Power & Market

MMT Confusion on Saving and Investment

A main thesis of modern monetary theory (MMT) is that fiscal deficits are not a problem. On the contrary, they create financial assets for the private sector (in a closed economy, a public sector deficit equals a private sector surplus). Moreover, if the government can always create money to cover its expenses, there is no need to fuss about government deficits. The pursuit of a balanced budget is, according to MMT supporters, completely misguided.

Ultimately, from an accounting point of view, public debt is a financial asset of the nonpublic sector, while, as L. Randall Wray’s writes in Modern Monetary Theory: A Primer on Macroeconomics for Sovereign Monetary Systems, “government deficits equal non-government’s surpluses, generating income that can be saved.”

This claim is very Machiavellian. From an accounting point of view, everything is correct, strictly speaking. The deficit in one place must equal the surplus in another. Conversely, governments can get into debt only if citizens put aside some savings that they agree to pass on to the government. At first glance this may sound fairly reasonable.

This sort of accounting, however, obscures the economic nature of events and tells us nothing about causality. We can change the definitions of our accounting terms all we want, but that still won’t mean that government deficits can produce prosperity.

We also encounter MMT confusion when it comes to the interpretation of budget surpluses. According to Wray, the Clinton administration’s budget surpluses were “just the flipside to the private sector’s deficit spending.” That is, they were simply a side effect of private sector deficit-financed expenditure. However, it is unclear how the private sector could be indebted to the government, which shows that this whole approach is highly suspicious.

Indeed, the supporters of MMT once again redefine the basic terms. As Robert Murphy notes, “when MMTers speak of ‘net saving,’ they don’t mean that people collectively save more than people collectively borrow. No, they mean people collectively save more than people collectively invest.”

Murphy continues:

the MMTers are certainly correct when they observe that “private saving net of private investment” can’t grow without a government budget deficit (again if we disregard foreign trade). But so what? The whole benefit of private saving is that it allows for more private investment.

By redefining “net saving” in this way, MMTers are ignoring the primary source of wealth creation, i.e., investments (and an increase in the market value of assets). Of course, any definition can be used, but the supporters of the MMT have chosen one that suggests that the government must have a deficit for the private sector to increase its net savings. The fact that any debtor’s obligation means a creditor’s claim is irrelevant to the basic fact that the private sector can increase its savings and assets even in a situation without a government deficit.

The above analysis clearly shows that MMT is largely based on semantic manipulations and using definitions different from generally accepted ones. However, when you get through this conceptual chaos, you see clearly what the MMT is all about. The whole theory seems to exist only to justify higher government spending and larger budget deficits (it is no coincidence that Congresswoman Alexandria Ocasio-Cortez or Senator Bernie Sanders refer to the MMT when asked about the source of funding for the Green New Deal or universal healthcare and free higher education).

Let’s give the floor to Wray himself (p. 8):

Imagine how the policy discourse will be changed when our President could no longer claim that “Uncle Sam has run out of money”; when our government can no longer refuse to create jobs, or to build better infrastructure, or to put astronauts on Mars because of lack of funds.

For the supporters of MMT, the government is almost a divine institution that creates money with its expenses and does not have to worry about this dismal economics and the limitations of its laws. Government deficits are not bad and do not lead to a crowding-out effect and interest rate increases. On the contrary, in the MMT view, deficits lead to decreases in interest rates, because they increase the amount of bank reserves; they also allow the private sector to accumulate wealth. As long as it issues its own currency, the government has virtually no financial restrictions. Limitations exist only in the minds of politicians and orthodox economists—we can afford much more; we can finally have full employment!

It is not surprising, therefore, that the MMT has recently gained despite its theoretical problems. The controversial program that turns the whole of economics on its head, promising full employment, must attract public attention, especially in times of economic crisis. Let’s hope, however, that this popularity will not prove permanent and MMT will be abandoned.

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