Economists, Bridge, and National Savings

Arnold,
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:

S-I+(X-M)=G-T
S+X-(I+M)=G-T

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

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.

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!

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.

Don't take the push, Sebastian.

Mike,

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.

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

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?

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.

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.