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Home Publications Blogs Beat the Press The Post Has Never Heard of Current Account Deficits

The Post Has Never Heard of Current Account Deficits

Wednesday, 26 September 2012 04:20

Those who wonder why the Post seems to focus obsessively on budget deficits when there are so many larger problems afflicting the country got part of their answer today in an article on the euro crisis. The article focuses exclusively on budget deficits and the risk of insolvency for the troubled economies of southern Europe. It never once raises the issue of the current account deficits that these countries are experiencing.

The fundamental problem in the euro zone is that costs in southern Europe have risen sharply relative to costs in Germany over the last decade. This makes southern Europe less competitive, leading to its large trade deficit. The trade deficit, implies negative national savings (i.e. there is no possible around this outcome). Negative national savings means either that private investment exceeds private savings (which was true in the bubble years) and/or budget deficits. Unless the trade deficit is reduced in these countries, there is no plausible way to get the budget deficits down.

The current route in to lower deficits is by shrinking the economy and thereby reducing private savings. It is not a plausible long-term strategy. Ultimately it will be necessary for costs in Germany and the south to move closer together. It is very difficult to get prices to fall, which means that Germany has no choice but to experience higher inflation.

But Post readers didn't hear about this issue. They were just told about budget deficits.


Comments (4)Add Comment
Baker the Marxist Endorses Theory of Surplus Value of Labor and Capital
written by Last Mover, September 26, 2012 6:09
It is very difficult to get prices to fall ,,,

Any economist knows this to be a heresy of neoclassical economics. How can prices be set by markets if they only rise and don't fall? This would create huge unemployed surpluses of labor and capitaL on the downside of a business cycle when aggregate demand falls off and reduced prices don't follow to maintain full employment.

Marxists like Baker should read Sticky Price Lies by Austerians For Flexibility, Freedom, and Fallacies of Composition.
Baker understands funds flow accounting
written by DanM, September 26, 2012 2:33
It is too bad that more people don't understand financial flows among the public, domestic private, and foreign sectors. When a dollar flows out of one sector into another the sum of debits and credits will always sum to zero.
written by Pragmatic Liberal, September 26, 2012 3:08
Yes, but Dean Baker (and everyone else) is guilty of this when he discusses America's problems. No one ever mentions current account balances, but the fact is that competitiveness runs the opposite way in America, with the wealthy blue states having strong dollars and the poor red states having weak dollars. And everyone who thinks that fiscal unity will magically solve the competitiveness problem needs to explain how fiscal unity will somehow magically make the current account balances work.
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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.