SECTORAL BALANCES AND DISCRETIONARY BUDGET DEFICITS: RESPONSES TO COMMENTS ON MMP BLOG #5

This week I am going to be unusually and thankfully brief (it is 4th of July holiday, after all). I will respond to the following comments:
  1. From Neil, can we tell from the sectoral balances what the multiplier effect from government spending might be?
Answer: No. It would be great if we could, but we need estimates on things like spending and saving propensities across sectors, and then we need those things to be stable across a cycle. I am extremely skeptical that they are stable. I do believe multipliers are reasonably big on direct government employment programs. Other than that, all bets are off. But look at it this way. Say the multiplier is one or less than one. Then we can have more tax cuts and more government spending on stuff we need. Personally, I’d like better roads, 21st century infrastructure, and some of those flying saucers we were promised when I was a kid. My Toyota looks an awful lot like my dad’s 1959 Olds. That is sad. I expected much more. My cellphone approximates something like what I was looking forward to. Dinosaurs that drink petroleum and still require rubber on the road is not even close.
  1. Jean: can you carry the graph back to look at growth of “transfers”. Yes. But of course we are an aging society and so yes you will see growing spending on Social Security since Ida May Fuller first began to collect benefits. (Yogi says: look it up)
  2. Murray: many questions, most to be addressed in coming weeks and months. One response now: what about gambling. As a rough rule of thumb, it is ignored. Only the profits and wages of gambling houses show up in the data. The bets (and losses) do not.
  3. Willorng: 45 mph speed limit. Mosler beat you to it—his campaign platform included a national 35mph speed limit. I did not sign on. Sorry, call me old fashioned. I’d rather drive fast and save the planet by foregoing meat—our meat consumption is far more disastrous for the environment than driving SUVs at 100mph.
  4. Dale on net imports: I mostly agree. It takes two to tango so we actually have little power over the outcome, anyway. I do not imply morality on imports and exports. I would not say net imports are good or bad. They just “are”.
  5. Anon: fast or slow collapse and rich vs poor savings: I do not want a collapse at all. I want debt relief and jobs creation. On the empirical evidence—who is cutting spending and increasing saving—I do not know. I suspect it is low to middle income that has cut spending but I am not sure.
  6. Wh10: again, I prefer to keep morality out of this, however, I am willing to say that in the circumstances that have existed since the early 2000s, increasing private sector deficits and debts is “bad”, unsustainable, and ultimately will (did) create a crisis. And, again, it takes two to tango. The rest of the world wants dollar assets. In such a situation, given US endorsement of mostly “free trade”, we will run a current account deficit. That is not good or bad, and it is sustainable. Now most analysts believe it is both bad and unsustainable. Hence, I called them out—how can they advocate private sector savings ,and government sector balanced budget without telling us how we will bring the current account to a surplus. They have no plausible story. They are either stupid or dishonest. I simply ask them to tell us which label they prefer. Personally, I am indifferent.

23 Responses to SECTORAL BALANCES AND DISCRETIONARY BUDGET DEFICITS: RESPONSES TO COMMENTS ON MMP BLOG #5

  1. So this is probably a niave question but I'm still puzzled by it:-Given that the current bubble was created by banks lending money they created out of thin air (not private sector savings as banks are not reserve constrained) and give that much of that money was malinvested and ultimately it became a "Ponzi" debt bubble built on ever increasing asset prices does the accounting identity imply that this private sector credit/money should now be matched by government spending and isn't this just matching bad with more bad?

  2. Anon: Briefly, uh, no.The matching occurred continuously–budget surpluses during clinton years matched private deficits at same time; private deficits over the entire bubble-onia decade accumulated to debt over that period, some held by foreigners. Malinvested real estate sits vacant and will be bulldozed. We cannot "match" after the fact. Private net saving NOW is matched by govt deficits NOW. LRWray

  3. hmm, thanks very much for the reply. I'm not sure I get it but at least I now know I don't understand it so I'll think about it some more.I'm guessing I'm misunderstanding the difference between "accumulated debt" and "saving NOW" and "deficits NOW"

  4. MMT passes muster with me because it seems pretty irrefutable given that all your doing is analyzing the flow of government liabilities and making logicial inferences.Having said that, as one of your die hard supporters, i got to say the way you guys explain this stuff kills me. no wonder people are confused. your explaining this stuff from the top down. you need to start from the bottom up. my gosh your monetary folks people. start in the basement and work your way up:Government debt of a currency issuer is the currency user’s savings as a matter of double entry accounting – a digital account corresponding to all currency users’ savings in banknotes, deposits, and treasuries.then from there you build out your arguments. look i've already done it for you.http://dollarmonopoly.blogspot.com/p/issuer-user-paradigm.htmlno one is gonna buy what your selling the way your selling it. change your pitch and you'll close them…and remember – coffee is for closers. you guys should pay me for all the pro-bono work i'm doing for you :-)

  5. Craig- this has already been addressed in other comment sections. This blog is not for "selling" the general public on MMT. It's for those who want a more comprehensive, rigorous explanation of the theory- for the relatively knowledgeable, intellectual, professional, academics, etc.

  6. @Naïve Anonymous, July 7, 2011 4:42 AMNot sure this is going to help you, but I think the story is something like this.1) During the Clinton surpluses, the non-government sector was in deficit (obviously — since the government was in surplus). 2) One would think that this would immediately contract the economy, causing a recession. However, to maintain life-style in spite of the deficits, households went into debt "internally within" the private sector, where banks and financial institutions accommodated with easy credit. (This was under under the Greenspan deregulations era.) 3) This kept the economy afloat for a while — the Clinton growth years was supported by private balance sheet expansion.4) But this is not a sustainable growth path. Finally, the households became indebted up to their necks — debt-to-income ratios reached unhealthy levels — households finally became very sensitive to changes in asset prices and interest rates.5) The private balance sheet expansion didn't work out any longer. Households retrenched, and the economy went into recession during the early years of the Bush administration. 6) Automatic stabilizers during the recession (increased transfer payments and lower tax payments) wiped out the government surpluses (thankfully — the population during the Great Depression was not that lucky). Thereby, households could strengthen their precarious balance sheets (pay down debt).7) However, the lesson was not learned. Private bebt levels started to increase again.. housing bubble.. bla bla (hmm, not sure)Sort of?

  7. "Mosler beat you to it—his campaign platform included a national 35mph speed limit."Is that actually true? If so, the irony is pretty massive!http://en.wikipedia.org/wiki/Warren_Mosler"Warren Mosler (born September 18, 1949) is an American economist, president and founder of Mosler Automotive…"http://en.wikipedia.org/wiki/Mosler_MT900"The MT900 they tested could also do a 12.0 second quarter mile at 118 mph (190 km/h), and they recorded a top speed of 150 mph (241 km/h), limited by the redline."

  8. Regarding Mosler's proposal for speed limit, see here: http://moslereconomics.com/2008/05/22/energy-crisis-solution/Scott Fullwiler

  9. "Anon: fast or slow collapse and rich vs poor savings: I do not want a collapse at all. I want debt relief and jobs creation."On jobs creation, that depends. If there are mostly no shortages, then there should be more retirement. On debt relief, either more jobs or more retirement is needed to tighten up the labor market so workers can get their fair share of productivity gains and other things to generate real earnings/real earnings growth so they can both spend and save (paying down debt is a form of saving). The people who were smart enough to not go into debt can save and retire earlier."On the empirical evidence—who is cutting spending and increasing saving—I do not know. I suspect it is low to middle income that has cut spending but I am not sure."I find this relevant and from:http://finance.yahoo.com/news/Retailers-post-strong-June-apf-2615027107.html?x=0&.v=15""Promotions were the clear driver this month, and consumers took advantage of some outstanding deals," said Ken Perkins, president of research firm RetailMetrics LLC. "But that leaves a big question mark for July and the back-to-school season. Will shoppers be willing to spend full price?"Selina Bierra, 32, says she would not. The teaching assistant bought discounted items at Macy's two weeks ago and a pair of white pants for $10 at Old Navy on Thursday. But she snubbed another pair priced at $19.99 because she thought it could be discounted more."Today, jobs aren't guaranteed," Bierra said. "My friend was telling me that her work was laying off people before the Fourth of July holiday."

  10. con't: "Brian Sozzi, a Wall Street Strategies said many consumers, particularly at the lower-income levels, feel that way. He said June's performance is indicative of the "rollercoaster" sales trend that has been prevalent this year."There continues to be more mixed reads on the state of the U.S. consumer than there are alcohols in a Long Island Iced Tea," Sozzi said. "The spending recovery is far from consistent."The June gains were lopsided, with discounters and luxury brands benefiting the most and results for merchants serving the low- and middle-income shoppers lagging. The figures are based on revenue at stores opened at least a year, a measure considered a key indicator of a retailer's health.Discounter Target Corp. and whole sale club chain Costco Wholesale Corp. were among the companies that posted June results that beat Wall Street estimates. Luxury retailers like Nordstrom Inc., Neiman Marcus and Saks Inc. also posted another month of stellar gains, as wealthy shoppers have gone back to spending.At the same time, J.C. Penney, which targets the middle income shopper, registered a sales gain that came in below analysts' projections and released a disappointing profit outlook. Bon-Ton Stores Inc., another mid-brow chain, posted a decline.Fred's Inc. reported that sales fell for the month and now expects its second-quarter net income to land in the lower half of its forecast range. It said its low-income shoppers are having a harder time stretching their dollars to the next payday."

  11. con't: "Fred's CEO Bruce Efird said in a statement that the "paycheck cycle," when financially stressed shoppers pull back in the days before they get their paycheck and then step up their spending when they get paid, was pronounced during the final weeks of June. But he said July 1 was the highest single day of sales so far this year."June sales reflected the volatility experienced with our customers' purchase patterns and demonstrated the broader decline in consumer sentiment that has been reported for the month," he added.June is historically the second most important month on a retailers' sales calendar behind December. During the month, stores typically clear out summer merchandise to make room for fall goods. But this time, it took deeper discounts than usual to get shoppers to buy amid worries about the economy.Teen retailer Aeropostale, for example, offered discounts of up to 80 percent, plus an extra 30 percent off on summer items, according to Dan de Grandpre, editor-in-chief of Dealnews.com. A year ago, Aeropostale offered up to 70 percent off, he said.Still, the revenue results are welcomed news for retailers, which had been hurt in some previous months by consumers' hesitance to loosen their purse strings.Most of the spring, shoppers, particularly in the low-to-middle income brackets, shrugged off buying discretionary items as gas prices neared $4 per gallon in late April and early May. Gas prices dropped almost 42 cents from a three-year high set earlier this year, and averaged $3.67 per gallon, according to AAA, Wright Express and Oil Price Information Service.But analysts fear that retailers have not quite turned a corner heading into the back-to-school shopping season, a period that accounts for 16.1 percent of annual retailers' revenue, according to the International Council of Shopping Centers. After all, gas prices are still 35 percent higher than last year at this time.Moreover, prices in the food aisle remain high and this fall, shoppers will be seeing the price tags of fashion and accessories rise as retailers try to offset higher labor costs in China and soaring prices of raw materials like cotton. Retailers, which had already raised prices on select items, are expected to expand those increases.Additionally, shoppers' biggest concerns —- a weak job recovery and stagnant wages —- continue to weigh on their buying decisions. These worries sent consumer confidence to a seven-year low in June, according to the Conference Board's survey released last week.In fact, consumer confidence has never been this low in the 24th month of a recovery, according to David A. Rosenberg, chief economist and investment strategist at the Toronto-based money management firm Gluskin Sheff. Historically at the two-year mark, confidence is at 94, not 58.5, which was recorded by The Conference Board's June survey.""

  12. "Hence, I called them out—how can they advocate private sector savings ,and government sector balanced budget without telling us how we will bring the current account to a surplus. They have no plausible story."I'm of the opinion of private sector savings (both lower/middle class and rich), gov't sector balanced budget, current account in balance, and the currency printing entity dissaving with currency and no bond/loan/IOU attached (thereby increasing the amount of medium of exchange). I believe that would give the best chance of productivity gains and other things being evenly distributed between the major economic entities and evenly distributed in time. This should also keep the currency pegers from buying the highest yielding asset that won't go down in value. If they want to peg their currency, let them buy an asset that might go down in value eliminating their excess saving.

  13. 1st Comment: "Anonymous said… So this is probably a niave question but I'm still puzzled by it:-Given that the current bubble was created by banks lending money they created out of thin air (not private sector savings as banks are not reserve constrained) and give that much of that money was malinvested and ultimately it became a "Ponzi" debt bubble built on ever increasing asset prices does the accounting identity imply that this private sector credit/money should now be matched by government spending and isn't this just matching bad with more bad?"That is actually a good question. The solution to too much lower and middle class debt is not more gov't debt, both owed to the rich. It seems to me you getting around to the medium of exchange question. Why should all new medium of exchange be the demand deposits from debt?About that malinvestment, is it malinvestment in time that debt allows?

  14. My comments must be really out of place.. have had two of them removed, one today here and one earlier. Or is there some technical problem? Hmm.When (or if?) you remove comments, it would be helpful if a note on the reason for removal could be provided. Honestly, I'm _trying_ to contribute with constructive stuff (although miserably failing?)

  15. Hugo: there could be some glitch; I'll ask our techie. I did not see your posts.Anon 1 (actually, way too many anons–but honestly I do not understand the software, either, so i post as anon then add name at bottom): you cannot have a private sector surplus, balanced govt budget and balanced current acct. That is the whole point of understanding the 3 balances. So, yes the "currency issuer" (sovereign govt) must run a deficit to let the private sector net save.Anon 2: The malinvestment was in McMansions that will be bulldozed. And you, too, seem to misunderstand the 3 balances. Yes we can subdivide the private sector into 3 components: rich households, other households, and firms. From 2000 firms did just fine–they did not deficit spend. It is very hard to get good data on households by income, but I did look at this in my "Ownership Society" brief at http://www.levy.org at the peak of the boom. Rich were not going deeply into debt. As a percent of income, debt rose as you went down the income distribution. So, yes, it was the poorer and middle income households that deficit spent. Now they have retrenched sharply. They cannot restore their balance sheets without jobs; and given the current account deficit there is no way for the household sector to pay down debt without big govt deficits. LRWray

  16. Prof. Wray and others,Regarding the issue with all the anons. You can post using the Name/URL option. If you do not have a website that you want to link, just leave the URL portion blink.

  17. Testing PJ Pierre's idea.Thanks!

  18. Actually, the anons at July 7, 2011 4:20, 4:22, 4:28, 4:40, and 4:49 are all mine.

  19. "you cannot have a private sector surplus, balanced govt budget and balanced current acct. That is the whole point of understanding the 3 balances. So, yes the "currency issuer" (sovereign govt) must run a deficit to let the private sector net save."I hope I'm not misunderstanding the 3 balances. I just believe the 3 balances are incomplete. My point is I want to add a 4th balance and at least break down the private balance into two parts.Rich private balance + lower and middle class private balance + gov't balance + foreign balance (current account) + currency printing entity with no loan/bond/IOU attached balance = 0 Because of what I consider flawed economic assumptions, the rich, the economists, and the bankers make sure the system is set up so that the last balance is 0. I don't believe that should happen, but it is. (Hoping I get the signs right the first time) Now if it could, then it would be:+2 plus +2 plus 0 plus 0 plus –4 equals 0.It seems to me what was happening was:+3 plus –5 plus –3 plus +5 plus 0 equals 0 (I'm thinking a plus foreign balance means the foreigners are saving which means a current account deficit)It seems to me what is happening now is:+3 plus 0 plus –7 plus +4 plus 0 equals 0When the lower and middle class stopped going into debt to the domestic rich and mostly foreign rich, those two entities got the lower and middle class' gov't to do it for them.Lastly and the way the system is set up now, I don't believe the sovereign gov't is a currency issuer. I believe it is basically a currency user too.

  20. It is very hard to get good data on households by income, but I did look at this in my "Ownership Society" brief at http://www.levy.org at the peak of the boom. Rich were not going deeply into debt. As a percent of income, debt rose as you went down the income distribution. So, yes, it was the poorer and middle income households that deficit spent."So if cheap labor legal immigration, cheap labor illegal immigration, cheap labor outsourcing (especially china's wto entry), and positive productivity growth produce price deflation and increase the amount of goods/services available, does the amount of medium of exchange need to increase too? If all new medium of exchange are the demand deposits from a bond/loan/IOU, then someone has to go into debt. Back in 2001, the rich didn’t need to go into debt (they might want to to get richer though), and the rich don't want the gov't going into debt because they might be forced to make the interest payments or even interest payments and principal payments thru taxes. So, let's trick the lower and middle class into debt (creating more medium of exchange) with a housing bubble.IMO, the point is in a wealth/income inequality economy (and maybe all economies), it is the entity that experiences negative real earnings growth that "drives" it with its changes to the amount of medium of exchange. The other entities may be reacting to the negative real earnings growth entity if they go into debt (in this 2001 case, some corporations and financial speculators)."Now they have retrenched sharply."So did debt defaults and debt repayments cause the amount of medium of exchange to start falling even though the fed funds rate went to zero(0) forcing the rich to get the gov't to go into debt for the lower and middle class (because they would not or could not) to attempt to keep the amount of medium of exchange stable to maintain the excess savings of the rich?"They cannot restore their balance sheets without jobs; and given the current account deficit there is no way for the household sector to pay down debt without big govt deficits. LRWray"I believe the balance sheets can be restored if older workers are put into retirement with currency printing with no loan/bond/IOU attached (helping to correct past medium of exchange mistakes). That would tighten up the labor market so the remaining workers can get their fair share of productivity gains and other things so they can both spend and pay down debt (a form of saving).

  21. Ok, turns out I had the comment saved in the browser, trying to post it again then@Naïve Anonymous, July 7, 2011 4:42 AMNot sure this is going to help you, but I think the story is something like this.1) During the Clinton surpluses, the non-government sector was in deficit (obviously — since the government was in surplus).2) One would think that this would immediately contract the economy, causing a recession. However, to maintain life-style in spite of the deficits, households went into debt internally within the private sector, where banks and financial institutions accommodated with easy credit. (This was under under the Greenspan deregulations era.)3) This kept the economy afloat for a while — the Clinton growth years was supported by private balance sheet expansion.4) But this is not a sustainable growth path. Finally, the households became indebted up to their necks — debt-to-income ratios reached unhealthy levels — households finally became very sensitive to changes in asset prices and interest rates.5) The private balance sheet expansion didn't work out any longer. Households retrenched, and the economy went into recession during the early years of the Bush administration.6) Automatic stabilizers during the recession (increased transfer payments and lower tax payments) wiped out the government surpluses (thankfully — during the Great Depression people were not that lucky). Thereby, households could strengthen their precarious balance sheets (pay down debt).7) However, the lesson was not learned. Private bebt levels started to increase again.. housing bubble.. bla bla (hmm, not sure)Sort of?

  22. I may be ending up in a spam filter or something? Trying again, but without providing an URL. Or is the comment too long maybe?@Naïve Anonymous, July 7, 2011 4:42 AMNot sure this is going to help you, but I think the story is something like this.1) During the Clinton surpluses, the non-government sector was in deficit (obviously — since the government was in surplus).2) One would think that this would immediately contract the economy, causing a recession. However, to maintain life-style in spite of the deficits, households went into debt "internally within" the private sector, where banks and financial institutions accommodated with easy credit. (This was under under the Greenspan deregulations era.)3) This kept the economy afloat for a while — the Clinton growth years was supported by private balance sheet expansion.4) But this is not a sustainable growth path. Inevitably, the households became indebted up to their necks — debt-to-income ratios reached unhealthy levels — households finally became very sensitive to changes in asset prices and interest rates.5) The growth supported by private balance sheet expansion didn't work out any longer. Households retrenched, and the economy went into recession during the early years of the Bush administration.6) Automatic stabilizers during the recession (increased transfer payments and lower tax payments) wiped out the government surpluses (thankfully — the population during the Great Depression was not that lucky). Thereby, households could strengthen their precarious balance sheets (pay down debt).7) However, the lesson was not learned. Private bebt levels started to increase again.. housing bubble.. bla bla (hmm, not sure)Sort of?

  23. I may be ending up in a spam filter or something? Trying again, but without providing an URL — and without using html for formatting — that may have been the problem. Or is the comment just too long maybe? @Naïve Anonymous, July 7, 2011 4:42 AMNot sure this is going to help you, but I think the story is something like this.1) During the Clinton surpluses, the non-government sector was in deficit (obviously — since the government was in surplus).2) One would think that this would immediately contract the economy, causing a recession. However, to maintain life-style in spite of the deficits, households went into debt "internally within" the private sector, where banks and financial institutions accommodated with easy credit. (This was under under the Greenspan deregulations era.)3) This kept the economy afloat for a while — the Clinton growth years was supported by private balance sheet expansion.4) But this is not a sustainable growth path. Inevitably, the households became indebted up to their necks — debt-to-income ratios reached unhealthy levels — households finally became very sensitive to changes in asset prices and interest rates.5) The growth supported by private balance sheet expansion didn't work out any longer. Households retrenched, and the economy went into recession during the early years of the Bush administration.6) Automatic stabilizers during the recession (increased transfer payments and lower tax payments) wiped out the government surpluses (thankfully — the population during the Great Depression was not that lucky). Thereby, households could strengthen their precarious balance sheets (pay down debt).7) However, the lesson was not learned. Private bebt levels started to increase again.. housing bubble.. bla bla (hmm, not sure)Sort of?