Tuesday, June 26, 2012

Talking About Demand Leakages

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.
Read it  at The Center of the Universe
Demand leakages- the 800lb economist in the room
By Warren Mosler

For many years the desire of some individuals to save was countered by a growing number of other households/corporations willing/able to spend more than their income. As rising interest costs on outstanding debt began outpacing meager income growth, debt levels became unsustainable without infinitely rising asset prices. During this period government was acting equally pro-cyclical, encouraging the massive expansion of credit.

As Warren correctly notes, the government can make up for lack of private sector demand through larger deficits. However, this is not the only possible solution and holds untold costs of its own. Another possibility is to force major writedowns of outstanding private debt, my preferred solution. There are many ways to attack this problem, if so desired, but the first key is to make this issue a widespread topic of conversation.

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