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Home Publications Blogs Beat the Press National Income Accounting for the Washington Post and Robert Samuelson

National Income Accounting for the Washington Post and Robert Samuelson

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Thursday, 25 August 2011 07:06

National income accounting is really basic stuff. It is taught in every intro economics class. It would be a really great thing if only the people who wrote about and implemented economic policy understand it.

Today Beat the Press features a quick lesson in national income accounting for folks who clearly do not know it: the Washington Post editorial board and its columnist Robert Samuelson.

Starting at the beginning, we know that we can add up GDP on the output side by summing its components, consumption, investment, government, and net exports. This must be equal to the incomes generated in production. This gives us a basic identity that:

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

where Y stands for income. This identity must always hold, it is true by definition.

We can then divide Y into disposable income, which is total income, minus taxes. This gives us:

2) Y = YD + T

We can then divide disposable income into savings and consumption, since by definition any income that is not consumed is saved. This gives us:

3) YD = C+S

since we now know that  Y = C+S+T, we can rewrite equation 1 as,

4) C+I+G+ (X-M) = C+S+T

we then eliminate consumption from both sides and we get:

5) I+G+(X-M) = S+T, rearranging terms gives:

6) (X-M) = (S-I)+(T-G)

This one actually has a clear meaning. X-M is exports minus imports, or the trade surplus, S-I is private saving minus private investment, and T-G is taxes minus government spending, or the budget surplus. This identity means that the trade surplus is equal to the sum of the surplus of private savings over investment and the government budget surplus. Remember, this is an accounting identity, it must be true.

Now, let's bring this back to the concerns that the Post and Samuelson raise today. Both are very concerned about inflation (I'll beat up on them for this is another post), but they also hold out the hope that the economy will get back to full employment once consumers and firms are more confident about the economy.

But consider the accounting identity. The country has a large trade deficit, which means that X-M is a large negative number. It's currently around 4 percent of GDP (just under $600 billion), but would certainly be much larger if the economy were near full employment. Imports rise with income, so that with a higher level of GDP the trade deficit would expand.

If X-M is negative, then either or both (S-I) or (T-G) MUST be negative. This means either or both that we have negative private savings or we have a budget deficit.

We can have the former with a very low private saving rate, as we did during the stock and housing bubble. In both periods there was aa consumption boom driven by transitory wealth created by the bubbles. It is difficult to understand why anyone would want a low private saving rate.

It means that people reach retirement with very little to support them other than their Social Security or Medicare, which both the Post and Samuelson want to cut. So no one can consistently want both low private saving and cuts to Social Security and Medicare, unless they want the elderly to be very poor. (It is in principle possible to raise investment, but in practice very difficult. The equipment and software investment share of GDP is already almost back to its pre-crash levels, so the prospects of further increases are very limited.)  

The other possibility is that we can have a large budget deficit, making T-G a big negative number. But, we know the Post and Samuelson hate budget deficits, they complain about them all the time.

For those who believe in accounting identities and evolution there is only one other place to go, we must get our trade deficit down. We need X-M to be a much smaller negative number. The best mechanism for getting the trade deficit down is reducing the value of the dollar.

A lower dollar would make imports more expensive for people in the United States, leading them to buy fewer imports. It would also make our exports cheaper for people living in other countries, leading them to buy more of our exports. Fewer imports and more exports translates into a smaller trade deficit.

So we should want a lower dollar, right? Not so fast, Samuelson explicitly warns that a falling dollar could be a bad consequence of higher inflation. The Post editorial never mentions a lower dollar as a possible benefit of more expansionary monetary policy.

What can we conclude from this? We can conclude that Samuelson and the Post do not know national income accounting.

 

Comments (10)Add Comment
Is Negative Private Savings an Irrational Number?, Low-rated comment [Show]
Showing your work
written by Jim S., August 25, 2011 12:31
Thanks for laying it out there. Even for those of us who think we remember our basic macro from years ago, it's nice to get a refresher.
YD or just plain D?
written by Rogermac, August 25, 2011 1:25
This is wonderfully clear, except for the use of YD to stand for disposable income in equations (2) and (3). At first glance I thought YD meant YxD, and I would have understood fastera if disposable income had been notated as just plain D.
Hilarious
written by Brett, August 25, 2011 2:00
These people are like the people who think we can start as many wars we want and cut taxes at the same time -- no one has to pay for anything!
Another conclusion
written by gary fitzgerald, August 25, 2011 2:04
You ask, "What can we conclude from this? We can conclude that Samuelson and the Post do not know national income accounting." Another possibility is that they don't care about national income accounting, they just want what is best for the rich. From this perspective, the editorially board and Samuelson are just foot soldiers in the class war on the side of the wealthy.
...
written by Jay, August 25, 2011 7:50
Great post.
You're reading their minds.
written by Keller, August 25, 2011 8:58
"So no one can consistently want both low private saving and cuts to Social Security and Medicare, unless they want the elderly to be very poor."

What fun is it to be rich if everyone else isn't poor?
A Bounty of Equations
written by Bob Canuck, August 26, 2011 3:02
"Is Negative Private Savings an Irrational Number?
written by izzatzo, August 25, 2011 9:01 AM

What can we conclude from this? We can conclude that Samuelson and the Post do not know national income accounting.

Neither does 99.99% of the rest of the population who don't have the attention span to read this.

Stupid liberals."

Therefore, according to izzatzo, the following equation must be true:

Total population = 100% = liberals + 0.01%

Thanks to Dean Baker for the helpful derivation of the (X-M) equation.

Thanks to izzatzo for revealing the two components of the population equation.
Investment levels and cash on hand
written by Michael Connor, August 29, 2011 2:05
Dean writes, " equipment and software investment share of GDP is already almost back to its pre-crash levels."

I keep seeing stuff about how the big firms have tons of cash sitting around -- which I take to mean that they are not investing because there aren't good options.

Can someone clarify what to mean looks like a contradictions? Is the investment share of GDP higher because GDP took a hit?

I'm easily confused. -- mac
GNP and NNP
written by accounting software, September 02, 2011 10:10
Technical change is often embodied in capital goods, therefore new cpaital goods are commonly changed into capital goods, so that new such goods are more productive than the ones they replace. A share of replacement investment is in reality an addition to the capital stocks. However, this is rather difficult to measure. Moreover, my concern and the concern of many others is with economic depreciation (as opposed to physical). In this regard many economists prefer to use GNP rather than NNP, in order to avoid relying on a unstable imputation.

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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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