Saving, Stock/Flow Consistency, and Kalecki

By JKH

Here are some of the equations and interpretations that flow from the basic national income accounting identity.

C + I + G + (X – M) = C + S + T                     (1)

This is the national income accounting identity.

 

(S – I) = (G –T) + (X – M)                                (2)

This is one form of the corresponding 3 sector financial balance model. It says that private sector saving is the source of net finance for the government deficit and the international capital account deficit.

 

S = I + (S – I)                                            (3)

This says that private sector saving is the source of finance for investment and net finance for the other two sectors. The term (S – I) is the compact form of the full expression noted in (2) above. The unusual form of the equation is for purposes of highlighting the distinction between physical and financial uses of funds from saving.

 

I = S + (T – G) + (M – X)                               (4)

This says that investment is funded by three sources of saving – private sector saving, government saving, and foreign saving. Among other things it says that, given the presence of government and foreign sector saving contributions, the term S must cover the saving contributed by the remaining sector, which is the private sector. In particularly, S does NOT stand for household saving, a fact that will become more pertinent further below. Note that the phrase “funded by” does not refer to macroeconomic causality, which flows primarily from investment to saving (refer to the Andy Harless post referenced in the long post link just below).

These four equations are mutually compatible and derivable from each other.

Thus, S is private sector saving in a 3 sector model – the same model that gives rise to the 3 sector financial balances model prominently used by MMT, and discussed at length here:

http://monetaryrealism.com/jkh-on-the-recent-mmrmmt-debates-2/.

The private sector decomposes into the household sector and the business sector.

And private sector saving decomposes into household saving and business saving.

So,

Let S = HS + FS

HS = household saving = household income after taxes and consumption

FS = business saving = undistributed gross profit (depreciation plus retained earnings)

(See the note below regarding depreciation. All equations hold net of depreciation as well, when specifications for I and S reflects that level of netting.)

From above,

I = S + (T – G) + (M – X)                                                                           (4)

 Substitute the two components of S:

I = (HS + FS) + (T – G) + (M – X)                                                                      (5)

 

FS = I – (HS + (T – G) + (M – X))                                                                    (6)

 

Now,

Business gross profit = undistributed gross profit + distributed profit

Business gross profit = FS + DIV (dividends)

Adding DIV to both sides of (6),

Business gross profit = I – (HS + (T – G) + (M – X))        + DIV                (7)

= investment – household saving – government saving – foreign saving + dividends

 

This is a modern version of the Kalecki profit equation

See the following interesting posts referencing the Kalecki profit equation by Ramanan and Cullen Roche (via Pragmatic Capitalism):

http://www.concertedaction.com/2012/03/12/kaleckis-profit-equation/

http://pragcap.com/james-montier-the-risk-to-corporate-profits

The Kalecki profit equation has an interesting characteristic. Dividends are included twice in the equation – once in their explicit role and once in an embedded role as a contributor to national income. To the degree that dividends flow through to household income in particular, they are a marginal contributor to household saving, other things equal. One has to be careful of this when using the Kalecki equation as a check on either backward explanation or forward projection of corporate profits. There are many moving pieces here, and dividends are one of them, and they can move in more than one place in the equation.

Meanwhile, a third MMT leader, Professor Bill Mitchell, has weighed in (albeit indirectly) on the subject of saving in the same context that was the subject of the long post. (H tip, Ramanan)

See question 1 here:

http://bilbo.economicoutlook.net/blog/?p=18780

There, he defines private sector saving as identically zero for the case of a closed, balanced budget economy.

What’s going on here? The equations noted above show consistency across parent national income accounting, the 3 sector financial balance model, and the Kalecki profit equation. There is nothing in those equations to suggest that private sector saving is identically zero in a balanced, closed economy. Under such conditions, S = I is straightforward, and nothing suggests that I is identically zero.

The professor appears to make the following adjustments:

First, he assumes (implicitly or explicitly) that all business profit is distributed to households. In connection with this, he specifies S at one point as household saving rather than private sector saving. But S is private sector saving in the parent national accounting model and therefore must be private sector saving in the 3 sector model that is derived from it.

Second, he assumes that investment constitutes dissaving. That is, investment is treated the same as consumption for purposes of determining residual saving by sector. When one combines that assumption with the preceding assumption that all business profit is distributed to households, it becomes the case that the business sector dissaves in total if gross investment exceeds depreciation.

Moreover, given budget balance and closure assumptions, the business sector dissaves in the exact same amount that the household sector saves. Therefore, from the consolidated private sector perspective, investment dissaving reverses household saving, and saving for the consolidated private sector becomes identically zero. That is the Professor’s effective position on private sector saving, I think.

And the consequence of that assumption is that the private sector must accumulate NFA in order to save, and the other two sectors (most likely the government sector) must deliver NFA to the private sector in order for it to save at all. One might interpret this as it becomes necessary for the assumed balanced, closed economy to be opened up to other sectors, in order for the private sector to save at all, according to the Professor’s characterization of saving.

So that appears to be his view on private sector saving.

However, the accumulation of household saving over time leads to a conflicting conclusion:

First, when businesses pay out all their profit as dividends to households (again, in the balanced, closed economy), they generally pay cash. That increases the book value size of household balance sheets. Assets increase by the cash dividend, and household net worth increases in book value terms. This is a transfer of book value net worth from the equity account of business to the comparable account of households. This is the balance sheet effect of a flow of income from business to households via dividends.

Households then have the option of reinvesting cash received from dividends in new financial claims issued by business – common stock, for example. But such reinvestment happens automatically in any event. Cash received from dividends in the form of bank deposits is a financial claim issued by banks, which are part of the business sector. And since we are assuming a balanced budget, closed economy, there is no avenue whereby that automatic effect can “leak” outside the private sector. Households have the option to change the counterparty for that claim within the private sector (e.g. new stock versus a bank deposit) but they have no option other than to “reinvest” their cash dividend in some private sector claim, even if that decision is only the default choice of the bank deposit that is initially associated with the dividend payment.

The result of all this is that with the assumption of 100 per cent dividend payout of business profit, the business sector issues financial claims and the household sector accumulates them. In other words, the business sector issues NFA and the household sector accumulates the same NFA. Indeed, that latter effect is the change in the household net financial asset position that results from the income that matches the original investment flow net of depreciation for the accounting period (This is due to the Harless type of causality referenced earlier).

Thus, the result is that business has issued NFA financial claims and households hold the same NFA financial claims (claims could be either debt or equity).

Let’s assume a single period model, whereby the income flows described for the period accumulate to a balance sheet position at the end of the period. Consider just the marginal effect of new investment. The result:

Business balance sheet:

Investment Asset / NFA liability

 

Household balance sheet:

NFA asset / Net worth

 

Consolidated private sector balance sheet:

Investment Asset / Net worth

 

That seems OK.

But there is a problem.

The problem is that private sector saving of zero for the period (according to the Professor) has somehow accumulated to a cumulative private sector savings stock equal to a non-zero outstanding investment stock. The net worth account is that accumulation of saving by definition, and it matches the accumulation of investment.

This is a contradiction of required accounting logic. It means that the accounting system as constructed is internally inconsistent. The cause of the contradiction is the assumption that investment is dissaving. This is stock/flow inconsistency. The essence of accounting for net asset value is the accumulation of net worth over time. This is contradicted by treating investment as dissaving for the current period.

Unfortunately, employing such methodology can lead to statements like:

“The sectoral balances show that if the external sector is in balance and the government is able to achieve a fiscal balance, then the private domestic sector must also be in balance. This means that the private domestic sector is spending exactly what they earn and so overall are not saving.”

 

Note:

MMT originally used the term “net saving” in referring to (S – I), or current period private sector saving net of investment. By contrast, in the national accounts context, net saving refers to (gross) saving net of depreciation on outstanding investment stock. But whether saving and investment are tracked at the gross or net level of national accounts, the difference between current period saving and investment is the same. If depreciation is subtracted from gross flows, it must be subtracted from both investment and saving sides to maintain accounting coherence. Accordingly, although duplication of the “net” terminology is unfortunate, it isn’t really a substantive issue in referring to the MMT originated concept and usage of “net saving” as current period saving net of investment (however unevenly that usage is now applied).

The issue discussed in this post concerns the question of the relationship of saving to investment, regardless of which level of national accounts, gross or net, is operative in the analysis of such flows. Therefore, there should not be a substantive issue in distinguishing conceptually between these two different applications of the term “net”.

Thus, the MMT context for use of “net saving” does not directly concern the use of the same term in the national accounts context. The issue for MMT is that of unusual flexibility in the way it uses the terms “saving” and “net saving” in MMT’s own chosen context.

Improvements that reduce such terminological overlap between either MMT or MMR and national accounts are desirable. But the existing intra-MMT usage issue noted here shouldn’t be confused with the separate issue of overlapping terminology between MMT and national accounts usage. I’d say the importance of the first dynamic considerably exceeds that of the second, such as occurs in the example above.

Here are two posts on the subject of related national accounts classification and terminology:

http://www.3spoken.co.uk/2012/02/savings-explaining-humpty-dumpty-word.html

http://fictionalbarking.blogspot.ca/2012/03/careful-with-saving-terminology-reply.html

Comments
  • Cullen Roche March 28, 2012 at 12:40 pm

    This is another tremendous piece of work JKH. Thanks.

  • mmp March 28, 2012 at 1:33 pm

    How about solving for Household saving (adding in wages as a factor) to give some insight if the government spending has found its way largely into wages/household or predominately into corporate profits.

  • Ramanan March 28, 2012 at 1:52 pm

    JKH,

    Looks nice.

    Btw, I myself had pointed out the net terminology before the last two links in your post popped up – directly highlighting data from FoF but not making an issue out of it!:

    http://www.concertedaction.com/2012/02/21/saving-net-of-investment-updated/

    Yes, the importance of the first dynamic considerably exceeds the other as per your post.

  • Ramanan March 28, 2012 at 2:27 pm

    Btw JKH,

    This post discusses Kalecki:

    http://bilbo.economicoutlook.net/blog/?p=12003

    and says:

    “which says in English, that gross profits after tax (Pn) equals gross investment (I), plus the budget deficit (G – T), plus the export surplus (NX), plus capitalists’ consumption (Cp) minus workers’ saving (Sw).”

    which is a strange way of putting it. Can you check?

    I am sure of your equation (7) and my equation on FU, not the above.

    For, instead of using household plus firms, it uses workers plus capitalists which for a first step is fine but later? (i.e., if capitalists keep guzzling like there is no tomorrow, do they keep making more profits???)

    • JKH March 28, 2012 at 3:14 pm

      Yes, I believe that’s the/an original version. It’s why I put “modern” in front of the equation in the post here. I really only wanted to touch on Kalecki, to emphasize the robust connection between investment and saving from multiple sources (almost like an anti-sector financial balances approach). But I think the difference between the original and the modern must be a very interesting story in itself. Workers today are vested as quasi capitalists, via their own saving process.

      • Ramanan March 28, 2012 at 5:28 pm

        Yes I understand the reason you put it as modern.

        Nontheless, I have a feeling the old/non-modern equation is incorrect.

  • Erik V March 28, 2012 at 2:49 pm

    Great post. It seems to me that another fatal flaw of MMT is that they treat investment like consumption, when in reality they are very different and have very different economic implications. MMR makes this distinction. Also, it makes one wonder how an MMTer would envision any economic growth happening in a closed, balanced budget economy?

  • Dan Kervick March 28, 2012 at 3:57 pm

    These four equations are mutually compatible and derivable from each other.

    This isn’t a major point, JKH . But clearly neither equation 2 nor 1 is derivable from equation 3. Equation 3 is an arithmetic identity containing only two terms. To derive equations 1 or 2 from equation 3, one would need some linking premise containing those terms, or else the terms would have to be introduced by adding or subtracting the same terms from both sides of the equation. You can’t do that to get from 3 to 1 or 2.

    I would like to suggest a way of looking at what seems to me is the underlying debate here: conflicting intuitions about the most appropriate meaning of the term “saving”.

    Let’s introduce a new term “B” for these equations defined as:

    B = S – I

    So the JKH identity could be re-expressed as:

    S = I + B

    The right-hand side of equation 1 is just one expression for income Y, so we can re-formulate the income equation as:

    Y = C + T + I + B

    I chose the term “B” because I think of it as the private sector balance. Now as a first pass on the intuitions behind this equation, think of it this way: there are three ways a private sector unit can dispense with its income. It can spend it on consumption goods; it can ship some of it to the government as a tax payment; or it can spend it on capital goods – that is goods used for future production. If there is anything left after those expenditures, then that amount left over is the private sector’s “balance”.

    Now if it is an established accounting convention to use the term “saving” or at least “gross saving” to refer to S which is equal to I + B, then one has to defer to the established linguistic practices of the accountants and be very careful when entering this minefield. But to my mind, B is the term in the above equations that more closely corresponds to our intuitive concept of saving. Intuitively, any unit’s saving during a period is the income that the unit received during the period that was not spent. From that perspective, if I am a firm and I use some of my income to buy a tractor, I have not saved that income. I have spent it.

    But referring to I + B as “saving” encourages us to call that tractor purchase a part of the private sector’s saving . That seems to me like an odd way to talk. (It seems even odder to me that since the usual accounting conventions tell us to include the purchase of a house under I as “residential investment”, then the purchase of the house also counts as part of private sector “saving”.)

    However, I understand that the term I is also supposed to include net private sector acquisition of financial assets. For example, if firm X purchases a $50 thousand financial asset from firm Y, and firm Y then uses the $50 thousand to purchase a machine, then the total addition to I from these transactions is only $50 thousand. You count the capital investment spending on the tractor asset, but don’t double-count the investment by adding in the financial asset purchased by X. When doing the accounting sums for the domestic private sector, the financial asset purchased by X is offset by the the financial liability incurred by Y. So financial asset purchases by one domestic private sector financial unit from another domestic private sector financial unit do not add to I. However, some financial assets purchased by private sector units are purchased from other sectors, so it is possible for the private sector’s net financial assets to be something other than zero.

    If we use “IG” to refer to domestic private sector purchases of capital goods, and “IF” to refer to private sector net acquisitions of financial assets from the other two sectors, then I = IG + IF and we would have:

    Y = C + T + IG + IF + B

    Now it could be held that there is simply no way for B to be anything other than zero in this equation, because the only way of saving income is in the form of some financial asset or other. OK, I’ll stay agnostic on that issue. But then I would just revise my comment above and say that the most intuitive account of what we ordinarily mean by “saving is the sum of IF and B ( even if B turns out to be zero.) Intuitively, IG is not part of what most people would classify as saving, even though the standard accounting conventions classify it that way.

    Finally, I think we need to say something about the term “T” in the equations above. MMTers usually try to specify that when they say “government” they are talking about the consolidated government sector – that is all units of all levels of the government. But if we think of T as just taxes, then T includes only some payments to the government, not all of them. If I buy a product or service of some kind from a government-owned enterprise, that is a payment from the private sector to the government sector, but not a tax payment. So we should just bear in mind that despite the suggestive alphabetical insinuation of the term T, T includes all payments to the government sector, and G includes all payments from the government sector.

    However, we should leave the private sector’s acquisitions of government financial assets where they are under I. So let’s divide IF into net acquisitions of financial assets from the government sector IFgov and net acquisitions of financial assets from the external sector IFext. Substituting and re-grouping terms we get:

    Y = C + (T + IFgov) + IFext + IG + B

    In other words, there are five things the private sector can do with its income during some period: purchase consumption goods; send income to the government as payment for either a tax or something the government is selling; net acquire financial assets from the government; net acquire financial assets from the external sector; or purchase capital goods. Anything left over (if that is possible) is the private sector balance.

    • JKH March 28, 2012 at 4:51 pm

      What is ground zero for language in economics?

      Is it the language of economists and accountants or the language of the street or some language in between?

      My own view is that there is a default ground zero language inherent in:

      C + I + G + (X – M) = C + S + T

      And that ground zero language (algebraic or verbal) is a fence, in the sense that you don’t tear down a fence until you fully understand why it was put up.

      I think there’s an argument to the effect that the most critical variable in the language of economics is that of time.

      That equation above is demarcated by time. It covers a time period, with a defined beginning and end.

      Furthermore, and here is where I’m totally with Scott Fullwiler, accounting logic is a necessary measurement infrastructure for all of economic thinking – at least the thinking that matters, which is coherent thinking.

      So you have a set of accounting measurement systems such as income statements, balance sheets, and sources and uses of funds statements. Those statements are also all demarcated by specified time assumptions – time periods and points in time.

      When it comes to the issue of saving, you must be coherent over time.

      If saving is what happens over time, what happens when you reach the end of time – i.e. when you reach the end of a specified time period? How do you deal with in a coherent fashion?

      And all of that leads me to the inescapable requirement that saving over time must be connected to a measure of net worth, balance sheet equity, or savings at a concluding point in time. We must take stock.

      And there must be a mapping between the net asset value and that net worth etc. entry on the other side.

      Whatever our blue sky hopes are for a better version of economics in the future, whatever your ideological inclination, these measurement questions in nominal terms are never going to go away. They will always be with us.

      And that’s why at least for now the housing stock and plant and equipment stock are the physical asset co-ordinate of cumulative saving. As I said in the post, if they really represented spending in the sense of dissaving, there is nothing left to coordinate with in terms of a coherent (balance sheet) measure of cumulative saving, net worth, equity in financial terms. There is no coherent linkage between period of time and point in time.

      Your B terminology, which by necessity classifies spending on I as dissaving, may appeal to spending intuition at the street level, but does it cohere adequately with the rest of the world’s economic discussion? I don’t see how it can. And if you could do it, you’ll have to create a new ground zero that is different from the above equation, and either operate in isolation from that vantage point, or convince the rest of the world to join you, including the economists and accountants.

      So I think a question for MMT is whether you formally want to move that ground zero. You seem caught in between informality and formality at this juncture.

      The irony I see is that up until relatively recently, MMT had evolved in the other direction – over the past 20 years or so – the 3-SFB model is a direct derivative of the above equation for example. And it seems to me that MMT was driven by an original enthusiasm for embracing this idea of fusing accounting with economics in a fully coherent fashion. And part of that requires fusing the measurement of saving over time to balance sheet equity at an end point in time.

      P.S.

      Not sure about your T/G discussion; I’ll think about that.

      I is physical stuff (generally); not financial stuff.

      Your further partitioning of transaction categories seems complicated; I’ll think about that too.

      • Michael Sankowski March 28, 2012 at 9:57 pm

        “Furthermore, and here is where I’m totally with Scott Fullwiler, accounting logic is a necessary measurement infrastructure for all of economic thinking – at least the thinking that matters, which is coherent thinking.”

        100% agree.

        The accounting is “truer” than the economics. There are long passages about this idea in Neal Stephanson’s book Anathem.

    • Ramanan March 28, 2012 at 5:16 pm

      Dan,

      “But referring to I + B as “saving” encourages us to call that tractor purchase a part of the private sector’s saving . That seems to me like an odd way to talk. (It seems even odder to me that since the usual accounting conventions tell us to include the purchase of a house under I as “residential investment”, then the purchase of the house also counts as part of private sector “saving”.)”

      You HAVE to spend extra time on understanding the concept of saving. Tractor purchase is not a “part of saving” in the sense you understand. I can have zero saving and yet purchase the tractor by borrowing.

      Saving is an income residual. Even MMTers define saving as the way JKH defines. It is only that further down in the steps of deriving something – they mess up by bringing some other definitions.

      “If we use “IG” to refer to domestic private sector purchases of capital goods, and “IF” to refer to private sector net acquisitions of financial assets from the other two sectors, then I = IG + IF and we would have:

      Y = C + T + IG + IF + B”

      You derive this after having written Y = C + T + I + B and breaking I into IG and IF.

      This is weird!

      Economists do not call purchasing financial assets as investment. The economic concept of investment is different from the sense used in statements such as “I invested in Apple shares”.

      Hence you get double-countings:

      You say:

      “Anything left over (if that is possible) is the private sector balance.” referring to B. But you already counted that in IFGov.

      You have to be careful Dan. It’s for this reason a not-so-heterodox commenter such as Vimothy catches you guys in many instances.

      I feel like a professor marking reds in the answer paper!

      • Dan Kervick March 28, 2012 at 6:13 pm

        You HAVE to spend extra time on understanding the concept of saving. Tractor purchase is not a “part of saving” in the sense you understand. I can have zero saving and yet purchase the tractor by borrowing.

        Ramanan, in that passage I was talking about total private sector saving. Per JKH’s comments, my understanding is that the tractor purchase is clearly part of I and I is clearly part of S, and so the tractor purchase is part of S – which is private sector saving.

        As you point out, the actual firm that purchased the tractor might not have saved during the period in question, since it might have incurred all kinds of liabilities in order to purchase the tractor and other things. And the value of the financial liabilities might be in excess of the physical assets acquired. But the fact remains that someone in the private sector purchased a tractor, and that purchase is counted as part of private sector S.

        I don’t think this is any kind of quirky MMT talk, or even quirkier Kervick-talk. I thought that was part of the common ground here.

        Economists do not call purchasing financial assets as investment. The economic concept of investment is different from the sense used in statements such as “I invested in Apple shares.

        Hence you get double-countings:

        My understanding is that the income accountants do count the purchase of a financial asset by a unit as an investment of that unit. However, when it comes to adding up the aggregate investments of an entire sector, the sum of the financial assets acquired and the financial liabilities acquired can net out to zero, if all of the financial assets purchased in the sector were purchased from other units in the same sector and the sector is thus financially closed.

        So notice that my IG and IF refer only to financial asset purchases by the domestic private sector from the government and from the external sector respectively. Thus there is no double counting, because those two numbers do not include financial asset purchased by the domestic private sector from the domestic private sector.

      • Dan Kervick March 28, 2012 at 6:24 pm

        “Anything left over (if that is possible) is the private sector balance.” referring to B. But you already counted that in IFGov.

        No, Ramanan, I explicitly did not include B in IFgov. By definition, as I gave them:

        B = S – I

        I then subdivided I into IF and IG, so we get:

        B = S – IF – IG

        and then I divided IF into IFgov and IFext, so

        B = S – IFgov – IFext – IG

        So B was defined in such a way as to exclude

        • Ramanan March 28, 2012 at 6:39 pm

          Dan,

          Even seen someone breaking “I” into purchases of capital goods and purchases of financial assets?

          • Dan Kervick March 28, 2012 at 7:27 pm

            Well, it’s pretty routine when talking about investment in general to distinguish between financial and non-financial assets:

            http://www.investingforbeginners.eu/financial_assets

            • Ramanan March 28, 2012 at 7:37 pm

              “Well, it’s pretty routine when talking about investment in general to distinguish between financial and non-financial assets:”

              In another context not in the sense you used.

              Ever seen a NIPA GDP release?

              Ever seen NIPA accountants use purchases of financial assets in the calculation of GDP?

              • Dan Kervick March 28, 2012 at 8:30 pm

                Yeah, you’re right. They usually go under what I called B – and which MMTers call “net saving”. Hence the idea that in a two-sector system, the private sector can’t net save w/o a government deficit, and in a three-sector system the entire non-government sector can net accumulate dollar-denominated financial assets without a government deficit. I just wanted to make it clear that the way I defined the terms, I didn’t double-count anything.

                • Госбанк March 28, 2012 at 8:47 pm

                  The way you treat accepted macro terminology is extremely unhelpful. In the SNA, as others pointed out, “investment” has a clear definition of purchasing equipment and software, offices, factories, homes, apartments, change in inventories. “Financial investment” is not “investment” in the SNA’s sense, as it is better thought of as ownership/deed transfer rather than acquiring means to ensure future production.

                  Now, there is some dispute about SNA measuring intangible investments, but that’s a different from the “financial investments” non-issue kettle of fish.

                  It would be helpful to use accepted terminology (accepted worldwide by the way) rather than trying to appeal to layman’s intuition and invent your own vocabulary. “Force” in everyday usage is quite different from “F” in the Newtonian F=m*a equation, yet no one, except some cranks perhaps, disputes established terminological conventions.

                • Госбанк March 28, 2012 at 8:54 pm

                  The link below may or may not be helpful to establish common NIPA vocabulary and avoid unneeded translation loss occurring over a noisy communication channel:

                  http://www.lidderdale.com/econ/104/ch4Lect.html#Investment

                  • Dan Kervick March 28, 2012 at 8:57 pm

                    OK, but don’t blame MMT for my bungling. They have always been quite clear in saying that the net private sector accumulation of financial assets goes in the S-I box, not the I box.

                    • Cullen Roche March 28, 2012 at 9:03 pm

                      Dan, these terminology problems are pervasive in MMT. They’re not just present in the saving debates. They’re in the monopolist arguments, the horizontal description, and on and on. The inconsistencies are due to major misrepresentations of the way the system actually works. Like claiming that the horizontal “leverages” the vertical yet you reject the money multiplier. Or the state has a “money monopoly” yet you only support price fixing when it supports your particular policy agenda. These aren’t minor points. They reduce the credibility of the entire framework. And it’s pervasive across large and important components of the foundation of MMT….

    • JKH March 29, 2012 at 9:00 pm

      Your first point is not a major issue, I agree. But it did come up in the context of the Mosler discussion to which I responded in section 3 of the long post. So I’ll just revisit that here. What I said was that I had always been specific that S in the S = I + (S – I) equation referred to the same S as in the national accounts and 3-SFB model. So it was derivable from those equations, which agrees with your point as you stated it.

      But it does work in the other direction as well. You need only specify the same 3 sector world covered by the first two equations and define S as private sector saving. Given that starting point, logically, you don’t necessarily need to know the first two equations. If you define investment and saving in the standard way, it falls out that each defined sector has a match or mismatch between investment and saving. And the mismatches must be net financial flows by such construction. It also falls out by definition of investment and saving that total investment must equal the sum of saving from all sectors, and that the sum of all investment/saving imbalances across sectors must be zero. Those imbalances are net financial positions. As defined, (S – I) by definition is the excess of private sector saving over I. It then suffices to come up with expressions for the mismatches or financial imbalances of the other two sectors, which must fall out from consistent definitions for G, T, X, and M. In other words, so long as you specify that S is private sector saving in such a 3 sector world, which I did, you can derive the first two equations from the third, provided you are consistent in defining the various sector flow variables.

  • Dan Kervick March 28, 2012 at 5:47 pm

    I think the fundamental MMT insights can be expressed in whatever language one chooses to use, including the conventional one you have relied one. But it’s also the case that its easier sometime to convey intuitive ideas in one language rather than another, and depending on the audience. And that means sometimes one will slide back and forth between different economic dialects, and rely on context for disambiguation.

    There seem to be a lot of differences among about the speakers of the various economic dialects about the meanings of fundamental terms. If you look in an economics dictionary, you often find multiple lexicographical entries for the same terms. These alternative sub-languages were developed for different purposes and different areas of professional concern, and no matter which consistent dialect one uses, some expressive intuitiveness will be lost.

    “Investment” is a big one. Sometimes it means something like, “purchase of anything that delivers a future return”, and sometimes it is used more exclusively to mean something like “purchase of a factor of production.”

    MMT does emphasize the importance of the underlying accounting realities. But that doesn’t mean there aren’t conflicting, but equally effective linguistic choices one can make to express the same underlying realities. The point is to get beyond the merely semantic questions to address more substantive causal questions.

    I believe the whole MMT picture can be more clearly and simply expressed in a spare three-sector framework that uses terms like “payment”, “receipt”, “financial asset acquisition”, and “financial liability acquisition,” and that then adds some discussion of the difference between government liabilities represented by the legally established final means of payment, and all other liabilities. It is not ultimately necessary to employ sector-relative terms like “investments”, “taxes”, “exports” etc.

    • Ramanan March 28, 2012 at 6:06 pm

      “Buying a government bond or a share in a listed company is not investing to an economist. Entrepreneurs invest, hedge funds rarely invest. That distinction helps to understand why the Glaeser article misses the point.”

      http://bilbo.economicoutlook.net/blog/?p=16992

      I realize economists sometimes also use investment in other sense (FDI e.g.) but the sense you used is clearly wrong according to Bill.

    • JKH March 28, 2012 at 6:40 pm

      You may be able to do that. But again, the fact is that the MMT 3-SFB model derives directly from the national income equation. And Bill Mitchell in particular develops many of his posts and themes top-down from that equation. So if you do develop an alternative framework with alternative language, you’ll have to decide whether you’re going to retain that conventional linkage as well, or not. So it becomes a difficult juggling act in terms of communication. But it shouldn’t be an option to intersperse language from one model with non congruent language from a second one. At the end of the day, I’m not sure you’ll be able to escape the desirability of maintaining some link with the conventional model, whatever additional tools you want to use. And maintaining consistency relative to that conventional model is an issue in itself.

      More importantly in my view, it shouldn’t be necessary to avoid conventional language in getting the important ideas across that you want to. There has to be a way of doing it. And I think this was a big part of Lavoie’s critique.

      • Dan Kervick March 28, 2012 at 7:29 pm

        So it becomes a difficult juggling act in terms of communication.

        Agreed. But I do think they are inter-translatable.

      • Dan Kervick March 28, 2012 at 7:50 pm

        More importantly in my view, it shouldn’t be necessary to avoid conventional language in getting the important ideas across that you want to. There has to be a way of doing it. And I think this was a big part of Lavoie’s critique.

        What if conventional language is obscure and cumbersome, as a result of arbitrary historically given conventions, and there is a more elegant and simple, but non-conventional, language for expressing the same ideas?

        To me, the fundamental idea is just this: the aggregate financial flows among the three sectors sum to zero. But unlike the private domestic sector and the external sector, the government can create and issue a type of formal asset – currency – that is special because the government does not possess a merely finite stock of financial assets. And when the government issues this class of asset to a recipient, it neither depletes its own stock of assets nor creates a claim on its stock of assets representing a future payment and depletion of its stock.

        My preference would be to say that we shouldn’t even classify these assets as customary financial assets corresponding to a liability. Liabilities are supposed to represent negative value to their owners. But issued currency does not represent negative value to the government because it does not represent a contract for a future depletion from its stock. But I’m happy to accept the conventional formal classification of these assets as corresponding to “liabilities” so-called, as long as we bear in mind how special these liabilities are.

        • JKH March 29, 2012 at 12:16 pm

          “But I’m happy to accept the conventional formal classification of these assets as corresponding to “liabilities” so-called, as long as we bear in mind how special these liabilities are.”

          That would definitely be my preference in terms of either MMT or MMR evolution of language. I believe that you can impart all the special qualities for government issued NFA that you need to, starting from such a foundation.

          Special example:

          If currency is viewed as a tax credit held by the currency user (which is the MMT view), then the currency issuer has an obligation or liability to extinguish the user’s corresponding tax liability when that currency is delivered from the user back to the issuer.

          • JKH March 29, 2012 at 12:19 pm

            BTW, that’s sort of the idea behind Mosler bonds. They extend the scope of that same described liability of government.

            • Tom Hickey March 29, 2012 at 12:59 pm

              “If currency is viewed as a tax credit held by the currency user (which is the MMT view), then the currency issuer has an obligation or liability to extinguish the user’s corresponding tax liability when that currency is delivered from the user back to the issuer.”

              As I understand it, that is Warren’s definition of currency from the get-go.

  • Ramanan March 28, 2012 at 8:21 pm

    “What if conventional language is obscure and cumbersome, as a result of arbitrary historically given conventions, and there is a more elegant and simple, but non-conventional, language for expressing the same ideas?”

    There are specific reasons national accountants define saving the way they do.

    There is nothing obscure about it. But you seem to give a lot of obscure interpretations!

    It’s counterproductive to include purchases of financial assets in the standard definition of investment especially when you started out with the sectoral balances with the standard definitions.

  • jrbarch March 29, 2012 at 12:16 am

    For me at least, I could twist this debate up another notch in the spiral.

    Words are symbols. Symbols mask meaning. Meaning masks significance (purpose).

    For me at least, never ever ever ever lose sight of purpose ….

    Both politics and economics are all about ministering to the needs of people (despite the inversion of democracy in this ‘modern’ age where the many support the few). The real problem is to turn this around!

    What is the significance of this little familial ruckus around MMT/R (amongst a few minds with a select audience)? Only time will tell, but probably not much ….

    I know people like to moan and bitch about Bill Mitchell’s approach (bit gruff around the edges), but he actually cares! None of you newcomers (as far as I am aware) have a 25 year track record, arguing tirelessly for a fair go – in the face of gross pig ignorance! How’s that for commitment? You can dance around and argue about all the symbols and meaning as much as you like.

    Never known that to change anything …..?

    I just wish (respectfully) that you extremely highly talented people were as enthusiastic in telling others the simple truths, really loudly – like: we are all solvent despite what government says (and if they don’t get it lets say so even louder as People)! Solvency is one little aspect of our human, sovereign, dignity and reality …. we NEED to claim (wrest) back! I mean, people really need to feel secure. Peace on this earth has always been the purpose. We are not serfs – financial or otherwise; there is no need for (primitive) human sacrifices in economics or politics. The challenge is far greater than syntax or even meaning.

    Whoever has the best symbols and meaning that reflect the reality of our monetary system – good for you! A medal if you need one, or somebody thinks you should have one!! Now how can that be used to turn democracy (amongst other things) back upright ….?

    • Cullen Roche March 29, 2012 at 1:31 am

      Who in the MMT/R community has been more vocal and louder than I have? I don’t think MMTers quite understand my effort to reach out. Pragcap does a million page views a month. Seeking Alpha, where I was their #1 contributor does 10 million. Business Insider where I am syndicated daily does 25 million. Ask John Carney At CNBC why he even knows about MMT. Search google for MMT or Mkdern Monetary Theory and see whose website comes up. I’ve reached more people in a few years than MMT reached in 20 years. I’m absurdly vocal about this because I think the world desperately needs to know these lessons. But I won’t sell politics. Mosler Monetary Theory in the form of MMR. i’ll sell that every day until the world knows these lessons….Because it’s the right approach. Not a policy driven and politically motivated approach. MMR is a stepping stone that will possibly give MMT a fighting chance at some point….As is, MMT is a total political non-starter. Dead on arrival.

    • Michael Sankowski March 29, 2012 at 6:35 am

      Yes, the reason MMT has any web presence at all beyond a few far left websites is because of Cullen. When Bill Gross backed off from his claims the U.S. could go broke, it was because people were seeing “The U.S. can’t go broke” with good reasons the U.S. cannot go broke across major financial websites. Millions of financial people saw these counter punches and some of them actually read it.

      The idea “The U.S. can go broke” went from accepted truth to self-evidently wrong among the smarter financial crowd because of Cullen Roche.

      I’ve tried to tell MMT and PK people over and over again they should pay more attention to financial people, but many of them are too arrogant to understand why it might be useful.

      They denigrate Mike Norman who has stepped into the lions den over and over again, and only now are letting Phillip Plinkington into their debates. And they carpet bomb Cullen.

      It’s bizarre beyond belief.

      • Michael Sankowski March 29, 2012 at 7:40 am

        I’ll add I consider behavior like we’ve seen demonstrated by some in the MMT community to be somewhat anti-democratic.

        • wh10 March 29, 2012 at 9:27 am

          What happened with Mike? Pilkington’s a practitioner?

      • PeterP March 29, 2012 at 7:53 pm

        MMT pays a lot of attention to finance people. Its creator, Mosler is a finance guy. MMT folks simply tell those who misunderstand MMT that this is the case, some people may not like it.

      • jrbarch March 30, 2012 at 10:06 pm

        RE Cullen Roche March 29, 2012 at 1:31 am & Michael Sankowski March 29, 2012 at 6:35 am

        Your antithesis the WSJ has 36M page views per month: Google 1B, Tumblr 15B, WikiM 7B, HuffPo 1B, NYTimes 30M, FB 1 Trillion – how has that changed anything? The internet is a veritable ocean of misinformation and out of date ‘facts’ ( probably just quoted some). Gross might have lost a battle but not the ideological war – I do appreciate the efforts made by MMT/R and others. I don’t think anybodys purpose and inner motivation should be swept aside, nor should they be denigrated simply because of differences in meaning and symbol – most people want something better for more than just themselves. All of this stuff just happens in your heads – I know it impacts on what is happening on the outside, but there is more to a human being than a little bubble of mind, ego and thoughts. When bubble rages against bubble, the casualty is always what is.

        From a simple human perspective I would nominate and prioritise:

        1) contentment
        2) being useful
        3) learning and growing

        as relevant to human existence. As to:

        1) ‘What you are looking for is already inside of you’ – that’s been the message over the millenia;
        2) Everywhere you look are opportunities;
        3) See 1 & 2.

        Granted if there is FE PS and sustainable production then that satisfies one conditional aspect of people’s physical needs – and that’s that. No more, no less. You can feed people fish, but that does not fulfill them as human beings! Neither does FE PS & production/innovation creativity/art …. they are ‘expressions’ ….

        Do you think I would be elected on those ‘political realities’? The human realities are always shoved aside – the world of thoughts mostly serve to eclipse understanding, of WHO WE ARE!! We act like we are little puppets; slaves to FE PS production ect – dependent upon TPTB. This is not true ….

        To me, its always deeper than economics or politics. We are whole beings ….

        Was wondering about that actually: politics is just one aspect of human nature – can’t quite understand why you guys would want to separate yourselves conceptually from it? As above, separations only happen in the mind …. ?? I guess I think MMT/R should be highly politicised (socialised, economised, turned into a musical – crikey, you can make a religion out of it if you like if that helps)!!!

    • paul (formerly paulie46) March 29, 2012 at 8:45 am

      jrbarch,

      I like the way you think.

  • Joseph Laliberté March 29, 2012 at 8:05 am

    JKH,
    So it doesn’t really matter if your flow of funds equation ‘S=I+(S-I)’ refers to gross or net saving/investment because the identity is still respected. So whether we talk about ‘gross saving’ or ‘gross saving minus depreciation’ is really red herring; do I get this right? On this, four points.
    1. Your flow of funds equation is a two variables equation. Substract whatever amount from both variables, and the identity will still be maintained. Do you really want to use this to say that ‘gross versus net’ doesn’t really matter?
    2. Do you really want to go around claiming that you have designed and defined a brand new “JKH-homemade” sources and uses of funds statement where depreciation is not added back as a source of funds? If yes, then your approach flies in the face of proper accounting rules and practices. And it also flies in the face of your own pontification about proper financial accounting in your paper.
    3. You often talk about Professeur Lavoie. Have you ever met or chatted with him? I suggest you do and present him your flow of funds equation and tell him that it works irrespective of whether depreciation is kept in or taken out, and see what his response will be.
    4. On this same basis, it doesn’t really matter whether we say that the private domestic economy seeks to satiate its desire for “gross saving” or “gross saving minus depreciation”. Right?

    • PeterP March 29, 2012 at 7:55 pm

      The beauty of S=I+(S-I) is that it is *always* respected :) I, S can be flows, stocks, weights, lengths, whatever. The equation is vacuous, as it is obeyed for any two quantities that can be added (have the same units).

      • JKH March 29, 2012 at 9:03 pm

        In case you were to have an interest in understanding where that equation came from, I’d direct you to section 4 of the long post, which was my response to Randall Wray, who shares and/or shared your view.

        • PeterP March 29, 2012 at 9:57 pm

          Are you saying there exist two quantities of the same units that do not obey this equation? What are they?

          • JKH March 29, 2012 at 10:02 pm

            I don’t know what equation you’re talking about, but S and I were specified in that one.

            • PeterP March 30, 2012 at 7:57 am

              The equation in my previous post, obviously. S=I+(S-I). You don’t need to specify anything about I, S, it is always obeyed.

              • JKH March 30, 2012 at 8:48 am

                As I said, I dealt with this in the long post, section 4.

                Is there something I said there that you disagree with?

                If so, what?

    • JKH March 29, 2012 at 9:02 pm

      I really shouldn’t respond to such stuff, but let’s just have a look at what I actually said, with some semblance of accuracy this time:

      I said it would be possible to construct a “net” flow of funds statement, for a particular purpose. I did not say that it would replace the standard statement. It would supplement the standard flow of funds presentation for the particular analytical purpose at hand. There is nothing about such supplementary analysis that necessarily conflicts with any national accounts or corporate financial reporting. It doesn’t undo any standard reporting in this area.

      The purpose of such analysis would be to analyze the defined issue, which is the referenced treatment of investment as if it were dissaving.

      So let me construct an example for this purpose, one that corresponds to the discussion in the post:

      Assume a business pays out all its profit as a dividend to households. I suggested in the post that is an implied requirement of the Mitchell analysis. Here is the example then:

      Gross investment 200
      Depreciation 100
      Net investment 100
      Profit/Dividend 100

      In conventional terms, that means:
      Business gross saving 100 (depreciation)
      Business net saving 0
      Household saving 100 (assumed dividend reinvestment)
      Private sector gross saving 200
      Private sector net saving 100

      Gross sources of funds 200
      Gross uses of funds 200

      Net sources of funds 100
      Net uses of funds 100

      For my own purpose, I have defined the last two items as “net” in the sense of net of depreciation. That is not a national accounts statement or even a standard corporate financial statement. It is a statement constructed for purposes of this particular analysis.

      I said in the post:

      “But whether saving and investment are tracked at the gross or net level of national accounts, the difference between current period saving and investment is the same. If depreciation is subtracted from gross flows, it must be subtracted from both investment and saving sides to maintain accounting coherence.”

      I said “track”, not replace standard reporting with something different. And what I said is true in this example. The difference between private sector current period saving and investment is the same in both cases. The difference in both cases is zero in this example.

      Now look at the effect of the Mitchell methodology for treating investment as dissaving at both levels of the flow of funds, as I have defined them.

      At the gross level, let’s look at the business sector first. And let’s look at how he would treat that section of the flow of funds that connects the income source corresponding to depreciation to the use of funds in an equivalent amount of investment. He views investment as dissaving, so that would be (100) of saving. The source of funds, depreciation, is an internally generated source of income. As such, it is the income from which money is “spent” in this example, to use Mitchell’s term. So, the net result is that this flow of funds is associated with saving of zero in his terms – investment has been “spent” from that source of income.

      Now, let’s look at the household sector at the same level of the flow of funds. The household sector is entirely disconnected from any such flow from depreciation as a source of funds to investment as a use of funds. Therefore, there is no household saving corresponding to this section of investment. The household contribution to saving for this section of the flow of funds is zero.

      Therefore, considering this section of the flow of funds consisting only of deprecation sources and equal investment uses, the Mitchell treatment would identify private sector saving of zero.

      That leaves the remaining section of the gross flow of funds. For purposes of analysis here, I’ve defined that as the net flow of funds, which in this case consists of funds sourced from reinvested dividends and used for net investment of 100. Here, the household is involved by construction, via reinvested dividends, as describe in the post above. The analysis proceeds exactly as I described in the post. And end result is that private sector saving associated with this lower, net piece is also zero, as in the post, according to the Mitchell methodology.

      Thus, the result is the same, whether the Mitchell treatment is implemented at the normally reported level of the gross flow of funds, or the level of the net flow as I defined it for purposes of this analysis. And the reason it works that way is that the net flow measure I constructed for purposes of this analysis is congruent with what ends up being the net nominal balance sheet impact of the gross flow, given the fact that the cost of depreciation is netted away from both assets and equity. And that’s why I constructed it as I did.

      • Joseph Laliberté March 30, 2012 at 8:17 am

        Look JKH, I do not want to be disrespectful. This whole discussion started about the definition of (S-I). You pointed out that MMTers sometimes incorrectly call (S-I) “saving”, and this change in terminology allows them to say misleading things like “government deficit increases the saving of the private domestic economy to the penny”. (BTW-I have complimented you several times for clarifying this up).

        Now, in a super weird twist of event, you arrive with your own definition of (S-I) as meaning ‘gross saving minus depreciation – gross investment minus depreciation’, when you know dam well that the definition for the letter “I” in the standard economic book is “gross investment”, and the definition for the letter “S” in the standard economic book is “gross saving”. Concomitantly, you come up with your own definition of “source of funds” as meaning “net source of funds” (!!??) and your own definition of use of funds as meaning “net use of funds” (!!??). And when you get caught fiddling around with definitions, you brush it aside as a minor thing because talking about S and I net of depreciation does not change the result of (S-I) in any case. This sounds a lot like a MMTer saying that changing the definition of (S-I) to “saving” is fine because in any case it does not have an impact on his empirical analysis.

        You are fond of Krugman’s graphical expression of I and S? Do you know that Krugman’s graph talk about gross investment and gross saving? Do you really thing that Krugman does not know that if you would net out depreciation from both S and I, the difference between the two lines on his graph at any point in time would not change? Krugman chooses to depict gross saving rather than ‘gross saving minus depreciation’ so that depreciation of past gross investments does not blur the picture of the evolution of investment (I) in the United States.

        Now in the same way that you claim that MMTers fiddling around with definitions allows them to say things that could be seen as misleading, your own fiddling around with definitions allows you to say things that could be seen as misleading like saying that the private domestic economy seeks to satiate its desire for S. This is utter non sense if you talk about “gross saving”.

        So when you say:
        “I said it would be possible to construct a “net” flow of funds statement, for a particular purpose. I did not say that it would replace the standard statement. It would supplement the standard flow of funds presentation for the particular analytical purpose at hand. There is nothing about such supplementary analysis that necessarily conflicts with any national accounts or corporate financial reporting. It doesn’t undo any standard reporting in this area.”
        I can easily imagine a MMTer saying:
        “I said it would be possible to construct a “saving” definition as meaning (S-I), for a particular purpose… blablabla”

        You know, everyone around here treat you like a super heroe that can never possibly go wrong, I am sorry if I am spitting in the punch bowl, crashing the party and pricking the JKH balloon. I am not here only to tell you how great you really are, I am also here to tell you when you may have gone wrong. Accept it. Take it like a constructive criticism and move on. Otherwise all you will get as comments on your posts is some bootlicking thing with the JKH fan club signature.

        • JKH March 30, 2012 at 8:32 am

          Can you show me please where I redefined (S – I) as being net of depreciation, as opposed to saying that (S – I) net of depreciation subtracted from both terms is equal in magnitude to (S – I).

          • JKH March 30, 2012 at 8:39 am

            with a link to the comment, thx

          • Joseph Laliberté March 30, 2012 at 9:02 am

            nice try. Yes, all of this was just in my dream. I dreamed about you talking about the equation S=S+(S-I) as being a flow of funds that can be condensed on a balance sheet as a measure of equity or net worth. I also just dreamed about you saying this:
            “From a financial accounting perspective, the following is true:
            Saving is an income statement “event” in the sense that saving must be a subset of income. (Harless has the same view of it.) The accumulation of saving is recorded as a balance sheet item usually called net worth or equity (and classified as savings).
            The deployment of saving or savings as a source of funds into increases in investment or financial assets (or reductions in liabilities) as a use of funds is classified as an accounting flow of funds. (Flow of funds is sometimes known as sources and uses of funds in corporate financial reporting.)”

            BTW- I still think you are an outstanding commentator (maybe second in my view to Scott Fullwiler). I may just have changed my views as to how open you are to constructive criticisms. I am done. No more reply from me on this issue.

            • JKH March 30, 2012 at 9:30 am

              I’m trying to be open.

              I’ve never said I don’t make errors.

              I just don’t see what’s wrong with what you just quoted.

              It’s quite possible that my writing is condensed so that it can be misinterpreted.

              Or it may be wrong. But I don’t see it here yet, based on how I’ve explained it so far.

              • JKH March 30, 2012 at 10:03 am

                P.S. If I were doing an ex post indictment of myself, the best (worst?) I can attempt is that what I probably/may have done in my writing style is conflate the flow of funds properly defined to include gross saving and gross investment, before depreciation, with my own defined supplementary version that nets out depreciation. But as I’ve tried to explain, the reason for doing that is to make a short cut to the reconciliation of balance sheets, including cumulative investment, and cumulative saving or net worth – because the effect of cumulative depreciation is netted out in the stock measure of net worth or equity. Balance sheets do not reflect differential increments of value that match gross saving. So that sort of short cut is consistent with stock/flow reconciliation – whereas the Mitchell treatment of investment as dissaving isn’t.

              • Cullen Roche March 30, 2012 at 10:16 am

                I don’t see this “error” either, but I might just be a “bootlicker”. Not sure what it is about MMTers that drives their comments into the ground like this, but they could sure use a PR rep.

                Also Joseph, the whole MMR project is about being open minded and discovery. The main issue we have with MMT is that it’s rigid. There is no evolution. It is what it is. The “founders” created the bible of MMT and everyone else just has to accept the word of the lord(s).

                MMR is all about being open minded in this regard. Now, I know the accounting is not open to interpretation in the same way that other elements are, but I would assume that JKH would be open minded about any errors. I know for a fact he has been in the past so I don’t know why this time would be any different. I know from my experience that being wrong is an important part of the learning process. NO ONE HAS THE WORLD OF ECONOMICS TOTALLY FIGURED OUT. We all get things wrong on occasion. Even the very best of us. But you know what we do? We realize the mistake and work from it to form a better foundation. I write about being wrong all the time. It’s expected. But what I don’t do when I’m wrong is get all defensive, insulting and dig my heels in on a position like MMTers do (well, except in a few rare cases where I’ve been slinging MMTers mud back at them! Oops.). I mean, some MMTers have never been wrong about anything in their whole life according to them. They have the whole macro world figured out and they’ve packaged it in this one neat little box and if the world doesn’t accept the box then a storm of insults and attacks follows them….I think we should all try to be a bit more open minded and understanding here and not so quick to attack and insult….

  • Ramanan March 30, 2012 at 9:38 am

    Joseph L,

    I thought your post and your comments were less important to the whole issue.

    If the basic model being critiqued does not talk of depreciation itself, why critique JKH’s critique which didn’t make that distinction by using either gross saving or net saving at each and every place saving appears?

    Btw, your criticism applies to MMT as well – if you haven’t realized.

    Anyway since you are done, don’t ask for you to respond.

  • Ramanan March 30, 2012 at 9:59 am

    JKH March 30, 2012 at 9:30 am,

    If you don’t mind my interruption:

    I think what Joseph quoted was that he was trying to say that net saving (i.e., net of CFC) is added to net worth rather than gross saving.

    I don’t know if he realizes or not but gross saving is added in full and consumption of fixed capital is subtracted at revaluations which you probably pointed out in the earlier thread.

    Anyway apologies if some misunderstanding is created – I think he may have gotten the idea that you were using net saving from a comment of mine on his blog.

    I also wrote a post on this http://www.concertedaction.com/2012/03/29/more-national-accounts-consumption-of-fixed-capital/

    • JKH March 30, 2012 at 10:04 am

      my 10:03?

    • JKH March 30, 2012 at 10:12 am

      Another excellent post by you Ramanan:

      “This can be confusing because depreciation is a negative for net worth. The reason is that, as I have mentioned before, revaluations need to be done before end of period stocks are calculated. And it is where consumption of fixed capital will make a reappearance – subtracting from net worth due to a reduction in the value of nonfinancial assets.”

      So you could have written my 10:03.

      The fact is that I’m pretty familiar with the idea of depreciation as a source of funds and I could have made life a lot easier at this stage if I’d paid attention to that in the long post, and spent extra time on it. But I’d already cut the length by half. Also, as you say, the MMT treatment rarely mentions the depreciation factor if at all as far as I can tell, so it wasn’t front of mind in drawing out analysis, comparisons, etc.

      • JKH March 30, 2012 at 10:17 am

        So in that sense it was an oversight of explanation and could have been improved on, so Joseph has a point (which I did acknowledge on his own site).

      • Ramanan March 30, 2012 at 10:49 am

        Thanks.

        I guess you also said it in a comment in that long previous post in reply to Joseph on how it appears in revaluations.

        But imagine writing a post with net net saving and all that. It would have added to confusions because others would have thought you are critiquing that they don’t have depreciation.

        It’s difficult to define everything as per the full definition which Joseph correctly points. Even all of “G” is not counted in GDP etc. But that shouldn’t be an excuse for not making the distinction between saving and saving net of investment which is crucial especially given both make an appearance in the basic MMT model. So if someone wants to say something they have to use the same basic model where gross saving and saving net of depreciation collapse into one another because there is no depreciation.

        The important part is that in spite of the “angst” (in Bill’s opinion), he couldn’t come up with a proper reply and continued the same way as earlier.

        • JKH March 30, 2012 at 11:01 am

          Yes.

          Framing it formally as “net net” would be quite complicated. Although that’s what I was getting at in my additional explanations.

          • Ramanan March 30, 2012 at 1:28 pm

            Yes understood.

            Btw, here’s quoting Marc Lavoie – he says the same thing as Krugman (I think) but in a causally correct way

            http://www.asymptosis.com/lending-velocity-and-aggregate-demand.html#comment-4626

            See my two comments (basically links)

            • JKH March 30, 2012 at 1:43 pm

              http://www.asymptosis.com/keen-answers-krugman.html#comment-4618

              “I guess there’s a self referencing problem with it because he defines aggregate demand in terms of incremental debt in the first place. That definition seems a bit mushy to me anyway. And there’s a further measurement problem in comparing debt increases with velocity increases. And it no doubt varies between short term and long term. So measurement overall is problematic. But it is an interesting sentence at least.”

              • Ramanan March 30, 2012 at 2:03 pm

                great.

                I sorta remember you pointing out issues the first time Keen came up with this definition.

  • Frank in midtown March 30, 2012 at 2:30 pm

    Technically, the “Savings” rate is the cash left over to be used by the partial reserve banking system. A substantial amount of what modern households do to create networth (SS, IRA’s, 401k’s) are newer than NIP accounting and end up as I and C even though they will be I and C again when distributed.

  • PFitzSimon March 31, 2012 at 10:11 am

    One parameter overlooked here is the private sector debt. I believe the S in the national account equation refers to whether the national aggregate debt gets increased or decreased over the one year measurement period. That is , all income not used for consumption including real investment or to pay taxes, can be viewed as paying down existing debt. If S is positive you pay down debt if S is negative you increment the aggregate private sector debt.