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Goldman’s Hatzius: “Peterson-ism” Can’t Win

Joe Weisenthal posted an incredible interview with Jan Hatzius yesterday. Hatzius is known for schooling fools on the economy, but he’s better known as Goldman’s economist. And Joe is…always working 10x as fast (and better) than everyone else in the world.

Also today, David Weigel wrote about the 20 years of failures of the Peterson Institute. The Peterson Institute has tried to make balanced budgets a political priority for over 20 years, and it has had almost zero success.

It seems like nobody is very interested in balancing the budget in the near term. This post will explain why so few people ever want to balance the budget.

The recent fiscal cliff debate is all about spending more money instead of cutting back enough to balance the budget. Jan Hatzius thinks going over the fiscal cliff would be a disaster:

“…I think the economy will be contracting, and potentially contracting pretty rapidly. It’d be a very unpleasant environment.”

But this does’t tell us why so few people are willing to cut the budget at any given point in time. Here is where it gets really interesting – we need to do a bit of detective work to figure why people hate balancing the budget.  Hatzius shows us this chart, and then explains:

“…every dollar of government deficits has to be offset with private sector surpluses purely from an accounting standpoint, because one sector’s income is another sector’s spending, so it all has to add up to zero. That’s the starting point. It’s a truism, basically. Where it goes from being a truism and an accounting identity to an economic relationship is once you recognize that cyclical impulses to the economy depend on desired changes in these sector’s financial balances.”

That’s pretty dry, but hold on. Think about what Hatzius is saying, in terms of Peterson’s desired policy outcome. Peterson is trying to reduce the government deficit. Peterson is trying to balance the government budget. 

Hatzuis is telling us Peterson’s policy approach to reduce the government deficit must force the private surplus lower, by definition. Peterson wants there to be less private surpluses for the United States.

“Private Surpluses” is a weird term, isn’t it? You might know it better by the words “Private Savings”. This phrasing makes it much more clear what Pete Peterson wants.

Pete Peterson wants Private Savings to be ZERO in any given year, and zero in total.  

Deficit reduction means savings reduction. Pete Peterson might think his cause is smart, and even noble. But he’s just a person doesn’t know what consequences of his desires would be. He would not want private sector savings to be zero – of course not. Who would? It’s a case of “be careful what you wish for – you just might get it!”

Now, we can and should investigate the meaning of money and the link between the real and nominal worlds ( and many other useful topics). This is a worthy and useful examination of a complex and difficult topic. I think this is one of the most important ideas in economics, and I am lucky to be working with such insanely talented people.

But this post is about how Jan Hatzius implies Peterson-ism can’t win. Hatzius shows us the most important chart in the world, and explains the math behind it. It’s 100% clear: Reducing the government deficit reduces private savings. Pete Peterson’s institute is constantly trying to convince people to reduce the amount of savings available to them.

Of course, reducing savings is a terrible sale, an awful pitch, and will be totally unpopular. “Come on – let us all have LESS savings! If we enact my scheme – you are all but guaranteed to be poorer in 20 years!” Yeah, that’s a hell of a sales pitch.

Deficit reduction means savings reduction. We know from Hatzius every time someone says “reduce the deficit”, they are really saying “reduce private savings”. Less Savings is what Peterson is trying to sell, even if he is changing the packaging to make it more attractive.

I suspect even though most people today do not know about Hatzius’s chart, the Sector Balances equation, many people intuitively suspect we need government spending. Hatzius takes this intuition and makes it a concrete relationship between government deficits, and private savings.

Nobody wants to have less savings, especially right now. In fact, it’s widely recognized there is a shortage of safe assets in the world. In general, nobody has wanted less savings…ever.

Pete Peterson is trying to convince people to do something that just feels wrong, and so he’s had almost zero success with his endless pitch to reduce private savings.
Of course, I hope Peterson fails entirely. It’s the only sane response once you know the relationship between government deficits and private savings. A balanced budget is (usually) a terrible idea, because it reduces the savings available to the private sector.

In the interview, Hatzius gives a shout out to Wynne Godley. We are big Godley fans around here at MR. I’d like to leave with a quote from the master himself, which should help to illuminate why Pete Peterson is doomed to failure:

 “It is thirty years since Carl Christ, of Johns Hopkins University, had the brilliant insight that should an economy ever reach stationary equilibrium, all stock variables as well as all flow variables would be constant; and that if all stock variables, including government debt, were constant, government receipts would have to equal government payments. It would then follow that if the economy were moving toward stock-flow equilibrium and if taxes were levied as a proportion of income, the GDP of a (closed) economy would always be tracking, perhaps with a long lag, government outlays divided by the average tax rate – the very same concept that we call fiscal stance. Therefore, a necessary condition for the expansion of the economy, at least in the long term, is that the fiscal stance should rise: Government expenditure must rise relative to the average tax rate. If the tax rate were held constant, government expenditure would have to rise absolutely for output to grow; if government expenditure were held constant, the tax rate would have to fall.” [Italics and Bold mine]

How can you fight against this basic fact? It is like fighting the moon. We need an increasing fiscal stance in order to have a growing economy. And once you know this relationship – why in the world would you want to balance the government budget? 

This is what Hatzius shows us with his chart. Pete Peterson’s success would mean the economy stops growing. And it’s why Peterson is doomed to lose the battle, and the war.



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  • Anon

    So how is it possible that Germany had a budget surplus in the first half of 2012 – yet the German economy also grew?


  • Matt Franko


    GREAT JOB making the case that Peterson is probably THE worlds biggest moron deficit terrorist… he’s a serious candidate for a rubber room at GITMO imo … rsp,

  • Michael Sankowski

    There are lags between the stance of government and the GDP result. Additionally, private credit can spur growth, at the risk of increasing reliance on stable collateral values. We’ve seen from the 2008 crisis that total reliance on stable collateral values is not always a good idea.

    Then, your Germany government deficit number did not seem accurate to me, but it turns out to be close at least. Germany has run semi-large government deficits during most of the 2000’s.

    According to trading economics, the defict for 2012 is .8%. This is not a surplus.

  • Michael Sankowski

    Thanks Matt. He’s probably a good man, just a massively misguided one. I think he is going to spend around $500MM more on his deficit reduction madness.

  • Greg

    Germany also is a net exporter, so they can run a balanced budget and their German citizens can save. They are saving the spending of the buyers of BMW, Mercedes and Volkswagen

  • PeterP

    I thought MMT was “so wrong” by pointing out that govt deficit = private sector saving? ;)

    btw, Peterson spending 500M out of his savings at least helps offset the deficit reduction…

  • Joe Franzone

    This site has been on fire the past month. Appreciate the work you guys do. As a CPA, I too am amazed at the hypocrisy of my own profession, namely the AICPA, getting on board with Peterson, David Walker and “Fix the Debt” with their “What’s at Stake” campaign, while simultaneously running their “Feed the Pig” campaign which encourages young adults to save more.

  • Michael Sankowski

    haha – we’ll let that one slide. ;) We know when to take off the training wheels and when to keep them on, over here at MR.

  • Michael Sankowski


    It seems this is a case of ignorance, not of malice. Peterson gives the impression he genuinely cares about the U.S., and not just about politics. He thinks balancing the budget would improve our economic lives. It’s just he doesn’t know the sector balances equation.

    I’d guess the same about the accounting profession. From their flawed point of view, the deficits are unsustainable.

  • Michael Sankowski

    Also, note the homage to the S = I + (S-I) in the middle of this post. I didn’t forget! haha!

  • Joe Franzone

    Yes, the ignorance is extremely frustrating when our industry is founded on accounting identities and double-entry bookkeeping, but can’t seem to make the same connection on the macro level.

  • James A. Kostohryz

    The identity framework is great. But it can be taken too far — to the extent that it is forgotten that distribution matters. In other words, it matters for economic growth and other things who is doing the spending and the saving and in what proportions. The argument can be framed in terms of distributing resources in a way that best achieves certain goals. The right argues that it is better to allow resources to be allocated by the market and that this will create more prosperity. The left says more properity and other goals will be achieved by enabling a greater proportion of available resources to be allocated by the government. The really interesting question is who is right about this. Merely saying that there is an identity is an issue of somewhat limited value. The identity would only be terribly important if it were true that distribution did not matter.

    Having said that, I understand that many people make arguments that violate the identity. And to that extent it is important to educate people about this and combat false arguments. I just hope folks dont get so carried away with the importance of the identity that they lose sight of the importance of distributional issues such as allocative efficiency and so forth. To take an extreme example, because of the identity we could set taxes at 100% have the government own all assets and let the government distribute everything. Despite the identity, this will not produe the same economic results as if the tax rate and state ownership were 75%, 50%, 25% or 3%. I know MR understands this, but I think it bears repeating.

  • Cullen Roche

    James, spot on! Earlier this year a huge debate broke out when JKH wrote a very detailed paper on an MR equation (S=I+(S-I)). We had been going back and forth with MMT for a while about why we think they don’t always properly describe the sector financial balances. MMT uses a definition of net saving that marginalizes investment by saying net saving is (S-I). They often say things like “Without a government deficit, there would be no private saving.” That’s a preposterous comment coming from a professional economist. We broke down the equation to show how investment is the backbone of private sector saving. It is, by a wide margin, the key component to the entire economy. MR takes a private sector based view of the world in this regard. And it’s not a political view. It’s one backed by reality. If you look at the total net worth of private sector balance sheets you find that just $15T of this is govt “net financial assets” as opposed to $45T represented by private sector financial assets. That $45T is the key piece of the economic puzzle. That’s not to say that the $15T govt piece is unimportant, but again, this is all about balance in our eyes. MMT lacked the balance by claiming that private saving comes the govt only. That’s hogwash. It’s a misconstrued govt centric view of the world and the SFB is often presented in such a manner so as to give the appearance that the private sector is just wandering through life waiting for the govt to give us all prosperity. That couldn’t be further from the truth….

    You might be interested in JKH’s paper on this in the recommended readings. It’s all about balance. I think you might like it.



  • beowulf

    Good point Greg, and the US is a net importer. Check out the chart above, you can see the US has been running a Current Accounts Deficit (CAD) 20 years in a row. The net savings drain of the domestic private sector doesn’t begin when govt deficit hits 0. Its begins when size of govt deficit shrinks to below size of CAD.

    In 2007, for example (to use slightly imprecise numbers), the federal deficit of $160 billion federal deficit and $710 billion trade deficit meant approx. $550 billion of savings net of investment were drained out of the domestic private sector. That ain’t good.

    Unless and until we zero the trade deficit (with something like Warren Buffett’s import certificates plan), any attempt to reduce govt deficit below CAD is a fool’s errand. Its astonishing to me that the CBO never makes this connection in any of its budget projections (so far as I can tell, its model doesn’t even track current CAD, much less estimate it for future years).

  • Ciaran

    In any case surely its better to speak in terms of the European economy, of which germany is just a (large) part.

  • Greg

    Well, he didnt say ;

    “To the penny!!”, so that makes it different ; )

  • Greg


    You are far too gracious at times. Calling Peterson “probably a good man” or Rowe and Sumner “smart” stretches the definition of those words in my view.
    Peterson is calling for reducing senior citizens payments to health care and income support, which will no doubt increase the hardship on many, and he isnt blinking an eye.

    Rowe and Sumner, while they have obviously spent much time in school and can write well, are of the belief that Japans prices are a hundred times higher than ours, because they account in what could only be the equivalent of pennies when looked at rationally, and when its pointed out to them they double down.

    If these were private sector employees who had to pay for their mistakes, (like I do if i screw up an anesthetic or give a patient wrong information) they would all be unemployed but since they are simply running interfernce for Koch bros type plutocrats they will likely get raises!!

  • Spot-On

    I believe you are correct. Since Germany does not print money, it cannot be compared to the US. It is more like a US state running a surplus against other US states. The EU and US would be comparable.