Hello ToK Society,
A very important concept in Modern Monetary Theory (MMT) is a macroeconomic accounting identity called, "Sectoral Balances". It's an identity, meaning it's true by definition --- like saying "All triangles have three sides".
Sectoral Balances is derived from two national accounting identities --- one based on aggregate spending, the other based on aggregate income ---- Gross Domestic Product (GDP), & Gross Domestic Income (GDI).
And since --- as the saying goes --- one person's spending is another person's income, GDP = Y = GDI.
(1). GDP
Y = C + I + G + (X - M)
Where
C = Consumption
I = private Investment
G = Government spending
X = eXports
M = iMports
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(2). GDI (i.e., how households can use total income)
Y = C + S + T
Where
C = Consumption
S = Saving
T = Taxation
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(3). Since both identities are two perspectives on Y, we can say:
C + S + T = Y = C + I + G + (X - M)
Or simply
C + S + T = C + I + G + (X - M)
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(4) We can drop C (Consumption) from both sides and get
S +T = I + G + (X - M)
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(5). Now you can rearrange the equation to get the following
(G - T) = (S - I) + (M - X)
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(G - T) = the Government Sector (in the U.S., we could say, more specifically, The Federal Government Sector)
If Government spending equals Taxation, or G = T, then we have (by definition) a balanced budget.
If G > T, then we have (by definition) a government deficit.
If G < T, then we have (by definition) a government surplus
----
(S - I) = the Domestic Sector
If S > I, then the Domestic Sector has a surplus
If S < I, then the Domestic Sector has a deficit
----
(M - X) = the Foreign Sector
If M = X, then we have a Balance in Trade
If M > X, then we have a trade deficit (and the foreign sector is saving the currency in question)
If M < X, then we have a trade surplus (and the foreign sector is not saving the currency in question)
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So let's put all this in simple, plain English... we'll use the U.S. as a concrete example
A federal Government deficit = a Domestic Sector surplus + a Foreign Sector surplus
If we to combine the Domestic Sector and the Foreign Sector, we could simply the "Non-Federal Sector". Thus,
A Federal deficit = a Non-federal surplus
So we hear all the time here in the U.S. about people wringing their hands over the federal deficit.
"The federal deficit! The federal deficit!! OH NO!!!"
But if the rest of us want to save U.S. dollars, then the U.S. government must be in deficit.Conversely, if the U.S. government is in surplus, then the rest of us are in deficit!
This is all true by definition --- and it simply cannot be any other way. It's simple macro-accounting. It's basic Sectoral Balances.
Hence why reducing federal deficits for the sake of reducing them is completely misguided (and actually unjustified). Just one of the dangers of comparing the U.S. government to a household or a business, (which is also unjustified).
As I've stated in a previous post, the U.S. government is the currency issuer, while households and businesses are currency users.
As I also mentioned in a previous post, the U.S. government --- as a matter of logical ordering --- had to have spent those dollars into existence first before there were any dollars to take back in taxes. In other words, the federal government, on day one, had to begin with a federal deficit in order for the rest of us to even have dollars to use!
And that is the primary function of federal taxes --- not to fund federal spending, because the federal spending logically had to have come first ---- but to create demand for the intrinsically worthless currency.
We often hear of tax-and-spend when it comes to the federal government, but it's actually spend-and-tax.
It's not the federal taxpayer that funds federal spending. On the contrary....
It's federal spending that funds federal taxpayers!
I'll leave it that for now.
~ Jason Bessey