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Warren Mosler: Demand Leakages



June 25, 2012 – Comments (10)

Extremely good points. Mosler also discusses this point further in this interview


Demand leakages- the 800lb economist in the room
Posted by WARREN MOSLER on June 25th, 2012

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

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

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

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

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

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

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

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

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

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

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

Am I missing something?

10 Comments – Post Your Own

#1) On June 25, 2012 at 4:39 PM, binve (< 20) wrote:

Link to original post:

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#2) On June 25, 2012 at 5:13 PM, outoffocus (23.59) wrote:

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

Or shouldn't the supply adjust to meet the demand?

Am I missing something?

I think I am the one missing something.


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#3) On June 25, 2012 at 7:20 PM, binve (< 20) wrote:


The point is that supply is not some independent private sector determined construct. The US Dollar is a fiat currency system, the US government issues the US Dollar and can not have Dollars, and as issuer of the currency supplies Dollar to the non-government sector (private domestic and foreign sector) via deficit spending. So it is clear that the private domestic sector does not act independnetly of the government sector and has accumulated currency because of the net cumulative deficit spending position of the US government (the so-called national debt). After all spending and savings decisions are made by the private sector there is either a shortfall in total demand, resulting in a widening output gap (and hence unemployment) or a closing output gap and decrease in unemployment. It is then clear that the spending position of the government is not discretionary and should therefore increase (either via spending increases or tax cuts) to make up for any private sector shortfalls.

So to return to your point:  'Or shouldn't the supply adjust to meet the demand?', since the private sector and the government sector are not independent actors, supply is as much determined by private sector spending and investment as it is by government sector, as outlined above the government net spending provides the funds to be accumulated by the private sector which either increases spending and aggregate demand directly, or with which the private sector will increase its savings and investment to contribute to future productivity gains. The private sector 'supply' does *not* exist independent of this dynamic.

But if one were to suppose that it does, then one would urge the government to cut spending (likely under some incorrect assumption about 'solvency') which will remove income from the private sector (since it is currently trying to net save) which will further reduce economic activity, which will force layoffs and increase unemployment, which reduces both demand *and* supply, which further reinforces this downward spiral. This was point I was making in this post:

So going on the theory that we should cut government spending by some large amount and let supply adjust to meet the demand means that we will endure some self-inflicted recession (or likely depression) to meet that equilibrium, under the banner of 'reducing the deficit' (which likely won't happen anyways because as the government cuts spending and demand drops, unemployment will rise and tax recepits will drop and transfer payments will rise which increases the deficit ....)

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#4) On June 25, 2012 at 7:29 PM, portefeuille (99.56) wrote:

Krugman mentions "persistently inadequate demand" here.

Deleveraging and the Depression Gang

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#5) On June 25, 2012 at 7:36 PM, AvilaRobertaa (< 20) wrote:

just as Allen replied I'm blown away that any body able to get paid $5111 in 4 weeks on the internet. did you see this link(Click on menu Home more information)

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#6) On June 25, 2012 at 8:23 PM, ChrisGraley (30.25) wrote:

Wow! I need a day just to type a response here and I usally avoid any thread that mentions Krugman because it is inevitively hopeless but....

First hello Binve and Porty, it's good to see you again.

So I think the suggestion is that savings is an evil force that will force depression on the economy because the unspent money will not go back into the economy. Money should immediately be spent the moment it hits the consumers hands and if the consumer won't do that, then it is the absolute duty of government to step in and do that for them.

Is that the suggestion? I'm thinking the best course of action would be for the consumer just to cash their paycheck at the casino and play until it's gone to get the money back into the system quickly.

I must have this wrong so I'll wait for a better explanation before I respond.

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#7) On June 25, 2012 at 11:19 PM, binve (< 20) wrote:


I don't always agree with Krugman, but I think this piece makes a lot of sense, and I agree with quite a lot of it.


Hey Chris, good to see you.

So I think the suggestion is that savings is an evil force

Completely and utterly disagreed.

Savings is a completely necessary force because the private sector as a whole leveraged up so much during the last cycle to the point of unsustainability. They are rightly and necessarily deleveraging, paying down debt and saving.

Now, to the second part of that sentence, this is the demand leakage. Basic accounting 101, spending = income. If in any period any economic actor does not spend all of their income (i.e. saves part of their income) then any subsequent transaction to that decsion must necessarily have less income. So we get the classic fallacy of composition: 'saving is good, so if everybody saves it is very good'. Nope. Since saving is by definition a reduction in spending (demand) and is a reduction in income, then for the private sector as a whole to save (and we have a current account deficit which mens money is leaving the borders, not coming in) the government sector must net spend (spend more than they tax).

So in this dynamic, if the private sector is net saving and we have a current account deficit, there is a loss of demand in the economy. Which means the government must spend money into the economy to support that demand. And if that demand is insufficinent? We have an output gap which most visibly manifests as high unemployment, exactly what we are seeing.

So in order to support demand ( which is spending, which is income) in the economy, the government must run defecits, and should run deficits that are high enough to close the output gap (i.e. reduce unemployement). If business are swamped with demand, they will start to build inventories, and then start hiring to keep up with demand.

These deficits by the US government do not pose an 'insolvency' issue at all. So for the private domestic sector as a whole to save and pay down debt (which they need jobs to do) an economic agent must spend more than their income. And since that sector is not the foreign sector in this case, it is the US government's *DUTY* to do so. Otherwise the private sector will not be able to realze their savings desires and economic activity will drop to recession (or depression) levels.

Not all government spending is the same, and what it spends on is just as important as how much it spends. That is the point of this post:

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#8) On June 26, 2012 at 11:01 AM, portefeuille (99.56) wrote:


The Importance of Studying the Obvious

by Duncan Watts  |  12:25 PM June 25, 2012


In the same vein, no matter how many times economists explain that cutting government spending in the midst of a recession is generally bad for economic growth, politicians continue to pursue austerity policies based on the flawed but intuitive analogy that government debt is the same as individual debt, and so should be handled the same way. 



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#9) On June 26, 2012 at 5:43 PM, whereaminow (42.76) wrote:

In the same vein, no matter how many times economists explain that cutting government spending in the midst of a recession is generally bad for economic growth

Is that what ALL economists say?  And if I were to find an instance where government spending was slashed in the midst fo a recession and great economic growth followed, could we conclude that this is not some iron law, but rather a loose idea that is clung to with religious fervor by otherwise intelligent poeple?


David in Liberty

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#10) On June 26, 2012 at 7:44 PM, ChrisGraley (30.25) wrote:

lol, sorry devoish had a climate change post, so i am spent. I will try to post tomorrow.

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