1. Does the math require a growing deficit to create growth? The answer to this is yes, according to Godley – it falls out of the steady state observation. If you want to avoid the steady state, you need something to “grow”

or

2. Why do People consistently demand more savings than investment is willing to supply?

One game I always think about is a coin flip game. This game is easy, you win on heads, lose on tails. It’s even easier because you get to name your odds before you flip. Any odds will be taken.

The only catch is you need to bet your entire net worth on the game. As wealth goes up, the minimum odds you need to play go up until at some point, you’ll no longer play.

I think this thinking applies to societies as well as individuals. People in aggregate could demand higher odds than investment is perceived to supply at that time, well basically forever.

As time goes on and society gets more wealthy, this quality spread in demand should grow. it’s late and I’ve had lots of cough medicine, so I can’t tell if this makes any sense at all.

He he. I still think there is something in Shaikh because some of expressions like alpha(1-t)g looks familiar but I can’t make more sense of it at all at this point despite many attempts to read it.

R.,

Every so often, I see a paper that covers some very interesting subject matter, and invest some time on it, but with some puzzlement at first. After a while, it becomes painfully obvious, that the paper is so badly written, it warrants absolutely no time at all. So it is with this Shaikh piece. And it should be considered no reflection on the quality of Godley’s work, in any way. But the Goldman paper was worthwhile.

Are you saying that these authors are saying that the financial balance of the household sector is zero?

Ruggles & Ruggles changed the definitions around to reach the conclusion is what I make of it.

Hatzius’ charts on the household sector looks very similar to Godley’s charts on the personal sector.

Shaikh observes that Godley’s models (as opposed to his empirical work) leads to long run saving of zero. However this is for “non-growth” models not for growth models. He makes some changes to say something.

Sorry, but that’s not true either!

I’m going to spend a bit more time with the numbers – later. My guess right now is that Godley and Rubbles (independently) came up with some generalizations about the expected gross distribution of sector balances, that don’t apply very well (at least in recent years) to the US. But there’s still the somewhat separate point that Rubbles made about the long term expectation for household net saving – as being zero – which I find particularly unbelievable in the case of the US, given that the household NFA position reflected in the Flow of Funds report is around $ 30 trillion. That sort of discrepancy can only be explained as differences between market value (NFA) and book value (cumulative saving), and I don’t see how 100 per cent of the NFA position can logically be attributable to that sort of differential. On the other hand, the Goldman numbers look like they work quite well. Enough for now, though. Thanks.

“The mechanism ensuring that, ..”

I think Hatzius is talking more of income changing rather than changes in interest rates – the latter emphasized by neoclassical economists. But yeah definitely accounting constrains economic outcomes.

I haven’t understood Shaikh’s paper yet (though I heard it live) – the details but seems like it is saying that households in the US spend whatever they receive immediately in their bank accounts after making compulsory mortgage payments, so that all their accumulation of financial assets is via pensions which they are unable to spend immediately.

I saw this footnote is Godley&Lavoie’s book:

“It has been shown by Ruggles and Ruggles that once the fictitious
real estate enterprises of NIPA that take care of households new purchases of residential
units have been taken out, and once pension fund schemes are considered as saving by
firms rather than that of their employees, then the change in the net financial position
of the household sector is virtually nil, and even negative on the average in the United
States since 1947″

http://books.google.co.uk/books?id=YUZv_8BvlLAC&lpg=PP1&pg=PA282#v=onepage&q&f=false

is the Ruggles and Ruggles article.

The definitional issues and differences between authors is too confusing to me at this stage. That is, the footnote changes definition temporarily to use R&R’s definition. But the general idea seems to be revolving around households spending everything available after compulsory mortgage payments so that households increase their financial assets purely by compulsory saving plans of their employers, on an average.

“Typo? I can’t make sense of it otherwise. What am I misreading?”

Looks like more than a typo. Somehow reminds me of the discussions around the “paradox of profits”.

‘“Third, financial balances in the public sector probably depend more on political preferences than on long-run sustainability considerations”
- not sure how to interpret that; maybe his pre-MMT version, or maybe consistent”

Yes, I too am not sure on how to interpret his version of sectoral balances.

Yes Hatzius seems to do some good modeling. Liked his part that when stock markets are doing well, there is more household spending since they feel richer etc.

International macro is the only place national accounts make any impact or are used.

The national accounts are almost completely ignored in mainstream econ. How do we know this?

Because Wynne Godley isn’t revered as a saint. If national accounts were important to econ, then someone would have come up with Godley’s system back in the 1960′s. His work is incredible and hard to do, but slap across the face obvious if you’re really thinking about national accounting seriously.

It’s the obvious step, to get more detail and have it all add up in a coherent manner. It’s what a competent CFO would do if he was looking at the accounting of a country. Yet nobody had done it before Godley, and he’s hetrodox today.

Do you see any debate in the mainstream about what’s happening in the Godley model? No. How about a reasonable and nuanced discussion of the twin deficits of Government and Current Account? No.

This is how I know.

Year 2040 for the JKH accounts theory. 2030 for the Steve Waldman relationships between value and accounting.

We first need to have a bunch of people die for the accounting to integrated, and they like value already, then another 15 years for the JKH analysis to become mainstream.

Ya’ll think we’re joking. Someones going to win a Noble for what was gone through in the last post.

Thing is, someone has to put practical thinking into policies here: http://www.law.cornell.edu/uscode/

and a few others need to get it into political realms first. Can’t do it all by yourself.

Ramanan,

From the Goldman paper:

“The economy will be weak if desired changes in financial balances add to a number greater than zero, and vice versa. The mechanism ensuring that, after all is said and done, the actual balances always do sum to zero, is changes in income.”

- accounting constrains economic outcomes

“If corporations are running a financial deficit — cash flow exceeds the sum of capital spending and inventory accumulation — …”

- Typo? I can’t make sense of it otherwise. What am I misreading?

“We can solve for the long-run equilibrium financial balance for the household sector. Depending on the exact assumptions that we make, this type of calculation yields an “equilibrium” household sector balance of +2% to +4% of GDP.”

- Appears to contradict the previous previous Shaikh paper, as in my questioning of the same here:

http://www.asymptosis.com/how-accounting-constrains-economics.html#comment-3771

“Third, financial balances in the public sector probably depend more on political preferences than on long-run sustainability considerations”

- not sure how to interpret that; maybe his pre-MMT version, or maybe consistent

Apart from that, the behavioural modeling is impressive, but also pretty intuitive. At the end of the day, the accounting constrains the sum of the sector results, whatever the behaviour. The behavioral modeling must always “fit” (in the pure modeling sense of that word) the accounting outcome, not vice versa.

Jan Hatzius of Goldman Sachs wrote this article in 2003 and someone posted this on Scribd:

http://www.scribd.com/doc/79229916/Financial-Balances-Model-of-the-US-2003

“The Private Sector Deficit Meets The GSFCI – A Financial Balances Model Of The US Economy”

You’re probably right, but it’s something I inferred from “Since 1776 there have been six periods of substantial budget surpluses and significant reduction of the debt.” I took that to mean ‘significant’ reductions over (relatively) short periods of time.

BTW, however, looking at the data, I found 2 more periods of significant debt reduction. They were from 1805-1812 (45% reduction) and 1844-1846 (33% reduction). I don’t know what the economic climate was like then, but why doesn’t Wray address these time periods?

In any case, I definitely agree with Vimothy that some sort of econometric study is needed before the claim is validated; I just think there is more support for it than the ludicrous claim that low unemployment causes large contractions in output.

Steve,

“Is Godley breaking the Roth Rules of accounting and economics? Suggesting that accounting causes economic behavior?”

I would say no. Godley uses accounting matrices to track and relate the evolution of variables. The actual behaviour of those variables is driven by behavioural assumptions, i.e. structural-type equations, and by existence of the stock-flow steady state.

I actually don’t think he fleshed out his thinking to that extent. Which is why I went and pulled the data. I don’t think the “eyeball analysis” I provided either supports or rejects your suggestion. I couldn’t actually figure out how to do that analysis. Greater minds than I?

“in Godley’s models, this comes out of behavioural assumptions and the conditions needed to solve the model for the steady state. It’s not behaviour which is generated from the (theoretically grounded) behaviour of actors within the model. It’s a top-down assumption.”

Interesting. Is Godley breaking the Roth Rules of accounting and economics? Suggesting that accounting causes economic behavior?

Or is he just choosing some behavioral assumptions that comport with the accounting, while acknowledging that very different assumptions could achieve the same?

I feel like you ignored the rest of my comment. As I said, I agree more analysis needs to be done, but to equate the surplus hypothesis with your unemployment hypothesis is taking it too far. The logic is not the same since one can actually postulate a reason why a surplus might cause a downturn (NFA drain). That warrants further research.

“So how do you tell what direction the causality is running? Is it the case that a sufficiently large boom can cause the govt’s fiscal position to go positive, or is it the case that a sufficiently large surplus can cause the economy to go from a boom to a bust?”

I agree we can’t be sure until the data is rigorously analyzed, but I don’t think you’re making the proper dichotomy. Those two can go in sequence. Just because the cycle leads to the fiscal position doesn’t mean the fiscal position cannot feed back into the cycle. See: “However, I will say that low unemployment does cause the automatic stabilizers to move towards higher taxes and lower welfare – which helps drive the surplus. So the low unemployment might not be causal in and of itself, but it’s impact on the fiscal position could be causal.” Meaning, “a sufficiently large boom can cause the govt’s fiscal position to go positive,” and as a result, that “sufficiently large surplus can cause the economy to go from a boom to a bust.”

Furthermore, I think Wray’s hypothesis was specific to significant and quick reductions in the debt ( perhaps “shocks”). I don’t believe slow declines over a long period of time applied.

I admit to finding it hard to make sense of that result, though. Why should private sector demand for saving systematically exceed investment supply? You’ll note that in Godley’s models, this comes out of behavioural assumptions and the conditions needed to solve the model for the steady state. It’s not behaviour which is generated from the (theoretically grounded) behaviour of actors within the model. It’s a top-down assumption.

Ha!

Anyway, been going through that paper. Here’s a brief summary of the bits that stood out to me.

Author describes two parallel (and I assume) PKE approaches to understanding national income and expenditure flows: Godley and Cripps (G&C) and Ruggles and Ruggles (R&R).

G&C model starts with an equation for excess demand as a function of the three sector balances. Excess demand causes undesired changes in inventories. Their equilibrium condition is that this value is zero in the “short-run”.

Now, you can write the private sector balance as the difference between private saving and investment, where private saving is the difference between disposable private income and consumption.

The “Twin Balance Hypothesis of the New Cambridge Approach” is that this is zero in equilibrium, which implies that the budget deficit equals the trade deficit and that private savings equals investment.

G&C hypothesise that the private sectors desired stock of net financial assets is proportional to private disposable income, and that this stock-flow ratio is constant. Private savings adjusts against investment to bring the two into equilibrium.

Author of the paper makes a slight alteration to the model to ensure that the adjustment process dynamically stable.

The result we end up with this that the proportionate growth rate of private net financial assets equals the proportionate growth rate of the economy. G&C assume that the growth rate of the economy is zero in the short run, in which case the private balance is zero.

R&R don’t use formal modelling. Based empirical analysis of NIPA hypothesise that no sector is a net supplier or receiver of funds in equilibrium. They have a nice turn of phrase: “with respect to sector saving and capital formation the general rule is that each tub tends to stand on its own bottom.” Household saving is zero. Business saving equals business investment. Private balance is zero. Capital accumulation drives saving (i.e. saving adjusts to investment to equilibrate the system). Expected future aggregate demand drives investment.

Welcome aboard!

thinking about it a bit, I can start to visualize how it might happen in theory

just have to imagine now why it might happen in practice