CEPR - Center for Economic and Policy Research


En Español

Em Português

Other Languages

Home Publications Blogs CEPR Blog ECON 101 FAIL


Written by David Rosnick   
Friday, 12 November 2010 16:04

OK, folks. It's time for a refresher on basic national accounts.  Treasury Secretary Tim Geithner is interested in reducing current account surpluses around the world without devaluing the dollar. Good luck with that.

Even worse, Geithner reiterated that the U.S. "will bring our fiscal position back to a sustainable balance."

Loosely speaking, our national income is equal to what we produce in any given year-- that is, GDP (Y).  GDP may be broken down into private consumption (C), private investment (I), government consumption and investment (G), and trade surplus-- exports minus imports (X-M).

If we take national savings (S) to be income which is not consumed, then S=Y-(C+G)=I+(X-M).  If "we haven't saved enough" then by definition we have insufficiently invested or we have too large a trade deficit. There is no escape from the iron grip of elementary mathematics.

In turn, national savings may be private or public, where public savings is taxes minus government spending.  If the private sector suddenly decides to save more-- as they did with the collapse of the housing bubble-- then the public sector must save less.  That is, budget deficits must rise.

As a matter of pure accounting, there are exactly the two ways to avoid large government deficit.  One is for private investment to rise. Unfortunately, unemployment is at 9.6 percent and capacity utilization is low.  Businesses have no incentive to invest in more capital when they have existing capital already going to waste.  The only other way to avoid increasing government deficits is to increase net exports.  Econ 101 says the dollar must fall relative to other currencies in the world.

So when unemployment is high, capacity utilization is low, and devaluation is unprincipled, what is left to do to increase national savings?  Declare war on algebra?

As for Geithner, he has a little more wiggle room, reportedly declaring that the fiscal consolidation will wait until the recovery strengthens. Currently, CBO projects unemployment to average 9 percent next year and finally fall below 8 percent... sometime in late 2012.

Comments (1)Add Comment
written by sun agee, December 03, 2010 1:34
Wow! very creative!I want to thank the blogger very much not only for this post but also for his all previous efforts. I am apreciating it very much.I have never read such a lovely article and I am coming back tomorrow to continue reading.abercrombie sweat shorts

Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.


Support this blog, donate
Combined Federal Campaign #79613
budget economy education employment Haiti health care housing inequality jobs labor labor market minimum wage paid family leave poverty recession retirement Social Security taxes unemployment unions wages Wall Street women workers working class

+ All tags