In this New Economic Perspectives post Randy Wray and Eric Tymoigne confuse accounting identities with behaviour.

In a context, the bloggers claim:

… Only a government deficit induced by fiscal policy leads to net saving.

where “net saving” is saving net of investment.

This posits a one-way causality of the sectoral balances accounting identity S − I = G − T from the right to the left.

This is inaccurate because of the endogeneity of the budget deficit which Wray himself is aware of but nonetheless confuses. This is because private expenditure may lead to a change in output and tax flows which may change the sign of the private sector balance (S minus I)

Suppose the private sector is in deficit and the government budget in surplus and the household sector drastically reduces its propensity to consume. This will lead to a fall in output and income and hence reduce tax flows to the government even if fiscal policy hasn’t changed (government expenditure and tax rate decisions haven’t changed) and the private sector’s balance can turn into a surplus from a deficit position.

That’s what endogeneity of the budget balance is all about. [Some government expenditure may change because of social transfers but the magnitude of this may be much lower than other things involved such as the private sector balance or changes.]

Second, it ignores the external sector.

Moreover the authors make another claim:

Monetary policy can change the composition of net saving by buying financial assets in the domestic sector in exchange for government currency, but it cannot change the size of net saving, i.e. the net accumulation of financial assets.

Cannot change the size of private sector saving net of investment?

Suppose the private sector is in surplus and interest rates are high. The central bank reduces interest rates drastically to induce the private sector’s expenditure to rise. If there is a large rise in investment for example, the private sector can go into a position of a deficit. It is true that the private sector may want to target a small surplus but this isn’t the case always and the private sector can remain in a deficit for long – not necessarily due to fiscal policy.

In the opposite case/scenario, starting from a case of a private sector deficit, suppose the central bank drastically raises interest rates to the point of causing the economy to go into a recession. The private sector balance may rise as people save more and output will fall, leading to lower tax outflows to the government and hence changing the private sector balance.

Some humility is needed by a few people who incorrectly seem to think they know how the world works with confused language such as “taxes aren’t revenue”!