I can’t say I’ve seen anyone in the deficit debates talking about the demand leakages? Not a mention in the mainstream press, financial news media, or any of the thousands of economic reports?

That’s like discussing the right horsepower for a truck or an airplane without any consideration of the weight of the vehicle.

Demand leakages are unspent income. And if any agent doesn’t spend his income, some other agent has to spend more than his income or that much output doesn’t get sold.

And if the non govt sectors collectively don’t spend all of their income, it’s up to the govt to make sure its income is less than its spending, or that much output does’t get sold, which translates into what’s commonly called the ‘output gap’. Which is largely a sanitized way of saying unemployment.

And with the private sector necessarily pro cyclical, the (whopping) private sector spending gap in this economy can only be filled with by govt via either a (whopping) tax cut and/or spending increase, depending on your politics.

So why the ‘demand leakages’? The lion’s share is due to tax advantages for not spending your income, including pension contributions, IRA’s, and all kinds of corporate reserves. Then there’s foreign hoards accumulated to support foreign exporters. And it all should be a very good thing- net unspent income like that means that for a given size govt our taxes can be that much lower. Personally, I’d rather have a tax cut than a policy to get other people to spend their unspent income. But that’s just me…

And then there’s the fear mongering about the likes of the $200 trillion present value of US govt unfunded liabilities. But 0 mention of the present value of all demand leakages- that future income that will be unspent as it’s squirreled away in the likes of retirement plans, corporate reserves, and foreign central banks.

If history is any guide, the demand leakages will probably continue to outstrip even the so called ‘runaway spending of our irresponsible government,’ like they’ve always done in the past, as evidenced by nearly continuous output gaps/excess unemployment.

Worse, every mainstream economist learned that it’s the demand leakages that create the ‘need’ for govt deficits. But somehow fail to even mention it, even casually.

If anything, they voice no objections to the popular misconception that we need more savings to have funds for investment, thereby tacitly supporting the call for higher levels of demand leaks and the need for even higher levels of govt deficit spending.

And all you hear are calls for deficit reduction, both public and private, all in the face of geometrically expanding demand leakages.

Am I missing something?

79 Responses

  1. > Am I missing something?

    Nope. Every population is necessarily comprised of static thinkers in a dynamic context. Their, as yet uncoordinated, activities always have far more latent than realized potential.
    That is, after all, what allows evolution to occur. We’re always discovering how much more we’re capable of doing. How fast is a separate question.

    No matter what we accomplish, we simply generate even more options to explore. Call it the “Traveling Entrepreneur Task”

    How FAST we explore emerging options separates those who evolve from those who don’t. By sitting on our demand leakages, instead of being all we can be, we’re putting our grandchildren close to being those who don’t evolve.


      1. @Art,

        Art – Do you think that it is the size of the deficit that matters or the quality of it? What I mean is that Warren refers to “Good”, “Bad” & “Ugly” deficits. In this context, the Good vs. the Bad is really just a matter of political perspective depending on whether you prefer more government spending or more tax cuts.

        MMT interprets tax cuts purely from the perspective of how it impacts aggregate demand. If more people are allowed to keep more of their income it will translate into more consumer spending and thus will stimulate economic activity. In this sense tax cuts in the MMT paradigm increases the supply of money, which if taken to extreme would be inflationary.

        However, Supply Siders will argue that the right kind of tax cuts, as in pairing back marginal tax rates, will create more incentive to work, save and invest. Logically it makes sense that entrepreneurs will be more willing to take risk if they know that their after tax return on capital has gone up.

        Logically this would appear to increase the demand for money. Does this increased demand for money negate the increased supply of money from the tax cuts, keeping potential inflation in check? Or does an increased demand for money translate into greater potential for inflation if it extends to increased loan demand which inflates assets values via expanding leverage?

        I’m nor sure how to answer these questions, so I would appreciate hearing some feedback from other participants on this thread.

      2. do i use the term ‘good bad and ugly’ deficits? maybe but don’t recall stating it that way, so might be someone else?

        consume spending is economic activity

        we know that 0 taxes = infinite demand/hyper inflation/0 value to the currency.

        so as taxes go down it all works its way in that direction

      3. WARREN MOSLER Reply:
        June 26th, 2012 at 7:20 pm

        “we know that 0 taxes = infinite demand/hyper inflation/0 value to the currency.”
        Just a fool who wishes to ask some questions, in hope of receiving some profound answers.
        Question.Could we reduce “taxes” to zero on any money that is
        in circulation that represents all goods and services that are presently in existence. And all new currency would be issued as loans with a “tax” attached, that would be compound interest.?
        For example; If the American people would allow the deposit of a $1 quadrillion platinum coin to be a receipt of all the present goods and services of this great nation, a sum that would be available for lending at todays rate of 2% for 36 years.
        This would also call for the separation of for-profit banks and the govt since they would have to be 100% liquid on their loans.
        The Fed has the authority to declare 100% margin. If they do not wish to comply, then they are to be declared insolvent as they rightfully are.
        This alone(perhaps $100 trillion) would create a revenue of more than $5.5 trillion a year for 36 years, but of course most would have to be redistributed (SS,Ed.,Health care, “for the general welfare”)
        or it would be impossible to pay back the $200 trillion.
        No FICA,No federal income tax, No FDIC (The banks would have to borrow that fund (could you imagine if another $100 trillion is needed ?) if they as a private for profit institution
        will get to keep their gains but would also have to pay their losses.
        ****And so that I remain on topic, Wouldn’t this take care of “leakage”? The most powerful force in the universe-compound interest will make all the money created come back for redistribution.
        “Thw Wealth of a Nation is in How it Redistributes its Wealth”
        One last question,Why has the world forgotten Frederick Soddy,
        what he had written in 1926,1933 has been mostly on target.?
        ***If you have read this far, I thank for and beg that you read, edit, challenge, improve. If you feel that it would be for the betterment of mankind; endorse it.
        As a fool who hopes that he may be “justaluckyfool” -A fool who if by chance is correct.

  2. Even a lot of the $200 Trillion in unfunded liabilities is probably due to demand leakages or deficit spending that hasn’t occurred yet.

    Pension funds have to be funded with future spending as they are mainly leveraged investments, aren’t they?

    1. yes, the point is pension funds will be getting massive and growing contributions which represent unspent income, supporting the need for some other agent to spend more than his income.

      1. @WARREN MOSLER,

        Seems to me there’s something at rather unnecessary about all that. I can’t quite put it in to words, but I’m tempted to start with a question like “Why have pension funds at all?”

      2. @Sam,

        They will live on what everybody lives on, ever: the output of producers.

        Money is a tool for accounting. And accounting can be made in many ways.

        For example, one could divide the population in 4 groups. The children (that are not ready yet to produce); the disabled (that lost or never had the ability to produce); the retirees (that already have made their fair share of production); the producers (that are able to produce).

        It is clear that unless the producers produce for all people in the other 3 groups, some people in these groups must die.

        Accounting could reflect this: government spending assuring minimal pensions for children, disabled and retirees.

        Surely, the details of how to make such accounting are open to much debate.

        But no debate can change an iota in the basic fact that they must use goods and services produced by producers, whichever are the accounting means. Unless one admits that it is OK to regress in social evolution.

      3. @Warren,

        If there aren’t any pension funds, how does investment happen and who would the investors be.

        Should SS payments be counter-cyclically adjusted for inflation?

      4. Soc Sec should be set at a level that makes us proud to be americans. not too much, not too little.

        there are alternative investment models, including private banks, public banks, etc.

      5. @PG,

        Let’s not forget the non-human production capacity that leverages the power of the “producers”, who produce with the tools and technology built by prior generations of producers.

      6. @Unforgiven,

        “What will retirees live on?”

        Fiat currency is more useful as leverage to execute real transactions, and generate real return on coordination.

        It’s the prodigal son story. Best use of currency is at work, not being hoarded.

        Retirees can live off of the real Output assets they invest in, including their children, neighbors, … up to nation. Warren’s message sums to: “Invest in more output & better democracy. If we do that, we’ll ALWAYS be able to care for our old folks.”

        Art points out that if we don’t, we’ll only be in a position of wanting to steal hoarded financial assets from the old folks.

        Invest wisely, or hoard safely? Easy choice for an informed electorate.

        Are we investing enough in education, training & practice?

      7. @Unforgiven,

        To give people dignity in retirement

        Without them they are like children that rely on Govts (often very stupid Govts) to survive. That may change their mind at any point to say reduce the burden on the taxpayers

        Pensions are essential.

        Excellent post by the way. That explains the need for Govt debt very well. To fund pensions

      8. @WARREN MOSLER,

        “yes, the point is pension funds will be getting massive and growing contributions which represent unspent income, supporting the need for some other agent to spend more than his income.”

        And when total leakages undermine profit expectations and risk taking enough so that pension fund assets take a hit, the ‘need’ for contributions (and in some cases higher taxes) increases.

        After enough of this, more and more investment commitees just start matching government security portfolios to expected liabilities, while the central bank keeps rates anchored near zero, a la Japan, compounding demand leakages with massive loss of interest income.

        And all of this tends to intensify saving desires in the rest of the economy — a vicious cycle.

      9. @Art,

        “intensify saving desires” = excess hoarding

        = excess sitting on our thumbs instead of generating compound real returns

        Why is it so difficult to compare hoarding a piece of a small pie with owning a piece of a much larger pie?

        There’s a paradox of cultural training at work here.

        Our folklore is still steeped in personal hoarding against hard times, vs collective investment as a buffer against hard times.

        We’ve always had both legends.
        Thrift – the ant & the grasshopper.
        Creation – the prodigal son.

        All in traditionally large families!

        Seems our paradigms are slow in catching up to changing contexts. We need a parable for the hoarding electorate and agile electorate.

        During an ice age, the hoarders (ants) do marginally better, while during boom times they’re overrun by investors (plague of locusts). 🙂

        Of course it’s always more complex than that. Ants have to fully invest in offspring in order to ramp up hoarding! Locusts have to store lots of resources in order to go places & reap returns.

        We need another parable, about people who will do anything in their power to avoid thinking – until they absolutely have to – vs people who, by thinking, can be ants or grasshoppers whenever & wherever they want, sooner than non-thinkers.

  3. I think you miss mentioning the present value of demand inflation- that past income that is being spent as it’s being dug up from retirement plans.

      1. @paul,
        Well, as for retirement plans, the private sector is only leaking demand into them with their pension contributions if retirees are not taking an equal amount out of them. The net leakage is the growth of these plans (contributions – payments to elderly), not just the contributions.

    1. yes, retirees spend more than income from payment for producing real goods and services (working) which is a demand add, like deficit spending. But there’s double counting to watch out for as well. The deficit spending that goes to the retirees is already counted as net spending.

  4. What about when you hear the media criticizing corporations having billions of dollars in cash which they are not “investing” to create jobs?

    1. @jcmccutcheon, The ironic thing about investing to “create” jobs is that that creates a demand leakage also – if the investments are profitable.

      Profits are accumulated wealth if net positive in the aggregate.

      1. @Paul,

        Look at G-T (flow) and change in public debt (stock) in relation to figures for distribution of change in income (flow) and wealth (stock). Pretty clear where the funds went.

      2. @Paul, Exactly Paul. Look at the military. The army that spends the most on training will always win against a similarly or even better equipped army.

        The sports team that practices more wins more.

        This ain’t rocket science.

      1. @WARREN MOSLER,

        You forget to mention a good chunk of the demand leakage is accumulating in the bank accounts of multi millionaires and corporations.

        Not that I begrudge an all round good chap like yourself his dues. Just keeping it real.

  5. “Demand leakages are unspent income. … The lion’s share is … pension contributions, IRA’s, …”

    Pension funds, IRA’s, etc. don’t hold cash, do they? The money gets invested, ie. exchanged for something else. And whoever gets the money then, subsequently spends it, no?

    1. @Curious,

      The money passes from account to account until it finds someone who has no immediate need to spend it. Either they are saving for a rainy day, hoping to stop work and retire or they don’t need the money but like big numbers.

      1. and in the first instance you can say it ‘finances’ unsold inventory that’s unsold because the income wasn’t spent.

        more dynamically, when inventory increases output and employment is cut back to where the income to ‘not spend’ isn’t there in the first place.

        That is, savings desires reduce sales/output/income to the point where there is no income to save/not spend.

      2. @WARREN MOSLER,

        So it’s best to keep the money away from those pesky savers no? I’m sure that’s what Mervyn King suggested and nearly got sent to the tower for his error of judgment.

      3. “Either they are saving for a rainy day, hoping to stop work and retire or they don’t need the money but like big numbers.”

        When someone is saving for a rainy day, they don’t keep cash, they invest ie. they trade cash for something else, don’t they?

  6. Possibly one thing:

    ” that much output doesn’t get sold.”

    Which means that much output doesn’t get produced in the first place as there is no signal to the production system that it is required.

    The output doesn’t sit there as inventory awaiting the thawing of the savings fetish.

    It never existed in the first place and is gone forever.

    It’s that old time management argument repurposed – there are a million ways to lose an hour, but none to get it back.

  7. Warren,

    When you say “the popular misconception that we need more savings to have funds for investment” …

    Is the reason we don’t need more savings to have funds for investment because banks are not reserve constrained? i.e. funds for investment get created “out of thin air” when banks extend credit?

    1. @JK,

      All investment automatically creates an equivalent amount of savings as a matter of accounting.

      Since it is just a capitalisation journal of some current spending.

      For banks that just translates into ‘loans create deposits’.

    2. yes, but not just banks.
      savings can be said to be the accounting record of investment.

      it could be, for example, corporate liabilities like corporate bonds and commercial paper.

      1. say a business pours a lump of concrete to use as a loading ramp
        if the accountant expenses it, there’s no investment and no savings
        if he capitalizes it, the amortized value of that asset shows up as investment and savings.

      2. thanks! i spent a couple of hours with Prof Basil Moore at my Bretton Woods conference in 1996 going through it with him after which he asked if I minded if he used that expression for the title of a book he wanted to write. i told him i’d be honored.

      3. @WARREN MOSLER,

        “savings = the accounting record of investment”

        So you (or someone you “loan” your savings to) owns whatever the investment is.
        That “savings” can do anything between evaporate and grow.

        So the onus is always on quality & tempo of changing savings decisions.

        The spectrum of savings = the accounting record of the entire spectrum of investment?

        Best savings vehicle is better democracy?

  8. Only about 10% of Americans save ..Most of the hoarded cash is in the hands of corporations and a minority individuals who clearly follow the philosophy of Tyler Cowen …How do you tell the asset rich that sales matter more than asset appreciation ? you cannot . They need to learn it the hard way . Your only solice is that this one rule never fails . But goodness it can be painful !!

  9. Warren,

    You mention that the “lion’s share is due to tax advantages for not spending your income” but what about the myriad of tax advantages for using credit/debt over money/equity? Private sector debt grew much faster than income for many years. Wouldn’t the interest costs on that debt, which largely accrues to the financial sector, also represent a demand leakage?

    1. yes, interest costs are income for lenders, who may have a low propensity to consume and a high propensity to accumulate equity.

      the important take away is to ‘think demand leakage’ when discussing deficits

  10. @Warren Mosler said “I’ve proposed social security of $2,500 per month”

    You’ve got my vote, Warren. 🙂

  11. I’m confused about “savings = the accounting record of investment”

    If I put my savings into a bank in the form of a deposit, but a bank doesn’t technically loan out my deposit to a borrower, why is my savings considered investment? What is my deposited “being invested in”? This must be written about somewhere. Can someone provide a link?

  12. “If history is any guide, the demand leakages will probably continue to outstrip even the so called ‘runaway spending of our irresponsible government,’ like they’ve always done in the past, as evidenced by nearly continuous output gaps/excess unemployment.”

    I disagree with this due to demographic reasons. I understand that many forecasts of baby-boom retirement are inaccurate (people will keep working) and that immigration is keeping the USA’s age distribution from becoming “Japan-like” but I don’t think we can assume saving desires won’t go the other way someday. If savings desires went negative (i.e. net redemptions of retirement funds, spending of hoarded financial assets) then the output gap might go into surplus creating inflation. You and other MMT’ers myopically welcome this sort of outcome and say this can be addressed by adjusting tax rates or government spending at that time. Although true, this process has its difficulties, especially considering that a larger than normal portion of spending will be from hoarded (post tax, or foreign owned) financial assets. Does MMT suggest that we implement a consumption tax in this event? I think that such a switch would be impossible and as a result the “loser” in such a scenario would be current workers at that time (or gov benefit recipients)since the required fiscal adjustment would be borne by them. The “winner” here would be someone like yourself who has post-tax financial assets that were relatively under-taxed. Similarly for the foreign sector – how exactly will the government “tax” demand generated from a trade surplus (which would come about if China, etc. decided to spend their hoarded assets)?
    My main point here is that we need to eliminate the output gap without producing excessive sectoral balance deviations as their reversal can have distributional ramifications. Statements such as the following seem very short sighted in this context

    “yes, the more they hoard the better. for a given size govt taxes can be that much lower”

    I think we need to lower demand leakages directly (instead of just accommodating them) by, for example, increasing tax rates on folks with a low marginal propensity to consume and lowering them on folks with a higher propensity to consume. We should also take steps to lower our trade deficit (hard, I know).

      1. @WARREN MOSLER,
        Deficit spend sends new money in but sooner or later it ends up being hoarded by a minority ..zero tax regimes outside the US have not stopped the hoarding effect . An altenative approach that recycles more efficiently what was already created is not without merit . CDNDC has a point . Low or negative rates dont seem to work . current taxation policy does not do it .philanthropy is not mandatory. more government more corruption. communism not welcome . Spend it or lose it ? …could be popular with the wife !

      2. @Walid M,

        The options are confiscation of excess savings, or accommodation.

        Remember that in neo-classical theory the default is confiscation – via the default of the corresponding debtor.

        They like to push the idea that the market ‘clears’ at a particular interest rate *at the current quantity of financial assets*.

        That is a myth. Without government sector support the market will clear by wholesale destruction of financial assets and real assets – aka a depression.

      3. the ‘support’ from the public sector is the common sense ‘support’ of making sure that if you tax in your currency of issue, which creates a nominal demand for that currency equal to the tax plus any residual savings desires, you provide the economy the means of paying the tax and net savings.

      4. @WARREN MOSLER,

        If your ideal policy to address demand leakages is accommodation via higher government deficits only then we do not agree. Sure, this policy is better than the status quo – no accommodation – which in the current environment of deleveraging plus wealthy hoarding of financial assets would mean recession/depression. However, my argument is that this policy does have its costs in that the resulting stock of latent demand (government debt/NFAs) will be spent at one point and that the subsequent policy response can have downsides. Now to be clear I am a friend of MMT, but the standard MMT policy recommendation of tax cuts and the job guarantee to address demand leakages and its results ignores a whole bunch of equally valid (or even superior?) policy options. I guess this might be the case because its main thinkers don’t want to delve into policies that are almost micro in nature, or perhaps it’s because they have given up on the ability/competency of government. Either way I think this needs to be discussed more explicitly by MMTers because otherwise its omission either misleads its followers or makes its recommendations seem misguided.

      5. Agreed in general, and I’ve proposed a lot of things that reduce savings desires, and also increasing social security to maybe $2,500/mo, etc.

        But *meanwhile* the political imperative is to sustain full employment and that means to continuously adjust fiscal balance pretty much regardless of the cause of any particular demand leakage that happens to be causing the unemployment.

        So in mid 2008, for example, the demand leakage was the shut down of the credit structure, and my proposal was to suspend FICA to sustain demand and high levels of output and employment.

        Others, for example, proposed repairing the credit structure, which they’ve been continuously trying to do in the context of high unemployment.

  13. “However, my argument is that this policy does have its costs in that the resulting stock of latent demand (government debt/NFAs) will be spent at one point”

    Your argument is not backed by any evidence.

    It’s like saying that the huge amount of methane Clathrates under the ocean will melt at some point.

    Chances are they won’t for various reasons – same with savings. People die, people that are spending savings are offset by those who are saving instead of spending, etc.

    Over time the level of excess savings tends to go up and has for decades with little effect.

    So why worry about something that isn’t likely to happen, given the serious problems of working out which savings are ‘excess’.

    1. @Neil Wilson,

      “Your argument is not backed by any evidence.”

      I would say that your argument doesn’t have much support either given the Lucas critique (outcomes from the past don’t necessarily repeat, especially considering the different specific environments – when did the last baby boom generation retire? how long has neoclassical economics dominated macro policy?).

      I think a good indicator will be Japan (although not decisive because of different cultures, economic policies, etc). I (being first schooled in neoclassical economics) believe that the life cycle has an influence on savings desires such that the elderly tend to dis-save at some point. But regardless, is this really the main MMT retort to my argument – that since NFAs have been increasing over the last few decades that they will never go down? Further, I over-stated my point in that savings desires don’t necessarily have to go negative overall in order to require a fiscal adjustment that would have distributional impacts. Maybe that’s really my point – MMT doesn’t really touch distributional issues (JG aside) or bother with market failures that manifest themselves in demand leakages. In this sense is MMT treating the symptoms instead of the disease itself? Perhaps in an effort to be acceptable to people from all political leanings?

      1. MMT says to optimize as politically prescribed, the govt can always make the fiscal adjustments needed to sustain full employment and output.

        This website also contains too many proposals to mention here with regards to the micro, including banking, healthcare, and just about anything else you can think of.

      2. @CDNDC,

        “hat since NFAs have been increasing over the last few decades that they will never go down?”

        What I was getting at is that you don’t need to concern so much about it *now*.

        Deal with it at the time it becomes a problem in the usual fashion – by choking off excess demand.

        In current thinking there is too much worrying incessantly about the future and not enough taking care of the now.

        As the Sugar Beet farmer tells us it is sensible to keep an occasional eye on the horizon but you need to put the plant in at your feet.

      3. to use a car analogy, which isn’t perfect, if you’re driving down the highway and you know you need to turn 5 miles down the road you don’t turn now.

    2. agreed, and also note that if savings desires do shift the subsequent problems are that of an overheating economy as evidenced by unemployment being ‘too low’ and output ‘too high’ for price stability. Seems in that case demand reduction can hardly said to be painful…

      1. @WARREN MOSLER,

        “Seems in that case demand reduction can hardly said to be painful…”

        Unless of course it’s your demand that is being diminished, especially if the individuals that caused the demand leakage don’t have their demand reduced in anyway, as was my initial point.

        In the end though I agree with you and Neil – given the current situation accommodating leakages via higher budget deficits is the right thing to do now.

  14. “we know that 0 taxes = infinite demand/hyper inflation/0 value to the currency.”

    Hmmm . . . never knew that. I assume “infinite demand” requires infinite money supply, but how does that come from 0 taxes?

    1. with 0 dollar taxes (federal, state, or local) no one is looking to exchange his real goods and services for any amount dollars

      which happens to be the case with my business cards, confederate money, etc.

      1. @WARREN MOSLER,

        Only eventually though.

        If there has previously been taxes and then they are cut to nothing, the currency will likely run on its momentum and reputation for quite a while.

        Taxes are really like a circulation pump – to be used to keep the flow moving if it stops moving on its own accord.

  15. That is a good tip especially to those fresh to the blogosphere.
    Simple but very accurate information… Thank you for sharing this one.

    A must read post!

Leave a Reply

Your email address will not be published. Required fields are marked *