Rancid wrote:I'd have to think about this some more. That relationship could just be a historical correlation, and not some sort of hard truth.
A little macro food for thought:
National Accounting relationship between aggregate spending and income:
Y = C + I + G + (X – M), where Y is GDP (income), C is consumption spending, I is investment spending, G is government spending, X is exports and M is imports (so X – M = net exports).
GDP (Y) is also subject to another set of identities, as follows:
Y = C + S + T, where S is total saving and T is total taxation (other variables as previously defined).
If you rearrange the factors, you can separate out these accounting identities into a sectoral balances relationship between these three sectors: private sector (S – I), government budget sector (G – T), and external sector AKA net exports (X – M):
(S – I) = (G – T) + (X – M), or alternately:
Net Private Spending = Net Govt Spending + Net Exports
If you examine this sectoral relationship in detail, you can see a few interesting tidbits:
* If you increase net exports, you can increase net private spending without changing net govt spending (this is the post war Asian miracle, in macro terms).
* If net imports remain steady and net government spending remains constant, then net private spending will remain constant. That sounds okay at first glance, but it has a big problem: it doesn't allow for family income to remain constant as population grows. Net private spending must increase in proportion to population growth, or else families will suffer reduced incomes.
* Either net govt spending or exports must increase as population increases, or else per capita incomes will fall.
* If net exports are steady, net government spending must increase over time to match population growth. Notice that net government spending is defined as G - T (gross govt spending minus taxes).
* Net government spending can only grow if the deficit grows
. That is to say government spending must exceed taxes on a consistent basis, which is exactly the same as saying there must be a deficit
* This is reflected in the historical record, where the relatively small number of budget surpluses are followed by sharp recessions as private net income falls.
NOTE: accounting identities are not causal factors, they simply reflect the underlying structural relationships in monetary economies.
The old world is dying, and the new world struggles to be born: now is the time of monsters. -Antonio Gramsci