Sectoral balances

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The Sectoral balances (including sectoral financial balances called) are a frame of reference of the sector analysis for the macroeconomic analysis of economies, developed by the British economist Wynne Godley .

Sectoral balances of the US economy, 1990–2012. By definition, the three balances must cancel each other out to zero. Since 2009, the US capital and private sector surpluses have forced a state budget deficit.

The balances represent an ex-post balance sheet identity, which results from the rearrangement of the components of the aggregated demand and show how the cash flow affects the financial balances of the private sector, the government sector and the foreign sector. This corresponds to the balance mechanics developed by Wolfgang Stützel in the 1950s . The time development of the sectoral balances is modeled in stock flow consistent models .

The approach is used by students at the Levy Economics Institute to support macroeconomic modeling and by Modern Monetary Theory ( MMT ) theorists to support theoretical statements about the relationship between government budget deficits and personal saving.

overview

In July 2012, the economist Martin Wolf stated that the state's fiscal balance sheet is one of the three major sectoral balances of an economy. The other two are the international finance sector and the private finance sector. The sum of the surpluses or deficits over these three sectors must by definition be zero. Consequently, there is a foreign financial surplus (or capital surplus) due to capital imports (on balance) to finance the trade deficit . Furthermore, there is a financial surplus in the private sector because (private) household savings exceed business investment. According to the definition, there must then be a deficit in the state budget, so that all three cancel each other out to zero. The state sector includes local, federal and state levels. For example, the US government's budget deficit in 2011 was roughly 10% of gross domestic product (GDP) - compared to a capital surplus of 4% of GDP and a private sector surplus of 6% of GDP.

Wolf explains that sudden shifts in the private sector from deficit to surplus force the state balance into deficit, and cites the US as an example: "The financial balance of the private sector shifted towards the surplus by an unbelievable total of 11.2% of gross domestic product within the third Quarter of 2007 and the second quarter of 2009, which was when the US government (federal and state) financial deficit peaked ... No fiscal policy changes declare the collapse a huge deficit between 2007 and 2009 because there is none of concern The collapse can be explained by the massive surge in the private sector from financial deficit to surplus, or in other words, from boom to bust. "

In December 2011, the economist Paul Krugman also explained the causes of the considerable surge from the private deficit to the surplus: "This huge move to the surplus reflects the end of the housing crisis , a sharp increase in household saving and a collapse in business investment due to a lack of customers."

Description of sectoral balances

The GDP ( Gross Domestic Product ) is the value of all goods and services that were sold in a country in one year. GDP measures flows rather than stocks (example: the public deficit is a river, the national debt is a stock). Flows are determined from the relationship in the national accounts (VGR) between aggregated expenditure and income. So:

Abbreviations: Y: GDP (income); C: consumer spending; I: private investment; G: government spending; X: exports; M: imports; and thus (X - M) = net exports; S: personal savings; T: Taxes.

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

Another way of looking at the national income account is to suggest that households can use their total income Y for the following purposes:

(2) Y = C + S + T

So consumption plus saving plus taxes. Then you bring both perspectives together because both are just "sights" of Y :

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

C is omitted because on both sides, and one obtains:

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

Now one can convert this into the following balance sheet relationships of sectoral balances, which allow to understand the influence of fiscal policy on the indebtedness of the private sector. As a result, equation (4) can be rearranged to obtain the calculation identity for the three sectoral balances: domestic private, national budget and external / international:

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

The equation of the sectoral balances says that total private savings S minus private investments I are equal to the public deficit (expenditure G minus taxes T ) plus net exports (exports X minus imports M ), with net exports representing the net savings of non-residents, i.e. abroad.

Another way of putting this is that total private savings S equals private investments I plus the public deficit (expenditure G minus taxes T ) plus net exports (exports X minus imports M ), with net exports representing the net savings of non-residents , i.e. abroad.

All of these relationships (equations) turn out to be questions of bookkeeping and accounting, not questions of opinion. It is about arithmetic relationships beyond economic schools.

If an external deficit ( X - M <0 ) coincides with a public surplus ( G - T <0 ), then there must be a private deficit. While private spending can persist under these conditions by utilizing the savings of the foreign sector, the private sector indebtedness increases in the process.

application

In macroeconomics , Modern Money Theory uses sector balances to define any transaction between the government and non-government sectors as a vertical transaction .

The state sector (public sector) includes the treasury and the central bank , while the non-state sector includes private individuals and private companies (including the private banking system) and the external sector (foreign sector) - these are foreign buyers and sellers.

In any given period the state budget can be either in deficit or in surplus. A deficit appears when the state spends more than it receives in taxes; and a surplus occurs when the state taxes more than it spends. The analysis of the sectoral balances reveals from the bookkeeping, as a question of accounting, that consequently government budget deficits add net financial wealth to the private sector. This is because a budget deficit means that a state has deposited more money in private bank accounts than it has collected from such accounts as taxes. A budget surplus means the opposite: on the whole, the state has withdrawn more money from private bank accounts through taxes than it has returned through its spending.

Hence, government budget deficits are by definition equivalent to adding net financial wealth to the private sector; whereas budget surpluses drain financial wealth from the private sector.

This is represented by the identity:

(G - T) = (S - I) - NX

where G: government expenditure, T: taxes, S: private savings, I: private investments and NX: net exports.

This is

(Government sector balance) = (Domestic private sector balance) - External balance

The conclusion is that net private saving is only possible if the state runs a budget deficit; otherwise, if the government is in surplus, the private sector is forced to use up savings.

According to the framework of sectoral balances, public budget surpluses eliminate net private savings; in times of high real demand, this may lead the private sector to rely on credit to finance consumer behavior. As a result, a growing economy that wants to avoid deflation requires persistent budget deficits. Therefore, budget surpluses are only required if the economy has excessive aggregate demand and there is a risk of (too high) inflation.

Austerity from the perspective of sector balances

Following the sector balance approach, austerity can be counterproductive during a recession due to a significant financial surplus in the private sector, whose consumer savings are not fully invested in business and by businesses. In a healthy economy, companies borrow and invest the savings of consumers that they have deposited in the banking system. However, a surplus develops when consumers have increased their savings but companies do not invest the money. Corporate investments are one of the major items in gross domestic product .

In December 2012, the economist Richard Koo described similar effects in several of the developed world economies: "Today the private sectors of the USA, Great Britain, Spain and Ireland (but not Greece) are subject to massive deleveraging (repay debt rather than state spending) despite low interest rate records that these countries are all in serious balance sheet recession . However, the private sectors in Germany and Japan are neither borrowing. With debtors disappearing and banks unwilling to lend, it is no wonder that after nearly three years of low interest rates and massive liquidity injections, industrial economies are still going strong US cash flow data shows a huge shift in the private sector away from credit to savings since the housing bubble burst in 2007. The shift in the private sector as a whole is more than 9% of US GDP at zero interest rates . On top Moreover, this growth in savings in the private sector exceeds the increase in government credit (5.8% of GDP), suggesting that the government is not doing enough to offset private sector deleveraging. "

See also

Individual evidence

  1. ^ Goldman's Top Economist Explains The World's Most Important Chart, And His Big Call For The US Economy
  2. ↑ a b Brett Fiebeger: A constructive critique of the Levy Sectoral Financial Balance approach . In: Real World Economics Review . 2013, pp. 59–80.
  3. ^ A b Financial Times-Martin Wolf-The Balance Sheet Recession in the US- July 2012
  4. ^ NYT-Paul Krugman-The Problem-December 2011
  5. ^ "Deficit Spending 101 - Part 1: Vertical Transactions" Bill Mitchell, February 21, 2009
  6. ^ Richard Koo-The world in balance sheet recession-Real World Economics Review-December 2011

literature