Tweet
"Lesson" by ryuu_ji on flickr
National income really is very basic stuff. It gets taught in every intro econ class. Anyone writing on economics should know it inside out. They should be able to do it blindfolded, with one hand tied behind their back, and standing upside down.
Unfortunately, it seems that most people reporting and writing on economics for major news outlets can’t do national income accounting at all. Let’s take Robert Samuelson at the Washington Post. I had a lesson on this topic for him last month, which I won’t repeat here.
But his column today really would benefit enormously from an understanding of national income accounting. He is asking why the economy has not recovered despite President Obama’s stimulus. His answer is that firms are not investing because of regulatory uncertainty created by President Obama’s health care plan and other measures and that consumers are worried after the collapse of the housing bubble and therefore not spending money.
See, if Robert Samuelson understood national income accounting, he would know that there really is no problem with either investment or consumption. Investment in equipment and software has pretty much risen back to its pre-recession level as a share of GDP. This is actually quite impressive, since there is a huge amount of excess capacity in most sectors of the economy.
Consumption is actually high, not low. The saving rate is hovering near 5.0 percent. This is well-below its post-war average of 8.0 percent, before the wealth created by the stock and housing bubbles sparked a consumption boom.
So, if neither investment nor consumption is the problem, then why isn’t the economy bouncing back? This is where national income accounting would be very useful to Mr. Samuelson. The problem is that the country has a large trade deficit. It is close to 4.0 percent of GDP now, and would likely be in the 5-6 percent range if we were back at full employment. (Higher GDP increases imports, which would increase the size of the deficit.) This creates a huge shortfall in demand.
This shortfall was filled during the housing bubble years by a consumption boom and boom in residential construction and some categories of non-residential construction. With the loss of housing bubble wealth, there is no reason to expect consumption to return to its bubble levels. Nor would this be desirable, since it would mean that families are not saving adequately for retirement even as the nation’s elite (e.g. the Washington Post, Peter Peterson, etc.) are planning to cut back their Social Security and Medicare.
The only way to get close to full employment in the short-term is through much higher levels of deficit spending. In the longer term we will have to lower the value of the dollar to get the trade deficit closer to balanced.
It really is that simple. The problem is not regulation, taxes, or uncertainty, the problem was that the stimulus was not big enough or long enough. As it is, we are sitting around watching our national leaders debate why the water that they heated to 160 degrees is not boiling. This is getting really painful.
21 Comments
Thanks for cutting through and exposing the nonsense! I wish that you were on television more often than you are. Way too many talking points going unchallenged on the ‘news’ programs.
Our spam filters & troll catchers suddenly started breaking down. We can’t let garbage like Islaa60 onto the site, we will start to look like some ghost town that nobody pays attention to.
This dipshit has posted the exact same spam on four different threads within seven MINUTES of becoming a member:
http://my.firedoglake.com/members/lslaa60/
How about a visit to Alyona if in DC unless one can do it by video cam?
Baker knows nothing about the J-curve. And his focus on the trade deficit, in general, is not only misplaced, it’s idiotic. Baker shows no command of the obvious in the sense that a trade balance is bet two or more countries and one of them, no matter how big & powerful, has limited means to deal with it. It’s the economic analogue to thinking that the U.S. can militarily deal with terrorism all by itself without asking why the other countries hate us and our policies spawn terrorism. U.S. created WB & IMF are major forces behind U.S. trade deficit. Devaluing the dollar without abolishing those heinous institutions will do nothing but create another area where U.S. is racing to the bottom.
I flagged it but mods don’t seem to pay attention to flags on diaries.
To Dean Baker,
Thanks for reminding us once again (if reminding were necessary) that the editors of our so-called ‘national’ newspapers know absolutely nothing about basic economics. One can excuse Samuelson. He’s an imbecile. One cannot excuse those who selected him to comment on economic matters. He should go back to reviewing high-school musicals for a local rag.
You are confusing dynamics with statics and accounting identities. Most imports are income driven. The exchange rate, as you note, as a limited effect on imports in the short to medium term. It takes a pretty big swing in exchange rates to affect bilateral trade balances, so the big driver is income. No discrepancy here.
>>The problem is that the country has a large trade deficit.
My understanding is that Adam Smith taught us that for a nation to build wealth, it needs to manufacture domestically the goods it needs, not import them. (Smith was in Scotland, which faced the same restrictions on domestic manufacturing as did the American colonies.)
If this is so, then corporate exporting of production and jobs harms the US economy and diminishes our wealth.
I believe that unthinking support of “all things corporate” is dangerous
Of course imports are income driven.
During the $ devaluation around the Plaza Accord, I ran so many regressions that I ran out of personal degrees of freedom. It takes a full 2 or more years for devaluation to make a diff on the U.S. trade balance, and the U.S. had to impoverish itself in the process.
So Baker’s obsession with devaluation is disturbing.
But the other things I was alluding to in my comment (I’ve commented in more detail on other threads so I meant mine to be a hit & run but I didn’t get away fast enough) is that the U.S. trade deficit is not just a matter for the U.S. to deal with. Trading partners like China are pursuing an export driven econ development policy and unlikely to change anytime soon, as much as they “should” be spurring domestic consumption. China also needs huge reserves to stay out of the maws of the IMF & WB.
Also, were the U.S. to devalue, it might well launch a round of competitive devaluations, which is what I was alluding to in my somewhat opaque “race to the bottom.”
Now I am going to run.
Could Dr. Baker please provide readers with historical examples where domestic depreciation/devaluation caused trade deficits to turn into trade surpluses?
They know the truth, but they don’t acknowledge or tell the truth because it conflicts with their political aims.
Sorry, run that by me again. A trade deficit creates a shortfall in demand exactly how? And deficit spending creates demand to reduce trade deficit how? There’s something missing in this explanation at least for someone not in graduate level economics.
so, a too small stimulus was always in the best interest of the Republican party. Money spent, that was ineffective…so they could say…”see it didn’t work”. I am usually not someone to argue for black and white all or nothing solutions, but this is truly one of those times when having a compromise president was ineffective. Obama needed to be able to see…as many of us did, that if he didn’t get enough stimulus going to be effective…it would literally be “wasted” and would instead feed the opposing party. This is why opposition politics has been so effective. If he had not been an such a “compromise guy”…(which looks like a cover to me)…then the opposition politics would have back fired. Not by a blazing power and control pres. but a president following the higher power of truth. That would have stopped all this b.s…but of course…when you look at Greece, Germany, Saudi, China…it’s funny but all the folks with power seem to agree to run the U.S the same way the Republicans want to run the U.S. I am certain this is no coincidence. End of rant.
Nice piece Dean. Of course, I had to look it up but, you’re right. Water doesn’t boil at 160. I am pretty sure a lot of people get confused like I did. You must COOK chicken to 160 degrees. BUT, you have to heat water to 212 degrees* for it to boil. Common mistake.
*Unless you are at altitude or the water is under higher pressure both of which effect the boiling point of water. ‘Course, then there is ethylene glycol (anti-freeze) and, well, that’s a whole ‘nother story.
Reminds me of an old jokem however….Did you hear the one about the college economics professor….he gave the SAME final exam every year, he just changed the answers.
This could be MY fault. I bough some new Klipsch speakers last week. I thought they were “Made in USA” but they were made in Japan. Should I take them back and buy some Bose?
the natiional income identity is what dean baker is talking about.
that identity is a handy tautology; a way of saying supply = demand.
the identity is often written:
gdp = c + i + g + (x-m) where
gdp = gross domestic product
c = consumption
i = investment
g = government spending
(x-m) = exports – imports
the value of this little calculator lies in playing with algebra.
what dean baker is saying is that if c is back to pre-recession levels
and if i is back to pre-recession levels,
and if (x – m) is a large negative number (a large trade imbalance),
then the way to raise gdp under this scenario is to raise gov’t spending.
Thanks. I think I see the point. But try buying something made in USA these days.
Robert Samuelson probably went to a Charter School.
True – and a reason why tariffs – and non tariff barriers like “inspections” – are important.
or to raise tariffs
” The saving rate is hovering near 5.0 percent. This is well-below its post-war average of 8.0 percent”
for the last 25 years the personal savings rate has been straight down for that 8% http://www.clevelandfed.org/research/trends/2010/0410/01ecoact-1.gif , and while personal savings runs on average 55% of total net savings, post the Bush tax cuts the national savings rate has been negative http://www.clevelandfed.org/CFFileServlet/_cf_image/_cfimg-661999433980629959.PNG
I think the consumption influence is indeed not a drag on the economy.
But we no more “free trade” – we need tariffs.