Friday, January 18, 2013

A good, accessible piece on the trade deficit and budget deficits

Dean Baker in Has Anyone Heard of the Trade Deficit? Beat the Press 01/12/2013 gives a good, brief explanation of the relationship of the trade deficit to domestic deficits and savings:

Fans of arithmetic (a tiny minority among DC policy types) like to point out that a large trade deficit implies negative national savings. In other words, if we have a trade deficit then by definition the United States as a whole has a negative saving rate.

This means that we either must have budget deficits (negative public savings) or negative private savings, or both. There is no way around this fact. There is now a holy jihad in progress against the budget deficit in Washington, which means that all right thinking people don't want to our negative national savings to mean negative public saving.

The implication would then be that we want negative private saving. This could come through an investment boom, but only believers in Santa Claus think that investment is likely to expand much as a share of GDP. It is not easy to produce large increases in investment and we never have in the whole post-war period. So even though Serious People in Washington might talk about some huge uptick in investment, serious people don't believe it.
This is an accounting identity that reflects what happens in the real world. For a country, the trade surplus/deficit equals the sum of private and public surpluses/deficits. In a post from 2011, National Income Accounting for the Washington Post and Robert Samuelson 08/25/2011 he gives a wonkier explanation.

This is a major factor that is missing from most of the political discussion on the federal deficit. Because a lot of the Very Serious People appear clueless about it.

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