Investment boom, crowding out consumption.
— Warren B. Mosler (@wbmosler) May 31, 2024
Odd "X" posts from Warren Mosler recently talking about "crowding out." He says business investment is "crowding out" personal consumption. This is an odd claim because crowding out is not a condition that would be claimed under MMT understanding, where money is a function of demand and where there is no theoretical limit to its creation. (Under a free-floating FX regime.)
If business spending rises and personal consumption falls, so what? All that is, is a shift in the cohort doing the net spending. The economy may look a little different (factories getting built rather than expenditure on consumer goods, leisure, etc), but why is that a concern and how does he conclude, necessarily, that this is the reason for an economic slowdown?
It's wrong and it misses the main point which is the fact that the slowdown in the economy is coming from a decline in net government transfers (i.e. the "deficit") because "reverse stabilizers" are kicking in. (Tax deposits are rising faster than Treasury withdrawals.)
He ought to know this.
It's wrong and it misses the main point which is the fact that the slowdown in the economy is coming from a decline in net government transfers (i.e. the "deficit") because "reverse stabilizers" are kicking in. (Tax deposits are rising faster than Treasury withdrawals.)
ReplyDeleteDoes the deficit really tell us anything ?
The deficit is just private sector savings which means
a) They can sit there unspent and not have any effect at all.
b) They can be swapped for a treasury or stocks and not have any effect at all. Apart from future income which might not be spent.
c) Can be taxed away and not have any effect at all.
d) Spent and have an effect.
So let's say the deficit reduces from 5% of GDP to 3% of GDP. How do you measure d) and measure a) b) and c)
Is it not just better measuring actual rate of change of Treasury withdrawals + rate of change of all bank lending ?
Forget about the deficit which large parts of it may or may not get spent.
If you give somebody £100, they spend it which is taxed at 20%, leaving the next person with £80 as income. They then spend that £80 which is taxed at 20%, leaving the next person with £64 as income. And so on until the entire £100 disappears and creates £100 of extra tax. All without changing the tax rate one single percent
The result is lots of extra sales and income for people down the spending chain they wouldn't otherwise have received. It's a straightforward geometric progression.
To get maximum output in that scenario you don't want anybody saving any income. Savings reduce sales. When people do save you end up with the same problem the Monetarists have. You simply can't tell what they are going to do with it. Is it a) b) c) or d).
Actual rate of change of Treasury withdrawals which we know are spent + rate of change of all bank lending which we also know are spent must tell you more than measuring savings ?
Warren also says to get the true deficit figure you have to subtract the core inflation rate from it ? So sometimes it looks like countries are running a deficit but actually running a surplus.
Take the UK it says the the deficit is 4.4% so why all the problems and bordering on recession. Subtract the core inflation rate of 3.9% and they are running a O.5% deficit.
Probably the Biden people throttling the illegal alien flow in advance of election…
ReplyDeleteThe flow of blood is more important to your well-being than the amount.
ReplyDeleteUsing the 2 figures in the Twitter post
ReplyDelete" a decrease in the nowcast of second-quarter real personal consumption expenditures growth from 3.4 percent to 2.6 percent was partly offset by an increase in the nowcast of second-quarter real gross private domestic investment growth from 5.1 percent to 6.3 percent"
Would you not just be better off adding them together ?
3.4% + 5.1% = 8.5% growth
V's
2.6% + 6.3% = 8.9% growth
So the rate of change is still a positive thing ?
Here's a prediction for you let's see if I am right and I have talked about this before.
ReplyDeleteIf you graph US$ v's US foreign exchange reserves they mirror each other.
This was released late on last week on the 31st.
https://www.federalreserve.gov/data/intlsumm/current.htm
It is the foreign currencies figure you are looking at in the table. which represents the US foreign exchange reserves on the trading economics website. Which hasn't even been updated yet.
Foreign exchange reserves have dropped again to 35316 in April from 35990 in March.
Dropped from 44537 to 35316 overall which explains the $ strength.
I predict the $ moves higher from it's current 104.62 Maybe just by a 100 pips to 105.62 but 100 pips is a 100 pips.
The $ hasn't reacted to the foreign exchange reserves figure dropping again yet that was publish on 31st May.
It will because they mirror each other.
Warren is talking in physical terms.
ReplyDeleteAn investment boom necessarily crowds out consumption in physical terms. We can't build a factory and produce more items in that factory at the same time. You can't train a new doctor and treat patients at the same time - the appointment have to be longer. People can't be in two places at once.
There can't be a shortage of money, but there can be a shortage of stuff.
The tweet is explaining the numbers in terms of stuff.
ReplyDeleteNeilW
Exactly.
This is the same mistake, from a different perspective, that quite few other MMT supporters make due to a rather simplistic reasoning when it comes to inflation pressure from excessive spending.
"Until there is slack in resources, inflation is not a problem" is the answer. Well no, in a highly specialized modern economy you can have significant inflation pressure in many areas well before full employment is reached. You cannot turn a factory worker into a computer programmer on a dime.
“The tweet is explaining the numbers in terms of stuff.”
ReplyDeleteNo it’s not Neil “crowding out!” is a figure of speech …
He trying to explain the abstract in terms of the figurative to fellow Art Degree people ….
Previous growth rate in US consumption is not as high as previous because the Biden people are now in election year limiting illegal immigration at a lower rate than previous … so consumption is not growing as much as last year …
Still growing but not as fast as previous …
It seems to me there is nothing wrong or contradictory to MMT in asserting, within a particular risk structure, and given a particular level of private savings, that private sector expenditure can be more investment-focused or more consumption-focused overall. Public investments do not crowd out private investment or vice-versa (except possibly in real terms when nearing full capacity), but there can still be a kind of private sector crowding out, at any given level of private savings and public expenditure.
ReplyDeleteJapanese households famously used to save more of their incomes than households in other countries, which contributed to deflationary tendencies in Japan. And Japanese investment spending was comparatively higher
ReplyDeleteJapan a closed mono-culture…
ReplyDeleteUS currently has doors wide open and anyone can just walk right in… not politically popular policy so the MMT Democrats won’t mention it..,