> It seems the most likely, if somewhat inadvertant savior (of the US
> economy from the burden of current account and savings adjustment) now on
> the horizon is Bush's 1.3 trillion dollar tax cut, which would drastically
> reduce the budget surpluses at roughly the right time to smooth the
> transition.
>
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How would reducing the federal budget surplus help the current account deficit? The deficit is the excess of domestic investment over domestic saving. Lower budget surpluses would mean *even lower* national saving.
Seth
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I think Michael was referring to the overall growth picture, not the savings rate per se. With the current fiscal stance, private debt will have to finance growth. A smaller surplus would mean that the private sector would have to use less debt to finance the OMB's projected growth rate. Hence, "smoothing the transition."
This raises an interesting question for me. As I understand it, the surplus drains money out of the private banking system, until the Fed buys back some debt, which restores cash and reserves. So a lower surplus would mean a smaller drain on banks--though in theory this would be righted by the Fed still buying debt back. If the Fed doesn't buy back debt, it can spend this cash. Beside the fact that any GWB tax cut is likely to be regressive, is there any sense of whether gov't stimulus spending or tax cuts are likely to "cushion" an impending downturn better? Japan's case doesn't seem to provide evidence either way, since its tax cuts have been temporary, and its stimulus insignificant as a % of GNP. And neither has worked.
How would a lower surplus (and, as Doug says, a lower national savings rate) be reflected in the private balance? Is there any way for determining how lower gov't saving will add to private saving?
Christian