Docstoc

Deficits

Document Sample
Deficits Powered By Docstoc
					   Savings
   Deficits

  Links between
the Domestic and
 the International
      Sectors

     Econ 102
    Winter 2001
    Mr. Smitka
The 1993 Turnaround
Structural Balances up, too
   The Government is Saving
Interest as a share of the budget
Wealth & Consumption
Consumption is up sharply
Investment & Saving
Govt, Personal & Corp Saving
Domestic & Foreign Savings
    If everyone is consuming ...
• Then where do we get the goods?
  – (T-G) was negative
  – (S-I) is negative
     • So C is high
     • But I is also high
• AS - real GDP - can’t expand overnight
  – Can all of this happen simultaneously?
• What gives?? … inflation?
                  S-I arithmetic
• Y=C+I+G+X-M
• C=Y-T-S   (“S” is private savings)
                          (“T” taxes net of transfers)
• Substituting: Y=Y-T-S+I+G+X-M
•   Rearranging: 0 = (I + G + X) - (T + S + M)

    – leakages equal injections
• Or:   (T-G) + (S-I) + (M-X) = 0
     (T-G) + (S-I) + (M-X) = 0
• Govt savings (T-G) plus
• Private savings (S-I) plus
• Foreign savings (M-X) total to zero
  – all money goes somewhere!
• But these also represent the flows of real
  goods and services
  – If the government raises taxes it forces us to
    cut C and frees resources for G
          Case Study: 1980s US
• Initial change: Reagonomics
   – Lower taxes
   – Increase G (“Star Wars”), don’t cut elsewhere
   – Let transfers continue their increasing trend (rising health
     care costs & an aging population)
• Despite “voodoo economics” claims during the
  primaries, this did increase budget deficits
   – the initial deficits were due to recession, not Reagan &
     the Democratic Congress that passed his budget
   – remember “structural” vs “cyclical” deficits
Federal Deficits & Surpluses
             DIGRESSION
              Food for thought
• Today is different, but partly for cyclical
  reasons
• Will “W” push the “voodoo economics”
  against which his father campaigned in
  1979-80?
  – Missile defense
  – Big tax cuts
  – Hands-off social security, other budget items
The 1993 Turnaround
       So we borrowed a bit ...
• Well, $5.6 trillion, mostly under Reagan
  and Bush Sr.
• So what?
  – Selling lots of bonds drives down prices
  – That’s the same as driving up interest rates
• Or ... (the textbook’s version)
  – A tax cut stimulates the economy, driving up Y
    and hence MD and hence “r”
Nominal Interest Rates
Short-term interest rates (pink)
  -- as deviation from average --
   Real Interest Rates
-- deviation from trend (black line) --
      Now what might happen?
• We started out the 1980s in balance
      (T-G) + (S-I) + (M-X) = 0
        0       0       0
• Bit deficits (T-G) threw us out of balance ==>
  how adjust?
• Economists expected “crowding out”
      (T-G) + (S-I) + (M-X) = 0
       --      ++       0
   – Impossible to “buy” growth absent AS shifts
   – No “flex” anticipated on the intl side
               But in fact ...

• Real interest rates rose

• Attracting foreign capital

• And if everyone buys US$ their price rises

• We ended up with a very strong dollar
                    Forex Rates
“real” is adjusted for movements against many currencies and
                       for inflation rates
             Reflecting ...
• Large capital inflows
• The US went from being the world’s banker
      ===>
• To the biggest customer of the world’s
  banks
• All during a period of just 8 years
Capital Flows
from creditor to debtor
   Money flows … and goods?
• The strong dollar made imports cheap
• US trade moved to big deficits
• These deficits however let us keep growing
  – If used for investment, future growth will let us
    keep our creditors happy without tightening our
    belts
  – If used for consumption…..
  – Which do you think is the case? (check data!)
         US Trade, 1900-2000
Historically - until the 1980s - we ran trade surpluses
    But others must adjust, too!
• If we “want” to run a deficit and borrow
  from abroad
• Others must “want” to run surpluses and
  lend overseas
• In fact, Japan and Germany both suffered
  from surplus savings
  – They avoided the paradox of thrift
  – We could have our cake (I) and eat it too (C)
       International Savings (CA) Balances
                   -- Europe and Japan offset the US --

Current Account Balance
(Percent of GDP )

                1977-   1980-   1983-   1986-   1989-
                1979    1982    1985    1988    1991    1992    1993    1994
               --------------------------------------------------------------
U.S.            -0.7     0.0    -2.3    -3.2    -1.2    -1.1    -1.6    -2.3

Japan            0.8      0.0     2.8    3.5    1.8     3.2     3.1     2.8

Germany          0.5      -0.5    1.7    4.3    2.2    -1.2    -0.8    -1.1

France           0.8      -1.2   -0.6   -0.2    -0.8    0.3     0.8     0.7

Italy            1.6      -2.2   -0.5   -0.2    -1.7   -2.3     1.2     1.3

U.K.             0.2      1.9     0.7   -1.6    -3.0   -1.7    -1.9    -0.1

Canada          -1.9      -0.7    0.1   -2.3    -3.9   -4.0    -4.3    -3.3
           k
G10 average     -0.2      -0.8    0.5    0.5    -0.3   -0.5     0.5     0.8
 Shifts in Japanese Savings Flows

                1961-65   1966-70   1970   1971-75   1976   1976-80   1981-85   1986-92
I (business)      17.0      16.7    19.6     15.2    8.8       8.3       8.5      11.1
S (business)       5.2       8.7    10.7      4.0     0.8      2.7       2.9       2.3
S-I              -11.7      -8.0    -8.9   -11.2      -8     -5.7       -5.5      -8.8


I (household)      2.8       4.3     4.5      4.0      7       6.1       2.8       1.3
S (household)     12.1      12.0    12.8     16.4    19.9     17.1      13.6      11.6
S-I               9.2       7.7     8.3      12.4    12.9     11.0      10.8      10.3

S - I Private     -2.5      -0.3    -0.6     1.2      4.9     5.3       5.3       1.5

I   (Center       5.5       5.7      5.7      6.9     6.5      7.5       6.8      6.4
S   & Local)      6.9       6.6      7.6      6.7     2.3      2.4       3.6      8.3
T-G               1.4       0.9      1.9     -0.2    -4.2     -5.1      -3.2      1.9

T-G +S -I         -1.1      0.6      1.3     1.0      0.7     0.3       2.0       3.4
   Swings in Japan were v. large
        - one source of savings for the US -
• Investment plummeted with the transition from
  high growth (postwar reconstruction, convergence
  with the US) to “normal” growth c. 1971-73
• But the Japanese were still poor and kept saving
• So a potential “paradox of thrift” developed
   –   Keynesian budget deficits bailed them out 1975-81
   –   Exports to the US bailed them out from 1982-1986
   –   And a “bubble” during 1987-91
   –   But slow growth since then
So where do we get the goods?
           Macro, not micro!
• As the previous chart shows, we import
  everything!!
• Aggregate trade is a “macro” issue,
  not a micro one
• Indeed, developing countries’ experience
  suggests protectionism exacerbates deficits
     • Intermediate goods imports dominate, and a small
       “burp” in trade thus kills all production
       Freer trade
and enhanced incomes & welfare
Trade Rises as Share of Output
  Freer trade leads to more trade
• But it also raises incomes through enhanced
  long-run productivity growth!!


• Remember, tariffs and quotas are taxes, and
  hurt real incomes while shifting production
  to sectors where we’re inefficient
              Trade deficits
• Trade deficits accumulate
• But we’ve got lots of trade in lots of sectors
• There will be no sudden crisis, but:
  – a gradual loss in maneuvering room if we must
    keep real interest rates high to attract capital
  – lower “I” and slower long-run growth
Sectoral composition of trade
 The End

Economics 102
 Prof. Smitka
 Winter 2001
Convergence
Innovations & Consumption

				
DOCUMENT INFO
Shared By:
Categories:
Stats:
views:10
posted:7/30/2010
language:English
pages:41