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Home Publications Blogs Beat the Press Has Anyone at the Washington Post Heard of National Income Accounting?

Has Anyone at the Washington Post Heard of National Income Accounting?

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Sunday, 01 May 2011 07:47

It seems that the answer is no. The Post ran a major front page article about the switch from the huge budget surpluses projected in 2000 to the large deficits that we are now seeing today. It never once discussed the implications of such surpluses for the economy.

National income accounting is helpful for understanding items like budget deficits because it provides a simple framework in which their impact can be examined. National income accounting has the advantage that it is by definition true -- there is literally no way around these accounting identities. National income accounting is also taught in every introductory economics class so it is reasonable to expect that the people who deal with economic issues at major news outlets would be familiar with it.

One of the identities in national income accounting is that the trade surplus (actually current account surplus, but these can terms can be used pretty much interchangeably for the United States) is equal to the net national savings. Net national savings in turn is equal to the government budget surplus (public savings) and the excess of private savings over private investment (private savings).

As a conscious policy under the Clinton administration (pushed by his second Treasury secretary, Robert Rubin) the United States begin to push for a high dollar. It used its control of the IMF in dealing with the East Asian financial crisis and subsequent crises in the developing world to put muscle behind the high dollar policy.

The high dollar in turn led to a large trade deficit. If the dollar is over-valued by 25 percent it has roughly the same impact as imposing a 25 percent tariff on all U.S. exports and giving a 25 percent subsidy to all imports. In other words, we expect a high dollar to be associated with a large trade deficit. This is exactly what happened in the late 90s, the high dollar sent the trade deficit soaring to record levels.

Using national income accounting, if the United States has a trade deficit of 4.0 percent GDP (roughly the 2000 level), then it must have negative national savings equal to 4.0 percent of GDP. There is no way around this, it has to be true.

If it has negative national savings equal to 4.0 percent of GDP then some combination of budget deficits and negative private savings must sum to 4.0 percent of GDP. In a context in which the country has a large trade deficit, if the government runs large budget surpluses, as it did in 2000 and CBO projected at the time would continue over the next decade, it would imply that there would be large negative private savings.

This could come about because of an investment boom, it is very hard to raise non-residential investment by much. Even at the peak of the Internet bubble in 2000, non-residential investment was up by only about 1.0 percentage point of GDP from its peak in the 80s cycle and was below its 70s level. This means that the huge budget surpluses projected by CBO in 2000 implied either extremely low private savings or a boom in residential construction. The last decade gave us both.

If the Post knew national income accounting it would have realized that it is pointless to discuss the budget deficit without reference to the trade deficit. This in turn means a discussion of the value of the dollar. Those who know national income accounting knew that the surpluses projected in 2000 were not plausible and furthermore would not have been desirable even if they were plausible. Without a large fall in the dollar, they implied a whole generation approaching retirement with almost no savings, since their failure to save was a logical implication of the budget surplus.

The real problem facing the economy is a hugely over-valued dollar. For some reason the Post, like most of the media, refuses to discuss this issue, instead distracting readers with phony morality tales about the budget deficit.

Comments (2)Add Comment
...
written by Fed Up, May 01, 2011 4:12
"If it has negative national savings equal to 4.0 percent of GDP then some combination of budget deficits and negative private savings must sum to 4.0 percent of GDP."

Couldn't the currency printing entity "dissave" enough currency with no bond attached to fund the trade deficit?

And, "If the Post knew national income accounting it would have realized that it is pointless to discuss the budget deficit without reference to the trade deficit. This in turn means a discussion of the value of the dollar."

If the "dissavings" was with currency and no bond attached, wouldn't that allow the dollar to fall and probably steadily? If debt is used, is that allowing the dollar to stay overvalued over time and having the possibility of the fall being mostly at once?

Notice the time difference with debt.
TANSTAAFL, but what about the Fed buying Treasuries?
written by AnotherScott, May 01, 2011 8:38
Hi Dean and All,

I greatly enjoy your commentary and clear expositions on economics. I never believed that Clinton's surplusses would continue indefinitely (there are such things as recessions), but I hadn't appreciated the trade deficit aspects. Thanks for that.

Intuitively, we know TANSTAAFL.

But what about your proposal that the Fed buy Treasuries rather than worry about financing the deficit? e.g. http://www.huffingtonpost.com/...03682.html from June of last year. Isn't that getting a free lunch? If it's so easy, who is against it? Just the bankers? Please connect the dots for me.

Thanks.

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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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