"At the level of the economy as a whole, when one sector spends more than its income, another necessarily spends less for the simple reason that in the aggregate, total spending equals total income. Let us, then, disaggregate the economy into three sectors to determine the implications of government surpluses for the other sectors. First, we can consolidate all levels of government into a public (or, government) sector, and likewise consolidate households and firms into a domestic, non-government (or, private) sector. For completion, we must add a foreign ("rest-of-the-world") sector. At the aggregate level, the spending of all three sectors combined must equal the income received by the three sectors. It is clear that if the public sector is spending less than its income-that is, it is running a surplus-this must imply that at least one other sector is spending more than its income (in other words, is running a deficit). Mathematically, the sum of the balances of the three sectors must equal zero. It is convenient for our purposes to write this as:
{Public Sector Surplus} + {Foreign Sector Surplus} = {Private Sector Deficit},
which merely moves the private sector balance to the right-hand-side and reverses the sign (in other words, writes the balance as a deficit rather than a surplus, since a negative surplus is the same thing as a deficit).
Because the US has been running a balance of payments deficit in recent years, this means that the foreign sector is in surplus (the rest-of-the-world receives more US dollars than it spends). A few years ago, our public sector ran a sufficiently large deficit to more than offset the foreign sector surplus, so that our domestic non-government sector was able to run surpluses. However, in the past two years, the US public sector's balance has turned toward surplus. When combined with our balance of payments deficit (or foreign sector surplus), this means that the domestic private sector's balance (that is, its savings) has turned sharply negative-toward large and growing deficits. The non-government sector deficit is now approximately equal to 5.5 percent of GDP-far and away the largest private sector deficit the US has seen in the post-war period."
-----Original Message----- From: Seth Ackerman [mailto:SAckerman at FAIR.org] Sent: Friday, March 16, 2001 6:00 PM To: 'lbo-talk at lists.panix.com' Subject: RE: tax cut
Brad DeLong wrote:
> Remember that I (and a lot of other fiscally-orthodox Dems) are
> capital fetishists: believers in large positive externalities from
> investment through learning-by-doing, learning-by-using, and
> worker-employer quasi-rent sharing. Thus a low national savings rate
> terrifies us.
>
> Thus we favor the policy mix proposed by Robert Solow back in the
> early 1960s: tight fiscal policy (to boost national savings); a
> redistributive tax system (to level out the distribution of income
> and create large fiscal automatic stabilizers); loose monetary policy
> on average (to counteract the tight fiscal policy); and delegation of
> the bulk of stabilization policy to the Federal Reserve.
>
> Of course, this requires that (a) the Federal Reserve be competent,
> (b) the Federal Reserve have a sound and accurate view of what
> "maximum employment and purchasing power without accelerating
> inflation" means, and (c) the economy not have gotten itself so
> wedged that monetary policy is ineffective.
>
> Neither (a), (b), nor (c) can be taken for granted. (Indeed, back in
> the spring of 1992, IIRC, Laura Tyson, Larry Summers, and Alan
> Blinder were all sufficiently alarmed by the then-ongoing "credit
> crunch" to say that it was time to restore fiscal policy to a more
> prominent stabilization policy role.) But *here* and *now* I think
> all three of them hold--but (c) does not hold in Japan, and (b) does
> not hold in Europe.
>
.
But in the U.S., fiscal policy has been getting progressively tighter even
while national savings have been getting lower. If tight fiscal policy
doesn't produce higher national savings, what good does it do? In candid
moments, Fred Bergsten might say it restrains government spending.
And if investment is such a tonic (learning-by-doing, etc.) why not do public investment? Fiscally orthodox Dems make occasional noises about public investment, especially the "education&training" mantra, but it's clearly much further down their list of priorities than, say, protecting the surplus.
As for Europe's contractionary monetary policy, the U.S. Treasury's line has consistently been that loosening must happen in the context of "structural reforms," meaning junking the welfare state, including the restributive tax policy that Brad lauds so much.
Seth