National Income Accounting

National Income AccountingAbout a year and a half ago, Dean Baker posted an article about national income accounting. It sounds boring, but it isn’t. It’s a little bit mathematical, however, so if you want, just skip down to What This Means.

Let’s look at the nation’s total income, which we will represent as Y. It is equal to all of the money that is spent on consumption (C), on investment (I), by the government (G), and on net exports: total exports (X) minus total imports (M). Thus, the following equation is true by definition:

C + I + G + (X-M) = Y(1)

Note: investment means something different in economics than it generally means to people. Investment is spending on infrastructure. So if a construction company buys hammers, that’s investment. If it purchases nails, that is consumption.

Now total income (Y) is equal is disposable income (D) plus taxes (T): Y = D + T. And disposable income is equal to savings (S) plus consumption (C): D = S + C. We can combine these two equations and get: Y = S + C + T. We can substitute this equation into equation (1) above:

C + I + G + (X-M) = S + C + T(2)

Consumption is on both sides of the equation, so it cancels out:

I + G + (X-M) = S + T(3)

This equation doesn’t clarify anything. So we need to arrange the terms. First, we want to combine government spending (G) and taxes (T). Second, we combine non-governmental savings (S) and investment (I). Once we do this, we get:

(X-M) = (S-I) + (T-G)(4)

What this says is: net exports equals net (non-governmental) savings plus the government’s budget surplus.

What This Means

Baker notes that most people who fret about budget deficits want something that is impossible. We currently import more than we export. This means that we either have to save less than we export or the government must spend more than it taxes or both. But look at what we hear all the time: we must balance the budget so that consumers will feel more confident and start spending! For that to happen, we would need to to export more than we import. Okay, we could do that. But the only way we can is by weakening the dollar compared to other currencies. And the same people who want a balanced budget generally want a strong dollar. We simply cannot have both.

I’ve write before that the balanced budget people are just liars. What they want is what they think is good for their class—the rentier class. They want a strong dollar with no inflation because that’s great if you already have piles of cash. They want to destroy entitlement programs because they fear their taxes might someday go up, but also because more desperate poor makes finding cheap labor easier.

But notice how if we really want to fix the federal deficit, we should be working on weakening the dollar. This would necessarily improve the budget deficit. But we don’t talk about this because the rentier class doesn’t want a weak dollar and their media lapdogs aren’t going to contradict them. In fact, the media by and large don’t even seem to understand that there is an issue. Strong dollar, fuck yeah! We’re number one!

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

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