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Home Publications Blogs Beat the Press Can Someone Teach the Post National Income Accounting?

Can Someone Teach the Post National Income Accounting?

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Wednesday, 27 April 2011 05:07

It has become fashionable for billionaire types to offer big prizes for all sorts of things: new green technologies, teaching inner city kids, raising poor people in the developing world out of poverty. In this spirit, we really need some enterprising billionaire to offer a big prize for teaching basic national income accounting to the Post's editorial board.

The lead Post editorial expresses great concern that the world may lose confidence in the dollar, first and foremost because of the country's budget deficit and debt. If the Post's editors knew national income accounting then they would understand the contradiction in this position. The only sustainable way to get the budget deficit down is by lowering the value of the dollar. In other words, if it wants lower budget deficits, it should want the dollar to fall.

The logic is simple. The trade surplus is equal to net national savings. This is a definition, sort of like 2+3 being equal to 5. There is no way around it: 2+3 will always equal 5 and the trade surplus will always be equal to net national savings.

When the United States has a large trade deficit, as it does today, then it means that net national savings are negative. This means that either private savings must be negative or public savings must be negative (i.e. we have big budget deficits) or some combination of the two.

In the last decade, we had very low private savings as the budget deficit shrank to just 1.0 percent of GDP. The low private savings were the result of the housing bubble. The bubble led to a huge amount of wasted construction (which counts as investment) and very low household savings as consumers spent based on bubble generated housing equity. While the Post may want a return to bubble driven growth, this is disastrous for the economy and it is certainly not sustainable.

In the absence of very low private sector saving, there is no alternative to having the government run large budget deficits to make the identity balance. (In principle, other investment could rise, but it is very difficult to find formulas to make that happen.) This means that the current trade deficit essentially requires a large budget deficit.

The way out of this story is for the dollar to fall. The Post and its deficit hawk buddies can jump up and down and call all sorts of people all sorts of names but the trade deficit is not going to fall by much unless the dollar falls. A lower valued dollar makes U.S. exports cheaper to foreigners, leading them to buy more of them. It makes imports more expensive for people in the United States, leading us to buy fewer imports.

For this reason, a lower valued dollar is an essential part of any sustainable recovery plan. If the Post's editors knew national income accounting they were be putting pressure on Bernanke and Geithner to reduce the value of the dollar, not pleading for pledges to a strong dollar.

Unfortunately, the Post's editors don't understand national income accounting so we get this confused editorial calling for lower budget deficits and a strong dollar. Isn't there some billionaire out there willing to put up the prize money so that these people can be taught? Please. 

Comments (11)Add Comment
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written by skeptonomist, April 27, 2011 9:12
A lower dollar is not the only way to reduce the trade deficit; there are also tariffs and other direct measures which can be targeted more precisely. Of course the exchange rate with specific countries can also be targeted more precisely - we could actually take some action to force China to give up its pegging policy. Monetary policy as administered by the Fed is usually a very blunt instrument.

The average value of the dollar decreased greatly 2002-2008 while it has not decreased at all since 2008. The fall 2002-2008 did not prevent a huge increase in the overall trade balance. The decrease of the dollar was mostly against the euro and the Pound, and European countries would seem to be much better prospects as consumers for any goods still manufactured in the U.S. than the Chinese.

At this point a major readjustment by whatever means would be painful in the short term to U.S. consumers - manufacturing would not revive in the U.S. until prices increased considerably. The current concern with deficits is based on partisan politics and not economics and I am not sure how many politicians are aware of the likely real economic consequences of devaluing the dollar and not just appealing blindly to nationalism, but their awareness would rise quickly if prices at Walmart started going up.
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written by Marvin, April 27, 2011 9:20
Would someone be kind enough to point me to an explanation of the identity Dean cites, trade surplus = net national savings. I fear I don't understand why that must be true because I'm missing some steps.

Thanks.
Can someone teach the Post about the National Income Identity
written by Sherparick, April 27, 2011 11:16
Here is a good article that explains the National Income Idenity, the trade deficit, the personal savings rate, and Government deficits.

www.rhsmith.umd.edu/.../The Trade Deficit--Where Does It Come from and What Do... - Similar
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written by Sherparick, April 27, 2011 11:25
The WaPo editorial board is also a mindless cheerleader for trade agreements, misnamed "Free trade" agreements, and apparently it has never entered their collective heads that the chronic trade/current account deficits of the last 30 years means ultimately the dollar will decline in value (as well as relative U.S. standards of living) as surely as the high tide will change to low tide. But at the same time, China's and Japan's interest in sustaining exports to the U.S. means that an actual dollar crisis is extremely unlikely in that neither country would want to see a decrease in their exports or a drastic decline in the value of the U.S. dollar bonds they hold.
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written by JBG, April 27, 2011 1:53
I have the same need as Marvin, but the document Sherparick points to, at a first look, seems to tell about complicating additional factors (that Dean's post also hints at) rather than a simple explanation of the basic identity. Such an explanation is necessary if we non-economists are going to be able to follow Dean's argument. And since he uses it a lot, the need is acute.
Private Sector debt
written by osfp, April 27, 2011 7:20
Just wanted to add that with the private sector deleveraging that's occurring (and we want to continue), it's hard to reduce the budget deficit without a similar reduction in the trade deficit. But as other countries worry about their currencies appreciating, I wonder how possible even that will be.

We should also consider the possibility that that WaPo/these billionaires want to continue spending cuts and contract the economy to further their rentier interests.
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written by Calgacus, April 27, 2011 7:49
Marvin, it is ridiculously simple, but rarely explained simply. It's a little easier to think of a trade deficit as national dis-saving. Think of a cash only economy and physical dollar bills. The USA is the only ultimate source of them. A trade deficit means we export dollar bills and get stuff back in return. In other words, we are losing, dissaving dollar bills. A trade surplus means we are importing the dollar bills back, saving them. Introducing banks, credit, lending, private debt blah blah blah etc doesn't change anything. So the accounting identity, as always, boils down just to two ways of saying the same thing.
Identity
written by osfp, April 27, 2011 7:53
does this link help: http://en.wikipedia.org/wiki/National_savings

another consideration is that the private sector tends to accumulate (a small amt of) net financial assets, that is investment (I) exceeds savings (S) by a little bit.

start with national accounting identity:

Y= C + I + G + (X-M) where X-M is net exports

Y-C-G= I + (X-M) rearrange by subtracting c & g

Y-C-G (domestic savings) can be rewritten as

(Y-C-T) + (T-G) where y-c-t is private savings and t-g is public savings or budget surplus

so plug those back in:

(Y-C-T) + (T-G)=I + (X-M)

so when the private sector is accumulating net financial assets (not going into debt):

(Y-C-T) is greater than I

and we know that x-m is negative because that's the trade deficit

so the value of T-G has to be negative...which means a budget deficit equal to the trade deficit plus the private sector's net financial assets accumulation.

hope this helps...it was a fun exercise...hopefully not too many errors


History repeats, regularly
written by Nassim, April 27, 2011 11:52
It seems, at least to an amateur, that the economic conditions in the US is very similar to that of GB in the last decades of the 19th century.

Financiers would borrow low in the UK and lend high and invest outside the UK. The infrastructure fell apart as a high pound policy was force by those trading in money (financier) rather than products (industrialists). The latter lost by a big margin.

Germany jumped so far ahead of the UK in industrial and military capabilities that it was impossible for the UK to catch up and not lose its dominance of the waters, so, a war was needed to ruin Germany. Thanks to the archduke being in the right place at the right time, a good excuse appeared.

The high dollar policy supports financiers (bankers) and hurts industrialists just as it did back in GB in 1890's, and that kingdom has gone downhill ever since. If we continue with bankers running our economy, there is no prospect other that what the UK faced.

The people at WAPO know very well what their agenda is and will bend any fact to support a high dollar for their financier financiers. They know exactly what they are doing, instilling fear of lower dollar in the public which is not literate in economic issues (a very simple subject indeed).
...
written by Oggy, April 28, 2011 12:24
This analysis is correct as far as it goes. But when will you finally come to the realization, Dean, that a continued and increasing budget deficit IS the answer to the problem, rather than a balanced budget and a lower dollar?
"The trade surplus is equal to net national savings."
written by econ layman, April 28, 2011 10:18
According to ofsp's post and wikipedia, wouldn't the net national savings (S) be equal to investment (I) AND the trade surplus (X-M). Dean lead me to believe that S=(X-M) not
S=I+(X-M). I trust that Dean knows what he is talking about, so what the hell am I missing? Please help!

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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