Mr Mosler and the Moderns

by vimothy

No, it’s not the name of my new band, and no, you’re not the first person to tell me just how handsome/charming/witty I am.

Warren Mosler, leader of the Modern Monetary Theorists, has a post up at his site, “The Centre of the Universe”, accompanied by some animated discussion, that puts forward what you might call an MMT theory of deficits. I shall attempt to say something interesting about this theory, but bear with me, dear reader, for I am at heart a very boring individual, and we are cut adrift upon what might be some very boring econ-nerd seas. We will return you to your regularly scheduled aphorisms as soon as we are able.

The theory basically states that the reason we have deficits is that people save in financial assets, and without the deficit, this saving could not take place. (Actually, Mosler is trying to explain the magnitude of the current US fiscal deficit via tax advantages for savings, but the particular argument need not concern us here; instead, the particular argument allows us to examine some of the the underlying theory). It relies on the identity that equates spending with income at the aggregate level. In other words, if I am to save, then someone must borrow my unspent income and use it to purchase goodies–otherwise our collective income will fall, since, by definition, our collective income is just the sum of our individual transactions.

Of course, the government is not the sole borrower in the economy–although at times, reading MMT blogs, one might come away with precisely the opposite impression–and so the government need not borrow all of our current saving, merely the quantity that exceeds the amount that everyone else wants to borrow and spend, because whatever is not spent cannot be earnt. Thus we arrive, with a small bump, at Mr Mosler’s favourite accounting identity:

S – I = G – T + X – M

The identity tells us that, for a given level of economic activity (that is, the identity is ex post), if the amount saved is greater that the amount invested, either the government is running a deficit (G > T) or the country is running a current account surplus (X > M), or both. Since even I go glassy-eyed when international economics is mentioned I will ignore the balance of payments, despite its relevance here, and through the miracle of imaginative power, pretend that the rest of the world does not exist. Sock that, Rest of the World!

Then we are left with simply the equation of, for a given level of activity, the amount of saving net of investment (i.e., the number S – I), and the government deficit (i.e., the number G – T). So it is obviously not quite true to say that all the money that is sitting in your pension funds and your savings accounts is doing nothing and is stuffed under a figurative mattress, as Warren Mosler does. If the government borrowed and spent all of the income saved, that would imply that S = G – T, and that I = 0; which is to say, that investment for the period was non-existent, that no new capital was formed. Even the most postest of the post Keynesians, I feel, would agree that such a situation is not entirely optimal, regardless of the unemployment rate that then obtained.

In short (okay, okay–it was somewhat less than short), what the accounting actually tells you is that, in a closed economy, aggregate income that is saved must have either been invested, or borrowed by the government and spent.

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