Stop Me Before I Vote Again

A little further explanation of how the sectoral balances equation is derived.

The basic GDP equation, from the expenditure approach, is

NGDP = C + I + G + (X-M)

Another way of stating GDP tracks where all of the money leaving the producers is used by households:

NGDP = C + S + T

Since two of these are drains on the money in the economy, and the other (C) is already present in the expenditures equation, they can be subtracted from the expenditures in the first equation to give us the change in NGDP over the given period:

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

Giving us

ΔNGDP = (C-C) + (I-S) + (G-T) + (X-M)

and ultimately:

ΔNGDP = (I-S) + (G-T) + (X-M)

NGDP changes because, for example, if the foreign sector saves without lending it back to the private sector or public sector, the money just sits in a foreign bank account, instead of coming back into the economy in exchange for goods and services. NGDP (the money paid for all goods and services produced in the national economy) therefore decreases.

One other thing that could use some explaining is the ex ante perspective vs. the ex post perspective.

The ex ante refers to the prospective plans of each sector at the beginning of the year and their net effect on NGDP over the course of the year:

(I-S) + (G-T) + (X-M) = ΔNGDP

The ex post refers to the outcome at the end of the year:

(I-S) + (G-T) + (X-M) = 0

Let's start with an economy with a NGDP of $10, and all sectors in balance initially, .

(1-1) + (1-1) + (1-1) = ΔNGDP

If none of these sectors try to save (change their balance) then ΔNGDP will be $0, and NGDP will be the same at the end of that year ($10).

If all sectors try to save, then we get:

(1-2) + (1-2) + (1-2) = ΔNGDP = -3

NGDP would shrink by $3. The economy that started at $10 NGDP would end the year at $7 NGDP.

The savings that don't balance out (-$3) reflect money that is taken out of flow of the national economy (commercial bank debt paid down w/o new loans, money stuffed under a mattress, retired by the government, or hoarded abroad). From the perspective of NGDP, that money is effectively destroyed (at least temporarily), since it is no longer being used to buy goods and services from domestic producers.

If that sounds strange to you, then maybe this remark from Hume might help:

"If the coin be locked up in chests, it is the same thing with regard to prices, as if it were annihilated"

From the perspective of national NGDP, saving without lending back to another sector of the national economy is akin to locking it up in a chest. It disappears from circulation.

Once that money has disappeared, then we get back to the ex poste view of the economy at the end of the year, now that NGDP = $7. Since none of the sectors found a counterpart for their second dollar in savings (which leaves the equation), the balances still sum to 0:

(1-1) + (1-1) + (1-1) = 0

The sectoral balances sum to 0, but NGDP is now only $7 instead of $10, as the demand for excess savings (beyond borrowing) took money out of circulation.

BLAM. Ouch. My brain just exploded.

Surely there were other factors (than a widening trade gap) that "forced" Bush to run a fiscal deficit. Tax policy comes to mind.

How does the housing bubble show up in this diagram? Household dissaving?

(Side note: the animation distracts and detracts from the point. One reason is that it suggests that the relative velocity of the $'s must have some significance, though on further examination it does not. Another is that the whole damned diagram disappears without Flash.)

"Surely there were other factors (than a widening trade gap) that "forced" Bush to run a fiscal deficit. Tax policy comes to mind."

Well, the tax cuts effectively killed two birds with one stone. They fulfilled his political objectives, while also keeping the economy going (in part at least). He was forced to run a deficit (decrease taxes and/or increase spending), although he may have had other motivations for doing so, and did it without being "forced", so your right that it is probably the wrong word to use there. I'm going to edit it to change it to "necessitated"

"How does the housing bubble show up in this diagram? Household dissaving?"

To the extent to which the housing bubble was fuelled by households going into debt, then it shows up in household dissaving. In the overall scheme, this is conflated with business saving/dissaving, to give us private sector saving/dissaving, so the household dissaving is obscured in the Goldman Sachs chart. It just forms part of the overall Private sector balance.

In the more advanced models used by Godley, all of the households, businesses, banks, etc. are fully disaggregated, so you would be able to see the change in household savings rate, but it gets very complicated very fast. Grouping them together as the "private sector" is just a simplification.

the ice berg has landed ...

JL has entered the comment house

this model has no assets jl
house lots are not here they are off stage
in fact despite discussion of a credit system and talk of the holy ghost power of borrowing rates this model is stripped ala keynes cross
of any balances its pure flow

we have a sector called households and one called finance
not any sector is specifically
labeled firms here or banks

we have then
merely the reification
of the outflow of I domestic investment
and inflow of S domestic savings

none of the hicksian is/lm mischief enters here on the surface just his infernal text book categories

i 'm not sure what fb's next stage will be
but i'm sure balance sheets will emerge
at some point
and one of the entries
under household assets
will be lot values
and
another under household debt
mortgages

household borrowing might look like a flow
out of finance back around to households
thru that left side arc
goosing the flow into and in part
out of households
but only to the extent households buy new houses and of course any
transactional services

each node here has an input to output ratio eh ??

and that is not entirely driven by the flow itself
enter the buffers
the reservoirs of each node
filling or draining or neither

to show the direction of flow is the dollar signs purpose
on the right we have the real production system
on the left the flow of nominal income

we have no transfer system here
the gub is merely buying real stuff and extracting income flow headed for households

the domestic producer node
might save or dis save
here its actions either way are mediated
by households
rendering them passive players in finance
as the foreign sector is as well so far

lots to build here ...

"Grouping them together as the "private sector" is just a simplification."
but not a just simplification ..no ??

its really the opposite of how a system
might look that played domestic producters
as the corporate firms they are
and the real stars of the system

as with the bland label finance
nicely conflating
the credit portion
of real productive investment flow
crucially mediated by "banks "
with these same banks
usury aimed at households

here households are made the stars
doubtless out of goldman's
version of congenital corporate modest

foreign sector as a label
again leaves
one guessing as to just who that might be
in there under that sinister cover
foreigners
--sounds chinese eh ??--

in fact of course the same MNC
hiding out in the chorus of domestic producers
might be in that foreign chorus too
just in another costume

i've always prefered to bypass hicks and his interest rate

and make household and firm expenditures
a function of income only (y)
right now we are just awakening from a long slumber where the trail blazed by hicks has led back to pre keynesian fantasy notions of
purely interest rate manged macro
the cyclops macro that emerged
out of the troubling 70's
only to crash in the credit train wreck of 08

however i know FB is headed straight for the celestial city and i can't wait ...

"and make household and firm expenditures
a function of income only (y)"

it would be a function of (y)(MPC) though, right? I guess you could probably consider MPC itself to be some function of (y), so you would get some sort of curve in the end. I'm still not sure that it works.

Interest rates, and exchange rates aren't really necessary for this model. There are other factors that could affect the balance of saving vs. consumption for the private and foreign sectors (an outbreak of calvinism, tariffs, quotas, or subsidies). I just included those three because they are the three main economic levers associated with macroeconomic policy in each sector, and thought that it might make the overall picture a bit easier to understand.

"in fact despite discussion of a credit system and talk of the holy ghost power of borrowing rates this model is stripped ala keynes cross
of any balances its pure flow"

"i'm sure balance sheets will emerge
at some point"

Yes. Next post is all about stocks (balance sheets, debts, assets).

"to show the direction of flow is the dollar signs purpose"

arrowheads

"this model has no assets jl"

Indeed. But those bubblicious "assets" financed the little green $$ leaving households with no matching $$ coming in the door on the left.

WHOOSH... is the sound of this going straight over my head.

I appreciate the effort, FB, even if I doubt my ability to understand what you posted.

Could we have more of those giant rabbit pictures, please?

jl
this model is not much for explanation
of the state of affairs
or prediction
but quite sufficient to guide
an activist fiscal policy
and at least indicate the direction
of an interventionist trade policy
plunge in and alls well despite the simplicity of the model
so long as the policy fellahs
get timely and accurate info
on the various aggregate flow rates in and out of each node
and watch the changes in subsequent periods
as they apply injections
and exact extractions

oxy if this goes over your head

peace be with u my friend
because you ought not to be trusted
evaluating larry summers

Why is the interest rate the only determinant of (I-S)? Where does effective demand/the distribution of wealth and income enter into consideration?

My impression of this model is that it has about as much in common with how things really work as the Astrologers' model of the Universe:

Terms like "trade" are used in a profoundly misleading fashion--e.g.--when a transnat moves products in various stages off assembly from one country to another this is recorded as trade.

Liquidity is restricted by the Federal Reserve to mainly the banking and financial industry rather than to the production of products with even incidental benefit to the general population.

Floating exchange rates and rampant currency speculation mean the relative values of currencies are often decided at the caprice of "investment" agencies.

etc.

One needs to start by establishing criteria for judging the condition of the economy that are in some way credibly linked proportionally to general welfare; not based on arbitrary criteria mainly related to corporate profits (and not always even that).

op,

When something like this goes over my head, it's because when I look around me I see one thing, but when economics describes that same thing, I see a completely different thing, a hologram that doesn't much resemble the actual thing I've examined. Probably that's due to my lack of inculcation in the finer points of economics lingo and theory. For a system that is supposed to describe our world, economics seems unsuited to the task -- but that's how I always see it, as I've said many times before. I'll just go back to dragging my knuckles on the ground, and chipping away at the flinty stone that one day will be my hand axe. I'm just an unfrozen caveman lawyer, not an econ student, econ professor or econ auto-didact. Your strange system of reality-representation merely confuses me... yet again!

As to evaluating Larry Summers, I would suggest something novel: be rid of the whole system of "economic planning" and all that it implies, thereby rendering Summers and anyone who holds his office a non-entity. Make them find real work producing real things of real value.

Shocking, I know.

"Why is the interest rate the only determinant of (I-S)?"

It can influence the balance of (I-S) but doesn't determine it. You are right that other factors also influence the balance of (I-S). I just used interest rates because it is easy to understand how they affect Saving and Investment.

"Where does effective demand/the distribution of wealth and income enter into consideration?"

Effective demand would be measured by NGDP

Distribution of income is ignored because it occurs within one sector in this model.

The distribution of wealth is ignored because this model is only concerned with tracking flows, while wealth is a stock.

So, the usefulness of this model lies mostly in identifying which of the (*-*) sectors is out of whack?

Seems to me that our big problem, as Keynes held, is that, despite capitalists' long-running "supply-side" claims to the contrary, and as recent news reports from places like the WSJ and Bloomberg BW confirm, S does not automatically lead to I.

This model doesn't really explain that, right? Saying that (I-S) is negative because of interest rates and falling RGDP says nothing about the number and motives of aspiring savers and spenders. Right?

Could we have more of those giant rabbit pictures, please?

Kind of, maybe. Okay, not a giant. But a bunny nevertheless.

dw
this is a perfectly operational structure
so long as you know where to put everything

this interest rate issue is off point here

if we are talking operationally
about our production system

we prolly start with a goal
say a rate of job growth or a level of jobs
or job hours

we can use these boxes C I G T S M X
to monitor the system

these nodes can be measured more or less eh
i'll admit each has its niceties
especially S
its no overstatement to suggest box S
is seriously problematic
in fact from it grows the magic bean pole
to the upper world of credit and finance
but we ain't climbing that yet
it remains a black box
household and firm income goes in one end and funds for box I box C and box G come out the other end

fb ever the provocateur despite himself
has accounted for this pandora's box under the nasty label "finacial system "

at any rate it can not be wrong to the extent
the data is accurate not counted twice
or left out

we have simply
a set of analytically pure boxes
to put
all the relevent if heterogenious
spending data into

and since again by definition
all the relevent spending
must
add up to (NGDP)

nothing here is about causation

i suggested we step toward a model where all wheels are driven by a think called y
which isn't exactly ngdp
cause the g has to become an n
nngp=y

but if we hold it to be self evident
that something we can control the flow rate of
can push up or pull down
say something else like job growth
in other words that job growth or the job level
is related somehow to something
say the growth of nominal net domestic product y
then if we have a means to make nndp(y)
"grow faster or slower "
we can use that means to hit any target job growth rate we choose ...right ??

how do we make y grow faster or slower ??

well in the simple keynes --the schlock keynes
of the late 1940's samuelson college text book
you simply increase G -T or decrease G-T

now if we want to be precise as possible
we'll want to know just how much faster or slower we need net g to grow
to makke y grow just enough to hit our job growth target
we're asking a question for the science team

here at smbiva
forget about it

all citizen sidewalk supers
need know is its possible
given the will power and good data
any job level is reachable

we just take a reading of the job level or job growth rate now in real time
and use the difference between
that actual level or rate and the target level or rate
to order a move up in gub "net" spending (G-T) to increase the gap
or a move down to close the gap

obviously
if you need to increase the gub gap
to close a job gap from below
you can increase G or decrease T
or any combo of the two
and visa versa if you need to close
the job gap from above

how much of this fiddling is necessary
becomes secondary
once the job goal is clear
you keep at it till you reach your target

of course if trying to reach your job target
"causes" inflation to increase
and that's a bug not a feature
we need to move to a new lower job target
or squarely face
the need for structural reforms somewhere
in the production system's institutional arrangements

see ma no interest rate !!!!

md

"S does not automatically lead to I "

yikes !!!

if by I and S
you mean "investment and savings "

getting into that
why it's aregular
who's on first gig !!!!

poor keynes gets saddled
with that seriously
dwarfing and transmogrifying
condensation
of his general theory

lets avoid the words all together

more gub net spending creates jobs
fucking with interest rates is a con game

that we know
and that is all we need to know

pw:
"My impression of this model is that it has about as much in common with how things really work as the Astrologers' model of the Universe"

knot headed know nothing response
i'd expect better out of a house cat
let alone out of u ...mighty mr ward

oxy that caveman humility schtick
got d hartmann shot dead
by his wife

"Terms like "trade" are used in a profoundly misleading fashion--e.g.--when a transnat moves products in various stages off assembly from one country to another this is recorded as trade."

that's not misleading, that's the power of global enterprise to play the sectors of the many countries against each other -- brokerage gone wild, yes, but still trade because the goods, services, and money *are* moving from one discrete economic entity to another, albeit by some very corruptly-defined means of transport.

the old (pre-telegraph pre-everything) idea of me making wine to trade you for pretty furniture is a lab experiment best now circular-filed between 'EMH' and 'externality.'

heh heh heh... but don't you mean p hartman, op?

http://images3.makefive.com/images/200914/9e611ffe0863dffe.jpg

I think I will go to my grave not understanding economics, much in the same way that in my youth I had to humbly accept that tennis and basketball were two sports in which I could never excel, despite trying very hard at both. We all have our talents. And deficits. No pun intended.

I don't get it either. No matter how hard I look at it, it still seems like a schematized post-hoc statistical precis of a complex dynamical system, without a dynamical model of causation.

On the other hand my old comrade Owen observes:

if we are talking operationally

about our production system


we prolly start with a goal

say a rate of job growth or a level of jobs

or job hours

we can use these boxes C I G T S M X

to monitor the system

these nodes can be measured more or less

If in fact these aggregate metrics do give us some useful practical guidance about What Is To be Done, then three cheers for 'em.

herr oxtrot if you would like to understand economics it starts from something very simple and basic: the problem in any society is making everyone's dreams come true with a sadly somewhat more concrete supply of resources. even if your particular country is one that lies and steals profligately, it's an amazing juggling act among buyers, sellers, referees and groundskeepers.

now, macroeconomics is the art of keeping balls in the air so that everyone* who wants to juggle can; microeconomics is the art of identifying when people are more or less likely to juggle; and behavioral economics is the art of identifying those who are happy to watch.

___
*by invitation

It may do violence to Keynesian debates, op-san, but is it not a powerful question, the difference between I and S? Indeed, are we not smack dab in the middle of perhaps the largest negative (I-S) moment in the recorded statistical history of corporate capitalism? The overclass is sitting on a Mount Everest of investment-seeking cash (S), but there is no reason to turn it into I.

And, whatever the niceties of various economic literatures, isn't the claim that permitting and encouraging maximal private accumulation of S will automatically lead to I one way to translate the core claim of the investing class into the symbols of economics? Isn't that "supply-side economics," in other words?

I'm certainly not disputing that (G-T) has a direct effect on (I-S) or that the public is woefully misinformed about how (G-T) works, but (G-T) is only a secondary effect, right? The balance of class relationships is even more important. When capital is overly potent, it stifles its own claim-to-fame, namely productive, job-creating investment. It wins its own poker game. No?

Or is this model simply trying to say that (G-T) is really just another way to talk about this point? That soaking the rich and engaging in a fairly comprehensive socialization of investment is really THE political question of the epoch? I can get with that point, I think, though I don't see how you explain and advance it without the underlying class analysis.

"a complex dynamical system, without a dynamical model of causation."

that is exactly right
most of what you get is comparative statics
or a steady state condition
ie no open system dynamics
no ....history and no uncertain future
only games of risk and chance
-- with known probability distributions or randomness ie
markets as gambling tables--

a system where uncertain event follows known event in a causal pattern ???
that type of dynamics ??
assumed away !!!

in its place a spurious substitute
meta statics where you convert time
the dynamic itself as if its a spacial dimension or the utterly non caused "next" stage
a system that like mother natures earth
has a beginning and an end
that must be part of the models data
to produce analytic results

at best --when you get it --
closed dynamics provide
ones that don't require full histories or at least a starting state
ie a story
with a beginning middle and an end
a closed orbit or infinite trajectory
a model falls out with newtonian insights
into a very chaotic solar system

still quite useable so long as you keep observing and updating

the watch mechansism not only winds down
it morphs itself with dirty little tricks
always at the marginalof a greater chaos

self inventing as it goes along so to speak
filling the log book with unanticipated events etc

but here we only want a closed loop a feed back mechanism to get some decent use out of the model

our model here of a national production system and its attendent "workers village"
need not be exact at all in its determinations
only "good enough" to improve outcomes
once we set up the feed back loop
and start gathering real time data
on changing conditions

one of the great and paradigm
change making moments
in keynes general theory --noted recently by pk of nassau hall :

the guy junked the question of causation
the holy grail of prior investigations
the question of why business cycles occur
in capitalistic production systems
in particular international ones
founded on credit

if you ask the following question:
why does the credit system
often the means to higher performance
on occasion itself seem to generate
the very cycles credit ought to smooth out
and on even rarer occasions
intensify these cycles into a crisis

he just skipped that horse shit pursuit
and asked
can we improve the spontaneous outcome
when the traditional credit channels
are going nutz and headed for impotence ??

he answered that with a yes
and built a frame work to
to sort out the various key elements for observation needed to activate
his prescribed means
of intervention

a simple improvers mandate

that was 74 years ago

about 40 years ago
new theorists started to build new
and "better" models
that to the question can uncle help ?
gave with no regrets the answer ...no

credit systems correctly manged day to day
can only not make things worse
cause in essence a social production system travelling thru time
is just one damn thing after another
hitting a system that but for the grace of its invisible hand would produce zimbabwe or the soviet union

The overclass is sitting on a Mount Everest of investment-seeking cash (S), but there is no reason to turn it into I.

no no
that s is but the act of adding to ..cash
and other paper holdings or gold or house lots or paintings or anything else so long as it isn't a product of the market based production system

the model's S here
is really only that part of the greater cash/credit driven economy that originated inside the production system
as buying and building a product with cash/capital
got turned into cash by a sale of that product
but where the cash so received
doesn't flow back into the production cycle
by way of a subsequent purchase of a just now produced item
but instead goes elsewhere
maybe th agent buys something not produced this period or as in your case doesn't buy anything at all

and here's the key
while this agent is not back into the product market
no other agent off sets this out flow by taking outside money of equal amount
and buys new ouput with it

zillions of these ins and outs go on all the time

only a providence divine could keep these ins and outs in a rough balance for long eh ??

and yet its not just brownian motion here
there are eveloved mechanisms that operate spontaneously to keep ins and outs closely balanced
most of the time
however
real motives emerge mass motives
that send the system of ins and outs
into convulsive imbalance
the ram's horn sounds
and the system is forced once again
into its perp walk

how few or how many will any go to jail this time

md

its best to keep these categories as they stand

if one wants to draw parallels
keynes i is part of marx's department one
and his c is department two

the other part of department one
ignored by keynes :

the replacements for
those elements of the production system
in the pre existing stock
of
machines
factory buildings
goods in process
and saleable inventory
that got consumed scrapped imploded etc
during the current period of production
ie the gross less net of the system

marx's constant capital

now recall keynes use y here not nndp
let aline ngdp

his y is a vector (q )of real products
multiplied by a vector (p)
of those products actual selling prices
this period
ie
y=pq

if y is changing from period to period
that is a result of changes in both vectors right ??

keynes never solved the question
how do we get maximum q change and minimum p change from period to period

why didn't that matter ??
because he was suggesting a solution to a very particular state based problem

lifting production in a time of deflation
where even p rising was good over all
but here we not only get ahead of ourselves but outside of the simple model
where y is y
and employment in hours is assumed to increase with y because
well prices are ...errr frozen

"..is this model simply trying to say that (G-T) is really just another way to talk about this point"

line em up

t and s on one side
and
g and i on the other

in a system that is closed
ie the global market economy
that identity rules performance

the pairs will be equal in the end
s+ t= g+i
so if for example \
s>i then g>t
s greater then i
then g has to be equally greater then t
or the system will over time
pull s back down so to speak
by reducing next period y
till
a smaller s does equal i or at least equal the difference between g and t
--say thers a chronic fiscal deficit --

of course nothing
that simple happens
all 4 boxes change
their data pile
if the pairs are out of allignment

the claim :

" permitting and encouraging maximal private accumulation of S will automatically lead to I"

the gimmick is to leave
those occasions when
the time scale is protracted
and the pathway
a nasty misery filled purgatory
totally hidden under
the technoidal sounding word
"automatically"

here's a recent run down
by old school keynesian bob solow
of the DSGE model
built over the last 40 years of macro

"i do not think that the currently popular DSGE models pass the smell test. They take it for granted that the whole economy can be thought about as if it were a single, consistent person or dynasty carrying out a rationally designed, long-term plan, occasionally disturbed by unexpected shocks, but adapting to them in a rational, consistent way. .... The protagonists of this idea make a claim to respectability by asserting that it is founded on what we know about microeconomic behavior, but I think that this claim is generally phony.

Most economists are willing to believe that most individual "agents" – consumers investors, borrowers, lenders, workers, employers – make their decisions so as to do the best that they can for themselves, given their possibilities and their information. Clearly they do not always behave in this rational way, and systematic deviations are well worth studying. But this is not a bad first approximation in many cases.

The DSGE school populates its simplified economy

– remember that all economics is about simplified economies just as biology is about simplified cells –

with exactly one single combination worker-owner-consumer-everything-else who plans ahead carefully and lives forever.

One important consequence of this "representative agent" assumption is that there are no conflicts of interest, no incompatible expectations, no deceptions.
This all-purpose decision-maker essentially runs the economy according to its own preferences.

Not directly, of course:
the economy has to operate through generally well-behaved markets and prices.

Under pressure from skeptics and from the need to deal with actual data, DSGE modelers have worked hard to allow for various market frictions and imperfections like rigid prices and wages, asymmetries of information, time lags, and so on.
This is all to the good.

But the basic story always treats the whole economy as if it were like a person, trying consciously and rationally to do the best it can on behalf of the representative agent, given its circumstances.

This can not be an adequate description of a national economy, which is pretty conspicuously not pursuing a consistent goal.

A thoughtful person, faced with the thought that economic policy was being pursued on this basis, might reasonably wonder what planet he or she is on.

An obvious example is that the DSGE story has no real room for unemployment of the kind we see most of the time, and especially now: unemployment that is pure waste.

There are competent workers, willing to work at the prevailing wage or even a bit less, but the potential job is stymied by a market failure. The economy is unable to organize a win-win situation that is apparently there for the taking.
This sort of outcome is incompatible with the notion that the economy is in rational pursuit of an intelligible goal.

The only way that DSGE and related models can cope with unemployment is to make it somehow voluntary, a choice of current leisure or a desire to retain some kind of flexibility for the future or something like that.

But this is exactly the sort of explanation that does not pass the smell test.

..... To the extent that the observed economy is actually doing the best it can, given the circumstances, it is already adapting optimally to whatever expected or unexpected disturbances come along. It can not do better.

It follows that conscious public policy can only make things worse.

If the government has better information than the representative agent has, then all it has to do is to make that information public.

If prices are imperfectly flexible, then the government can make them more flexible by attacking monopolies and weakening unions.

The point I am making is that the DSGE model has nothing useful to say about anti-recession policy because it has built into its essentially implausible assumptions the "conclusion" that there is nothing for macroeconomic policy to do.

I think we have just seen how untrue this is for an economy attached to a highly-leveraged, weakly-regulated financial system.

But I think it was just as visibly false in earlier recessions (and in episodes of inflationary overheating) that followed quite different patterns. . "

"No matter how hard I look at it, it still seems like a schematized post-hoc statistical precis of a complex dynamical system, without a dynamical model of causation."

That's basically what it is. It's just a way of looking at the economy that brings out certain necessary relationships between the big sectors. PIMCO refers to it as a "workhorse framework". The questions of causation are left open. You can plug in any causative story you want:

A change in (I-S) could be caused by: a change in interest rates, a change in expectations about the price level, a change in expectations about future demand, an outbreak of calvinism, a problem in the financial system that prevents money being lent, etc. etc.

A change in (G-T) seems straightforward, but the causation can actually be a bit complicated. It could be increased spending, or reduced tax rates, but tax rates don't fully determine tax revenues. Tax revenues could be reduced by cutting tax rates (under control of the government) OR a decline in gross taxable income in the economy (beyond the direct control of the government).

A change in (X-M) could be caused by: exchange rates, tariffs, quotas & subsidies (both here and abroad), demand for oil, price of oil (terms of trade) etc.

It's all left open in this model.

"So, the usefulness of this model lies mostly in identifying which of the (*-*) sectors is out of whack?"

Yes thats basically right.

I think that this might help clarify some of your questions about the S=I issue:

According to Richard Koo, in his ideal world all of those lines in the chart would run at 0. All savings are recycled within the private sector, the government runs a balanced budget and trade is in balance (no surplus or benefit). If you break it up into 4 sectors instead of 3:

Household Sector
Business Sector
Government Sector
Foreign Sector

All saving would simply go from the household sector into the business sector (the old S=I), so their net saving when combined as the "private sector" would be 0.

As the chart shows, obviously this doesn't happen in real life, where there are constant imbalances.

hapa --

I get that's the point of economics. What I don't get is how the point ever is reached. What I see is complex masquerades describing something very simple. What I see is people wanting to be thought of as smart and insightful, conducting a game of 3-card monte so that the haves can continue to have.

One might suggest that in order to try to take the stuff away from the haves and give it to the have-nots, we have to stick with the games and lingo used by the haves.

I doubt there's much utility in that. My theory and premise are, as in most things, quite simple... the economics fanbois who think they're working for the have-nots, actually end up helping the haves. Why? They have let the haves' charade of the map is the territory win the day.

The whole process reminds me of the American governmental period of 1776-1789. And the econ-boys who think they're working for the have-nots, they're like the Anti-Federalists. Hearts in the right place, social persuasion power sorely lacking.

Rewrite the rules, boys. Make the territory = the territory, NOT the map.

PS to hapa --

Let me say it differently. My first exposure to economics left me with this impression:

"You guys are talking sociology. You're just talking sociology, from a money perspective."

See, sociology doesn't try to create complex formulae in order to re-imagine itself a hard science like math or chemistry. It humbly accepts it's talking about fuzzy, whimsical human behavior.

Economics, on the other hand, imagines it's like physics.

Which just makes me shake my head in disgust at the over-hyped, extremely pretentious game being played.

I don't need a formula to tell me that if Joseph Higginbotham has 2.7 billion dollars to his name, he wants to keep that money and expand it. I don't need a formula to tell me that if Jack Dirteater is always behind the due-date on his debts, he needs more money or less debt. I don't need a formula to tell me that Joseph and his country club pals, his Tiger Club dinner boys, his board room buddies all will create dirty games to hang onto and expand their money. It's pretty damned simple and obvious.

Why make it so complex? Anyone smart enough to wade through the charade-formulae of economics would do better using his/her intellect persuading the world of the lies of "economics."

Assuming their aim is to better things for everyone, that is.

If their aim is merely to retain the secret handshake of the "I'm an economist" society, then by all means -- continue the charade and the exclusivity. It's definitely still working.

talking about simple steady state conditions
simply
avoids the reality of imbalances
that exist all the time everywhere
AND
are to a certain extent spontaneously
and quickly adjusted and adjusted to

example t taxes and g spending
with a large
progressively taxed transfer system
linked to a safety net
when imblances occur
that send effective demand for products of
the domestic private production system down the gub system automatically reduces tax take and increases safety net payments

discretionary fiscal policy however
on occasion is required to fully and rapidly
adjust the systemand that's where keynes comes in
in an open system with imports and exports

if the rate of currency exchange spontaneously
lowers the forex rate on a currency zone in trade deficit or what amounts to the same thing
raises the forex rate on a currency zone
in trade surplus this too
automatically adjusts effective demand
to restore trade balance and full production

but again discretionary policy becomes necessary
often the necessity
arises
--as with chindia trade today--
when discretionary interventionist policy by other states
must be active countered by
home state discretionary policy
better known in its final form as
trade war

md is correct nothing about the market system we have insures rapid restoration of full employment
what we have now is wilful persistence in a macro policy that "insures" continued
high unemployment
not out of feckless boobery but out of guile

"What I see is complex masquerades describing something very simple"

utterly reversed

as mjs suggests
the sop of political economy when addressing the citizenry
is to present simple imaginary masquerades
to mis-describe
vey complex real systems
---

if you get what's up

tell me what's up
and why that's what's up

growling howling and scoffing
in some nihilistic lone cur moon dance
gets us elves .... exactly ...no where

if you know nothing
as u often claim
how can you be sure
this isn't
as the corporate party flaks claim
basically
give or take management skills
the best world that we hupersons
-- all of us together --can devise ??

"charade of the map is the territory win the day"

but nobody actually thinks that

"Make the territory = the territory, NOT the map."

The idea is to make a better map, so that map=territory as closely as possible, while presenting the information in a way that can be readily understood.

You can't see the entire landmass of the United States, and you can't see everything that happens in the economy, so we make representative maps that aggregate direct observations into a big picture representation.

Are you against using maps? Is map making a pointless endeavour?

Isn't it kind of useful if you are say deciding how much supplies to pack for your wagon trek to oregon?

persuading the world of the lies of "economics."

i agree that's a mission

but some folks like details and evidence

given they've heard responses to both your scenarios that disguise their pangloss model as bitingly grimly real

one thinks of mathus responding to godwin

peak oil
now there's a fool's gold response to growthsmenship

share the scarcity

zero sum modeling of a social struggle
might require more
then mere physical limits
again malthus only now
posing as ally
on the other side of the class divide

oxy
really other then in a chorus of fellow grunters what do you add to the dialogue
if we are talking about say peak debt bull
cooked up by rogoff and company
the infamous 90% barrier
we are headed to cross
if we don't double down
on our stagonomics by cutting the fiscal deficit

i know

growl rage roar fart puke
its beastly kool

"social persuasion power sorely lacking"
indeed !!!

changes the rules
how jacobin

you don't even understand the rules
enough to know you're actually changing them

the negation of the negation here
is not
hand axe ready

I'm going to edit the original post, as this one bit seems to be causing some confusion:

"There are three main economic variables that affect each of the sectors:

Interest Rates: Lowering interest rates encourages investment (I) and discourages saving (S).
Fiscal Policy: The government can choose to lower taxes (T) and/or increase spending (G).
Exchange Rate: A lower dollar encourages exports (X) and discourages imports (M)."

I'm changing it to:

"The balance of saving vs. dissaving in each sector can be affected by a variety of factors. Here are some examples:

Private Sector: a change in interest rates (lowering interest rates encourages investment (I) and discourages saving (S)), a change in expectations about the price level, a change in expectations about future demand, an outbreak of Calvinism, a problem in the financial system that prevents money being lent, etc.

Public Sector: a change in the fiscal stance (increased discretionary spending (adds to G), reduction in the tax rate (can reduce T), automatic stabilizers (unemployment benefits are paid out, increasing G), reduction in taxable income (reduces T at a given tax rate).

Foreign Sector: change in the exchange rate (a lower dollar encourages exports (X) and discourages imports (M)), tariffs, quotas or subsidies (here or abroad), a change in the price of imports or exports (terms of trade)."

should I just delete it altogether?

what do you think op?

op --

No, actually I do not "know nothing," I am joking when I say that. I am joking on my lack of the secret handshake granting me entry into the insular world of The Economist.

FB says we're making a better map here. I say we're just changing the symbols used to designate types of landmarks. Instead of blue lines for rivers, we're using red ones. Instead of cross-hatched black lines for RRs, we're using squiggly green ones. The map thereby is improved? Or merely changed?

op, you tell me that I have it reversed: that I am trying to simplify something infinitely complex.

Yet you fail to show how that is true. You simply assert it. I'm sorry, but not even my closest, most respected friends get that sort of intellectual deference from me. You want to persuade me I'm wrong -- then show me I'm wrong, how I'm wrong. Otherwise, you're reinforcing my premise, that you're more interested in retaining special group privileges with a secret handshake.

You can keep your Dick Tracy Decoder Ring and I'll never envy it. I don't have the desire to belong to the club. What I do desire is that the club do what it says it's doing.

If it doesn't do that, it is just like The Noble Democrats -- saying a bunch of pieties, while committing existential sin after sin.

You can create systems of complexity that you imagine to be defining The Thing Itself, but when the systems' complexity take them further and further away from The Thing Itself, the exercise becomes one based mainly in self-justification, self-perpetuation. And then, The Thing Itself is forgotten, but occasionally raised as a strange token of the raison d'etre of the whole complex system.

From the looks of things, nobody on the Econ-Boy side wants to bridge the gap that has been created between The Complex System and The Thing Itself. The Econ-Boys seem more interested in defending The Complex System, even at the risk of completely ignoring The Thing Itself.

Which is what puts me off my feed.

op, you want concretes?

Here are some concretes:

Derivative interests are a scam, a mathematical probability game, just like insurance. The fact that someone can devise a new probability scam doesn't mean it has intrinsic value, no matter how many people are gulled and thereby caused to invest in the scam.

Hypothecating interests rooted in the concept of "interest" is nothing more than creating money out of thin air. Econ-Boys would be wiser to advise The Knuckle-Dragging, Dirt-Eating Public of this fact, but instead what they do is Rewrite The Map -- criticize the mechanisms (lack of regulation! Wall Street is incompetent!) etc, etc, etc.

If your only aim is to "win" an argument within a tiny rarefied group of "leftist economists" and not really to persuade the larger group of The Knuckle-Dragging, Dirt-Eating Public that the present system is eternal fiscal rape, I suppose that it would serve you well to call my criticisms nothing more than grunts and snorts. Because after all, you're not grunting and snorting are you? No sir! You're doing something much more elevated and useful! You're kicking someone out of a tree-fort! And that seals the insular, "I belong here!" nature of existence, no?

Pardon me while I reel and sway, regaining my bearings down here on terra firma.

I actually thought that might turn out to be satirical at the end, and you’d ask me if I would rather be a pig or something.

I don’t think I got it at all, even a little, but thank you for the effort.
(Also: Yay! Animations! I understand arrows!)

" the usefulness of this model lies mostly in identifying which of the (*-*) sectors is out of whack?"

it might be better not to chamber these pairs
ie

g-t i-s and x-m
and just compare
the pair of triplets
gix stm

they must balance and they will balance
and in the process of balancing force adjustments all over the system
that will lower real performance

action plan if you want to maintain high performance

gather data on all 6 boxes

and use the two that are under state control
g and t
to balance the pair of triplets

raise or lower g
and /or
raise or lower t

again
see ma no use of the fed !!!!
or its infernal rate game

could the fed counter gub moves ??
yes but the g stick and t spot
can be activated to counter the counter

the fed can't defy the gub if the gub is determined to achieve a certain "real" result
like say
2 % unemployment

inflation ???

we lack the means to control the price level
directly save by a nixonian "freeze "

brutal sub optimal but some what effective

btw
here's a macro flow chart
that really puts the sleeper hold on ya

http://bilbo.economicoutlook.net/blog/wp-content/uploads/2009/07/Koo_balance_sheet_recession.jpg

I think op has a good point there about rearranging the equation.

I have the brackets set up by sector, but they could also be used to separate the inflows inflow from the outflows

ΔNGDP = (I-S) + (G-T) + (X-M)

could be stated as

ΔNGDP = (Inflows) - (Outflows)
ΔNGDP = (I + G + X) - (S + T + M)

oxy
u miss my point
i love you in this tree fort
you are clearly a good representative to this ad hoc parlement of fowls

please don't mistake my censor as a will to banish

if i could persuade you to atend to a little macro
i'd feel i'd gotten somewhere
it really isn't about anything more then you read about in the MSM
but a few simple macro relationships
kept clear ccan help you sensitize the bull shit meter

a simple
"to hell with corporate capitalism "
won't get us into many heads eh ??

i comment every day over at this namby pamby site
economists view
why ??

to figure out what gets thru to folks and what doesn't
now these are folks with an interest in economics obviously
but few have anymore clarity as they enter the scrum there in the comment arena
then you have

your examples are excellent examples
of the paper economy nightmare that hoovers
vamp like over our production system

"Hypothecating interests rooted in the concept of "interest" is nothing more than creating money out of thin air
Econ-Boys would be wiser to advise The Knuckle-Dragging, Dirt-Eating Public of this fact, "
we don't ??

".. instead what they do is Rewrite The Map -- criticize the mechanisms (lack of regulation! Wall Street is incompetent!) "
fb or i do that ??? or at least simply that

calling for more regulation ??? me and fb ???

calling the wall street whales incompetent

me and fb ???

----------------

"If your only aim is to "win" an argument within a tiny rarefied group of "leftist economists"
i long ago gave up on that
not that i didn't engage in more then my share
30 to 35 years ago
i found
most leftist poli econs
have no notion
when they've been beaten into pulp

its not alas a contact sport
and no one keeps score of destroyed
pieces on either side of the combat

the opponent has no sacred rag to snatch

oh t'is very frustrating really
-------------------
oxy clean's prefered mission for me:

"persuade the larger group of The Knuckle-Dragging, Dirt-Eating Public that the present system is eternal fiscal rape"

gee i ain't trying to do that ???

fair enough i'll redouble my efforts

but first help me understand what exactly u mean by fiscal rape ???

"From the looks of things, nobody on the Econ-Boy side wants to bridge the gap that has been created between The Complex System and The Thing Itself. The Econ-Boys seem more interested in defending The Complex System, even at the risk of completely ignoring The Thing Itself"

oxy

i tire folks with my specific policy suggestions
i'm far from a cloud lander

but if you are to battle the bastards you have to blow up their forts eh ??

that requires knowing where they blow up easiest and best

know the enemies game his models his tricks

they are smart and hard working and fighting from vastly superior field positions
example dde jour the peak debt scam
i mentioned above

many well intended pwogs buy into
this fiscal restraint line
in fact if they want more spending
often like md they work up tax and transfer schemes
that implicitly suggest simply borrowing the funds or better yet monetizing them
is off limits

i see a lefty's task
to liberated pwogs from their silly household budget analogy
but that requires showing them why uncle isn't just like the head of a household

or the battle over chindian imports
many decent one world pwogs
see this as zero sum
if we protect our kulack klass we must hurt the chindian masses as they lift themselves out of peasant backwardsness
or worse they take some green based small is beautiful stance
where we all need to cut back
anyway so ....
again there aren't answers for these questions
one can fashion into a growl

Just a passing comment from one passing through-

Truly, Mr. Oxtrot, you have a very dim view of your fellow humans if you think they need someone to tell them that they're getting fucked. In my experience, this is something very few people are unable to detect for themselves.

Where the Bright Lights, Big Schooling gets deployed is not in shielding us losers from the ugliness they've created, but in convincing us that there is nothing better possible, and that any move we make to improve our lives will bring forth only torrents of new and unanticipated misery.

All things considered, we're allowed a pretty clear view of the world that is. It's our view of the world that might be that has the big iron shutter slammed across it.

To work out what else could be and how to make it happen- that's where we need something more than just a wholesome tribal awareness of the dirt between our own toes.

Even though economics has always confused the hell out of me, I'm very grateful to FB for posting this. Now that I've looked at it for the third or fourth time, I'm starting to get a glimmering.

anon
your comment completely and concisely
states the collective mission
any social change economist
ought to join
------------
btw fb

i whole heartedly share mjs's gratitude
u are a brave fellow
to risk playing tutor to us brutes here
at SMBIVA
i look forward to the moment
when the mighty Wynne hizseff
enters the drama

Anonymously passing through says:

Truly, Mr. Oxtrot, you have a very dim view of your fellow humans if you think they need someone to tell them that they're getting fucked.

Interesting. That's pretty much the opposite of what I've said above. You must have missed this part:

I don't need a formula to tell me that if Joseph Higginbotham has 2.7 billion dollars to his name, he wants to keep that money and expand it. I don't need a formula to tell me that if Jack Dirteater is always behind the due-date on his debts, he needs more money or less debt. I don't need a formula to tell me that Joseph and his country club pals, his Tiger Club dinner boys, his board room buddies all will create dirty games to hang onto and expand their money. It's pretty damned simple and obvious.

op,

Here's the crux of what I'm always griping about: if a non-initiate like me is to understand what you and FB understand, can it be done without all the jargon? Or is the jargon essential?

That's basically what I'm saying when I talk about the reality versus the hologram that --to me-- doesn't seem to represent the same reality I've examined. When interpreted through the insular terminology, the reality gets very hazy and I start to ask myself, "what are these guys talking about?"

As I said in a prior comment, when the jargon is stripped away, I'm able to notice that economics is sociology from a money-oriented perspective. What makes me get lost and confused is the injection of the econ-specific terminology and theory. My frustration becomes this: I don't want to screw up a solid discussion between you and FB, but at the same time I want to know what the hell you guys are talking about.

That's it, in a nutshell. That's why I want the bridge between the Econ-Boys and myself, so I'm not sitting here wondering what you and FB are talking about. I'd rather learn from it, instead of being baffled by it.

cf oxtrot, ok i get it.

what you have to know here though is that whatever political stripes you wear, if you don't watch over these kinds of large flows of trust or money or service, whatever you want to call them, if you don't keep them flows flowing, you get shocks -- sudden lurching disruptions that leave some helpless and others in undue command. shocks are very very bad for political equity and the general welfare and so on.

corrupt economists and fakirs use the language of basic national accounting the way they use the phrase 'free markets,' to imply that their favored political avenue is all of effortless, frictionless, automatic, and thoroughly grounded in sound bookkeeping.

that's their lie. to throw out the idea of keeping your money straight because you hate how bankers talk is like speaking only chinese because someone once lied to you in english.

I hear you, hapa.

I think you might overestimate the extent to which I have a pool of riches that require monitoring and safekeeping from The Liars, though. I make so little income that my personal, direct stake doesn't require constant monitoring of the sort you say is simply wise self-protection. However, my interest in social systems generally, and in wanting things to be better and fairer generally, keeps me somewhat focused on the machinations of Bernanke, Summers, Geithner, Rubin, etc. I know they're thieves; I know the "bailouts" are corporate welfare; I know --for example-- that AIG was NOT in operational peril due to unforeseen developments, but rather knew exactly what it was doing.

I know there are two different sets of fiscal ethics:

"Take care of your own self!" for the proles.

"Public assistance when we're hurting!" for the AIGs, CitiCorps, etc. of the world.

I know this.

It's the detailed mucking about that I do not and cannot follow when FB and op start jawing back and forth here.

Shouldn't the household->finance line be a two-way street, or am I missing something?

I'm also unclear on why some cash flows make the cut, and some don't show up on the diagram (transfer payments, foreign investment, net T-bill purchases, &c).

(I-S) + (G-T) + (X-M) = ΔNGDP
(1-1) + (1-1) + (1-1) = ΔNGDP

Ignorant neophyte asks "(1-1) what?" or "1 what?"
The ΔNGDP and NGDP are measured in dollars and the ΔNGDP equation works out to 0, ok, but next thing you show:

(1-2) + (1-2) + (1-2) = ΔNGDP = -3

This seems to mean that the private sector saved twice as much as its income (good trick, that), the government spent only half of its tax revenue (never seen that), and imports were twice exports (this one is almost believable, so long as foreigners are hypnotized by $$$ and will exchange real goods and services for paper promises).

Anyhow these (1-1) and (1-2) terms cannot be denominated in dollars, can they? What am I missing, besides intelligence, experience, and education, of course?

Jonathan Lundell,

Yes, the "finance system" in that diagram is highly abstracted, and the arrows are placed kind of arbitrarily. I wasn't able to make my own flow diagram so I just used that one because it shows the major inflows and outflows clearly.

In a more accurate diagram, those two big "saving" and "investment" arrows would be erased.

Instead, there would be both a green borrowing (dissaving) arrow and and a blue lending (saving) arrow going from each of the 4 sectors (Household, Business, Government and Foreign) to the "financial system". Those are the channels through which you would get t-bill purchases (government dissaving), etc. The financial system mediates each sector's financial saving and dissaving.

Bonkers,

It's in dollars. Anytime your see "nominal" anything, that means it's measured in dollars. Nominal GDP (NGDP) is the dollar amount of all goods and services sold in one year.

"(1-2) + (1-2) + (1-2) = ΔNGDP = -3

This seems to mean that the private sector saved twice as much as its income (good trick, that), the government spent only half of its tax revenue (never seen that), and imports were twice exports (this one is almost believable, so long as foreigners are hypnotized by $$$ and will exchange real goods and services for paper promises)."

You're getting a bit mixed up here on the private sector.

The private sector saved twice as much as it borrowed ("investment"), not made. I is investment, not income.

The government runs a large surplus, yes. Not likely, but not unfathomable, right? None of the numbers here are very realistic (every flow being either 10% or 20% of NGDP, $1/$10, or $2/$10). They are just there for example.

Thanks. Education proceeds.

i mean 'you' as in 'your country' oxtrot-san, this is collective accounting

Aha. Gotcha, hapa.

I just wanted to say thanks for the explanation of GDP. It really does make some sense to me finally, rather than being some made up sounding number. I must admit that it took some real concentration and thought to understand that flow chart but once I did it all became crystal clear. By the looks of that second chart, we look fucked.