Identity Theft

The U.S. federal government is running a huge deficit. It argues that it needs to run this deficit in order for the economy to ” recover.” Since the collapse of the housing bubble that was the government’s previous attempt to “stimulate” growth, the government has argued that the private sector needs to save in order for people to “rebuild their balance sheets” after suffering the loss of their savings from the depreciation of their residences. So, the argument goes, “if the private sector is to save, then government must run a deficit.” This is based on a so-called accounting identity that says:

Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0

Now there’s nothing wrong with the identity, except abusing it to infer facts that are, as they say, not in evidence.  The identity itself is rather trivial, and is based on the argument that, since my spending is always someone else’s income,  in the aggregate income equals spending, and therefore net savings is zero. It then goes on to partition the spenders into groups. This partitioning is entirely arbitrary, and meaningless. For example, the identities:

Everybody East Of The Mississippi’s Balance + Everybody West Of The Mississippi’s Balance + Foreign Balance = 0

or even better:

My Balance + Everybody Else’s Balance = 0

are equally accurate and valid (and useful). So that if the West spends more than its income, then the East must be spending less (assuming foreigners are spending all the income they receive from us). And if I put a dollar bill in my drawer as savings I can drive everyone else into deficit. It doesn’t matter, it is just a trivial identity. However, since we know the government is in massive deficit, where are the savings – the offsetting balances?  Well, they’re in plain sight, not hard to find. First of all, the U.S. runs a substantial trade deficit, about $500 billion per year – this means that foreigners are saving, which is where China’s vast pile of Treasuries comes from, for example. The other savings are corporate profits, running about $1.7 trillion (not a clean number, but indicative).

In their newly released study, the Northeastern economists found that since the recovery began in June 2009 following a deep 18-month recession, “corporate profits captured 88 percent of the growth in real national income while aggregate wages and salaries accounted for only slightly more than 1 percent” of that growth.

These profits flow to a great extent from two sources. First of all, military spending:

and secondly from subsidies to the banking industry.

“The trading profits of the Street is just another way of measuring the subsidy the Fed is giving to the banks,” said Christopher Whalen, managing director of Torrance, California-based Institutional Risk Analytics. “It’s a transfer from savers to banks.”

So we see that that private-sector households are not benefiting, in fact the argument is totally bogus because corporations and households were lumped together, and the benefits claimed for households are in fact going to corporations. So much for the balance sheet rebuilding. For honesty’s sake, the identity should  have been written as:

Domestic Household Balance + Domestic Business Balance + Domestic Government Balance + Foreign Balance = 0

But weren’t we told that the deficit was a stimulus to the economy, that we were saving people’s jobs with the deficit? Well, yes we were. The problem is, it just wasn’t true. Recent research shows that the “stimulus” has cost a million private sector jobs, so far (and counting).

This paper uses variation across states to estimate the number of jobs created/saved as a result of the spending component of the American Recovery and Reinvestment Act (ARRA). The key sources of identi cation are ARRA highway funding and the intensity of state sales tax usage. Our benchmark point estimates suggest the Act created/saved 450 thousand government-sector jobs and destroyed/forestalled one million private sector jobs.

So what this boils down to is that the government’s deficit spending is a combination of massive subsidy to the corporate sector and a preservation of bureaucracy which do nothing to help grow the economy. The Obama administration believes that it can get away with this charade because most Americans are ignorant idiots. As White House press secretary Jay Carney says of his fellow Americans (I’m assuming that he is an actual American):

They do not sit around analyzing The Wall Street Journal or other — or Bloomberg to look at the — you know, analyze the numbers. Now, maybe some folks do, but not most Americans. I think that’s the point David Plouffe was making; that’s the point the president was making just moments ago in his statement in the Rose Garden.”

What contempt. John Adams, first Vice President, warned of just this situation:

There is nothing which I dread so much as a division of the republic into two great parties, each arranged under its leader, and concerting measures in opposition to each other. This, in my humble apprehension, is to be dreaded as the greatest political evil under our Constitution.

The news over the weekend is that the Republicans have blinked, and a compromise will be reached on raising the debt limit. Surprise, surprise. The Obama administration and its economist sycophants like Paul Krugman will continue their campaign to destroy the U.S. economy by starving investment – because government spending is, after all, essentially pure consumption. There’s another identity:

GDP = C (total consumption) + I (Investments) + G (government Spending) + net exports

Now some would look at this and say, well increasing G – government spending – increases GDP. But this is encouraged by writing the identity in a crafty way. I would say that what really happens is that, as G increases, government consumes a greater share of GDP. GDP changes slowly, and falls much more easily than it rises – it is easy to close a plant, it is hard and costly to open one. At the same time, people are reluctant to reduce their consumption, so investment is most easily cut and the  GDP share allocated to investment declines. There go the future jobs. This is my version of the identity:

 I (Investments)GDP C (total consumption)  – G (government Spending) – net exports

Look around the world, at Germany, China, the powerhouse economies. They are built on investment, not government spending. The level of investment is the determinant of future productivity and growth, which is the dependent variable that we should really be interested in.

These identities are a sales tool. You read in what they want. Does 1=1 (an identity) tell you anything you didn’t already know? They are being used to sell us lies, just like the old Friden “Okie charmers” were used by auto salesmen.

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Trackbacks

  • By Corporate Stimulus « Financial Reality on November 25, 2011 at 1:46 am

    […] My piece looked at the same facts from a slightly different point of view; So what this boils down to is that the government’s deficit spending is a combination of massive subsidy to the corporate sector and a preservation of bureaucracy which do nothing to help grow the economy. […]

  • By Happy New Year? « Financial Reality on January 2, 2012 at 1:02 pm

    […] will, in essence, be diverted to fund a growing trade deficit. See my previous piece – “Identity Theft” for more […]

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