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Wednesday, 2 October 2013

Joseph, John and Gideon

I've noticed some people using the Biblical story of Joseph as justification for their idea that personal saving is a Christian virtue. And indeed, the concept of "rainy day savings" is essentially the same: save up in the good times so that you have savings to see you through the bad times. But in reality the story of Joseph has nothing to do with individual saving. Indeed, Joseph's actions actually made it more difficult for the people of Egypt to save for the coming famine.

You see, Joseph was not saving for himself. Joseph worked for Pharoah. And Pharoah and his court were the Government of Egypt. So Joseph was a Government minister. Rather a senior one, actually: he was the Ancient Egyptian equivalent of the Prime Minister. He "ran the land of Egypt" on Pharoah's behalf.

So when Pharoah's dream prophesied that famine was coming, Joseph created grain mountains to feed the population. Has anyone ever considered how he managed to do this, given that he was a Government official? Well, there are two possible ways. Either all the grain belonged to Pharoah and was distributed to the population by a beneficent government, or it was produced by private sector farmers who were taxed in kind (in the Bible they call this a "tithe"). So in order to build up the grain mountains either Joseph restricted distribution to the private sector, or the private sector was heavily taxed. Either way, the private sector - the population - ended up with less grain during the good times than they would have done if the Government were not saving. Now, they might of course have eaten all the grain and become grossly fat, then starved in the famine.....and indeed that was probably the assumption made by Joseph. After all, everyone knows that people are feckless and the nanny state knows best. So the population were prevented from eating the grain. But they were also, of course, prevented from saving it - as some would have done.

In fact Joseph saved up so much grain that he was able to export some. So he not only taxed the population so heavily they couldn't save, he then sold the receipts to foreigners - including his family. Isn't that corruption? Really Joseph was not a good role model for Government ministers. And no way can his story be taken as promoting the virtue of individual saving. On the contrary, it promotes the virtue of GOVERNMENT saving in order to feed a population that, it is assumed, does not save.

The story of Joseph is a great example of Keynesian economics. John Maynard Keynes advised that Governments should run surpluses in the good times to build up reserves against future scarcity. Joseph and Pharoah did exactly that - and to their credit the population survived (as did the rest of the world including Joseph's family, apparently). What we will never know, of course, is whether it was necessary. Had Joseph not taxed the population so heavily that they couldn't save for the coming famine, would they have saved? Was all that building up of grain mountains really necessary? My guess would be that some would have saved far more than they needed, and others wouldn't have saved nearly enough - and then there would have been food fights. Joseph's action was about keeping the peace as much as providing food.

Of course, the problem for governments that don't have resident prophets is knowing when you are in the good times and when  - or if - they are going to end. The Brown government didn't save during the good times because it did not expect the good times ever to end. Although it wasn't that there weren't prophetic dreams or people to interpret them, it was more that Pharoah wasn't listening to them. Whereas Pharoah did what Joseph said, Gordon didn't do what John said. Consequently the UK government did not have much in the way of savings at the time of the 2007/8 crash. Admittedly there was no famine, but there was a serious recession which caused production and tax revenues to slump. So the UK government borrowed heavily to prop up the collapsing economy. That, not "profligate spending" prior to the collapse, is where most of the debt increase under the Brown government came from. It was pure Keynesian stimulus spending in a recession, but financed with debt instead of reserves because of the lack of Government saving in the preceding boom. And it worked. The economy was recovering - until it was derailed at the end of 2010. That's when everybody got scared about the scale of the borrowing needed to prop up the economy, and decided that borrowing to stimulate the economy was a bad thing and what was really needed was spending cuts and tax rises to "get the debt under control".  Withdrawal of the Keynesian stimulus and its replacement with austerity at a time when the economy was still weak might have had something to do with the fact that the recovery fizzled out. Simon certainly thinks so.

Now, three years later, we seem to have the beginning of a recovery. And suddenly here is Gideon announcing his conversion to Keynesiansim. Having failed to listen to what John said for the last three years, he's become a fervent believer, apparently. I don't know if he went anywhere near Damascus, but he's seen the light. "I want the UK to be running a surplus in the next Parliament", he cries with evangelical fervour.

Except that actually he STILL isn't listening to John, or (for that matter) to Joseph. John and Joseph both say that governments should build up reserves IN THE GOOD TIMES. It is now the back end of 2013 and the good times have not yet returned: the ONS's review for October 2013 contains some promising statistics, but it really is far too early to be claiming that the economy will be performing well enough for a fiscal surplus to be either achievable or sensible in the next Parliament, which is less than 2 years away. The economy is still a long, long way from full capacity. Furthermore, the OBR's figures show that the Government will probably still be net borrowing in 2017-18:



















And the Government has missed every deficit reduction target since it came into office anyway. Running a surplus in the next Parliament frankly looks like a pipe dream. It is very worrying, especially for savers, that Gideon apparently thinks this is achievable.

Reducing a deficit is economically the same as saving, and in the absence of a trade surplus Government can only save at the expense of private sector saving (for a mathematical explanation of that statement, see the Footnote). So if Gideon actually puts into practice his harebrained scheme to force a fiscal surplus in the near future, people will find it even more difficult to save than they do at the moment: their incomes will fall, their debts will rise and they will have even less discretionary income to set aside as savings. Moreover, those who do manage to save can look forward to even worse returns than they have at the moment, because the Bank of England will be forced to loosen monetary policy even more to stop the economy going back into recession.  For Gideon to achieve his goal of a fiscal surplus, financial repression must become the new normal.

Neither Joseph, John nor Gideon appear to support Dave's idea that personal saving should be "rewarded". Joseph's story promotes Government saving, but only in the good times and only when you have reason to think there is a famine coming. John's recommendations are consistent with Joseph's. Neither of them is promoting personal saving: indeed, if John's recommendations are followed, people must rely more on the Government to save on their behalf, since Government running surpluses will limit their own ability to save. And Gideon apparently intends to follow their advice, though he doesn't seem to understand it. After all, he presumably agrees with Dave. He really should read John properly. Or Joseph. And do the maths.

Related reading:

Genesis 41 - NIV
George Osborne: We'll run a budget surplus - BBC
Cameron rules out "mansion tax" - BBC
Fiscal space: what does the IMF mean? - NIESR
Austerity and living standards - mainly macro
Economic review, October 2013 - ONS
Economic & fiscal outlook, March 2013 - OBR
What derailed the UK recovery? - Coppola Comment
One swallow - Coppola Comment
George Osborne's misconceptions about countercyclical fiscal policy - Azizonomics

WONKISH FOOTNOTE.

For those readers who like maths (and for Gideon), here's an algebraic explanation of the Joseph story.

The relationship of private sector and public sector savings is given in the sectoral balances equation:

S - I = (G - T) + (X - M)

where S = saving, I = investment (in this case the amount of grain planted for future crops), G = government spending, T = tax revenues, X = exports and M = imports. Let's express our story of Joseph in terms of this equation. By the way, we are of course using grain as the monetary unit.

We know that while Joseph was building up Government reserves, he wasn't exporting grain. We can assume therefore that X - M is zero. Therefore we have the following:

S - I = G -T

We also know that Joseph was saving grain in the Government's barns. So (G - T) must have been negative - the amount of tax revenue (in grain) exceeded the amount of grain eaten by the Government and its beneficiaries. Therefore (S - I) must also have been negative. The Government's grain mountain was only possible because the private sector DIS-saved.

During the famine itself, of course, G - T turned positive as tax revenue collapsed (no-one was producing any grain) and Government spending increased (Joseph dished out grain to the population). And Joseph also exported grain to other famine-hit regions. So should we assume that X - M is also positive? Was Joseph engineering an export-led recovery?

No, he wasn't and we shouldn't. What Joseph was doing was selling Government assets. It's not correct to regard X - M as positive: Joseph's aid to his family was part of G, not X, and when they paid for it (in something inedible such as silver), the receipts went into the Government's coffers, so were part of T. We still haven't got any private sector external trade. So X - M is still zero even though Joseph is exporting. In fact economically the net effect of Joseph's aid to his family is zero, except that it may have deprived the Egyptian population of grain they needed to eat (part of G was diverted to Joseph's family).

So the result of reducing the surplus (G - T) might be expected to allow (S - I) to increase. Except that it was a famine, of course. Which means that national income was falling. Here's the national accounting equation :

Y = C + I + G + X - M

where C = amount consumed, other variables as before. Note that S, which is private sector saving, is missing. However, Y in this equation includes taxes (the income of the public sector). If we want just private sector income Ypriv, we need to subtract T from both sides:

Ypriv = Y - T = C + I + G - T + X - M

However, we know that (G - T) + (X - M) = (S - I), so Ypriv = C + I + (S - I)

So if private sector income Ypriv is falling, then although (G - T) is increasing and (X - M) is zero, (S - I) actually doesn't increase as a proportion of Ypriv. If C and I remain constant (the population gets enough to eat and all seed corn is planted instead of being eaten), then  if Ypriv falls, (S - I) must also fall. People really don't save when there is famine.



37 comments:

  1. but either side can grow by the use of credit and so the equation can't be called a "sectoral balance"

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    1. Yes it can. Government debt is the savings of the private sector and the external sector. Private sector debt is negative saving.

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    2. Frances wrote: Government debt is the savings of the private sector and the external sector. Private sector debt is negative saving.

      Hi Frances -- Do these savings of the private sector include individual and business deposit accounts? I've understood these to be the debt of banks, created by crediting borrowers' accounts in exchange for their contract to repay.

      Rgds -- EconCCX

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    3. It depends how the money in those deposit accounts is invested by the banks. If it is used to fund private sector enterprise then it is part of I. If it is invested in government debt then it is part of (S - I).

      If you think about it, it is obvious that government debt = private sector saving. Who buys government debt? Private sector investors.

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    4. FC: "If you think about it, it is obvious that government debt = private sector saving. Who buys government debt? Private sector investors."

      So the equal sign here means only that government debt is a form and a subset of private sector savings, is that right? I've always interpreted MMT as arguing that government debt is whence all private sector savings originates.

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    5. That's a misunderstanding of MMT. Private sector NET saving (S - I) is made up of government deficit pus the external surplus if there is one. That's what the sectoral balance equation S - I = G - T + X - M tells us. So if there is no external surplus, all private sector NET saving (i.e. Savings that are not invested in private sector enterprise) is driven by government deficit spending. But of course if S = I, then the fiscal budget can be balanced. If S = I (ie all private sector savings are invested in the domestic private sector) then government deficit spending inevitably funds an external deficit.

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    6. So savings always nets to zero nationally as one persons asset is anothers debt. With the caveat that national debt has a special status as it is funded by law by tax.

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    7. yes, that's right.

      Interest on national debt is a tax credit.

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  2. But the private sector side of the equation can grow by one portion of the private sector being in debt and buying things from the other portion - and so no balance across the equation

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    1. No, it doesn't work like that. One man's debt is another man's asset. If part of the private sector is in debt, the other part is in credit. It balances out and the effect is zero.

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    2. National accounts have to balance, Dinero. GDP is the total of all activity in the economy. All the sectoral balance equation does is split that activity out by sector. It has to add up to total GDP.

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    3. Well, it depends what we mean by balance, and what the debits and credits actually mean when applied to national accounts, where central banks conflate two completely different obligations as 'liabilities'.

      Debits match credits by accounting identity. But assets and liabilities are pretty murky, particularly when it comes to national accounts.

      The undated 'liability' created by a Central Bank as fiscal agent for the Treasury is a very different beast to the dated liability that is created when that instrument is lent or sold and repurchased, to a clearing bank. (Note I haven't even mentioned what private banks do as fiscal sub-agents).

      The Treasury and Central Bank should be considered as a whole, and in my view both undated Treasury bills (aka £) and interest-bearing Treasury Loan Stock (dated and undated) should be considered as National Equity, not National Debt. Another perspective is - as Izabella Kaminska pointed out the other day - to view National Debt as National Savings.





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    4. Chris,

      I've been saying for ages that National Debt should be regarded as National Savings. It's a continual theme in my posts on government debt. I think Izzy might have got it from me!

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    5. Dinero,

      As MMTers have been pointing out for years, money or credit created by private banks nets to nothing. In contrast, money created by the CENTRAL BANK is a NET ASSET as viewed by the private sector: a VERY DIFFERENT kettle of fish.

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  3. well that does not mean that a gvmt deficit is needed for the private sector to function, including private savings.

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    1. The story of Joseph demonstrates clearly that it is not possible for the private sector to save if the Government is running huge surpluses. The more of the available grain that is stored in the Government's barns, the less there is for the population to store.

      I do agree that it is not essential for the government to run a deficit in order for the private sector to save, if all private sector saving is productively invested in the private sector (so forms part of I). In that respect I differ from MMT, which insists that private sector saving is only possible if government is in deficit or there is a trade surplus. But that isn't what I was talking about, and actually it isn't what the equation says either. Clearly, if S = I (all private sector saving is invested productively in the private sector), government can have a balanced budget.

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    2. sorry to butt in, but MMT says the same thing as you. (S - I) is what they call private 'net saving'. This definition is also used by Wynne Godley and the Levy Institute. Private 'net saving' equals the government deficit plus the current account surplus.

      (S - I) = (G - T) + (X - M) rearranges to:

      S = I + (G - T) + (X - M)

      which clearly shows that 'private saving' includes investment.

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    3. I found this great BoE document the other day which might interest you: "The UK recession in context — what do three centuries of data tell us?". It has a fascinating chart showing UK fiscal and current account balances going back to 1815. (p.284, chart 13).

      http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/qb100403.pdf


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    4. this page has the link to the data annex:

      http://www.bankofengland.co.uk/publications/Pages/other/monetary/mpreadinglistf.aspx

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    5. Hi Philippe,

      I'm only quoting what I have read. MMT theorists such as Stephanie Kelton tend to give the impression that private sector saving is not possible without a government deficit, which is true for net saving (S - I) but not for total saving (S). I think this is what the spat with MR was about. The inclusion of the word "net" makes all the difference!

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    6. and thanks for the links. Really interesting!

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  4. Good article, except for the "long long way from full capacity point"

    Any evidence for that?

    Eg. Highest employment on record?

    Eg. housebuilders complaining of being unable to find any construction workers (£40k bricklayers etc) despite this sector suffering the worst unemployment.

    And what sort of capacity are you after? Is this a denial of the need for rebalancing? Or shall we just buy Chinese tat with debt for the rest of our days....

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    1. 7.8% unemployment is a clear indicator that the economy is well below capacity.

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    2. Or that a good proportion of the population is unemployable.

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  5. The equation is simplistic based on transactions where the value of the stuff (and money) is considered constant.

    How do you fit rising and falling asset prices in the equation?

    Since the crisis central banks have slashed interest rates and also forced lower interest rates onto the market by purchasing debt. This has driven up the stock market, bond prices and prevented a collapse in the UK house prices.

    All these assets are considered a form of savings (except maybe by the financial sector, where asset prices are like a horse race, the bets are placed on the favourite, feeding it oats and shorting the loser by starving it of oats, which ensures the desired outcome).

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    1. The sectoral balance equation is a flow equation, not a stock equation. S is the activity of SAVING, not the stock of SAVINGS. However, it is incorrect to say that the value of the goods transacted is constant. It is not, necessarily. Increasing the value of the goods transacted increases GDP, and that flows through into the values of the other variables.

      Increasing asset prices also increases GDP, because of the larger amounts of the monetary unit that changes hands when they are bought and sold. I discussed in the post what happens to S - I when Y falls. I'm sure you can work out what happens to S - I when Y rises..

      However, this post is not about central banks, not about the financial crisis and not about interest rates. If you wish to comment again, please confine your remarks to the subject of the post. And please identify yourself.

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  6. Its noteworthy how the word savings is used in economics. . An individual saving for their future by making long term investments is actually, at the macro economic level, a form of consumption, with an expectation of return. Literally spreaking saving means defering consumption of non-perishable resources for future use.

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  7. Frances,

    "Increasing asset prices also increases GDP"

    How so, when you suggest in your previous post that high house prices is bad for growth?

    It is very confusing to read these posts.

    Richard

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    1. GDP is an extremely flawed measure of growth. Sustainable growth and growth due to asset price inflation are two very different things, but both show up as increased GDP.

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    2. GDP is a flawed measure of growth. It's flawed in a sense that it does not give an idea about the economic strength to grow. The GDP does give you a rough idea of how much 'money', the volume, is required to commit transactions in time. GDP is not a measure of an economy's wealth. It's an indicator (per capita) about the potential to grow savings. People in Indonesia don't starve to death because they earn 1300 USD on an avg./yealry, but they cannot grow rich from the western worlds perspective. Agreed.

      One question I found no answer to. Are stock (share) transactions included in the GDP - the volumes traded at a stock exchange? What is included in the GDP concerning turnover in the finance service sector?

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    3. Stock transactions are included in GDP.

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  8. Frances,

    Entirely agree and sadly we have only had the latter for about 25 years....

    And the fault for that largely lies with central banks (and to a lesser extent, reduced cost of products from China....)

    The link between central bank mistakes, asset prices, credit growth, misallocated capital and now low growth couldn't be clearer...


    Richard

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    1. Richard. I realise you are on a mission to blame everything on central banks, but I'm not going to agree with you. And I'm going to remind you again about the rules of this site. This post is not about central bank mistakes or their consequences. Please confine your remarks to the subject of the post.

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  9. Ypriv = C + S. That's true. Agreed. The famine in the real world economy is not an impact from the outside.

    From the money perspective it does not matter. Money does not care if someone dies, money does not care if someone is to weak to earn. When the individual drops out, starves to death for example money simply moves into the hands of others. It ends up on a savings account. So if those for example 'killed' the neighbor took the saving, then the one saved enough. Even if the state does store enough it still attractive for the whole folk to 'kill' the neighbor:) In the end all do benefit. That's maybe a sad story but imo it's a good argument that it's better to a) enable your neighbor to save in a first place and b) share when the times are hard. Since people are not very willing to do a) or b) I think the option to create grain out of thin air does make sense. I don't see the huge potential for sustainable growth if neither a) or b) are common sense. But doesn't government debt = savings mean that more debt does increase inequality.It's very attractive to take away from the neighbor, it's more attractive to keep the neighbor alive - this way you can take more over the time.

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    1. Well, Joseph may have been a prophet but as far as I know creating grain from thin air was beyond him. What he did was ensure that the Government saved on behalf of the population and then managed the distribution of food during the famine. Both saving and sharing became Government functions. Socialist dictatorship, really.

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  10. Calling the “national debt” “national savings” is a great idea. Sundry MMTers have been suggesting that for some time.

    There is an old saying: “control the language, and you control what people think”. I.e. 99% of the population (including 99% of the House of Commons) are too dumb to look BEHIND a word and think about what it actually refers to. That is, peoples’ brains are controlled by the NUANCES AND INUENDOS attached to words. And the main innuendos attached to the word “debt” are things like “bailiffs” and “bankruptcy”.

    So if you replace “national debt” with “national savings”, then “national debt” would immediately become a desideratum for 99% of the population.

    In fact if you called the national debt the “national giraffe”, 99% of the population would then start discussing the length of the giraffe’s neck and how many spots it had.

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  11. Dr Coppola,

    Going back to your initial point of government saving in the good times by taxing the people (because they can't do it themselves), do you believe it would be immoral or irresponsible to let them keep what they produce and if they don't save it themselves then let them starve in the bad time?

    I believe we need to redefine what "the economy" is from a government target to the passive outcome of the free peoples of the world transacting for goods and labor on their own device. Do we really think everything would fall appart without government micromanagement of people's savings?

    I mean, humans have adapted to harsher conditions in their period of evolution. When we did not have nany states people took responsability..now people borrow and spend in the good times and receive handouts in the bad times to keep them going. I ask you, how does a child learn not to touch the stove? By touching it usually, no? Why can't we let the citizens of the world become a little bit more responsible through experience? I find it very predictable that, especially here in the US, people act like big babies rather than adults since someone else is making all their adult decisions for them (and very poorly)

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