07/05/2012 05:06 pm ET | Updated Sep 04, 2012

Demand Leakages: The 800lb Economist in the Room

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. For a given currency, 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. So if the non government sectors collectively don't spend all of their income, it's up to government to make sure its income is less than its spending, or that much output doesn't get sold. This 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 government via either a (whopping) tax cut and/or spending increase (depending on one's politics).

So wherefore the 'demand leakages?' The lion's share are 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 -- all of that net unspent income means that for a given size government, and a given non government rate of credit expansion, 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 or borrow more. But that's just me...

And then there's the fear mongering about the likes of the $200 trillion present value of United States government unfunded liabilities, without even a hint of the present value of all demand leakages -- all of that future income just discussed 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,' just as they've always done in the past, as evidenced by nearly continuous output gaps/excess unemployment.

Worse, every mainstream economist has learned that it's the demand leakages that create the 'need' for government deficits, but somehow they fail to even mention it, even casually.

If anything, they voice no objections to the popular misconception (and another myth for another discussion) that we need more savings to have funds for investment, thereby tacitly supporting the call for higher levels of demand leaks, and consequently calling for the need for even higher levels of government deficit spending, which they also deem a 'bad thing.'