On Monday, Dean Baker decided that Robert Samuelson needed a lesson in National Income Accounting. Dean said:

”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.

It’s too bad Dean Baker can’t teach a little bit of National Income Accounting to President Obama, as well, since there is no one who is in need of such lessons more. In his long-awaited jobs speech, and ever since, Mr. “I understand the economy.” and his chorus of paid retainers have boasted that his proposed job legislation is fully paid for, as if this were a good thing, when all it does is demonstrate that all of them are ignorant of the most fundamental National Income Accounting relationships.

The role of Federal spending, can be better understood by looking at the Sectoral Financial Balance Model accounting identity I’ve referred to before. It is:

Private Sector Surplus – the Current Account Balance – the Government Deficit = Zero.

In a country like the US, with a fiat currency system, floating exchange rates, no debts in any other currency, and a negative current account balance, the identity tells us that the only way we can have a private sector surplus (private sector savings) is for the Government sector to run a deficit. That deficit must be great enough to balance the sum of the balance of payments deficit, and the total amount of private savings. So, in general, the more deficit spending by the Government, the more savings by the private sector, other things being equal. For private savings in the aggregate to increase over time in a situation like this, Government deficit spending also must continue and increase.

In addition to supporting and increasing private savings, Government deficit spending, when directed toward domestic needs like infrastructure, education, innovation, and other human needs, creates a structure of public goods that supports economic activity and growth, without at the same time reducing demand through taxation. The consequence of constraining Government deficit spending over a long period is declining shared “commons” capital that all of us can use to facilitate our economic activity.

In short, it is not good news that Mr. Obama’s jobs program “is all paid for.” And it is even worse news that he continues to believe that Government spending designed to solve problems needs to be “paid for.” It is even worse news because it tells us that he doesn’t understand the basics of National Income Accounting, and that means that he is unqualified to be the President of the United States because he will never be able to lead us out of this recession and create full employment. He should resign and give Joe Biden a chance, before he destroys the Democratic Party and and all it stands for.

(Cross-posted from Correntewire).