Peter Martin — How to Balance the Government Budget

Government Deficit = Savings of the Private Domestic Sector + External Deficit
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So, if government, in its wisdom (or folly?), does decide the deficit does need to be cut in a recessionary period, it should forget about spending cuts and tax rises. What needs to happen is for saving to be discouraged and, of course, having interest rates very low helps do that. Then imports have to be cut and/or exports increased as well. Of course that’s very difficult to do in a free society where individuals wish to purchase goods and services from anywhere in the world. However, if neo-liberals argue that it this is impossible they must also necessarily concede that running a government surplus is sometimes impossible too.

Of course, cutting savings is anathema to neoliberals because savings = financial wealth and they believe that saving causes investment.

Cutting the trade deficit could be done by making imports more expensive either through currency devaluation, but that results in inflation, which they hate, or by imposing tariffs, which violates free trade, a cardinal principle of neoliberalism.

As far as low rates discouraging saving in recession, the evidence doesn't bear that out since liquidity preference increases with economic uncertainty and liquidity preference determines the ratio of saving and investment.

So to be true to principle, neoliberals have to advocate fiscal austerity, which results in larger deficits due to automatic stabilization. The neoliberal answers, again true to principle — reduce or eliminate the automatic stabilizers that increase non-discretionary spending and add to the deficit.

And they don't understand stock-flow consistency anyway and not only think it's possible to have all three sectors in surplus simultaneously but also set this as the goal.

So the neoliberal formula is to increase domestic private savings to drive investment, run a balanced budget or even a fiscal surplus for fiscal responsibility, and run an export economy in emulation of "strong" economies like Germany and America as it used to be.

It's no wonder that the neoliberal countries are economically stagnant.

Modern Monetary Theory: Real Economics

How to Balance the Government Budget

Peter Martin