The Great Debt/Savings Throwdown: A Cheat Sheet

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The great debate over savings has come to a head over at the Monetary Realism blog. The pseudonymous writer JKH has an extraordinarily detailed presentation at Monetary Realism of the debate over the correct way to view the concepts of saving and investment.

It’s very long, very wonkish and full of accounting equations. If that sort of thing gets you going on a Tuesday afternoon, by all means please read the whole thing.

For those of you looking for a cheat-sheet, here’s a quick breakdown about what’s going on in this debate.

The concept of savings has an important moral undertone in most public discussion. To put it bluntly: saving is considered prudent and wise, and debt is considered risky and imprudent.

The common sense definition of saving—consuming less than you earn—is also the one used in formal accounting.

What you should do with the money saved, from investing it in financial assets to buying a house to locking it up in a you safe, is the subject of endless hours of debate at places like CNBC. But it’s important to keep in mind that saving—the act of not spending all we earn—is not exactly the same as investing, which is what we do with money we save.

The controversy arises out of the role of government debt in relation to private-sector saving. Proponents of Modern Monetary Theory often argue as if it were impossible for the private sector to save if the government doesn’t engage in deficit spending. For instance, Randall Wray has said “it is impossible for the aggregate saving of the nongovernment sector to be less than (or greater than) the budget deficit.”

On the face of it, this strikes many people as absurd. Although exactly why it seems absurd is hard to put your finger on. Most people hearing such stuff might scratch there heads and figure out that it must be some kind of advanced economics that they don’t understand.

What’s missed is that the MMT people aren’t talking about “saving” as the residual earnings after consumptions. They are talking about “net saving,” which is saving minus investment. Which is to say, the MMTers are saying that if you count consuming and investing as the same thing—or aggregate them together—and don’t count investing as part of saving, then aggregate saving must come from somewhere else. (Either the government or exports.)

In other words, if total earnings in the economy is $3.5 trillion per quarter, spending and investing also has to equal $3.5 trillion per quarter. Your paycheck is your bosses' spending. So if people spend and invest just $3 trillion per quarter, income has to fall to that level or someone else—the government or foreigners buying stuff we sell to them—has to spend that money.

From an analytical perspective, there’s nothing really wrong with this approach. But all too often, it seems to create confusion because the MMT folks aren’t always very keen on pointing out that when they talk about “saving” they are usually talking about “saving minus investment.”

It can create a serious confusion about what it takes to increase saving. If you back away from the MMT concept of “net saving” (savings minus investment), it is clear that saving can increase without any extra government spending (or exporting). All that is needed is for consumption to drop and investment to increase. What’s more, the total amount of household savings can increase simply through a rise in the valuation of past household investments. And this, typically, is what people mean when they worry about people “not saving enough.”

It was the assertion that MMT often seems either confused or confusing—or both—when it comes to saving and investment that led to this controversy. Many commenters at various websites decided that even the professional academics among the MMT crowd either (a) didn’t understand that they were conflating “saving minus investment” with the broader concept of “saving” or (b) were being intentionally vague in an attempt to piggyback on public support for the broader concept of saving.

For instance, Steven Randy Waldman of Interfluidity complained in a very long comment thread at Asymptosis:

“There is no ‘to the penny’ sort of accounting relationship between household-sector financial saving and Government Issue of NFA [Net Financial Assets]. You can tell stories of how there might be a positive relationship between the two, but those are a function of policy choices and behavioral models, not logically necessary as a matter of accounting. And it is household-sector saving that conventional morality so strongly proclaims as a virtue. No bourgeois moralist ever complains when the value of a firm’s assets rise, implying an increase in business-sector “indebtedness” to shareholders. (Firms owe their full value to financial claimants, as their value rises, so does what they owe.) It is a bad rhetorical trick that MMTers sometimes pull, to confuse an increase in “private sector net financial assets” with an increase in household-sector savings in order to recruit bourgeois support for the latter in the cause of promoting net issuance of government securities. There are a lot of perfectly good reasons to support net-issuance of government securities during times like now, and I’m certainly allied with MMTers in their promotion of wise fiscal policy. But claiming “saving” is impossible as a matter of accounting without a government deficit is a bait and switch, a game played with definitions by rhetorical confusing household sector financial surplus with an aggregate private sector surplus.”

This led JKH to present his alternative formula for the definition of saving. Instead of using the MMT “net saving,” he proposed using a formula that said private sector saving equals investment plus the change in private sector net financial assets. In accounting shorthand this would be S= I + (S-I).

The reaction to this on the MMT blogs was a mix of anger and confusion. You can read the post at Monetary Realism for links to many of them. But it was very clear from the reaction that many people were confused about the concept of saving.

“But in the real world households CAN'T net save without money entering the system via government deficits,” someone wrote it the comments at Mike Norman Economics.

This is direct evidence the people seem to come away from MMT confusing household saving with “private sector net saving” (that is, saving by households and businesses minus all investment). Once again, you can read a lot more of this kind of confusion at Monetary Realism.

A great comment summing up the JKH post at Monetary Realism:

Where that leaves us, it seems to me, is that it is not really arguable that MMT does not present such things in a confusing manner. The whole controversy is testament to that. And it also seems that there is confusion and disagreement amongst the top tier thinkers in the school what saving is and what it means. Since saving is so fundamental a concept in generl and to MMT’s analysis of the economy in particular, in my view (discounted per my first para) this suggests the need for serious consideration from the MMT community.

And that brings us around, I would say, back to my comment from three weeks ago:

If saving does not include households purchasing financial assets of the corporate sector, why should purchasing financial assets of the public sector count as saving? The attempt to exclude "investment" from saving just makes saving vanish altogether, if taken to its logical conclusion. If all you mean by "saving" is one sector accumulating claims on a different sector, then you aren't talking in ordinary language any more. You are probably confusing most of your listeners or readers, and if you do this over and over again, its fair to wonder if you are intentionally befuddling people.

The problem with constantly thinking in terms of a consolidated "private sector" is that it encourages you to skip over the most important economic dynamics, most of which take place within the private sector. Businesses get started, venture capitalists commit funds, people take out loans, and customers buy stuff with cash and credit — within the private sector. If all this just "nets out" to you and is therefore uninteresting, you aren't really doing economics at all. You are doing something else that may be interesting but it isn't economics. It isn't a new economic perspective or heterodox economics or any kind of economics at all.

A quick warning for those of you tempted to wade into the Monetary Realism debate: get there quick. There were already 49 comments as we went to pixels.

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