Thread by @SamHLevey

Let me try to clear up a point of confusion on MMT's "sectoral balance" approach.

In the equation (S - I) = (G - T) + (X - M)... why is it "S - I"? What does this mean? Why do we care about this rather than just "saving" S? Here's a thread on how I think about it 1/n

What we want to look at are deficits and surpluses. "Deficit" = spending more than your income, and "surplus" = spending less than your income.

If we split the whole world into parts, then it's only possible for one of those parts to be in surplus if some other is in deficit. /2

Why is this? Because if one part cuts down its spending (without its income falling) then some other part is now receiving less income, because that income was coming from the spending.

Here's more on sectoral balances: /3

Anyway, the math.

We split the world into the government sector GS, domestic private sector PS, and the foreign sector FS (rest of world). Consider the spending flows going into PS from outside: G, coming from GS*, and X, coming from FS. /4

Now consider flows coming out of PS to other sectors: T going to GS, and M going to FS. There's one more special set of flows, which are those that both start and end inside the private sector: C + I - M (because C and I count some imports so we need to subtract them out*) /5

Adding the flows that originate in the PS regardless of where they go gives: T + M + C + I - M = T + C + I.

Again "surplus" = income minus outgo, so to calculate the private sector surplus, we take PS income Y and subtract this thing T + C + I. /6

We can do this in 2 ways because Y gets written in 2 ways. One way is by "source" of income. This is the familiar GDP formula, Y = C + I + G + X - M.

This gives (C + I + G + X - M) - (T + C + I) = (G - T) + (X - M). The 1st term is the GS deficit and the 2nd is the FS deficit /7

The second way is to break Y by "use" of income, usually given as Y = C + S + T. Now to calculate the surplus we have (C + S + T) - (T + C + I) = (S - I). This is the PS surplus.

Set this equal to the equation in the previous tweet to get PS surplus = GS deficit + FS deficit. /8

All we did was: total private income minus total private spending (call it outgo if you're not comfortable calling taxes "spending"). It just happens that this reduces to S - I. When you see it, instead of seeing S and I, you can see it as the 2 bigger expressions, reduced. /9

Intuition on S - I? I dunno, partly it's a definitional issue, investment is just not defined as something that "comes out of" income. Or, sometimes in simple circular flow models, Y is received entirely by households so S is something households do, while I is something /10

that firms do. In that case, S refers to a household surplus, and I effectively refers to a firm sector deficit. So "saving" S can be positive because even if PS as a whole isn't in surplus, as the household sector can be in surplus by having the firm sector in deficit. /11

Why care? Because we observe that PS as a whole usually tends to be in surplus. This does NOT mean that "saving" is impossible without gov deficits: households can run surpluses if firms are willing to deficit spend. Or even simpler, you can always "save" in physical terms by /12

doing things like canning fruit from the tree in your yard; no gov deficit required for this!

But if the PS as a whole wants to run a surplus, in order to net accumulate financial claims, then this requires either a GS or FS deficit. /Fin

* I assumed here that the government doesn't import anything, only the PS imports, but this doesn't change the final result, just simplifies some of the steps.

@gabriel_mathy should we go around again on this?