Thursday, December 15, 2016

The Current Account Deficit: Low National Savings Redux

I have been reading something Lawrence Summers wrote over 12 years ago. A lot of interesting comments but let me pick out one key segment:
Tautologously, a current account deficit is the difference between national savings and national investments; or, equivalently, between net national savings and net national investment, removing the effects of depreciation. It is natural to look at the U.S. current account deficit and ask whether its level and its deterioration is better attributed to increased investment or to reduced saving. In the last year, the net national savings rate of the United States has been between 1 and 2 percent.
Taking a look at this source and updating what Summers said for 2015, it seems net investment was only 5.5% of NNP. With the trade deficit running at about 3.75% of GDP, net national savings is still only 1.75% of NNP. As Brad DeLong notes:
Let me disagree a bit with Paul: although evidence does suggest that we are near full employment, we are not at full employment--and the suggestion that we are near full employment is a very weak one
Brad was responding to Paul Krugman who also noted:
Trump deficits won’t actually do much to boost growth, because rates will rise and there will be lots of crowding out. Also a strong dollar and bigger trade deficit, like Reagan’s morning after Morning in America.
With a national savings rate of only 1.75%, we should not repeat the mistake of 1981 giving the rich another massive tax break which would further reduce national savings and make the trade deficit worse. We should instead think in terms of how to get investment demand – be it public infrastructure or private investment – higher. As Brad notes, lower interest rates and infrastructure investment would be good policy.

1 comment:

AXEC / E.K-H said...

Recycling trash talk
Comment on ProGrowthLiberal on ‘The Current Account Deficit: Low National Savings Redux’

You say “I have been reading something Lawrence Summers wrote over 12 years ago. A lot of interesting comments but let me pick out one key segment: ‘Tautologously, a current account deficit is the difference between national savings and national investments;’ ...”

From this discussion between Summers, Krugman, DeLong you draw a policy conclusion: “We should instead think in terms of how to get investment demand ... higher.”

This conclusion is absolutely unfounded and you should know it. On the preceding thread the proof has been given that the “tautologous” interrelation of balances, i.e. NX ≡ (S-I) + (T-G), is PROVABLE false.#1

By warming up the old discussion you make four points rather clear:

(i) That Summers, Krugman, DeLong were talking trash already 12 years ago.

(ii) That they did not realize then that their “tautologous” relation has been false since the 1930s.

(iii) That you mindlessly parrot trash from economists who are known to be scientifically incompetent.

(iv) That you do not understand the consequences of a formal refutation.

You violate scientific standards by mindlessly repeating provable false arguments. Take notice: “In economics we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened.” (Morgenstern, 1941)

Egmont Kakarot-Handtke

#1 See ‘The Identity-Equals-Causation Fallacy, Yet Again’
http://econospeak.blogspot.de/2016/12/the-identity-equals-causation-fallacy.html