National Income Accounting for the Washington Post and Robert Samuelson | Beat the Press | CEPR

Written by Dean Baker
Published: 25 August 2011
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“National income accounting is really basic stuff. It is taught in every intro economics class. It would be a really great thing if only the people who wrote about and implemented economic policy understand it.

Today Beat the Press features a quick lesson in national income accounting for folks who clearly do not know it: the Washington Post editorial board and its columnist Robert Samuelson.

Starting at the beginning, we know that we can add up GDP on the output side by summing its components, consumption, investment, government, and net exports. This must be equal to the incomes generated in production. This gives us a basic identity that:

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

where Y stands for income. This identity must always hold, it is true by definition.

We can then divide Y into disposable income, which is total income, minus taxes. This gives us:

2) Y = YD + T

We can then divide disposable income into savings and consumption, since by definition any income that is not consumed is saved. This gives us:

3) YD = C+S

since we now know that Y = C+S+T, we can rewrite equation 1 as,

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

we then eliminate consumption from both sides and we get:

5) I+G+(X-M) = S+T, rearranging terms gives:

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

This one actually has a clear meaning. X-M is exports minus imports, or the trade surplus, S-I is private saving minus private investment, and T-G is taxes minus government spending, or the budget surplus. This identity means that the trade surplus is equal to the sum of the surplus of private savings over investment and the government budget surplus. Remember, this is an accounting identity, it must be true.”

Source: National Income Accounting for the Washington Post and Robert Samuelson | Beat the Press | CEPR

Opinion | Tariff Man Has Become Deficit Man – by Paul Krugman – The New York Times

“Beyond that, however, Trump is completely wrong about what causes trade deficits in the first place. In fact, his own policies have provided an object lesson in the falsity of his vision.

In the Trumpian universe, trade deficits happen because we made bad deals — we let foreigners sell their stuff here, but they won’t let us sell our stuff there. So the solution is to throw up barriers to foreign products. “I am a Tariff Man,” he proudly proclaimed.

The reality, however, is that trade deficits have almost nothing to do with tariffs or other restrictions on trade. The overall trade deficit is always equal to the difference between domestic investment spending and domestic saving (both private and public). That’s just accounting.

The reason America runs persistent trade deficits isn’t that we’ve given away too much in trade deals, it’s that we have low savings compared with other countries.”

Opinion | A Smorgasbord Recession? (Wonkish) – by Paul Krugman – The New York Times

“The 2008 financial crisis is (duh) a decade in the past; employment has been growing steadily since early 2010. Since nothing is forever, and proclamations that the business cycle is over have always ended in embarrassment, lots of people are looking for the sources of the next recession.

The thing is, there’s nothing out there as obvious as the housing bubble of the mid-2000s, or even the tech bubble of the late 1990s. So here’s my thought: maybe the next recession won’t be caused by one big shock but instead by the combined impact of several smaller shocks. There are arguably several mid-sized bubbles out there, from private equity debt to emerging markets. Stocks are priced as if there’s no risk despite omens of trade war, consumer confidence similarly seems to discount dangers. There’s probably other stuff I’m missing.

The point, anyway, is that we might be looking at a smorgasbord recession, one that involves a mix of smallish things rather than a single dominant item. And there’s a model for that kind of recession: the slump of the early 1990s.”

Opinion | What Do We Actually Know About the Economy? (Wonkish) – Paul Krugman – NYT

“So let me talk about three things:

The unsung success of macroeconomics

The excessive prestige of microeconomics

The limits of empiricism, vital though it is

The clean little secret of macroeconomics

There’s a story about quantum physics – not sure where I read it – about the rivalry between the physicists Julian Schwinger and Richard Feynman. Schwinger was first to work out how to do quantum electrodynamics, but his methods were incredibly difficult and cumbersome. Feynman hit upon a much simpler approach – his famous diagrams – which turned out to be equivalent, but vastly easier to use.

Schwinger, as I remember the story, was never seen to use a Feynman diagram. But he had a locked room in his house, and the rumor was that that room was where he kept the Feynman diagrams he used in secret.”