Why We Can’t Cut Our Way to Prosperity: It’s the Algebra, Stupid

I’ve made this point many times before, but there is a very simple relationship that seems to be utterly ignored by our political betters: the government deficit equals the trade deficit plus net private savings. But don’t believe me, listen to Martin Wolf, a for realz economist (boldface mine):

If the government wishes to cut its deficits, other sectors must save less. The questions are which and how. What the government has not admitted is that the only actors able to save less now are corporations. The government’s – not surprisingly, unstated – policy is to demolish corporate profits.

Net lending – the difference between savings and investment – of all sectors of an economy must add up to zero. If the government is running a huge financial deficit – that is, spending vastly more than its revenue – then other sectors must be spending much less than their income. And so, indeed, they are….

In order to reduce huge government deficits, surpluses must fall elsewhere. But one should want that adjustment to occur via higher spending rather than via a collapse of the economy into a deeper slump.

…In Thursday’s second estimate for the third quarter, net exports made a negative contribution to growth. The household surplus is also quite low, particularly given the huge debt overhang. The government cannot wish that surplus to disappear, to offset fiscal tightening. That leaves corporations: if the public sector is to slash its deficits, corporations must also slash their huge surpluses.

In the U.K.:

In the second quarter of 2011, the government ran a financial deficit of 9.3 per cent of gross domestic product. Counterpart surpluses were 1.6 per cent of GDP for foreigners (the inverse of the current account deficit), 1.7 per cent of GDP for households and as much as 6.4 per cent of GDP for corporations.

In the U.S.:

The U.S. picture is similar: in the third quarter of 2011, the deficit of government was 9.1 per cent of GDP. Offsetting surpluses were 3.3 per cent of GDP for foreigners, 2.2 per cent of GDP for households, and 3.7 per cent of GDP for business.

This stuff really isn’t that hard, although there are a lot of people (about one percent) with a vested interest in doing so.

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2 Responses to Why We Can’t Cut Our Way to Prosperity: It’s the Algebra, Stupid

  1. Basically the shit is going to have to hit the fan first – we are going to have to pry the economy out of their cold dead hands…

  2. Pingback: More Creationist Economics: When the Foolishness of Austerity Collides With the Balance of Accounts | Mike the Mad Biologist

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