godley and Wray 1999) warning about the coming collapse of the “Goldilocks” economy. Stephanie (Bell) Kelton applied Wynne’s skepticism about the future of the euro project to her own work, and I included a section in my 1998 book.28 Stephanie and Ed Nell organized a conference on the euro at the New School,29 and Warren helped to organize one in London in 1998.

The most important takeaway is that the balances must balance, meaning that we cannot think about the government’s budgetary outcome independently of the other two balances. Any sector can run a surplus (the sector’s income is greater than its spending), but that means at least one other runs a deficit (spending exceeds income). It is not possible to reduce the government’s deficit by reducing spending or raising taxes unless the private sector’s surplus declines and/or the foreign sector’s surplus declines. Fiscal and monetary policy have uncertain impacts on these balances, as each balance is complexly determined and linked in complicated ways to one another. For the United States, we generally observe that robust growth is associated with a declining private sector surplus but a rising foreign sector surplus. Typically, the net result of those is a reduction of the leakages (domestic private saving and net imports), allowing the government’s injection (a deficit) to fall.

But those movements of the balances also set in motion countervailing forces: the reduction of the private sector surplus generally increases debt ratios (one of Godley’s most important unsustainable processes, and also highlighted by Minsky in his financial instability hypothesis; see below) even as the comovement of the government’s budget toward surplus and the current account toward bigger deficits takes demand out of the economy. Once a breaking point is reached (a “Minsky moment”), a financial crisis is triggered and the fallout is accompanied by slow growth, a rising private sector surplus, falling current account deficit, and rising government deficit. Deficit hawks who want to maintain balanced budgets must explain how they are going to control the private and foreign balances to produce them.

The MMT position is that the government’s balance should play the stabilizing role, accomplished by putting in place automatic stabilizers such as procyclical taxes and countercyclical spending. A deficit can certainly be too big—potentially fueling inflation. The evidence for the United States suggests that federal taxes are already sufficiently procyclical; however, if anything, federal spending is not sufficiently countercyclical, so the focus should be placed on creating a stronger movement of spending against the cycle—the topic of section seven (Wray 2019). It would also be helpful to address the inherent tendency toward financial instability in the private sector, the topic of the next section.

Additional sources

(Will be added to. Please suggest!)

The MMT view of sectoral balances by the U.K.’s Gower Initiative for Modern Money Studies.