Scott Sumner Does Not Understand that S ≠ I
Update April 4: Steve Waldman kindly links to this post, and I’m rather abashed that he does because it’s wrong as written. As pointed out by Ramanan. (Though the spirit is right.) I should have said:
Private Domestic Nonfinancial (i.e. households and businesses, a.k.a. the “real” economy in which people produce, sell, and buy goods and services that are consumed to produce human utility) Saving ≠ Private Domestic Nonfinancial Investment
Because other sectors exist. Sliced one way: Domestic Financial + Fed Gov + International (financial and non-). (One can argue which sector the Fed should be placed in.) And there are massive flows of funds between these sectors and the Private Domestic Nonfinancial sector.
And: those other sectors can (do) create new financial assets, notably bank deposits, which is how the cumulative surplus from production gets monetized over time.
The Scott Sumners and John Cochranes of this world seem to think that S=I for the “private” economy. And it’s unclear what’s included in their imagined private economy. (The financial sector? the International sector? They’re both “private.”). Their failure to understand or address the sectoral accounting makes their S=I thinking completely muddled.
That’s what I meant to say. Here’s what I said:
He expresses befuddlement at Steve Randy Waldman’s typically brilliant post, K is not capital, L is not labor.
S equals I (and properly understood, I = E) only in an imaginary private sector of producers/consumers with no financial sector, no government sector, no international sector, no lending, and no borrowing — really a barter economy in which not consuming corn is “saving.”
This is the walled-off imaginary sector constructed by Kuznets and company in the ’30s and embodied in the National Income and Product Accounts — NIPAs. (It was only properly supplemented years later with Flow of Funds accounting incorporating other sectors properly.) By necessity they had to construct it as if (to quote Garrett Jones). “Everything you delay gratification for is capital.” (I would add: “real” capital.)
This is basic sectoral accounting, a subject in which neoclassical (and “market monetarist”) economists seem to have received no training.
Cross-posted at Angry Bear.
Over at Monetary Realism they often discuss S=I. The formula in this piece is:
S = I + (S – I)
Thanks, yes. I am inordinately proud of the fact that that construct first emerged in the comments section of my lowly blog:
Wow, this is good to see. Someone actually trying to reconcile macro-economics and accounting. Too much macro makes no sense from an accounting point of view. It’s as if biologists argued that cells don’t need to conserve energy.
(My only minor argument would be that only commercial entities – firms and banks – have separate capital accounts. Individuals and governments have these as well, but our current political ideology doesn’t allow us to acknowledge this.)
Wow, the very next post, The Evils of Corporatism, backs up my parenthetical.
It might be intra Waldman[n] envy but I think that Steve Randy Waldmann neglected to mention the key huge error in the Jones post on which he commented “the optimal tax rate on capital is zero.” The word “is” makes the claim totally incorrect. The Chamley Judd result states that as time goes to infinity the optimal tax rate on capital goes to zero. In plain American English, the correct version is “the optimal tax rate on capital will be zero.” (in the Queen’s English it is “the optimal tax rate on capital shall be zero”).
In particular consider the case of an Ramsey model with rich capital owners, poor workers and an egalitarian government. The Chamley Judd result is that a government which can only tax capital (and can’t redistribute lump sum or tax consumption) and which can’t precommit will cease to redistribute when perfect equality is achieved.
The result, basically, is that if everyone is perfectly equal, then an egalitarian won’t change things.
In contrast, with precommitment and with empirical plausible parameter values, the optimal policy is to redistribute more so that those who were rich end up poorer than those who were poor.
Here are proofs of these claims (warning PDF heroically constructed by Sigve Indregard) http://tinyurl.com/2vwkl8k
None of this is a critique of Chamley Or Judd. It is just an explanation of what there result is. They made no claim about optimal policy in 2013 or 3013 or 10000000 AD. They only discussed what would happen to optimal policy as time goes to infinity,
Chamley-Judd should be ” more central to economic discussion?”, Why isn’t it “part of the canon that all economists breathe in” and “?in our freshman textbooks” “taught to everyone” when time has gone to infinity, that is never.
Jones left a little something out, but that little something wasn’t finite.
Thanks for the information. I will have to look into them for my own needs and check out your blog.