Read it at The Financial Times | Martin Wolf's Exchange
Understanding sectoral balances for the UK
by Marin Wolf
(h/t Stephanie Kelton via Twitter)
What would have happened if governments had, instead, attempted to slash their deficits by raising taxes or cutting spending at a time when interest rates were already as low as they could be? If governments want to cut their deficits, other sectors must, in aggregate slash their surpluses.
Broadly speaking, there are two ways such an adjustment can happen: higher spending, at given incomes, or a collapse in incomes. When interest rates are low and the financial sector frozen, the latter is far more likely than the former. In other words, the adjustment to fiscal austerity occurs via a slump.This is straight up Godley macro.
Finally, some people note that the sectoral balances are identities: they must add up to zero. This is correct. But there are many different ways they can add, both in terms of the relative sizes of the surpluses and deficits and levels of economic activity. This sectoral way of thinking can be easily converted into standard macroeconomic models, in which interest rates and income jointly determine the equilibrium outcome. The important contribution of this way of thinking is that it forces one to ask how one expects the economy to add up.Wolf gets it. And, yes, he does address corporate rent-seeking behavior as a problem to be addressed.