Revisiting S = I + (S – I)

About 10 years ago a huge war broke out in Post-Keynesian circles. Modern Monetary Theory (MMT) was becoming somewhat popular, but many people (including some rather prominent Post-Keynesians like Tom Palley and Marc Lavoie) thought they were being a bit loose with some of their descriptions. One of the big debates that raged had to do with the way MMT describes private sector saving. To keep things simple, the dispute had to do with the way MMT claimed that private sector net financial saving was composed of government deficits. Basically, their point was to create the view that the only way the private sector can obtain net financial assets is by having its government run a deficit. This and several other points of controversy were central to the many critiques of MMT from within Post-Keynesian circles, which the MMT people found frustrating because PK people should be rather closely aligned with MMT given that much of MMT is similar or based on PK economics.

Anyhow, as MMT has grown in popularity I see the same old debates popping up again (most recently on Scott Sumner’s blog). And I see MMT people making the same old mistakes. So let’s quickly cover some of this so we can hopefully clarify some of the issues at hand.

Randall Wray, an academic proponent of MMT breaks this down clearly: “private sector saving = “net accumulation of financial assets”. 

He goes into a bit more detail in a 2012 paper:

(Image 1)

And here’s the crescendo:

“THE GOVERNMENT SECTOR MUST BE IN DEFICIT”. This is MMT in a nutshell. It constructs a view of the world where the government MUST provide a Job Guarantee and MUST be spending in deficit in order to let the private sector net save and MUST spend before it can tax. There are huge problems in all three of those ideas , but let’s just focus on the saving issue.

First – “private sector saving = “net accumulation of financial assets”. 

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