Sectoral Balances and Keynesian Causation

Macroeconomists often start their analysis from an accounting identity or set of identities. Since identities are true by definition, they can provide a good framework for analysis, including a way to detect any errors in logic or inconsistent conclusions. A theory that conforms to an identity is not necessarily correct but is at least potentially correct. To constitute a theory, though, it is necessary to do more than just invoke identities. This is because identities in themselves tell us nothing about causation.

Once we begin to make behavioral assumptions, the ground becomes contestable. Identities are incontestable, at least if we accept the principles of double-entry book keeping, whereas behavioral assumptions are not.

The Sectoral Balances

An important identity emphasized by MMT economists concerns the sectoral balances:

(G – T) = (S – I) – (X – M)

On the LHS, government expenditure, G, minus tax revenue, T, is the budget deficit. On the RHS, private domestic saving, S, minus private gross investment, I, is referred to as net private saving. Exports, X, minus imports, M, is net exports (or the trade surplus).

When a sector, in aggregate, spends more than its income, it is said to be in deficit. If it spends less than its income, it is in surplus. We can write the identity as:

(G – T) + (I – S) + (X – M) = 0

This makes clear that the deficit of the government sector plus the deficit of the domestic private sector plus the deficit of the external sector (foreigners, including both foreign private sectors and governments) must sum to zero, balancing each other out.

This is an identity, true by definition. It tells us that whatever the net positions of two sectors, the other sector must offset them exactly. If, for instance, the domestic private sector and foreign sector are both in surplus (S > I, M > X), the government must, by definition, be in deficit to an equal extent. Or, referring to the first version of the identity, if the domestic private sector is net saving and the economy is running a trade deficit, the government’s budget must be in deficit. For an explanation of this point see Budget Deficits and Net Private Saving.

This is a very important point to understand, and it is critical that any theorizing conforms to the sectoral balances identity. Nevertheless, the identity in itself does not explain how each sector affects the others, or how the various sectors are likely to respond in different circumstances. Also, although there is a close connection between GDP and the sectoral balances identity, it is not immediately obvious from the identity itself how GDP is likely to move in response to sectoral behavior and interactions between the sectors. To find possible answers to these questions, we need to introduce our behavioral assumptions.

Broadly speaking, in MMT it is usually argued that once the government has formulated its fiscal policy settings, the behavior of the non-government (which includes both the domestic private sector and the external sector) will determine the ultimate size of the budget deficit (or surplus) through its behavior. In particular, tax revenues will rise and fall endogenously with oscillations in non-government activity. It is further held that if the government’s fiscal settings are not consistent with the non-government achieving its intended net saving position at full employment, there will be either a decline in income and employment or inflation. Fundamental to this position is that there is no mechanism in a market economy capable of automatically eliminating the resulting unemployment or inflation, and so in such cases it is up to the government to adjust its fiscal settings to provide a better fit with non-government behavior.

Clearly, these theoretical arguments go well beyond what is immediately obvious from the sectoral balances identity. To arrive at these conclusions, MMT economists employ behavioral assumptions that appear most appropriate from their perspective.

At the most fundamental level, there is the MMT understanding of modern monetary systems (i.e. flexible exchange-rate fiat-currency systems). The monopoly issuer of the currency is the only entity that can correct a shortage or excess of the one thing that can extinguish tax obligations or accommodate non-government net saving desires.

There is also the MMT insight that since any issuance of “debt” by the currency issuer is purchased out of funds it has net spent into existence, the notion of financial crowding out is inapplicable. The currency issuer as monopolist sets the price of its own money, and can do so independently of fiscal operations.

The Post Keynesian observation, accepted in MMT, that loans create deposits destroys the false notion of the money multiplier. The quantity of reserves does not – and cannot – constrain or drive private credit creation. Lending is capital and demand constrained, not reserve constrained. It is the state of the economy that underpins demand for loans from credit-worthy borrowers, and in a world without financial crowding out, the currency issuer can strengthen economic activity through fiscal measures whenever there is excess capacity and unemployed resources.

Keynesian Causation

It has been stated that, given the government’s fiscal settings, non-government behavior largely drives the budget outcome through its effects on tax revenue. So, in some sense, the budget outcome is endogenously determined by the level of economic activity. The endogenous determination operates through the automatic stabilizers. In particular, tax revenue rises and falls with income and employment.

However, at the same time, fiscal policy can have an exogenous influence on economic activity. This will occur whenever the government actively alters its policy settings. This includes changes in government spending measures and alterations of tax policy, such as changing rates, introducing a new tax or removing an old one.

In analyzing these effects, most MMT economists are essentially Keynesian or Kaleckian in the behavioral assumptions they make and the causation they envisage, although they uncover fresh insights concerning connections between the sectoral balances identity and the state of the economy. These connections have been made by various Post Keynesians, especially those associated with Wynne Godley, as well as MMT economists.

For instance, it was primarily the understanding that persistent fiscal austerity in trade-deficit economies during the 1990s corresponded to domestic-private net dissaving and an unsustainable accumulation of private debt that enabled some to foresee the coming crisis. It is this understanding that also informs the depiction of the current crisis as a balance-sheet recession. A heavily indebted private sector needs to work down its debt before it can be the driver of a sustainable recovery. But in the absence of an orderly cancellation or write down of private debts, debt repayment will require substantial net saving by the private sector, which in trade-deficit economies is only possible alongside large budget deficits.

Keynesian and Kaleckian causation suggests that fiscal stimulus can boost output and income when, as now, there is excess capacity and unemployment. MMT economists point out, in addition, that a failure to do so will impede the private sector’s attempts to net save.

I thought it might be instructive to elaborate on the kind of causation MMT economists have in mind, and the behavioral assumptions, many of them Keynesian, that are involved in the formulation of this theoretical perspective.

First, the notion that there is a connection between the behavior of the various sectors on the one hand, and GDP and employment on the other, is suggested by the fact that the sectoral balances identity is simply a reworking of an identity pertaining to GDP. In the sectoral balances identity

(G – T) = (S – I) – (X – M)

private saving, S, is disposable income not consumed; i.e. S = Y – T – C, where Y is income, Y – T is disposable income and C is private consumption expenditure. If we substitute this expression for S into the sectoral balances identity and rearrange, we get:

Y = C + I + G + (X – M)

Real income, Y, is real GDP, so this suggests that the connection between real GDP and the sectoral balances is close. But what are the causal connections?

Before introducing the behavioral assumptions, it may be instructive to express the sectoral balances in yet another way:

(G – T) = (S – I) + (M – X)

In words, this makes clear that the deficit of the government sector (or budget deficit, BD) equals the private sector surplus (or net private saving, NPS) plus the trade deficit, TD:

BD = NPS + TD

We can use this as a check for our results, and also to observe how the sectoral balances are affected by different circumstances according to Keynesian reasoning.

Turning to the behavioral assumptions, Keynesians and MMT economists assume that tax revenue, saving desires and import spending are endogenously influenced by the state of the economy, specifically by the level of income. In more elaborate models it is recognized that these variables have both endogenous and exogenous influences. For example, import spending depends endogenously on income but is also susceptible to other factors exogenous to the circular flow of income, such as exchange rates. For present purposes, we can keep things simple by assuming tax revenue, desired saving and imports can be expressed as positive functions of income, ignoring the exogenous factors:

Sd = s(Y – Td), Td = tY, Md = mY

These expressions reflect the behavioral assumption that desired saving (Sd), taxes (Td) and imports (Md) rise with income. In this regard, s, t and m are propensities to ‘leak’ from the circular flow of income and all take values between zero and one. It is being assumed that, within a reasonable range of income, a fraction s of each additional dollar of disposable income will be saved, and that fractions t and m of an additional dollar of income will be taxed and spent on imports, respectively.

Often reference is also made to the propensity to consume, c, which is the proportion of extra disposable income that households desire to devote to private consumption, Cd. The marginal propensity to consume, c, and the marginal propensity to save, s, sum to one by definition. That is, whatever disposable income is not consumed is saved. Desired consumption is assumed primarily to be endogenously determined by income but is also influenced by exogenous factors including interest rates and asset prices. Since, for simplicity, desired saving is being treated purely as a function of disposable income, this implies the same is true of desired consumption. From Sd = Y – Td – Cd it follows that:

Cd = Y – Td – Sd

Substituting for Sd we get:

Cd = Y – Td – s(Y – Td) = (1 – s)(Y – Td) = c(Y – tY) = c(1 – t)Y

In contrast to the leakages (tax revenue, private saving and imports), Keynesians assume that desired investment, government spending and exports are exogenous ‘injections’ into the economy originating from outside the circular flow of income.

From the MMT perspective, it makes sense to consider government expenditure this way. It is injected into the economy by the monopoly issuer of the currency. The act of government spending injects a flow of expenditure and adds to the circular flow of income. The level of government expenditure is not constrained by current income. It is referred to as an autonomous expenditure, because it is autonomous or independent of current income.

The same is assumed to be true of private investment and exports. Desired investment can be funded out of past profits or private credit creation of the banking system, and so is not constrained by current income. In Keynes influenced approaches, the level of investment is assumed to depend on expected profitability, which at the aggregate level is considered to be a function of aggregate demand. For instance, the Kalecki profit equation (see Thinking in a Macro Way) indicates that aggregate profit is equal to the sum of capitalist expenditures, the budget deficit and net exports, minus saving out of wage income.

Desired exports are regarded as primarily influenced by exogenous factors, especially the state of the global economy – the level of the rest of the world’s income – and other factors including exchange rates.

The assumption that the injections are exogenous is often signified by a subscript “o” to the variables:

Id = Io, Gd = Go, Xd = Xo

Introducing the Keynesian assumptions into the sectoral balances identity we have:

Go – tY = s(Y – tY) – Io + (mY – Xo)

This can be rearranged to get an expression for income in terms of the exogenous and endogenous variables:

Y = (Io + Go + Xo)/(s + (1 – s)t + m)

This expression is in the form:

Y = k.A

where:

k = 1/(s + (1 – s)t + m)

A = Io + Go + Xo

Here, k is referred to as the expenditure multiplier. This billy blog post provides a good introduction on spending multipliers.

In words, the expression for Y says that income can be expressed as a multiple of the sum of autonomous demands. The idea is that once private firms, the government and foreigners have made their spending decisions, the resulting expenditure flows will be received as income by other participants in the economy. A portion of the income will be dedicated to consumption, while other portions will leak out of the circular flow of income to saving, tax payments and imports. Subsequent recipients of consumption expenditure flows will likewise use some for consumption while some leak out, and so on. At each stage of the multiplier process the size of the expenditure flow shrinks until it is insignificant.

As can be inferred from the expression for k, the multiplier will be larger when the propensities to leak are small, and vice versa.

A Stylized Example

A simple numerical example may help to illustrate some features of the MMT perspective on the lead up to the balance-sheet recession and the effects of various policy responses to the crisis. It may also help to crystallize the connection envisaged in MMT between the sectoral balances and the economy’s performance in terms of output and employment.

We have our simple model:

Y = k.A

where k is the expenditure multiplier and A the sum of autonomous demands. We also know that:

k = 1/(s + (1 – s)t + m)

A = Io + Go + Xo

And the leakages are:

Sd = s(Y – Td), Td = tY, Md = mY

For calculation purposes we can rearrange the expression for private saving:

Sd = s(Y – Td) = s(Y – tY) = s(1 – t)Y

Suppose initially the following behavioral parameters and exogenous spending levels:

Io = 10, Go = 20, Xo = 10
s = 3/32, t = 1/5, m = 1/8

The figures for the components of autonomous demand can be regarded as in millions, billions or trillions depending on the country and currency we have in mind. Or, in fact, for the initial part of the example, the expenditures can be thought of as percentages of GDP.

The propensities to leak indicate that private households are currently saving just under 10% of disposable income, being taxed 20% of GDP and spending the equivalent of 12.5% of GDP on imports.

Plugging these figures into our model reveals an expenditure multiplier of 2.5, autonomous demand of 40 and GDP (= Y) of 100.

Let’s assume this GDP of 100 corresponds to full employment. We can see how this situation breaks down at the sectoral level by calculating the budget deficit, net private saving and the trade deficit using the equations in our model for the leakages. Doing so reveals that Td = 20, Sd = 7.5 and Md = 12.5. Since Go = 20, Io = 10 and Xo = 10, we can see that the sectors break down as follows:

BD [0] = NPS [-2.5] + TD [2.5]

Although the economy is at full employment, a trade deficit in combination with a balanced budget implies that the domestic private sector desires to be in deficit, spending more than it earns. Whether this is of concern depends on how long the situation has prevailed.

Suppose the economy has been performing somewhat like this for an extended period of time. Although highly stylized, this is kind of what happened in the US economy during the 1990s. Over time, the domestic private sector will get pushed increasingly into debt as it runs down net financial wealth to enable negative net saving.

At some point the situation proves unsustainable. The domestic private sector is likely to respond by trying to increase its saving rate and get its debt under control and balance sheets in better shape.

We can reflect this behavior in our model by assuming that there is an increase in the marginal propensity to save. Imagine it increases to s = 7/32, or a bit over 20% of disposable income. We’ll assume this occurs before any change in government policy settings, perhaps because the government has been lulled into the cosy neoliberal notion of a Great Moderation.

For simplicity, assume that exogenous investment and exports also remain unchanged. If the downturn in demand resulting from the increased saving rate is more or less global – as it is in the present crisis – these expenditure flows would actually be likely to decrease. But including these changes would only further underscore most of the points to be made.

We can recalculate the outcome of our model using the new, higher propensity to save. The effect is to reduce the size of the multiplier from 2.5 down to 2 and income from 100 to 80. The steepness of the decline in output (a 20% drop) is not the point. As mentioned, this example is highly stylized. It is the direction of the change that is relevant.

The decline in output implies a reduction in employment below the full employment level on the assumption that productivity has not declined as sharply as output. We can suppose that unemployment has increased significantly, much like the experience of the US and other economies since the onset of the crisis.

The decline in income will impact on tax revenue and import spending, and also thwart the private sector’s attempt to save to a significant degree.

If we suppose that the private sector’s new propensity to save was arrived at on the expectation that output would remain at the full-employment level, the saving rate would have translated into saving of 17.5 and net private saving of 7.5, considering investment is 10. We can think of 7.5 as the domestic private sector’s desired level of net saving at full employment.

Instead, because of the decline in income, the domestic private sector has only saved 14, indicating net private saving of 4. Admittedly, if investment had been allowed to decline exogenously, this would contribute to net private saving. This would have exacerbated the downturn in demand and output even further, but would help to boost net private saving. The current example most resembles a situation where private households feel the pinch first, due to unsustainable debt levels, perhaps on mortgages and credit cards, and firms do not anticipate the decline in consumer demand before it occurs. As mentioned, we are also ignoring the likely decline in export income, which would also impact negatively on income and subtract from net private saving.

Plugging the numbers into our model reveals the following breakdown by sector:

BD [4] = NPS [4] + TD [0]

Overall, the domestic private sector has begun to mend its balance sheets. The fiscal automatic stabilizers have kicked in to support private-sector net saving, even though the government has not responded to the crisis at this stage.

From the MMT perspective, the emergence of unemployment is a clear sign that the government’s deficit expenditure is insufficient to enable private sector net-saving intentions alongside full employment. Our simple model indicates that an increase in autonomous demand of 10 would be necessary to restore output to 100, which we have assumed is consistent with full employment.

According to the logic of the model, it wouldn’t matter if this exogenous spending increase came from government deficit expenditure, private investment or export demand. However, since investment is considered to be sensitive to expected profitability, which Keynesians regard as a function of aggregate demand, stronger investment seems unlikely in the midst of weak demand and high unemployment. This is especially true, in terms of MMT, given that the domestic private sector is intent on increasing its net saving, and this can be achieved through reductions in investment as well as a higher saving rate.

In a global downturn, exports are also an uncertain source of demand. They may provide a boost in demand for some countries, but only at the expense of demand in other countries, since at the global level net exports cancel to zero.

The solution, within the model, is for the government to increase deficit spending, either through increased spending or tax cuts.

By increasing government spending by 10 to 30, and leaving all other parameters unchanged, the model indicates output would be restored to the full employment level of 100 with the following sectoral composition:

BD [10] = NPS [7.5] + TD [2.5]

By running a budget deficit equal to 10% of GDP, the government has underpinned net private saving of the desired level (7.5% of full-employment GDP) and a trade deficit (2.5% of GDP).

Alternatively, the model indicates that the government could have left government spending at 20 and cut taxes, which would have the effect of reducing the propensity to tax below its current level of 1/5.

But maybe the government doesn’t want to increase its deficit spending. Suppose that instead of introducing fiscal stimulus, the government responded to the onset of the balance-sheet recession by attempting to restore a balanced budget. Recall that at the onset of the crisis, GDP had fallen to 80, with the budget deficit at 4 (5% of GDP) and net private saving at 4 (also 5% of GDP). The trade sector was in balance.

Imagine for whatever reason – perhaps a fanciful notion that a currency issuer could run out of its own money, or that budget deficits lead to hyperinflation or crowd out private investment – that the government chose to cut spending from 20 down to 15. Through the multiplier, this would reduce GDP further to 70, implying lower employment. We are assuming private investment remains unchanged for simplicity, but for Keynes influenced economists, the depressed conditions would probably result in a collapse in investment. The impact on the various sectors, according to our simple model, is:

BD [1] = NPS [2.25] + TD [-1.25]

The government has almost succeeded in balancing its budget and also created a small trade surplus (although this assumes no decline in exports despite depressed global demand). But the policy has also frustrated private-sector saving efforts.

The model indicates, as MMT suggests, that the unemployment would persist until either the government quit trying to balance the budget or the domestic private sector altered its desired level of net saving.

But, in a balance-sheet recession, if the domestic private sector cannot net save sufficiently to pay down its debts to sustainable levels, it will be in no position to drive sustainable recovery through credit expansion and private demand.

This, in any case, is a rough outline of the MMT perspective on causation, and why fiscal stimulus rather than austerity is regarded as the appropriate policy under current circumstances.

27 thoughts on “Sectoral Balances and Keynesian Causation

  1. I’ve started writing the Quantity equation the other way around

    PY = MV

    the mental model of a left to right reader is that causation occurs left to right. The dependent and independent variables are inferred by the presentation.

    Asking people who get obsessed by a particular form of an equality equation to write it the other way around, then watch the fun ensue.

  2. Great, a lot to sink my teeth into in the next couple of days. I can really see a nice flash tool that depicts the circular income flows with leakages and injections to help people visualize the point. With a small calculator where people can input numbers and get the resulting sectoral balances. Maybe I’ll create a prototype when I get time.
    Now one point. you say:
    Over time, the domestic private sector will get pushed increasingly into debt as it runs down net financial wealth to enable negative saving in aggregate.
    I believe this can be confusing. Because when the govt runs a surplus, the private sector as a whole does not go into debt, but rather runs down its previously accumulated NFAs. Some parts of the private sector go into private debt – households mostly, trying to keep up their standard of living and doing so by, say, taking mortgages or car loans. But this debt is wholly inside the private sector. Maybe there is a little bit of debt to the govt sector when credit expansion demands higher level of reserves in the system, which the banking sector gets thru the discount window, but this should be a small component, I think.

  3. Good point. The idea deserved more explanation than I gave it. On average, the frequency of households in debt stress will tend to increase if private net saving is negative for a sustained period, but of course it will also depend on the extent to which the debt is concentrated within segments of the private sector. As you point out, it is not that the private sector as a whole is in debt, but that part of it is, and that that part is vulnerable to a sudden change in circumstances, such as unemployment for an individual or a sharp drop in demand for some firms, etc.

  4. Nice work Peter C. Good to see you back in the saddle, I was beginning to miss your informative style on the blogosphere.

  5. Allow me to second PJ’s sentiments. Welcome Back!

    P.S.
    The great debate over at “America’s Debate” continues to rage on. Stop in if you have a free moment.

  6. I’ve been lying awake last night thinking some stuff over. It seems to me that to proceed with the MMT program we MUST introduce more detailed sectoral balances, such that take into account private debt. Maybe use Steve Keen’s work, though I am not familiar with it. It will probably look something like
    G-T-R=(S-B-I)+(B-R)+NX
    where besides the usual definitions,
    B is the debt service of the non-banking private sector (net of interest on deposits)
    R is the interest that the banking sector pays to the Fed for discount window loan net of IOR that the Fed pays to the banking sector
    Thus
    – the LHS represent the consolidated Fed+Treasury balance
    – the first term ont he left is the non-banking sector balance and
    – the second term on the right is the banking sector balance
    Why is this important? Because the level of private debt is one of the most important determinants of economic health. When MMTers say that taxes regulate demand, this may seem to gloss over quite a few important details. For example, the thesis that the credit bubble was fueled by insufficient private sectors saving of NFAs suggest that sometimes to reduce demand the govt needs to reduce taxes (or increase deficit in any other way), which seems counter-intuitive.
    In the proposed sectoral balances above one would have to specify, as you do in your post, the causalities and propose policy reactions.
    Additional point is that just saying “taxation regulated demand” is also wrong because taxation applied to different sectors of the non-govt sector will sometimes have the opposite effects. For example, taxing transactions may reduce demand while taxing income may increase it by forcing the non-banking sector into credit bubbles, as I noted above. If MMT wants to be credible, all this stuff needs to be figured out.
    These are just some random thoughts that I wanted to put out there before they escape my mind forever 🙂

  7. @Peter D,

    “For example, the thesis that the credit bubble was fueled by insufficient private sectors saving of NFAs suggest that sometimes to reduce demand the govt needs to reduce taxes (or increase deficit in any other way), which seems counter-intuitive.”

    I think behind every continuous private sector’s spending more than its income (credit cards, mortgages) is some lack of proper regulation.

    Like for instance Warren Mosler always points out this: people with yearly income of $20k were able to get mortgages of $400k. How could that happen?

    So a knowledgeable government should always be on alert to prevent the conditions for such criminological environment, but if it already happened unnoticed, yes tax reduction or/and increased government spending should be promptly introduced once private sector goes back in saving mode.

  8. Should add probably – lack of proper regulation combined with lack of high enough government deficits.

  9. rmv, correct, and it could show up in our sectoral balances above as B being exceptionally high or something like that. My point is we really need to break up the “domestic private sector” into at least banking vs. non-banking to be able to see behind the one number of S-I.

  10. Peter D, agreed.

    Yes, it is clear the non-government sector, as a whole, is still rich – it owns the total US so called government “debt”. But obviously this wealth is very unevenly spread. Very small percentage of non-government sector really owns it while the majority, probably mainly households own little, nothing or are in big debt. No matter how rich the small group of non-government sector is, it can’t compensate the lack of demand coming from the fact that the majority of non-government sector is poor.

  11. Good comments, everyone.

    Peter D, I am yet to really delve into the finer points of the sectoral balances analysis carried out in the tradition of Godley, but my understanding is that they do drill down to a very detailed level. Someone else might be able to suggest good papers to start with reading in this area. (?)

    PJ and brinn, thanks for the kind words. Unfortunately, there will be periods when I can’t blog, due to other commitments. But I’m trying to add my two cents when I get the chance.

    I thought everyone at America’s Debate would have come to universal agreement by now. 🙂

    That’s economics for you: no one agrees with no one!

  12. peterc: “Peter D, I am yet to really delve into the finer points of the sectoral balances analysis carried out in the tradition of Godley, but my understanding is that they do drill down to a very detailed level.”

    The models used as examples in Godley’s publications are simplified Treasury models, and they are still very complex. Probably no one but large institutions can develop such models and track data. But large institutions do, in the US the Treasury, Fed, and Goldman, for instance. Jan Haztius of GS brought Godley to Goldman.

    In Monetary Economics, Godley and Lavoie start with simple national accounting models and build complexity. Godley also published a text entitled Macroeconomics with Francis Cripps in the ’80’s. Although it’s out of print, it is usually available used. Try searching http://www.bookfinder.com if interested.

  13. Tom,

    Random info:

    I was at the Godley conference at Levy’s in May – nobody there knew that the 1983 text Macroeconomics is available in hardcover published by Oxford University Press!

    There was some discussion on some footnote in the textbook .. a point made by Jan Kregel and I picked out my copy and asked him to point out the page .. everyone was asking .. oh is there a hardcover of this book .. there’s also a Fontana paperback version of the book which everyone has.

  14. Thanks, Ramanan. I didn’t know about the hardcover still being in print. Searching the web doesn’t pick it up for me. I got a used copy of the softcover some time ago.

  15. Tom,

    Yes not in print.

    I got mine from a Barnes and Noble seller of used books – though it looked completely new with no sign of use!

  16. Tom and Ramanan,

    The real gold is if you can find a copy of Horizontalists and Verticalists. How I have longed to track down a copy that isn’t in the few hundreds.

  17. mdm,

    Hoo hoo haa haa .. I tracked it online at Amazon France! I guess it was the last copy available anywhere..

    The seller sold me for €175 but wouldn’t deliver it to my country. So I had to ship it to a friend in the US and get him ship it to me – which cost me a ridiculous $90.

    Before that I tried a French and a Greek online shop and made the payment – only to be told that they mentioned “available” by mistake.

    I even wrote to Basil Moore once and asked him if he know how to get it. He didn’t have an answer and suggested Paul Davidson’s Keynes and his other book Shaking the Invisible Hand which I already had purchased and read.

  18. Anders: I am familiar with that model and like it. Thanks for providing a link.

    My post is just at a more introductory level, focused on explaining the assumptions behind the behavior depicted in Keynes informed models, including the cross-style diagram.

    It is the same model, really. In terms of this post, the budget deficit is G – tY, which can obviously be drawn as a downward-sloping line (gradient -t) with Y on the horizontal axis and the deficit on the vertical axis. The non-government surplus is (s(1 – t) + m)Y – (I + X), with upward slope s(1 – t) + m.

    Maybe you are just suggesting I should have drawn the diagrams? Maybe. I didn’t think it was necessary for my purpose here, which was mainly to explain the reasoning behind the MMT argument that when private net saving falls short of desires, there will be negative income adjustments unless the government acts to maintain demand. I wanted to spell out the type of behavioral assumptions behind that argument, because the MMT position is not something that follows inevitably from the sectoral balances identity. I felt I could illustrate this point with a simple numerical example.

  19. @ peterc, I think the level is aimed about right of the purpose of a blog aimed at general readership. Links to more developed references can be added if people want to pursue the topic wrt what MMT economists have written.

  20. Another very clear, didactic and instructive post. Congratulations.

    In general, the exposition is quite reminiscent of the Hicks-Hansen IS-LM model exposition.

    The main differences I could find in a first quick reading seems to be that in MMT only the IS bit is considered (with private consumption implicitly included)

    While in the IS-LM there is also the money market (LM) bit: L(r,Y) = M/P (M is nominal money supply, P is price level, r is real interest rates, which are endogenous, and L is real money demand) and private investment is a decreasing function of real interest rates (I=I(r), thus, it is not exogenous).

    It probably exceeds the scope of your original post, but given that the mainstream views quickly drift towards the notion that P is about to go sky high, together with r, it could have been a valuable addition to have considered them here. Maybe an idea for a future post?

    Thanks again for an excellent post!

  21. I made it! 🙂

    And? I was able to process most of it, although the Marx/Kelecki (sp?) references still elude me. Which is huge progress for me since your material was over my head a few months ago when I was first introduced to MMT. Good to hear different perspectives, always fills in missing pieces along the way.

    My next goal is to make it through one of Bill Mitchell’s posts in one sitting. And then again, it’s always possible pigs may fly. 😉

  22. Thanks Peter. Those links are ideal to get me at least started. Lots of material for me to study, will take me a while to get through it. So if your intent was to throw out some economic “shinies” to distract and shut me up for a while, your strategy will highly likely prove to be successful.

    You’ve been quite the gracious host, thanks again.

  23. Trixie: Glad you found the links relevant. I wasn’t trying to distract you though. Your input is much appreciated.

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