Arnold Kling  

Economists, Bridge, and National Savings

The Budget Menu... The Two Employment Surveys...

Brad DeLong and I were sitting East-West, with Warren Mosler and Thomas E. Nugent sitting North-South. Somehow, we got to two ad hominems, doubled and redoubled. Let's review the bidding.

Mosler and Nugent opened with

Understanding that government deficits add to savings and that U.S. consumers fund the desires of foreigners to save is a good way to start seeing through the media's economic mythology.

DeLong overcalled with

Borrowing doesn't "fund" anything. Borrowers do not have funds to commit--that's why they are borrowers. It is the lender who "funds" the borrower.

Nugent and Mosler rebid, using quotes from banking texts. Steve Antler, who was kibitzing, wrote,
Everything Nugent and Mosler say is easily confirmed in standard current textbooks dealing with monetary macroeconomics, money, banking, and trade.
By this point, I had entered the auction. As an aside, I said to the kibitzer,
They quote the textbooks accurately on banking, but that does not say that banking applies to what they were talking about. They might as well quote the Pythagorean theorem, which is true, but also not relevant.
So, that's the bidding. Now, time to play the hand. As I see it, the topic at hand calls not for bank accounting but for national income accounting expressed in terms of savings--sometimes called the flow of funds version of the accounting identities. For a closed economy (with no foreign sector), we have:
S - I = G - T
where S is private savings, I is private investment, G, is government spending ant T is taxes. The left hand side is net private savings, and the right hand side is the government budget deficit. As the government deficit goes up, net private savings necessarily increase. However, it is quite silly to say that the deficit is increasing savings, making it sound like, "Oh, boy, we're increasing our savings."

We have to remember that this is net private savings, which means savings minus investment. One way for net private savings to go up is for investment to go down. That is what is called crowding out, and it is not a good thing. As the deficit crowds out private investment, the nation's capital stock is reduced, which is bad for productivity and just about anything else that you would care about.

From the nation's point of view, the whole point of savings is to increase the capital stock. Any savings that goes to fund the government budget deficit is wasted from that perspective. We should not be happy about that.

For the next trick (hanging onto the bridge game metaphor), let us look at an open economy, with a foreign sector.

S - I = G - T + X - M

where X is exports and M is imports. Here, what we see is that all else equal, when net private savings falls, the trade balance falls (we run a larger trade deficit). Conversely, foreigners save more. See The Balance of Saving.

Phrasing it as Nugent and Mosler do ("U.S. consumers fund the desires of foreigners to save") fails to convey that our assets are going down while foreign-held assets are going up. It also fails to convey Ken Rogoff's point, which is that our consumption is crowding out not only our own domestic investment but investment in less-developed countries as well.

For Discussion. A few years ago, Argentina was by Mosler-Nugent logic adding to savings (i.e., running a budget deficit) and funding the desires of foreigners to save (i.e., running a trade deficit). How did that turn out?

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The author at BOPnews in a related article titled Up One writes:
    Kling on Mosler selling a bridge. The question here is on budget deficits and savings. Kling is an influential - and generally sensible writer on Tech Central Station. He's right in the way econogeeks often are. He says "look the... [Tracked on March 14, 2004 10:53 PM]
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Lawrance George Lux writes:

I think you follow the Nugent and Mosler lead by the manner in which you state the equation. It makes far more sense altered, then translated into English:


This shows clearly that Government deficits are a loss of capital, without implusion of foreigners to Save more. They are simply receiving payment for Product sold. lgl

Mike writes:

This isn't a topic I have anything to add to but reading the give and take makes me want to make an unrelated point about Mr. Delong.

I'm a management scientist so I'll freely admit to not being an expert on Macro but I do find the discussions interesting. My area of expertise is in modeling large complex dynamic systems so I can relate to the problems of macro forecasters.

But whenever I end up reading DeLong or see his replies on other websites, I am almost always appalled. Rude, arrogant, and basically foolish. The style of argument is almost always to throw out a couple of facts and start name calling (liars, stupid, etc.).

The basic problems with taking this approach in macro (as I see it as an outsider) are that
1. The system we are concerned with is hopelessly complex to the point where we probably can't identify the main effects let alone the interactions that occur.
2. We are always engaging in out of period forecasting

In such an environment, arguments should be constructed with a great deal of care and with many caveats.

So frankly when I see a column entitled (Liars etc.) I tend to stop reading. My point is that DeLongs style is so insulting that he comes off as a partisan hack regardless of whether or not he is correct.

Gamerica writes:

I like Paul McCulley's take:

Mercantilism does reign in much of Asia, with high domestic saving rates, huge foreign exchange reserves, undervalued currencies on a purchasing power-parity basis, and large current account surpluses. Speaking as an American, this combination would not be pleasing to me, as it makes consumption an after thought in the pursuit of ever-greater stores of international wealth. Americans operate on the thesis that hearses don’t come with U-Haul trailers and spend accordingly.

Neither the Asian model nor the Anglo Saxon model is inherently right or wrong. Peoples’ utility functions are not homogenous: different strokes for different folks. And because peoples’ utility functions are different, there is scope for win-win international trade.
Except, of course, in the delicate matter of citizenship. There is no free market in passports. Indeed, the very definition of the sovereignty of nations includes the right – at the point of a gun – to define who is and isn’t a citizen: entitled to vote; subject to laws of the land, including the obligation to pay taxes and submit to conscription; and eligible for the social safety net funded by fellow citizens.
Accordingly, the leaders of sovereign countries rationally respond to exigencies beyond the economic doctrine of comparative advantage through free trade. This is nowhere more clear than in considering the political hot button of today called “outsourcing” – the creative destruction of American jobs in the (capitalist!) pursuit of profits through lower labor costs beyond America’s borders. Every sensible economist agrees that in the long run, “outsourcing” is a winning trade for both America and the countries who are the beneficiaries of outsourcing: American consumers get to buy more for less, and foreign workers get to move up the value-added chain, increasing their prosperity, too.
The problem is that the economist’s long-run dream is the politician’s short-term nightmare. Voters who benefit from free trade – employed consumers – do not reward politicians with yea votes, but those whose jobs are creatively destructed do punish politicians with nay votes. Thus, politicians are rationally less enthusiastic about free trade than economists.1 This is particularly the case in times of weak global aggregate demand growth, which begets “beggar thy neighbor” pathologies: political leaders rationally want to get re-elected!
Basically he's saying that if the massive demographic influx of the world's population into the capitalist system -- 2.5 billion people or about half the world over the last two decades, viz. China and India (causing the secular decline in interest rates?) -- is without concomitant movement of those people (human capital as it were) to A) where they're most productive and B) where their utility is maximized, then in the absence of a "free market in passports," it's the govt's prerogative to affect their 'collective' preferences as best it can, e.g. thru monetary policy. So in short the US should continue to respond by pursuing a weak dollar policy as long as it's non-inflationary, which it has been and likely will continue to be, for the reasons stated :D

I would also just add that politics -- in addition to suffering chronic short-sightedness -- also tends to be local, i.e. politicians having a certain constituency (since they're elected locally) aren't about maximising global utility, just the welfare of said constituency. This is where game theory and appealing to so-called 'enlightened' self-interest come into play :D

Thank goodness they didn't start with a preempt. The bidding might have gotten much too high. Wouldn't want the auction to get too high--that is when the recrimminations really start.

Bernard Yomtov writes:

Don't take the push, Sebastian.

Bernard Yomtov writes:


Let me defend DeLong. Yes, he is sometimes blunt, and yes, macroeconomics is complicated. But his criticisms tend to focus not on complex issues but on situations where someone is making a basic error (or willful mistatement) of fact, logic, or arithmetic.

And the "someone" is not a student (in the broad sense). It is always someone who claims to be worthy of being taken seriously. DeLong's targets, by and large, are reporters for major papers, economics writers for opinion journals -usually NRO - and government officials. All these people are fair game when they get simple things wrong.

Adrian Nicolici writes:

Arnold, I do not disagree with your conclusions but I have an alternative way of looking at the situation:

When the government borrows to fund a deficit (assuming it's a reasonably sized deficit), "that government budget deficit add[s] exactly that amount to the savings of financial assets that the rest of us hold" according to Mosler-Nugent. This seems true since "the rest of us" are now holding savings bonds. Further, the government does not actually have to ever pay back that debt since it can simply re-issue new debt to pay off the old debt. It's like an infinite refinancing process on your house. The government simply makes interest payments (with our tax money) to the bond holders - the interest is the only cost to society and its effects are relative to the growth of the economy. If the economy is growing faster than the interest payments, we are winning the battle over debt/spending. To my knowledge (I may be wrong), we have not been losing this battle, historically speaking, and that's why I am not necessarily afraid of either government deficits or government debt, as long as they are 'reasonable'.

With regards to the trade deficit, Mosler-Nugent are making the point that upon redemption of the bonds held by foreigners, the same process occurs and the Treasury simply pays off the foreign held debt with newly issued debt, in an infinite process. Further: "Remember, the U.S. is no longer on a gold standard meaning that the dollar is not redeemable at the government for gold or any other good or service. Holders of deposits or Treasury securities can't demand the surrender of our national parks, or any other U.S. asset" which to me means that foreigners have no real hold on any of our REAL assets, only the dollars which can be easily refinanced.

Of course currency trading comes to mind and the value of the dollar will obviously be affected by the trade imbalance but again, foreigners are on the losing end because we owe them debt in terms of dollars and not real assets. This assumes they are purchasing government debt securities and not real assets here in the US, which is of course only partially true since a lot of investment in the US is of the 'real' kind. But aren't the two interchangeable?

Adrian Nicolici

Tom Dougherty writes:
When the government borrows to fund a deficit (assuming it's a reasonably sized deficit), "that government budget deficit add[s] exactly that amount to the savings of financial assets that the rest of us hold" according to Mosler-Nugent. This seems true since "the rest of us" are now holding savings bonds.

Yes, but does this mean an increase in government spending translates into a one-to-one increase in private saving.

The uses of saving identity shows:

S = I + (G - T)

If private saving, S, is fixed, then an increase in the budget deficit, (G – T), will reduce investment, I. In this case, the budget deficit has crowded out investment.

Or private saving may only increase as some fraction of the budget deficit partially mitigating the crowding out of investment.

What is it about a budget deficit that would cause private saving to increase? If private saving does increase because of a budget deficit, then what fraction of the budget deficit does private saving increase by? And if private saving does increase by one-to-one to the budget deficit, isn’t that private saving only to be used to pay-off the deficit through higher taxes in the future?

Eric Krieg writes:

Forget the economic theory for one moment, because as Mario Cuomo likes to say, it is simplistic in the extreme.

At this time, the Chinese and Japanese are funding our deficits in an attempt to maintain their currency values against the dollar. Because of their appetite for US Tresuries, we can fund our deficit at a very low cost.

What that means is that taxes can be lower than they could if not for the Japanese and Chinese.

What are the effects of low taxes? They encourage people to work and save more than they would if taxes were higher.

This is just simple logic.

All of this is predicated on the Chinese and Japanese continuing to buy T-bills. If they decide to invest elsewhere, perhaps then we would need to raise taxes and cut spending. But I don't think that the Japanese or Chinese are able to kick their T-bill addiction. Their economies would be damages if they did.

When morgage rates are as low as they are today, you are a fool if you pay off your mortgage. You can do better things with your money than pay off a 5% loan, or whatever. The same holds true for US society. If the Japanese and Chinese want to ensure low interest rates in the SU and fund almost obscene deficits, there are LOTS of good things that we collectively can spend the money on.

Shalom Beck writes:

I am confused.

If the government runs a deficit to create public capital goods (roads, say), and public capital goods are complementary to private capital investments (people put factories on roads), then deficit spending stimulates private investment.

I have a feeling that
S - I = G - T
settles matters only if all government spending is wasted (build Presidential palaces that are destroyed by American bombs, for example).

"But whenever I end up reading DeLong or see his replies on other websites, I am almost always appalled. Rude, arrogant, and basically foolish. The style of argument is almost always to throw out a couple of facts and start name calling (liars, stupid, etc.)."

Where as sensible people like your self simply get down to the name calling without facts.

It only takes a couple of facts to show that someone is a liar, or is stupid. Especially when they are trillion dollar deficit facts.

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