2011-06-05

MMT for dummies (del II)

MMT for dummies (del I)


What Happens When the Government Tightens its Belt? (Part II)
By Stephanie Kelton

“As expected, this accounting truism ruffled the feathers of a flock of readers who have been programmed to launch into an anti-government tirade at the mere mention of the public sector and to regard the dangers of deficit spending as an unimpeachable fact. And while you’re certainly entitled to your own political views, you are not, as Senator Moynihan famously said, entitled to your own facts.”

“I still hope to convince both groups that they are acting against their own economic interests when they support policies to balance the budget or reduce the deficit, either by raising taxes or cutting government expenditures. So let’s continue the exercise and, as promised, extend the argument to the more realistic open-economy in which we actually live.”

“In an open economy, income flows into and out of the domestic economy as residents and foreigners buy goods and services (exports minus imports), make and receive payments such as interest and dividends (factor income) and make net transfer payments (such as foreign aid). Each country keeps track of these payments using a balance of payments (BOP) account, …”

When we incorporate these international flows, we transform the closed-economy accounting identity I used in my previous post:

[1]Domestic Private=Government
SurplusDeficit

into the open-economy accounting identity shown below:

[2]Domestic Private=Government+Current Account
SurplusDeficitBalance

or, equivalently,

[3]Domestic Private=Government+Capital Account
SurplusSurplusBalance

When the current account balance is positive, it means that we in the private sector (households and domestic firms) are accumulating net financial claims on foreigners. When it is negative, they are accumulating net financial claims on us. Thus, a positive current account implies a negative capital account and vice versa.






Stephanie Kelton
Ph.D. is Associate Professor of Economics at the University of Missouri-Kansas City, Research Scholar at The Levy Economics Institute and Director of Graduate Student Research at the Center for Full Employment and Price Stability. Her research expertise is in: Federal Reserve operations, fiscal policy, social security, health care, international finance and employment policy.




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