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Ramanan quotes Wray and Tymoigne out of context, misunderstands what they are saying and then proceeds to make an argument that doesn't actually contradict them.
Here is the Wray and Tymoigne quote, in context:
"A central point here is that government deficits add to the saving and net saving of the private domestic sector. Lavoie notes:
'While it would seem that government deficits in a growing environment are appropriate — as it provides the private sector with safe assets to grow in line with private, presumably less safe, assets — it is an entirely different matter to claim that government deficits are needed because there is a need for cash. Even if the government kept running balanced budgets, central bank money could be provided whenever the central bank makes advances to the private sector. (Lavoie 2013, 9)'
This is correct but this is not the point made by MMT that relates to net saving. Providing advances does not lead to net saving of government currency as financial assets of the domestic private sector increase by the size of the increase in financial liabilities.
Stated another way, advances have to be repaid so the gain in government currency is only temporary. Only a government deficit induced by fiscal policy leads to net saving.
Monetary policy can change the composition of net saving by buying financial assets in the domestic sector in exchange for government currency, but it cannot change the size of net saving, i.e. the net accumulation of financial assets.
We can think of it this way. Normally, a central bank advances currency into existence while the Treasury spends currency into existence. The difference is important: fiscal policy creates net financial assets; monetary policy only “liquefies” financial assets. This is a normal division of responsibilities, but one can imagine a central bank that spends its notes to buy real goods and services, and a Treasury that lends. Both are branches of sovereign government and can be directed to do what the sovereign government wants them to do."
Look if you make generic statements as if it is valid even out of context, that's not really quoting out of context.
Lavoie's situation is a dynamic situation. Tymoigne/Wray simply state an accounting identity in which there is an exchange of asset by the central bank with the private sector and hence some accounting but they write it is as it is a dynamic statement.
"Monetary policy can change the composition of net saving by buying financial assets in the domestic sector in exchange for government currency, but it cannot change the size of net saving, i.e. the net accumulation of financial assets."
This is a generic statement. And it is oft-said in MMT. If it were a pure one-off situation, the way to say it is to say such and such transaction doesn't affect the private sector balance instead of saying "monetary policy cannot ....".
One thing that confuses me around this issue is this:
"First, MMT argues the fiscal position of the government sector is ultimately driven by the desired net financial accumulation of the non-government sectors. "
Which I understand and agree with...
But then we say this:
"A central point here is that government deficits add to the saving and net saving of the private domestic sector. "
Which now seems like we are saying that it is govt sector actions that are leading to the savings... which it would seem logically that in the first sentence we are saying that the deficit is all on the non-govt, but then in the next sentence we are saying it is all on the govt sector...
Like we hear statements that "the govt let the deficit get too small..." which seems like not applicable if it is really the non-govt that decides its own savings based on its own desires...
"the way to say it is to say such and such transaction doesn't affect the private sector balance instead of saying "monetary policy cannot ...."
In your example the central bank raises interest rates and the economy goes into recession.
Less tax is paid to the government, the government budget goes into deficit, and the private sector balance goes into surplus.
So the private sector surplus is due to the government budget deficit, not to monetary policy.
If the government budget remained balanced, or in surplus, the private sector surplus would not be possible in your example (in a closed economy).
Lavoie says:
"Even if the government kept running balanced budgets, central bank money could be provided whenever the central bank makes advances to the private sector."
But in your example the government is not running a balanced budget - the budget is in deficit. As such the private sector can be in surplus.
In the opposite case/scenario, starting from a case of a private sector deficit, suppose the central bank drastically raises interest rates to the point of causing the economy to go into a recession. The private sector balance may rise as people save more and output will fall, leading to lower tax outflows to the government and hence changing the private sector balance.
"So the private sector surplus is due to the government budget deficit, not to monetary policy. "
Due to? When you say "due to", you are making causal statements. The government needn't have changed its fiscal policy to have had this effect. (Budget deficit is not fiscal policy. Fiscal policy is government expenditure and tax rates). The underlying cause is the rise in interest rates ie monetary policy.
Lavoie's point is nice but irrelevant to me in this discussion but twisted by Wray/Tymoigne.
This quote: "A central point here is that government deficits add to the saving and net saving of the private domestic sector"
I personally would prefer it were worded so as to properly assign consistent agency, something like:
"A central point is that net savings are added to the private domestic sector when it drives the government's budgetary balance into deficit."
I think that would bring it roughly into line with: "First, MMT argues the fiscal position of the government sector is ultimately driven by the desired net financial accumulation of the non-government sectors", although I would suggest changing "ultimately" to "largely, over the medium-long term."
"the budget deficit in the scenario is due to the private surplus"
it's only by the government spending more than its income that the private surplus can happen in the first place, in your example.
JKH made a similar point in another blog:
"for any accounting period, it is the expenditure on investment and the act of government deficit spending (as well as foreign sector effects in the more general case) that allows the actual private sector saving result."
If the government goes into deficit as the result of a recession, this may not be due to a change in fiscal policy, but deficit spending is still a part of fiscal policy, not monetary policy.
That assumes that the government has a control on its budget balance which it does not.
It has a control on the expenditure and tax rates, not the deficit.
In the situation, if for some reason the government tries to reduce its budget deficit, it will lead to a further fall in output and the budget deficit will likely widen.
(This seems counterintuitive - but it's just that the deficit is not a measure of the fiscal stance of the government).
Ramanan, I think trying to explain this stuff is a lot harder than it looks at first!
If it was easy, everybody would probably already know it...
I got 90% of it from Warren when he was on Mike's show years ago in about 10 minutes when Warren used the "subway tokens" analogy, looks like the 'acceptance rate' if you will varies greatly within humanity though...
I'd like to see Tom and Dan (both PhD Philosophy iirc) help out here if we are trying to make strictly 'logical' explanations vice 'mathematical' explanations (I get it thru 'math' myself dont need the 'logic' and I can just simply ignore the 'logic') .... seems like there should probably be optimum ways to approach these explanations from a 'logical' pov , some ways with this 'logical' approach here are probably better than others... rsp,
Lavoie's original point was to take issue with the statement that the government has to run a budget deficit because the private sector will run out of HPM.
Now Lavoie's argument is that HPM can be provided by the central bank by lending to banks, so this reasoning is wrong.
Second if Wray/Tymoigne try to argue something like: oh no we meant net private saving not HPM, even that is incorrect because of possibility of external surpluses.
ie you cannot have unqualified statements saying xyz is impossible.
Back to HPM, in the MMT blogosphere this point is muddled by saying "spending includes lending"
"Lavoie's original point was to take issue with the statement that the government has to run a budget deficit because the private sector will run out of HPM. Now Lavoie's argument is that HPM can be provided by the central bank by lending to banks, so this reasoning is wrong."
Here's the relevant part from Lavoie's paper:
"Another problematic statement is that the government has to run deficits, at least over the long run, for the public to get access to larger cash balances (high powered money). As Wray (1998, p. 123) puts it, “persistent deficits are the expected norm”, that is, “normally, taxes in the aggregate will have to be less than total government spending due to preferences of the public to hold some reserves of fiat money” (Wray 1998, p. 81). If the government was running persistent surpluses, the public would “run out of net money hoards” (Wray 1998, p. 79). While I would certainly agree that government deficits in a growing environment are appropriate, as it provides the private sector with safe assets, which can grow in line with private, presumably less safe, assets, it is an entirely different matter that government deficits are needed because there is a need for cash. Even if the government keeps running balanced budgets, central bank money can be provided whenever the central bank makes advances to the private sector."
Wray/Tymoigne's point is that the central bank can lend (advance) money to the private sector, but "advances have to be repaid so the gain in government currency is only temporary".
For the non-govt to own government currency outright (instead of just borrowing it), the government has to spend it.
Matt, the problem is explaining it to ordinary people, which means simplifying it, often immensely without distorting the picture. Economists debate with each other through papers where they can go into all the wonky detail. Prior to blogs the standard popularizations were in books aimed at a general audience. Now there are the blogs.
The mainstream already does this. I criticism of the mainstream is that the papers do not reflect what is taught in undergrad classes in econ and is given out to the media and in blogs as decided economics. It's simplified and ideologized to the point of being hype to dupe the rubes.
The task is to reverse this poisoning of the well of knowledge with simple explanations that are essentially correct and also accessible.
Then opponents throw up all sorts of FUD to distract and discredit.
"Second if Wray/Tymoigne try to argue something like: oh no we meant net private saving not HPM, even that is incorrect because of possibility of external surpluses."
They don't ignore external surpluses at all. Just above the Lavoie quote they say:
"In addition, MMT does differentiate between saving (in the flow of funds it is the change in net worth: ΔNW) and net saving (saving less investment). Net saving shows how the accumulation of net worth occurs beyond the accumulation of real assets. For the domestic private sector, this comes from a net accumulation of financial claims against the government and foreign sectors."
Earlier on in the same text they say:
"In an open economy, both the domestic private sector and the government sector could run surpluses, but that would mean that the rest of the world runs a current account deficit. Obviously, for every current account surplus there must be a current account deficit, so there is no way that all countries could be in surplus."
So you can see they are not saying "it's only possible for the domestic private sector to net save if the government runs a deficit", as they acknowledge the possibility of external surpluses.
My understanding of what they are saying is that out of monetary and fiscal policy, only fiscal policy leads to net saving via deficit spending. Monetary policy involves lending to the private sector/non-govt instead.
"My understanding of what they are saying is that out of monetary and fiscal policy, only fiscal policy leads to net saving via deficit spending. Monetary policy involves lending to the private sector/non-govt instead."
Again it is one of causality and you are also erring on it. Deficit is the outcome - it is not the cause.
You are doubly incorrect. It is not fiscal policy which decides how much the private sector NAFA is. In the same way, monetary policy can affect private sector behaviour to change its behaviour of NAFA to influence the budget balance.
The fact that the central bank transactions lead to exchanging one asset of equivalent value for another is just accounting. It doesn't say what happens next and how various stocks and flows change.
Plus monetary policy is not central bank transactions. Monetary policy is the change of interest rates and this effect happens via the announcement effect itself more than transactions.
And to add, there is of course causality in both directions in the sectoral balances. It is just that NAFA is determined both by fiscal policy and private behaviour. So to say only fiscal policy can affect is an error.
I think we sometimes use the term 'deficit spending' as sort of a 'cold slap in the face' for the morons who are going all around with this deficit phobia... We are trying to make the point that 'the deficit' or 'a deficit' should not be feared by policymakers if that is the projected financial outcome while we are running a particular fiscal policy in support of our real goals for outcomes...
but we cross a line of logic somewhere in there when we start to advocate for 'higher deficit spending' or something... it imo should just be 'higher spending' that we advocate for or 'lower taxes' for households who need the additional net income that would result...
Matt, my view is that there is no contradiction in the MMT position. The government's policy settings are exogenous. The ultimate budget balance is endogenous and depends on non-government behavior. There is nothing specifically MMT about that distinction. It is made in pretty much all macro -- certainly in all Keynesian and neoclassical-synthesis macro.
If there is unemployment, that is evidence that the government's exogenous fiscal settings are too tight given non-government behavior. That is true in the opinion of Keynesian economists in general. In terms of the MMT framing, there needs to be a greater injection of NFA to render the non-government behavior consistent with full employment.
Only the government can do this, and it does it through an exogenous change in its fiscal policy. The non-government cannot do it because if it acts in a way to bring the economy closer to full employment it will at the same time be acting against its capacity to maintain the surplus that the existence of unemployment indicates it is attempting to maintain.
Increased non-government spending, by adding to income, adds endogenously to tax revenues and an annihilation of NFA.
Without the government stepping in with an exogenous change in its fiscal settings to address the unemployment, there are two possibilities: (i) the non-government sticks to the spending and saving behavior that is inconsistent with full employment; or (ii) the non-government gives up trying to maintain its surplus (i.e. alters its behavior).
The central bank doesn't just lend to the private sector - it provides some dollars outright via interest on reserves. So it is possible for the central bank to increase net private sector savings in that way. I believe in 2012 the total Fed interest expense for depository institutions was about 4 billion dollars, so it's rather insignificant amount relative to the roughly $1 trillion that comes from the budget deficit.
The Fed also paid out about $1.6 billion in its statutorily required dividends on member bank paid-in capital.
On the other hand, the Fed had surplus earnings, remitted to the Treasury, of about $88 billion - which represents a net extraction of savings from the private sector.
I think the way to look at it is this: If the YoY net change in the Fed balance sheet is $F, and the deficit in the same period of time is $D, then the total federal government impact on net non-government sector savings will be $(D-F). The D term is much larger than the F term. But it's not negligible.
Also, we don't get a lot of information about economic impacts if we look at things from the abstract level of sectoral balances alone. Compare these two possible, though fanciful, operations:
The Fed unilaterally credits $300 billion dollars to the central bank deposit account of Goldman Sachs.
The government prints 300 million $1 thousand dollar bills and sends one to 300 million Americans.
The impact on net private sector savings would be the same, but the impact on aggregate demand from the second operation would be much greater.
The IOR paid out by the Fed was dwarfed by the interest payments it removed from non-government and the net was credited to the Treasury. The IOR payment was funded from that. If IOR would exceed the Fed's take from other ops, then it would be charged to equity.
The fiscal outcome, whether deficit, surplus or balanced, is the ex post accounting record of what transpired in the period. Without deconstructing the figures, it is not possible to know from the amount the quality of the outcome, that is, the winners and losers, so to speak. Government policy benefits some socially, politically and economically, ignores others, and disadvantages yet others. Those are political choices.
"central bank money could be provided whenever the central bank makes advances to the private sector. (Lavoie 2013, 9)"
This is complete bullshit made even worse coming from an academic. Advances are advances against future income, which comes from public spending mainly.
Income from public spending and advances (credit expansion) are taxed the same and saving accrues against both also...that's the end of those funds as far as amortization is concerned. There is at that point not enough money to satisfy the outstanding liabilities.
Advancing more funds doesn't reduce the liabilities outstanding.
Claiming that advances can fund themselves is akin to claiming that once we obtain a loan we can then obtain loans to make the payments. This is an absurd argument.
Guys, the system CANNOT function on advances unless public spending provides support for the payments.
Increasing the outstanding balance merely serves to increase the load on the system.
There's a functional reason credit has reached it's current peak. The people that need to borrow to spend have maxxed out their capability to service liabilities.
It's irrelevant that there are a bunch of rich people that can afford to borrow...beyond affordability it would make no sense to do so.
"It is not fiscal policy which decides how much the private sector NAFA is”
Without fiscal spending there can be no NAFA…it is a necessary condition. It is the size of the outcome that is always in doubt if there is a fiscal contribution.
"we cross a line of logic somewhere in there when we start to advocate for 'higher deficit spending' or something... it imo should just be 'higher spending' that we advocate for or 'lower taxes' for households who need the additional net income that would result…”
Yep. There really is no such animal as “deficit spending”. Not for the government. Spending is a verb and the outcome, the “deficit”, which is ex-post, is a noun.
"The Fed receives interest on the bonds it holds and pays out some of this interest as interest on reserves."
y, I think that statement is similar to the statement: "the federal government receives tax payments from taxpayers, and then pays out some of the tax receipts as public spending."
There is no inherent logical or operation connection between Fed receipts and Fed payments. The Fed chooses to operate with a positive balance sheet and positive annual income for (possibly misguided) policy reasons. It would be perfectly capable of making a net positive addition to private sector savings if it chose to implement a different policy.
peter no worries here I get what you are saying and agree w/ you and the MMT/PK position "mathematically" if you will...
I'm looking at the words/logic type issues and their explanatory powers (which is not my strong area for sure but I am trying to review the communications in that area anyway... seems like we are having trouble with our communications...)
I'm thinking of a non-mathematical or 'rote' learner in this.... we say 'savings is a leakage' and then 'we have to increase the deficit' and then 'the deficit represents non-govt savings' and if you run that thru, it looks like we are advocating for an increase of savings and this is a leakage: so how would that help?
I can "get around" these things (with math) but perhaps most others out there cannot so they end up confused.... rsp,
I think where (we) get into trouble with understanding how these identities work in economics is that imo economics uses a "modified accrual" accounting often, while the hard sciences work (our area of training) in the equivalent of a "cash basis" accounting approach.
imo govt can "spend" ie transfer balances to the non-govt but some of the $ balances are not accounted for in national accounting until the non-govt recipients spend the balances and this can confuse the situation (for us at least...)
The national accounts seem to be focused on accounting for things that we are not the most concerned with. So I often find myself puzzled by why someone would be concerned with some of this stuff... rsp,
y, no, I don't think that is true. Interest on reserves is a pure policy choice by the Fed. It pays them on both ordinary and excess reserve account balances. For that benefit, it doesn't require the bank to first move those balances to a time deposit account, much less to a government account. So I don't thing we can regard those payments as returns for the bank "lending" to the government.
I don't know why this issue causes such intensity. The correctness of the MMT accounting framework insists from the beginning on viewing the entire government in a consolidated manner. Government can increase net non-government sector financial assets via either issues from the treasury or the central bank. As a matter of actual current fact, the central bank produces a net drain of financial assets, while the Treasury produces a much larger net addition. But if the question is just about what is possible, there should be no question that the central bank could provide a net addition - even if the Treasury ran a surplus.
This would be a rather ineffective way to meet private sector desires to increase its net savings, in my view. Saving isn't something that is "desired" by a sector as such in the abstract, but by behavioral units within that sector. If all of the net addition to private sector savings was coming from the central bank, there is no guarantee that the aggregate savings desires of households non-financial firms would be satisfied. It would be possible that the assets remained bottled up in banks. To get from there to the satisfaction of the whole private sector, you have to add in some "hot potato", "portfolio balancing" or other money multiplier thinking, ideas that seem to have been refuted by current affairs.
Right, Matt, the various capital letters in the national accounts equations are supposed to stand for payments for final goods and services, since they are employed in the measurement of national product. The sectoral balances equation expressed in those terms is perfectly valid, but it is slightly incomplete, in my view, if one's goal is to examine total stocks and flows of financial assets. I think it would be better from a purely theoretical point of view to use comprehensive flow-of-funds accounting tools rather than NIPA tools.
Matt, thanks for the explanation. I get what you're saying now.
I agree it can get more involved than is ideal when trying to explain these concepts in purely verbal terms. If that can be improved, great.
Tom, as far as I know all economists would agree. I didn't say all because there could be some Chicago types claiming otherwise on the fringe. I don't pay attention to them, so wouldn't know.
I suspect there is little understanding of the basic exogenous/endogenous (and also actual/desired, identity/causation) distinctions as they are used in macro outside of economists and economics students/graduates. For example, when Europeans started up the austerity and budgets remained in deficit due to negative income adjustments, some people would say "Where is the austerity? They are still running large budget deficits." Or when the U.S. budget went into deficit with the onset of recession, primarily endogenously, austerians tried to paint anyone demanding more government spending as crazy because the budget was already in deficit. These arguments are ridiculous, but possibly not perceived as ridiculous by many people.
The interest it pays on reserves and the member bank dividend is a fraction of the total interest it receives on government bonds and loans to the private sector/ private securities.
Say the Fed receives a total of $100 interest on its government bonds, MBS and loans. It pays out say $10 as interest on reserves, $5 as the member bank dividend, spends $10 on operating expenses (salaries and equipment, etc), and returns the remaining $75 to the Treasury. That's how it does things at present. The amounts paid out depend on what it receives as interest.
"imo govt can "spend" ie transfer balances to the non-govt but some of the $ balances are not accounted for in national accounting until the non-govt recipients spend the balances and this can confuse the situation (for us at least...)"
Matt, I've always maintained that NIPA and FoF are not stock-flow consistent...I mainly cherry-pick the data that is useful.
As far as transfer payments are concerned, 99% of them are likely spent right away...the cohort that receives them does not have the ability to save.
Transfer payments are as if the government actually spent them, and are likely more high-powered than normal spending, which is mostly directed towards high-profit industries.
Anyway, with total public spending/transfers at ~$4T, Gross Private Investment at $$2.7T and GDP of ~$16T it's pretty clear a dollar doesn't get spent very many times before it is lost to saving, and the prior savings of ~$58T is for all intents and purposes inert.
" economics uses a "modified accrual" accounting often, while the hard sciences work (our area of training) in the equivalent of a "cash basis" accounting approach."
Matt, with all due respect, I don't think this matters.
In the end all relevant flows are recorded, only the timing changes.
In business it is used to keep up-to-date with respect to payables and receivables.
It may be advantageous to reduce taxes paid by shifting income to another date but once implemented you can't go back so much of that benefit is lost.
In the end the numbers all add up the same...if there were any difference it would be miniscule.
The interest it pays on reserves and the member bank dividend is a fraction of the total interest it receives on government bonds and loans to the private sector/ private securities.
I agree completely y. I'm just trying to make the point that that is not an operational requirement, but a policy choice. It would be entirely possible for a central bank to operate with negative annual earnings, year after year, while meeting all its statutory requirements and remitting nothing to the Treasury. The Fed can run a "deficit" just as easily as the Treasury can; the Fed could make a net positive contribution to private sector savings just as easily as the Treasury can.
The obstacles to this kind of policy are political. The Fed's communication strategy seems to be to present itself to the public as though it were a financially constrained private sector firm, with a balance sheet that signals its health as an enterprise and its net worth. They also convey a vague, but theoretically murky perception that positive central bank earnings are essential to price stability and keeping inflation expectations well-anchored. But that's probably not true.
.. And as I said before, a national macroeconomic policy stance in which the Fed is the entity running a deficit while the Treasury runs a surplus would be a very poor substitute for an alternative stance where the consolidated government deficit is the same, but where the Fed is the entity running the surplus while the Treasury is in deficit. The latter improves the balance sheets of real economy households and firms directly. The former improves financial sector balance sheets with no direct impact on the real economy.
"It would be entirely possible for a central bank to operate with negative annual earnings, year after year, while meeting all its statutory requirements and remitting nothing to the Treasury. The Fed can run a "deficit" just as easily as the Treasury can"
In theory, but in practice I think the Fed is prohibited from doing that. It can't create money and just give it out. It has to buy an asset (either certain financial assets or possibly gold at the statutory price), or its payments (like interest on reserves) have to match its earnings. It could technically end up with a negative capital position if it made a large enough loss on its assets. But I think it has a way around this whereby it redefines the negative capital as interest owed to the Treasury or something along those lines.
But yes, in theory the Fed could just create money and credit it to people's accounts without taking any financial assets in return.
In theory, but in practice I think the Fed is prohibited from doing that. It can't create money and just give it out.
No, I don't think there is any statutory restriction.
If the Fed ends up with negative earnings, it books that amount as a "deferred asset", and the Treasury receives no remittances until the Fed has restored positive earnings. But if it never restores positive earnings, and if its "deficit" deepens a little bit year after year, that just means the Treasury never receives any remittances. But the Treasury never has to send money to the Fed to "bail it out".
Also - and this something I was wrong about when I first started looking into these issues - the Fed does not remit money to the Treasury due to statutory requirements. The statutory transfers were effectively terminated in 1947, and remittances are now just Board of Governor policy. (Although its a policy the Fed has consistently followed since then.
No, I don't think there is any statutory restriction.
I should be clearer. I don;t think there is any restriction insofar as interest on reserves goes. Congress had to pass a law authorizing the payment of interest on reserves. But the the Fed gets to set the rate of interest as a policy choice.
"But if it never restores positive earnings, and if its "deficit" deepens a little bit year after year, that just means the Treasury never receives any remittances"
right, but unlikely. More likely is that it would 'pay down' the the deferred asset later, but you never know. Anyway all these rules could be changed if need be and the Fed could potentially operate with negative capital indefinitely. But the current setup is n
57 comments:
Ramanan quotes Wray and Tymoigne out of context, misunderstands what they are saying and then proceeds to make an argument that doesn't actually contradict them.
Here is the Wray and Tymoigne quote, in context:
"A central point here is that government deficits add to the saving and net saving of the private domestic sector. Lavoie notes:
'While it would seem that government deficits in a growing environment are appropriate — as it provides the private sector with safe assets to grow in line with private, presumably less safe, assets — it is an entirely different matter to claim that government deficits are needed because there is a need for cash. Even if the government kept running balanced budgets, central bank money could be provided whenever the central bank makes advances to the private sector. (Lavoie 2013, 9)'
This is correct but this is not the point made by MMT that relates to net saving. Providing advances does not lead to net saving of government currency as financial assets of the domestic private sector increase by the size of the increase in financial liabilities.
Stated another way, advances have to be repaid so the gain in government currency is only temporary. Only a government deficit induced by fiscal policy leads to net saving.
Monetary policy can change the composition of net saving by buying financial assets in the domestic sector in exchange for government currency, but it cannot change the size of net saving, i.e. the net accumulation of financial assets.
We can think of it this way. Normally, a central bank advances currency into existence while the Treasury spends currency into existence. The difference is important: fiscal policy creates net financial assets; monetary policy only “liquefies” financial assets. This is a normal division of responsibilities, but one can imagine a central bank that spends its notes to buy real goods and services, and a Treasury that lends. Both are branches of sovereign government and can be directed to do what the sovereign government wants them to do."
"Ramanan quotes Wray and Tymoigne out of context"
Look if you make generic statements as if it is valid even out of context, that's not really quoting out of context.
Lavoie's situation is a dynamic situation. Tymoigne/Wray simply state an accounting identity in which there is an exchange of asset by the central bank with the private sector and hence some accounting but they write it is as it is a dynamic statement.
"Monetary policy can change the composition of net saving by buying financial assets in the domestic sector in exchange for government currency, but it cannot change the size of net saving, i.e. the net accumulation of financial assets."
This is a generic statement. And it is oft-said in MMT. If it were a pure one-off situation, the way to say it is to say such and such transaction doesn't affect the private sector balance instead of saying "monetary policy cannot ....".
y,
One thing that confuses me around this issue is this:
"First, MMT argues the fiscal position of the government sector is ultimately driven by the desired net financial accumulation of the non-government sectors. "
Which I understand and agree with...
But then we say this:
"A central point here is that government deficits add to the saving and net saving of the private domestic sector. "
Which now seems like we are saying that it is govt sector actions that are leading to the savings... which it would seem logically that in the first sentence we are saying that the deficit is all on the non-govt, but then in the next sentence we are saying it is all on the govt sector...
Like we hear statements that "the govt let the deficit get too small..." which seems like not applicable if it is really the non-govt that decides its own savings based on its own desires...
Seems like it cant be both...
This is a sticky issue...
rsp,
I left a comment in another thread something like:
We have to keep in mind 3 scenarios and seek to not conflate them:
1. The system we would like to have...
2. The system we have....
3. The system the morons think we have...
Its like we have to keep juggling our thoughts between these 3 systems and sometimes I think we can easily conflate them in our communications...
rsp,
Ramanan:
"the way to say it is to say such and such transaction doesn't affect the private sector balance instead of saying "monetary policy cannot ...."
In your example the central bank raises interest rates and the economy goes into recession.
Less tax is paid to the government, the government budget goes into deficit, and the private sector balance goes into surplus.
So the private sector surplus is due to the government budget deficit, not to monetary policy.
If the government budget remained balanced, or in surplus, the private sector surplus would not be possible in your example (in a closed economy).
Lavoie says:
"Even if the government kept running balanced budgets, central bank money could be provided whenever the central bank makes advances to the private sector."
But in your example the government is not running a balanced budget - the budget is in deficit. As such the private sector can be in surplus.
In the opposite case/scenario, starting from a case of a private sector deficit, suppose the central bank drastically raises interest rates to the point of causing the economy to go into a recession. The private sector balance may rise as people save more and output will fall, leading to lower tax outflows to the government and hence changing the private sector balance.
Matt, why don't you ask Wray/Tymoigne that question over at NEP?
"So the private sector surplus is due to the government budget deficit, not to monetary policy. "
Due to? When you say "due to", you are making causal statements. The government needn't have changed its fiscal policy to have had this effect. (Budget deficit is not fiscal policy. Fiscal policy is government expenditure and tax rates). The underlying cause is the rise in interest rates ie monetary policy.
Lavoie's point is nice but irrelevant to me in this discussion but twisted by Wray/Tymoigne.
ie
the budget deficit in the scenario is due to the private surplus.
(of course the causality runs both ways in general - but the above case is different).
"Fiscal policy is government expenditure and tax rates..."
ie "govt spends first and then collects the taxes..."
rsp,
Matt,
He he. :-)
Matt,
This quote: "A central point here is that government deficits add to the saving and net saving of the private domestic sector"
I personally would prefer it were worded so as to properly assign consistent agency, something like:
"A central point is that net savings are added to the private domestic sector when it drives the government's budgetary balance into deficit."
I think that would bring it roughly into line with: "First, MMT argues the fiscal position of the government sector is ultimately driven by the desired net financial accumulation of the non-government sectors", although I would suggest changing "ultimately" to "largely, over the medium-long term."
Ramanan,
The Lavoie quote is not twisted by Wray/Tymoigne at all. Their response to the quote is: "This is correct but this is not the point made by MMT".
"the budget deficit in the scenario is due to the private surplus"
it's only by the government spending more than its income that the private surplus can happen in the first place, in your example.
JKH made a similar point in another blog:
"for any accounting period, it is the expenditure on investment and the act of government deficit spending (as well as foreign sector effects in the more general case) that allows the actual private sector saving result."
http://monetaryrealism.com/briefly-revisiting-s-i-s-i/
"Budget deficit is not fiscal policy"
If the government goes into deficit as the result of a recession, this may not be due to a change in fiscal policy, but deficit spending is still a part of fiscal policy, not monetary policy.
y,
That assumes that the government has a control on its budget balance which it does not.
It has a control on the expenditure and tax rates, not the deficit.
In the situation, if for some reason the government tries to reduce its budget deficit, it will lead to a further fall in output and the budget deficit will likely widen.
(This seems counterintuitive - but it's just that the deficit is not a measure of the fiscal stance of the government).
That's good Ben... rsp,
Ramanan, I think trying to explain this stuff is a lot harder than it looks at first!
If it was easy, everybody would probably already know it...
I got 90% of it from Warren when he was on Mike's show years ago in about 10 minutes when Warren used the "subway tokens" analogy, looks like the 'acceptance rate' if you will varies greatly within humanity though...
I'd like to see Tom and Dan (both PhD Philosophy iirc) help out here if we are trying to make strictly 'logical' explanations vice 'mathematical' explanations (I get it thru 'math' myself dont need the 'logic' and I can just simply ignore the 'logic') .... seems like there should probably be optimum ways to approach these explanations from a 'logical' pov , some ways with this 'logical' approach here are probably better than others... rsp,
y,
Lavoie's original point was to take issue with the statement that the government has to run a budget deficit because the private sector will run out of HPM.
Now Lavoie's argument is that HPM can be provided by the central bank by lending to banks, so this reasoning is wrong.
Second if Wray/Tymoigne try to argue something like: oh no we meant net private saving not HPM, even that is incorrect because of possibility of external surpluses.
ie you cannot have unqualified statements saying xyz is impossible.
Back to HPM, in the MMT blogosphere this point is muddled by saying "spending includes lending"
Ramanan,
"Lavoie's original point was to take issue with the statement that the government has to run a budget deficit because the private sector will run out of HPM. Now Lavoie's argument is that HPM can be provided by the central bank by lending to banks, so this reasoning is wrong."
Here's the relevant part from Lavoie's paper:
"Another problematic statement is that the government has to run deficits, at least over the long run, for the public to get access to larger cash balances (high powered money). As Wray (1998, p. 123) puts it, “persistent deficits are the expected norm”, that is, “normally, taxes in the aggregate will have to be less than total government spending due to preferences of the public to hold some reserves of fiat money” (Wray 1998, p. 81). If the government was running persistent surpluses, the public would “run out of net money hoards” (Wray 1998, p. 79). While I would certainly agree that government deficits in a growing environment are appropriate, as it provides the private sector with safe assets, which can grow in line with private, presumably less safe, assets, it is an entirely different matter that government deficits are needed because there is a need for cash. Even if the government keeps running balanced budgets, central bank money can be provided whenever the central bank makes advances to the private sector."
http://www.boeckler.de/pdf/v_2011_10_27_lavoie.pdf
Wray/Tymoigne's point is that the central bank can lend (advance) money to the private sector, but "advances have to be repaid so the gain in government currency is only temporary".
For the non-govt to own government currency outright (instead of just borrowing it), the government has to spend it.
Matt, the problem is explaining it to ordinary people, which means simplifying it, often immensely without distorting the picture. Economists debate with each other through papers where they can go into all the wonky detail. Prior to blogs the standard popularizations were in books aimed at a general audience. Now there are the blogs.
The mainstream already does this. I criticism of the mainstream is that the papers do not reflect what is taught in undergrad classes in econ and is given out to the media and in blogs as decided economics. It's simplified and ideologized to the point of being hype to dupe the rubes.
The task is to reverse this poisoning of the well of knowledge with simple explanations that are essentially correct and also accessible.
Then opponents throw up all sorts of FUD to distract and discredit.
Ramanan,
"Second if Wray/Tymoigne try to argue something like: oh no we meant net private saving not HPM, even that is incorrect because of possibility of external surpluses."
They don't ignore external surpluses at all. Just above the Lavoie quote they say:
"In addition, MMT does differentiate between saving (in the flow of funds it is the change in net worth: ΔNW) and net saving (saving less investment). Net saving shows how the accumulation of net worth occurs beyond the accumulation of real assets. For the domestic private sector, this comes from a net accumulation of financial claims against the government and foreign sectors."
Earlier on in the same text they say:
"In an open economy, both the domestic private sector and the government sector could run surpluses, but that would mean that the rest of the world runs a current account deficit. Obviously, for every current account surplus there must be a current account deficit, so there is no way that all countries could be in surplus."
http://neweconomicperspectives.org/2013/12/mmt-101-response-critics-part-3.html
So you can see they are not saying "it's only possible for the domestic private sector to net save if the government runs a deficit", as they acknowledge the possibility of external surpluses.
My understanding of what they are saying is that out of monetary and fiscal policy, only fiscal policy leads to net saving via deficit spending. Monetary policy involves lending to the private sector/non-govt instead.
Things need to be read in context.
y,
"My understanding of what they are saying is that out of monetary and fiscal policy, only fiscal policy leads to net saving via deficit spending. Monetary policy involves lending to the private sector/non-govt instead."
Again it is one of causality and you are also erring on it. Deficit is the outcome - it is not the cause.
You are doubly incorrect. It is not fiscal policy which decides how much the private sector NAFA is. In the same way, monetary policy can affect private sector behaviour to change its behaviour of NAFA to influence the budget balance.
The fact that the central bank transactions lead to exchanging one asset of equivalent value for another is just accounting. It doesn't say what happens next and how various stocks and flows change.
Plus monetary policy is not central bank transactions. Monetary policy is the change of interest rates and this effect happens via the announcement effect itself more than transactions.
And to add, there is of course causality in both directions in the sectoral balances. It is just that NAFA is determined both by fiscal policy and private behaviour. So to say only fiscal policy can affect is an error.
y,
I think we sometimes use the term 'deficit spending' as sort of a 'cold slap in the face' for the morons who are going all around with this deficit phobia... We are trying to make the point that 'the deficit' or 'a deficit' should not be feared by policymakers if that is the projected financial outcome while we are running a particular fiscal policy in support of our real goals for outcomes...
but we cross a line of logic somewhere in there when we start to advocate for 'higher deficit spending' or something... it imo should just be 'higher spending' that we advocate for or 'lower taxes' for households who need the additional net income that would result...
rsp,
rsp,
Matt, my view is that there is no contradiction in the MMT position. The government's policy settings are exogenous. The ultimate budget balance is endogenous and depends on non-government behavior. There is nothing specifically MMT about that distinction. It is made in pretty much all macro -- certainly in all Keynesian and neoclassical-synthesis macro.
If there is unemployment, that is evidence that the government's exogenous fiscal settings are too tight given non-government behavior. That is true in the opinion of Keynesian economists in general. In terms of the MMT framing, there needs to be a greater injection of NFA to render the non-government behavior consistent with full employment.
Only the government can do this, and it does it through an exogenous change in its fiscal policy. The non-government cannot do it because if it acts in a way to bring the economy closer to full employment it will at the same time be acting against its capacity to maintain the surplus that the existence of unemployment indicates it is attempting to maintain.
Increased non-government spending, by adding to income, adds endogenously to tax revenues and an annihilation of NFA.
Without the government stepping in with an exogenous change in its fiscal settings to address the unemployment, there are two possibilities: (i) the non-government sticks to the spending and saving behavior that is inconsistent with full employment; or (ii) the non-government gives up trying to maintain its surplus (i.e. alters its behavior).
The central bank doesn't just lend to the private sector - it provides some dollars outright via interest on reserves. So it is possible for the central bank to increase net private sector savings in that way. I believe in 2012 the total Fed interest expense for depository institutions was about 4 billion dollars, so it's rather insignificant amount relative to the roughly $1 trillion that comes from the budget deficit.
The Fed also paid out about $1.6 billion in its statutorily required dividends on member bank paid-in capital.
On the other hand, the Fed had surplus earnings, remitted to the Treasury, of about $88 billion - which represents a net extraction of savings from the private sector.
I think the way to look at it is this: If the YoY net change in the Fed balance sheet is $F, and the deficit in the same period of time is $D, then the total federal government impact on net non-government sector savings will be $(D-F). The D term is much larger than the F term. But it's not negligible.
Also, we don't get a lot of information about economic impacts if we look at things from the abstract level of sectoral balances alone. Compare these two possible, though fanciful, operations:
The Fed unilaterally credits $300 billion dollars to the central bank deposit account of Goldman Sachs.
The government prints 300 million $1 thousand dollar bills and sends one to 300 million Americans.
The impact on net private sector savings would be the same, but the impact on aggregate demand from the second operation would be much greater.
The IOR paid out by the Fed was dwarfed by the interest payments it removed from non-government and the net was credited to the Treasury. The IOR payment was funded from that. If IOR would exceed the Fed's take from other ops, then it would be charged to equity.
Peter, very clear explanation. Simple, but I had not realized that. Thanks.
Does this hold for all New Keynesians? I am thinking of people like Greg Mankiw.
The fiscal outcome, whether deficit, surplus or balanced, is the ex post accounting record of what transpired in the period. Without deconstructing the figures, it is not possible to know from the amount the quality of the outcome, that is, the winners and losers, so to speak. Government policy benefits some socially, politically and economically, ignores others, and disadvantages yet others. Those are political choices.
Dan,
"The central bank doesn't just lend to the private sector - it provides some dollars outright via interest on reserves"
The Fed recieves interest on the bonds it holds and pays out some of this interest as interest on reserves.
If the interest comes from government bonds held by the Fed then it's the result of government expenditure.
If the interest comes from private liabilities then it's the result of a loan to the private sector.
the same goes for the dividend the Fed pays on member bank paid-in capital. The dividend comes from earnings on Fed assets.
"central bank money could be provided whenever the central bank makes advances to the private sector. (Lavoie 2013, 9)"
This is complete bullshit made even worse coming from an academic. Advances are advances against future income, which comes from public spending mainly.
Income from public spending and advances (credit expansion) are taxed the same and saving accrues against both also...that's the end of those funds as far as amortization is concerned. There is at that point not enough money to satisfy the outstanding liabilities.
Advancing more funds doesn't reduce the liabilities outstanding.
Claiming that advances can fund themselves is akin to claiming that once we obtain a loan we can then obtain loans to make the payments. This is an absurd argument.
Guys, the system CANNOT function on advances unless public spending provides support for the payments.
Increasing the outstanding balance merely serves to increase the load on the system.
There's a functional reason credit has reached it's current peak. The people that need to borrow to spend have maxxed out their capability to service liabilities.
It's irrelevant that there are a bunch of rich people that can afford to borrow...beyond affordability it would make no sense to do so.
"It is not fiscal policy which decides how much the private sector NAFA is”
Without fiscal spending there can be no NAFA…it is a necessary condition. It is the size of the outcome that is always in doubt if there is a fiscal contribution.
"we cross a line of logic somewhere in there when we start to advocate for 'higher deficit spending' or something... it imo should just be 'higher spending' that we advocate for or 'lower taxes' for households who need the additional net income that would result…”
Yep. There really is no such animal as “deficit spending”. Not for the government. Spending is a verb and the outcome, the “deficit”, which is ex-post, is a noun.
"The Fed receives interest on the bonds it holds and pays out some of this interest as interest on reserves."
y, I think that statement is similar to the statement: "the federal government receives tax payments from taxpayers, and then pays out some of the tax receipts as public spending."
There is no inherent logical or operation connection between Fed receipts and Fed payments. The Fed chooses to operate with a positive balance sheet and positive annual income for (possibly misguided) policy reasons. It would be perfectly capable of making a net positive addition to private sector savings if it chose to implement a different policy.
Dan,
ok. But as it operates at present it doesn't "provide some dollars outright". Either it lends to the private sector or buys government bonds.
peter no worries here I get what you are saying and agree w/ you and the MMT/PK position "mathematically" if you will...
I'm looking at the words/logic type issues and their explanatory powers (which is not my strong area for sure but I am trying to review the communications in that area anyway... seems like we are having trouble with our communications...)
I'm thinking of a non-mathematical or 'rote' learner in this.... we say 'savings is a leakage' and then 'we have to increase the deficit' and then 'the deficit represents non-govt savings' and if you run that thru, it looks like we are advocating for an increase of savings and this is a leakage: so how would that help?
I can "get around" these things (with math) but perhaps most others out there cannot so they end up confused.... rsp,
Paul,
I think where (we) get into trouble with understanding how these identities work in economics is that imo economics uses a "modified accrual" accounting often, while the hard sciences work (our area of training) in the equivalent of a "cash basis" accounting approach.
imo govt can "spend" ie transfer balances to the non-govt but some of the $ balances are not accounted for in national accounting until the non-govt recipients spend the balances and this can confuse the situation (for us at least...)
The national accounts seem to be focused on accounting for things that we are not the most concerned with. So I often find myself puzzled by why someone would be concerned with some of this stuff... rsp,
y, no, I don't think that is true.
Interest on reserves is a pure policy choice by the Fed. It pays them on both ordinary and excess reserve account balances. For that benefit, it doesn't require the bank to first move those balances to a time deposit account, much less to a government account. So I don't thing we can regard those payments as returns for the bank "lending" to the government.
I don't know why this issue causes such intensity. The correctness of the MMT accounting framework insists from the beginning on viewing the entire government in a consolidated manner. Government can increase net non-government sector financial assets via either issues from the treasury or the central bank. As a matter of actual current fact, the central bank produces a net drain of financial assets, while the Treasury produces a much larger net addition. But if the question is just about what is possible, there should be no question that the central bank could provide a net addition - even if the Treasury ran a surplus.
This would be a rather ineffective way to meet private sector desires to increase its net savings, in my view. Saving isn't something that is "desired" by a sector as such in the abstract, but by behavioral units within that sector. If all of the net addition to private sector savings was coming from the central bank, there is no guarantee that the aggregate savings desires of households non-financial firms would be satisfied. It would be possible that the assets remained bottled up in banks. To get from there to the satisfaction of the whole private sector, you have to add in some "hot potato", "portfolio balancing" or other money multiplier thinking, ideas that seem to have been refuted by current affairs.
Right, Matt, the various capital letters in the national accounts equations are supposed to stand for payments for final goods and services, since they are employed in the measurement of national product. The sectoral balances equation expressed in those terms is perfectly valid, but it is slightly incomplete, in my view, if one's goal is to examine total stocks and flows of financial assets. I think it would be better from a purely theoretical point of view to use comprehensive flow-of-funds accounting tools rather than NIPA tools.
Matt, thanks for the explanation. I get what you're saying now.
I agree it can get more involved than is ideal when trying to explain these concepts in purely verbal terms. If that can be improved, great.
Tom, as far as I know all economists would agree. I didn't say all because there could be some Chicago types claiming otherwise on the fringe. I don't pay attention to them, so wouldn't know.
I suspect there is little understanding of the basic exogenous/endogenous (and also actual/desired, identity/causation) distinctions as they are used in macro outside of economists and economics students/graduates. For example, when Europeans started up the austerity and budgets remained in deficit due to negative income adjustments, some people would say "Where is the austerity? They are still running large budget deficits." Or when the U.S. budget went into deficit with the onset of recession, primarily endogenously, austerians tried to paint anyone demanding more government spending as crazy because the budget was already in deficit. These arguments are ridiculous, but possibly not perceived as ridiculous by many people.
Dan,
"no, I don't think that is true."
The interest it pays on reserves and the member bank dividend is a fraction of the total interest it receives on government bonds and loans to the private sector/ private securities.
Say the Fed receives a total of $100 interest on its government bonds, MBS and loans. It pays out say $10 as interest on reserves, $5 as the member bank dividend, spends $10 on operating expenses (salaries and equipment, etc), and returns the remaining $75 to the Treasury. That's how it does things at present. The amounts paid out depend on what it receives as interest.
"imo govt can "spend" ie transfer balances to the non-govt but some of the $ balances are not accounted for in national accounting until the non-govt recipients spend the balances and this can confuse the situation (for us at least...)"
Matt, I've always maintained that NIPA and FoF are not stock-flow consistent...I mainly cherry-pick the data that is useful.
As far as transfer payments are concerned, 99% of them are likely spent right away...the cohort that receives them does not have the ability to save.
Transfer payments are as if the government actually spent them, and are likely more high-powered than normal spending, which is mostly directed towards high-profit industries.
Anyway, with total public spending/transfers at ~$4T, Gross Private Investment at $$2.7T and GDP of ~$16T it's pretty clear a dollar doesn't get spent very many times before it is lost to saving, and the prior savings of ~$58T is for all intents and purposes inert.
" economics uses a "modified accrual" accounting often, while the hard sciences work (our area of training) in the equivalent of a "cash basis" accounting approach."
Matt, with all due respect, I don't think this matters.
In the end all relevant flows are recorded, only the timing changes.
In business it is used to keep up-to-date with respect to payables and receivables.
It may be advantageous to reduce taxes paid by shifting income to another date but once implemented you can't go back so much of that benefit is lost.
In the end the numbers all add up the same...if there were any difference it would be miniscule.
The interest it pays on reserves and the member bank dividend is a fraction of the total interest it receives on government bonds and loans to the private sector/ private securities.
I agree completely y. I'm just trying to make the point that that is not an operational requirement, but a policy choice. It would be entirely possible for a central bank to operate with negative annual earnings, year after year, while meeting all its statutory requirements and remitting nothing to the Treasury. The Fed can run a "deficit" just as easily as the Treasury can; the Fed could make a net positive contribution to private sector savings just as easily as the Treasury can.
The obstacles to this kind of policy are political. The Fed's communication strategy seems to be to present itself to the public as though it were a financially constrained private sector firm, with a balance sheet that signals its health as an enterprise and its net worth. They also convey a vague, but theoretically murky perception that positive central bank earnings are essential to price stability and keeping inflation expectations well-anchored. But that's probably not true.
.. And as I said before, a national macroeconomic policy stance in which the Fed is the entity running a deficit while the Treasury runs a surplus would be a very poor substitute for an alternative stance where the consolidated government deficit is the same, but where the Fed is the entity running the surplus while the Treasury is in deficit. The latter improves the balance sheets of real economy households and firms directly. The former improves financial sector balance sheets with no direct impact on the real economy.
"It would be entirely possible for a central bank to operate with negative annual earnings, year after year, while meeting all its statutory requirements and remitting nothing to the Treasury. The Fed can run a "deficit" just as easily as the Treasury can"
In theory, but in practice I think the Fed is prohibited from doing that. It can't create money and just give it out. It has to buy an asset (either certain financial assets or possibly gold at the statutory price), or its payments (like interest on reserves) have to match its earnings. It could technically end up with a negative capital position if it made a large enough loss on its assets. But I think it has a way around this whereby it redefines the negative capital as interest owed to the Treasury or something along those lines.
But yes, in theory the Fed could just create money and credit it to people's accounts without taking any financial assets in return.
In theory, but in practice I think the Fed is prohibited from doing that. It can't create money and just give it out.
No, I don't think there is any statutory restriction.
If the Fed ends up with negative earnings, it books that amount as a "deferred asset", and the Treasury receives no remittances until the Fed has restored positive earnings. But if it never restores positive earnings, and if its "deficit" deepens a little bit year after year, that just means the Treasury never receives any remittances. But the Treasury never has to send money to the Fed to "bail it out".
Also - and this something I was wrong about when I first started looking into these issues - the Fed does not remit money to the Treasury due to statutory requirements. The statutory transfers were effectively terminated in 1947, and remittances are now just Board of Governor policy. (Although its a policy the Fed has consistently followed since then.
No, I don't think there is any statutory restriction.
I should be clearer. I don;t think there is any restriction insofar as interest on reserves goes. Congress had to pass a law authorizing the payment of interest on reserves. But the the Fed gets to set the rate of interest as a policy choice.
Dan,
yes you're right about the 'deferred asset'.
"But if it never restores positive earnings, and if its "deficit" deepens a little bit year after year, that just means the Treasury never receives any remittances"
right, but unlikely. More likely is that it would 'pay down' the the deferred asset later, but you never know. Anyway all these rules could be changed if need be and the Fed could potentially operate with negative capital indefinitely. But the current setup is n
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