Matt, You took up my challenge to markg to give an MMT answer to the CRS analysis of the problem with big federal deficits. Good for you. Not so good for markg who keeps only sniping and running. But you put your answer in another thread where comments are now closed. So I repeat it here.
Jim,You pretty much make my case for me there.
But aren’t we trying to grow GDP, not just ‘I’ per se? Is not that the goal?
Or is our goal solely to just grow ‘I’, is that how we are supposed to think?
And what about EMPLOYMENT? Look at your equation for I. We can have high I with huge imports, a balanced budget and decent savings….and that would result in MILLIONS OUT OF WORK! How do you guaranty the maximum employment with a sole focus on I ?
But before I get to that I'll try to explain the significance of "I", as per the CRS, which you (like all MMTers as far as I can tell) miss completely. I'll do it quoting markg's MMT scheme...
... You are wasting your time here. I tried to explain mmt to her. No luck. I check back a few times a year to see if she has a change of heart (brain).
It’s quite simple but she still doesn’t get the following:
Treasury Securities are govt debt. Yup
Treasury Securities are listed as assets on private sector balance sheets. Sure.
A US Savings bond is a Treasury Security. OK
Gov Debt = Private Sector Savings. Um, nope. Uh, uh.
In fact, absolutely boneheaded wrong. Take my earlier example of Gipper saving his income to buy land, build improvements on it, then use it all to create a job-generating, community-improving private business, the profits from which he reinvests in it. Clearly, you will admit that GipperCo represents both private sector savings and investment.
Yet where do you find it listed as "govt debt"??? Hello? Thus, "Gov Debt = Private Sector Savings" is flat wrong. They don't equal each other at all. How wrong can a claim be?
What markg is trying to say, apparently, is something like:
because "government debt = private 'net financial' savings" (note the weasel words 'net financial') ... then somehow govt debt = private savings (which is wrong) ... and since private savings are good, thus govt debt is good (which is a nonsequitor) ... because govt debt supplies all private savings -- which is, in a kind word, "stupid".
Now an econ 101 student who did well on the first mid-term covering the elements of GDP (G,C,S,I, etc) would instead say something like this:
National wealth, employment, and the growth of both, come from capital accumulation that results from I, Investment, in plant, infrastructure, developing new technology, improved "human capital" and so on. Specifically, I improves productivity, which enables producers to quite literally get more from less, which pretty much definitionally increases domestic living standards, and increases sales internationally against less productive competitors. (Japanese car industry, US agriculture).
And through reinvestment of ROI -- more I! -- this growth compounds into the future, making the future richer. So I is a very good thing.
But I is income minus government and individual consumption. Specifically, as CRS stated, in a closed economy I = S + (T - G). So if G increases relative to T, deficits go up and I falls. And a major fall in I to lower levels is a bad thing, for reasons that should be self evident to anybody, in light of the above.
But MMTers constantly ignore I. Instead, they are hypnotized by the idea: "private sector net financial savings = zero" -- as if it means anything! Heck, the "net financial savings" of the entire Planet Earth -- entire Universe! -- equals zero. So what?
Then the MMTers use the "net" to jump to "the private sector has no financial savings" (Hello??, $200 billion in Microsoft stock is no financial savings) ... so, since "net financial" savings come to the private sector only from govt debt ... and surely the private sector needs savings to grow the economy ... more govt debt provides all those savings and grows the economy! WTF? How insane is that?
In reality, what matters to grow the economy is not "net financial savings" but real I. And, as we know via the identity, govt deficits reduce I, because the govt borrows to consume what private borrowers would have invested.
But aren’t we trying to grow GDP, not just ‘I’ per se? Is not that the goal?
Well, yeah. Sure. And what did CRS say about that?
economic growth is determined primarily by three factors: growth in the labor force, the rate of technological advance, and the amount of capital available to the workforce. Of the three, the last one may be the most susceptible to the influence of policymakers.So your objection is: "Economic growth is primarily determined by increasing I, but if we are trying to grow the economy, why would we want to increase I, per se??"
I could rest my case about MMTers not understanding what they criticize right here. But let's continue.
Look at your equation for I. We can have high I with huge imports, a balanced budget and decent savings….and that would result in MILLIONS OUT OF WORK!
Really? Can you explain precisely how? Just how do you imagine that the process ...
"I improves productivity, which enables producers to quite literally get more from less, which pretty much definitionally increases domestic living standards, and increases sales internationally against less productive competitors. (Japanese car industry, US agriculture)."
.... puts "MILLIONS OUT OF WORK"?
How does increasing productivity and competitiveness increase unemployment? The whole world wonders. This is MMT analysis???
But enough theory, let's look at some real-world examples. Such as, say, USA post-Civil War to WWI.
The USA for those decades had a balanced budget, and with huge imports rang very large trade deficits -- which financed very high I, which built railroads and steel plants etc, which turned the USA within one lifetime from a backward agricultural country into the world's #1 industrial powerhouse.
Why wasn't the economy impoverished? Why didn't the combination of balanced budgets and big trade deficits ruin the economy?
Hmmm.... Could it be because balanced bugets and big capital surpluses (the flip side of the trade deficits) fueled high I growth, which paid off big-time?
I challenge you to find any country with high I for a long period that hasn't benefited greatly from it China today? Japan 1946-1980s? USA 1870-1914, and then again 1945-1970?
OTOH, do you want a list of countries that started out rich then destroyed themselves by trashing their I down to nothing, impoverishing their whole economy? We can start with "A, for Argentina", and work through the entire alphabet.
And by identity we know that "helping" the private sector via the favor of "creating net financial savings for it must reduce I. So there we are.
And as to your objection...
Or is our goal solely to just grow ‘I’, is that how we are supposed to think?
.... it's bogus, and you surely know it. Who said "solely"?
Suppose a new Modern Medical Theorist appeared with a new miracle prescrption for good health, which necessarily involved starving the patient unto death. Then an old-style orthodox doctor replied: "Hey, you know, the first fundamental for good health is ample and healthy nutrition".
To which the MMTer replied: "Is your goal solely good diet? Isn't the goal good health? What are we supposed to think of the way you ignore the so many aspects of good health to fixate solely on diet???
You'd see the bogosity of that argument right away -- and how the need to jump the shark to make it so quickly is really an act of desperation.
"I" is the nutrition of the economy. Nobody says that it solely determines the health of the economy, but everyone sensible knows that if you starve the economy of it, the economy's health will suffer and decline unto death. And the massive govt deficits recommended by the MMTers massively reduce I, as per the identities that MMTers all love so much: I = S + (T - G)
Now back to my original point. Competent critics understand what they criticize. If one doesn't understand what one criticizes, one's criticism is incompetent. QED.
The only things MMTers don't understand as shown here, are simple 101 GDP fundamentals in theory *and* the obvious major examples of history that demonstrate them in practice.
Theory and facts, that's all. :-)
This makes everybody else stupid and ignorant ... how?
A soverign govt that issues its own currency (like the US, UK, Japan, but not Euroland countries) cannot go bankrupt or insolvent unless the govt chooses to do so. That choice is political - not functional.
OK. For extra credit: Why did Russia default on its bonds denominated in it its own-issue fiat currency in 1997?