By Joseph Laliberté and circuit. The authors reside in Canada and come from two different heterodox backgrounds, namely, MMT and the post-Keynesian/circuitist tradition.
Introduction
Much discussion took place lately regarding the proper meaning of the term “saving”. The issue surfaced when supporters of “Modern Monetary Realism” (a MMT offshoot) called out supporters of Modern Monetary Theory over the confusion they sometimes entertain when defining this term. Specifically, MMR contends that some MMTers often confuse “saving” with “saving minus investment” or “S-I”. The MMRers stress, correctly in our view, that “S” corresponds to “saving” rather than “S-I”. The anonymous blogger JKH has written extensively about this aspect and has even authored a
detailed paper on this issue. We highly recommend this paper, as it provides an in-depth analysis and summary of this whole issue.
That being said, we wish to start off by saying that, while one could blame MMTers for putting too strong an emphasis on “S-I” rather than “S” in their analytical framework, it would be wrong to suggest that MMT’s lead proponents (i.e., Fullwiler, Mosler, Wray, etc) are not aware of the intricacies of the “saving” definition. Also, although it is true that some MMTers may have been sloppy at times in their use of terminology (for instance, we know of examples where MMTers have incorrectly referred to “S-I” as “saving” or “net losses”), it is unfair to characterize MMTers as being the only ones who get the terminology wrong. As Scott Fullwiler repeatedly and correctly
pointed out, most of us at one time or another are guilty of using unclear or incorrect terminology, especially when commenting on blogs.
The objective of this post is to clarify terminology and demonstrate that JKH’s own choice of words regarding the notion of “saving” is not entirely without fault and could, as a result, mislead some readers. But before doing so, we wish to stress that we fully support the goal of both MMT and MMR (and JKH) in trying to put forth a more technically-sound approach to macroeconomics and economic policymaking. Indeed, it is our hope that all commentators would settle on a standard set of terminology moving forward.
Net Saving or Net Lending?
It is well-known that MMR and MMT have more or less officially adopted
Wynne Godley’s terminology. Accordingly, both MMT and MMR would contend that “S-I” should be identified as “net saving” (of which the origin is most likely shorthand for “saving net of investment”). However, in our view, this terminology is not the most appropriate and could result in significant confusion for readers given that the term “net saving” in the OECD’s System of National Accounts refers to something entirely different from “S-I”. The correct terminology for (S-I) is in fact “net lending” (or “net borrowing”). Blogger Neil Wilson has
been explicit on this point in the context of the aforementioned debate. In our view, “net lending/net borrowing” of the private domestic economy could also be appropriately described as the “sector surplus/deficit” of the domestic private economy.
Therefore, on the basis of the
Statistics Canada glossary (which is in line with OECD terminology), the following terminology will be used in this post when referring to saving and investment:
- “S-I” is “net borrowing/net lending” of the domestic private sector (in the three sector model), where “S” is “gross saving” of the domestic private sector and “I” is “gross investment” (or gross fixed capital formation plus investment in inventories) of the domestic private sector. Gross saving does not include a deduction for capital consumption allowance (capital consumption allowance is known at the micro level as “depreciation”). Similarly, gross investment does not include a deduction for capital consumption allowance.
- “Net saving” of the domestic private sector, unlike “gross saving”, includes a deduction for capital consumption allowance. “Net saving” for the domestic corporate sector (a subset of the domestic private sector) is approximately equivalent to undistributed corporate earnings.
From the above definition, it is quite clear that households/corporations deploy their gross saving, not their net saving. In fact, it could be said that if gross saving is above zero, then it will be deployed in assets (either actively, as in the case of deployments in equipment, or passively, as when leaving it in a checking account) or deployed to reduce liabilities (e.g., repaying loans). If gross saving is above zero, deployment will occur even if net saving is zero or negative due to deduction of capital consumption allowance (i.e., depreciation). Statistics Canada
drives this point home when it describes how gross saving is derived from net saving:
Added to this item [net saving] are capital consumption allowances (CCA). The latter are a cost reflecting the reduction in the value of fixed assets used up in production during the period (i.e., depreciation). Even so, they constitute available resources, since in practice, CCA is merely an accounting entry.
This is consistent with the definitions used by the OECD, and fully consistent with the approach used at the micro (business) level. Indeed, a business could in fact generate significant amount of gross saving and deploy them in various types of assets (real or financial) or to reduce liabilities while simultaneously running down its accumulated net savings (i.e., running down its accumulated retained earnings). This is why we argue that JKH’s flow equation S=I+(S-I) is really about
gross saving and
gross investment, as he himself
mentioned when he described this equation as one of “portfolio balance” in which “the two major categories for the application of saving are investment and net financial assets”.
Gross Saving or Net Saving?
On the basis of the above, we would contend that JKH and other MMRers have themselves entertained some confusion over their interpretation of “saving” in two important ways.
First, JKH rarely specifies whether he talks about gross saving or net saving. Second, and more importantly, JKH at times seems to switch from gross saving to net saving in the same paragraph or in the same text. Nowhere is this confusion more apparent as in the comments by JKH that
were published on the CNCB website. In those comments, JKH writes that:
Saving is described in proper accounting terms as funds sourced from income by virtue of being saved from income. The eventual deployment of that source of funds is described properly as a use of funds — whether such deployment and use occurs in the form of a bank deposit, a bond, a stock, newly produced residential real estate, or newly produced plant and equipment. The deployment or use of funds is separate from the act of saving itself.
In the paragraph above, JKH is referring to “deployment” and “use of funds” and, as such, ought to be talking about
gross savings. Then, in the subsequent paragraph, he states the following:
In summary, the consolidated private sector account obscures, not only the view of saving as it materializes within a given accounting period in bifurcated fashion across household and corporate sectors separately, but also the view of total private sector saving as it is projected fully into the household balance sheet, when captured as a cumulative measure over a sequence of such accounting periods.
In the paragraph above, JKH should really be talking about
net saving given that, after all, it is net savings that could be seen as “being projected fully into the household balance sheet, when captured as a cumulative measure over a sequence of such accounting periods”. On this point, we think that JKH has unfortunately erred in his flow-stock reconciliation. Flow is about the deployment (i.e., use of funds) of gross saving, as mentioned above. Stock is about cumulative net saving, as capital consumption allowance (depreciation) is netted out from both the asset side and the equity side when reconciling the flow to a balance sheet. As you can see from the chart below showing corporate gross saving, net saving and net lending, from an empirical standpoint, this is not a minor point. Indeed, using Canada as an example, there is a very significant difference between the level of corporate gross saving and net saving in the national accounts (click on chart to expand).
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| Source: Statistics Canada and authors' calculations |
Granted, the difference between gross saving and net saving will vary greatly between industries. For instance, in the service industry such as banking, the difference could be relatively small, but in capital intensive industries such as car manufacturing or oil and gas extraction, the difference could be very substantial.
Similarly, JKH repeats this error in his
paper by again not specifying whether he refers to net saving or gross saving and by confusing the act of deployment of gross saving with net saving:
In summary, saving is a subset of income. It is a flow, not a stock. It is the residual of after-tax spending on consumption. (In the case of corporations, it is undistributed profit after the payment of all expenses including taxes and depreciation.) Saving is not the actual deployment of funds into asset acquisitions or liability reductions. Those events are defined subsequent to the fact of saving.
In the above paragraph, JKH is referring to the deployment of gross saving (i.e. use of funds) while also referring to “net saving” when he writes that, for a corporation, saving “is undistributed profit after the payment of all expenses including taxes and depreciation”.
Concluding remark
Is JKH aware of the conceptual shortcuts he has employed when talking about the term “saving”? He is. At least one of the authors of this post has had exchanges with him on blogs about this issue and he has always been gracious and meticulous in his responses. So we are not about to claim that JKH does not know how to do proper stock-flow reconciliation.
Did JKH simplify his savings terminology so that his message about saving versus net lending is easier to assimilate for a general audience? We would say yes. And herein lies the paradox of academic expression. As a general case, we should always strive to be as precise as possible in terms of terminology or expression. But the necessity to get your message across to a general audience is bound to collide with our utopian goal to be perfectly and academically precise in the use of words.
So, in conclusion, we would argue that in trying to convince us that “saving” is different from net lending for the private domestic sector, JKH ended up using arguments that could be viewed as counter-productive in that they blurred the distinction between
gross saving as it is deployed (use of funds) and recorded on a cash flow statement, and
net saving as it is accumulated (as a stock) and recorded on a balance sheet.
