John B. Taylor:
Simply running a budget surplus would help achieve the productivity growth goal. Why? Because by running a budget surplus, the federal government can add saving to the economy rather than subtract saving from the economy. More saving means more investment...
John M. Keynes:
Those who think in this way are ... are fallaciously supposing that there is a nexus which unites decisions to abstain from present consumption with decisions to provide for future consumption; whereas the motives which determine the latter are not linked in any simple way with the motives which determine the former.
13 comments:
"Because by running a budget surplus, the federal government can add saving to the economy"
You gotta wonder what somebody who says that is smoking.
A federal surplus means the govt taxes more than it spends. How does he think taxpayers will be saving more when they have less disposable income?
The surplus created by taxing more than is spent is used to extinguish the govt's past debt (past deficits). That extinguished debt was the savings of some private sector entity. The private sector is given cash in exchange for govt debt instruments it holds, but the amount of cash received by the private sector is exactly the same amount of cash that was removed from the private sector by the surplus (the difference between govt taxes and govt spending).
Basic accounting tells us that a federal surplus leaves the aggregate cash balances of the private sector unchanged but diminishes the private sector's holding of savings in the form of govt securities.
Running a budget surplus -- That's what King John was doing, right? And then Robin Hood came along, trying to distribute that surplus as transfer payments...
So you guys are accepting the S=I definition.
Some would argue that if one was to hold savings as treasuries, budget deficits would mot help achieve the private sector productivity growth goals, unless that government spending is pushing up private sector productivity.
Most of my experience productivity increases due to GOV sector or transfer spending are an oxymoron.
I understand that the private sector has more savings due to deficit spending, but I do not think that automatically translate to higher private sector productivity or investment.
I think it matters how someone chooses to hold their savings, think about the gold bugs.
OT, I think we all three -- four, counting Keynes -- agree there is something wrong with John B. Taylor's claim that more saving means more investment...
re Productivity, I have to say that I am still considering Verdoorn's law (better growth causes better productivity), and while I do not accept that an expansion of government spending is a solution to anything, I am certainly comfortable with the argument that the increase in govt spending (including transfers) has not been enough to boost growth enough to boost productivity, and that maybe I can do this in all one sentence.
ALL IN one sentence, not "in all".
Anyway, S does equal I, because inventory increase counts as part of investment. But it's just a kludge to make the numbers work.
Infrastructure investment spending of the government will increase both the marginal product of labour and capital [New Keynesianism and Aggregate Economic Activity by Assar Lindbeck – Economic Journal, 108, 1998 pp167-80]
I often find a fallacy of composition when people talk about savings.
They describe changes in the income, expenditure and balance sheets at the level of the household, and then extrapolate those to the economy as a whole.
But this is invalid.
At the level of the household, income and expenditure can adjust independently, with the difference between them accommodated by changes in asset and/or liability positions.
But at the level of the economy as a whole, income and expenditure are not independent.
Expenditure for a buyer of goods and services, is income for the seller. In analyzing aggregate developments, both sides of this equation must be accounted for.
In Keynes’ analysis since he was a Macro thinker, individual savings decisions affect aggregate demand and income, not aggregate savings; aggregate savings is entirely determined by business investment.
Hence the famous S=I, all Taylor is saying is if you want more aggregate savings you need more business investment. To get more business investment governments must run a surplus.
You and Jim disagree offering the argument that deficit spending by the government adds savings to the private sector. IMO Keynes would acknowledge deficit spending affects aggregate demand and income, but would ask how does that increase aggregate savings, what is the transmission mechanism from deficit spending to increase business investment.
What are you and Jim proposing?
PostKey offers Infrastructure investment and I think he is correct, some have argued that spending on healthcare, education, and the military are also good ones as long as they induce an increase in domestic business investment.
My bigger problem with Taylor is S=I=+productivity (as measured in terms of the rate of output per unit of input.) is harder to defend.
Also even if productivity increase just because people want pet rocks should we tax the profits from these products at a higher rate than say a cancer cure.
"You and Jim disagree offering the argument that deficit spending by the government adds savings to the private sector."
No that's totally wrong. I didn't argue anything really. I stated some facts that are easy to verify with data. But now I will argue.
If the private sector spent all of its income that would cause govt revenues to go up and govt spending to go down and there would be no deficits. At the time Taylor was writing the private sector was in deficit which is why there was a govt surplus. It was easy for Taylor to wave his hands around and defend the status quo and claim that it was producing investment. Today if Congress tried to run a surplus the result would be a huge depression and high unemployment and there would be an increase in the inclination for the private sector to spend less than their income.
Few businesses would want to invest and they would be unable to even if they wanted due to declining sales and earnings.
Some entities in the economy have to spend more than income to offset those that spend less than income. Its a simple matter of accounting. Given that spending produces income, thus if aggregate spending falls below current income then income must fall.
Taylor is assuming an economy with no involuntary unemployment?
Postkey: "Taylor is assuming an economy with no involuntary unemployment?"
Probably. Or just redefining terms, as Sumner does.
Jim: "I didn't argue anything..."
Yeah, Jim. And I didn't think I was agreeing with an argument. Nevertheless, OT's remarks seem to me coherent and logical, and all the words I'd use to describe a thought-provoking point of view seem to apply to what he said.
In the post I quoted part of John Taylor's sentence. This is the whole sentence:
"More saving means more investment, raising capital, and increasing productivity."
To make sense of that sentence I translate it to this:
"More saving means more investment, which increases the stock of capital, which increases productivity."
But I'm not sure that is really what he means. Looking at just the five words that I didn't cut, I have to go back to what Keynes said: there is no "nexus" which unites decisions to save with decisions to invest. And again, saving equals investment because of the way the accounting is done: unsold output is counted as investment even though it isn't really investment.
Taylor also says this:
"by running a budget surplus, the federal government can add saving to the economy"
and I'm not clear on that at all. I guess the opposite would be
"by running a budget deficit, the federal government can reduce savings in the economy"
I think there are too many unspoken assumptions in those thoughts. I can't get from one end to the other without shaking my head and coming up empty.
Here's what I can see: When the government deficit spends, it spends money that somebody wanted to save. It puts that money into circulation. That is why deficit spending was the solution Keynes recommended. But the "somebody" that was going to save the money STILL DID SAVE IT. So the Federal govt neither adds to saving nor reduces it by deficit spending.
Here's what I can see: When the government deficit spends, it spends money that somebody wanted to save. It puts that money into circulation. That is why deficit spending was the solution Keynes recommended. But the "somebody" that was going to save the money STILL DID SAVE IT.
You do know that wanting to save and actually saving are not the same thing.
The recommendation by Keynes was born from the conundrum that when everybody wants to save nobody can save. Thus some entity was needed to borrow the money people wanted to save and spend it.
"by running a budget surplus, the federal government can add saving to the economy"
This is the statement that no one including Taylor has supported. It is simply laid out as a given. Everyone wants to quickly jump over that and move to savings means more investment which leads to greater productivity.
The actual connection between saving and federal revenue is that the more that is taken in taxes the less is available to save. There is no way around that. Also if the govt creates surplus by spending less, then the private sector also has less income and less ability to save. There is just no way for Congress to pass a budget that produces a surplus and expect to see the result be an increase private sector saving. That won't happen. And when you see that then well reasoned logical statements about savings leading to more investment and more productivity don't have any connection to a federal surplus.
Jim: "The recommendation by Keynes was born from the conundrum that when everybody wants to save nobody can save."
Wikipedia has it a little different. I prefer theirs: "The paradox is, narrowly speaking, that total saving may fall because of individuals' attempts to increase their saving..."
The latter leaves open the door that in a case of extreme inequality (for example) great wealth-holders may still be able to increase their individual saving even though total saving may fall.
"leaves open the door that in a case of extreme inequality (for example) great wealth-holders may still be able to increase their individual saving even though total saving may fall."
I agree with that. If that were the case that obtained in the 1930's Keynes would have been ignored.
Post a Comment