Further Thoughts On MMT And Net Saving

In a recent post, I raised two objections to the MMT description of “net saving”, which is the following for a closed economy:

(GNP – C – T) – I  ≡  (G – T)

This equation basically says that the government budget deficit equals the government budget deficit. But on the left side of the equation, the budget deficit is redefined as “net saving”.

Let me try to present a case in favor of this approach, before criticizing it. Suppose I said total wealth minus non-monetary wealth equals the money supply:

Wt – Wnm ≡ M

Obviously, the left side of the equation is also the money stock, but does describing it this way help? You could argue that this identity shows that a rush for liquidity at a given income level (i.e. a desire to hold more of one’s wealth in the form of money), is potentially destabilizing. If there is an increased demand for money, then the government should boost the money supply (right side of the equation) to prevent the identity from being maintained by a fall in national income. When there’s a rush for liquidity, printing more money would meet the extra demand for money at full employment.

As far as I can tell from the commenters, MMTers are making a sort of analogous claim for the budget deficit. Thus, if at current interest rates and the full employment level of GDP there is more desire to (privately) save than to invest, then the government should accommodate that increased desire to save by running a budget deficit, which represents a negative saving for the government sector.

Lurking in the background is the simple Keynesian cross model, with no role for monetary policy. (The “paradox of thrift” is another way of describing this concept.) This model is sometimes called “vulgar Keynesianism”, because it is considered less sophisticated than New Keynesian (IS-LM) models where monetary policy determines national income at positive interest rates, and fiscal policy is only needed at the zero lower bound for interest rates.

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