Dollars and Jens
Friday, June 25, 2004
federal deficits
The federal government deficit = non-government savings (of net financial assets). That's fact, not theory, a.k.a. an "accounting identity."
So writes one Thomas Nugent, concluding that
Domestic savings are low because the budget deficit is too low.
Now, Steve jump in if I get this wrong, but I believe the accounting identity he's reaching for is that net private savings minus investment is equal to the government deficit. Household savings can go to feeding the beast in Washington, or they get lent to companies that can either sit on it, or use it to buy factories and other capital goods that will spit off returns in the future. While Nugent is right, later, to distinguish between savings on a personal scale and savings on an economy-wide scale — though the comment that "[the government] can't run out of money because it creates it" is just painful — net real savings is possible through the purchase of durable goods, capital or consumer, that will generate much of the benefit being purchased several years after the purchase date.

My inclination is to suppose that a higher federal deficit would lead to some increase in private savings, but I don't see the benefit to this; insofar as savings has a benefit external to the saver, it would have to be through this kind of real savings, and it would be more than offset by any federal deficit capable of creating it.

The real problem is that the real consumption of resources by the government — viz. its spending — competes with the private sector for resources that the private sector can almost always allocate to more efficient uses. Because of arguments like the tenable ones made by Nugent — but made better by Ricardo — I think it often matters less whether they're financed by taxes or debt than most commentators seem to assume; I tend to support tax cuts because they lead to a political brake on spending growth, and not the other way around.

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