Monday, 23 March 2015

Sectoral balances make a mockery of debt-phobes.

The world economy can be split into any number of sectors you like. You can split it into different countries, or into households occupied by single people, married couples and non-married couples. Sectoral balance analysis was used extensively by the UK economist Wynne Godley decades ago, and MMTers have been keen on sectoral balance analysis for many years.

However when it comes to the sectoral balance idea as it affects an individual country, the world is normally split into three sectors: 1, the country’s government or public sector, 2, the country’s private sector, and 3, the rest of the world, i.e. the “foreign sector” as it’s normally called.

The basic idea of sectoral analysis is that flows of money out of one sector must be balanced by flows of money INTO one or more other sectors. And sectoral balance analysis gives you a good idea of what’s going on in an economy over a given period, all of which might sound a bit boring. However, there’s a sting in the tail, as follows.

Deficit-phobes and debt-phobes are for ever warning us of the dangers of government deficits and debt. Deficits and national debts are by definition “bad”. Indeed most of the Harvard department of economics (certainly Kenneth Rogoff and Carmen Reinhart) have been constantly tearing their hair out over the debt over the last few years. And Congress has recently imposed yet another cap on the debt.

And in the UK in the run-up to the forthcoming election, politicians are screaming B.S. laden insults at each other on the subject of the debt – that’s when they aren’t screaming B.S. laden insults at each other on some other subject.

However, money flowing out of the government sector (the deficit) equals private sector SAVINGS. And saving is widely regarded as “good”. Indeed, we have dozens of schemes which keep thousands of bureaucrats employed aimed at encouraging saving.

So get this, and try not to die laughing. When money flows OUT OF the public sector, that’s “bad”. But that money absolutely has to go SOMEWHERE. And when it flows INTO the private sector, the flow immediately becomes “good”.

Mad or what?

Of course there's the foreign sector to consider, but assuming there are no dramatic flows from or to that sector, then $X leaving the public sector will be balanced by about $X entering the domestic private sector. And even if THERE ARE significant flows to the foreign sector, the latter is itself composed to a significant extent if not mainly of the private sectors of sundry other countries.

It should also be said that saving in the above sense (as already intimated) refers to the accumulation of money or (much the same thing) government debt. I.e. saving in the form of accumulating cars, houses, etc is not what sectoral balance analysis is about.

But there are plenty of schemes (employing thousands of bureaucrats) aimed at saving in the “accumulating money or government bonds” sense.

And finally, the above is not to suggest that government debt is NEVER a problem. As I’ve pointed out before, it’s a problem when INTEREST on the debt rises significantly above zero.

But debt AS SUCH is not a problem. In fact you might as well call it – er – “private savings”.

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