I see the current Oxford undergraduates are being misled in their macroeconomic lectures - the slide below is from a recent lecture.
The notion that a budget deficit reduces savings is wrong. In fact it is exactly the opposite. It is necessary for the government to have a deficit in order to allow the private sector to save. This is because the public sector deficit must equal private sector savings. This is an accounting identity.
It is also intuitively obvious that the private sector can only save (spend less that it earns) if the public sector takes back in taxes less than it spends. Where else is the money going to come from?
This is the 3rd of the Seven Deadly Innocent Frauds Of Economic Policy described by Warren Mosler, one of the fathers of Modern Monetary Theory.
When our elite students are being taught this it is no surprise that everyone is so confused!
Aren't you left with the problem though that people are irresponsible and won't save, instead they'll continue to live beyond their means. Doesn't this need to be met with some major savings incentive to be effective?
ReplyDeleteEven if some private individuals spend all the increased income that the budget deficit injects into the economy that extra money goes to private companies and other individuals who are then able to save more. The point is that, in aggregate, the entire private sector saves more when there is a budget deficit, by an amount exactly equal to the deficit. That is an indisputable fact.
ReplyDeleteImportantly, that extra spending is critical in periods like the present when there is excess unused productive capacity in the economy. It allows more people to can get back to work, earn a living and pay off their debts.
Trying to reduce the deficit actually prevents all of this happening, and so is irresponsible government. That is why it is called the paradox of thrift.
Ah, i see! Keep up the good work, i am slowly trying to work my way out of severe economic ignorance but generally find a lot of the stuff available incomprehensible.
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