Current account deficit of the US in 2005

[KrazyHorse]

Originally posted by DanS


Are they? Could you cite me to those numbers? Thanks.

20 year terms I'm talking. This problem has been brewing for quite some time.

[KrazyHorse]

Originally posted by Last Conformist
So, near as I can make out, Vel's saying that American consumers will avoid lowering their consumption by buying less. Is it just me, or does that sound a tad odd?

Everything he's said in this thread has been odd.

It's the equivalent of sticking his fingers in his ears and shouting "la la la"

[Dinner]

I'm not seeing how tax rates in and off themselves directly impact people's savings rate other then the more money they pay in taxes the less they have to use in other places. I certainly don't get the argument that lowering taxes decreases the savings rate.

Now tax policy can be jiggered to encourage savings among the people but our tax structure seems to reward consumption. I would like to see more consumption taxes which encourage people to spend less and save more. More stuff like IRAs especially if they're combined with a VAT or some other consumption tax. We need to do something get people to spend less and save more.

[KrazyHorse]

Consumption tax rates affect the savings rate by making consumer goods relatively more expensive. I don't understand how income taxes reduce the savings rate.

[Kidlicious]

According to Keynes, income is the determing factor of consumer savings/spending. Interest rates are only secondary. The theory is that if you increase the deficit (either increase govt spending or cut taxes) you increase consumer income and that will increase comsumer spending. That only works when the economy is not in equilibrium. Some people say you can achieve the reverse when the economy is overheating by cutting spending and/or raising taxes, because that will create savings. The model that LoA is using is the same model that Keynesians created. LoA is using it differently though. The model wasn't created to use the way LoA is using it. It wasn't designed to create policy to affect CAD, or make policy for a period of equilibrium.

[Lawrence of Arabia]

aight, im back

Y has C and G as added statements,according to the all knowing google, so if thats the case how do government spending and consumption effect savings?

In the model, Y is fixed, since we use Y = Ybar = F (Kbar, Lbar). kapital and labor are fixed, so that means that Y is fixed.

In the model, C is positvely related to disposible income, which is Y - T. the consumption function is thus C = C(Y - T)

In the model, Investment and real interst rate are negatvily related. The investment function is I = I(r)

National Saving is defined as S = Y - C - G. its a definition, and im not going to derive it now (but its very easy)

What LoA doesn't realize is that when one factor of that model changes the whole dynamics change. The equation was designed for a different argument, and for measurement purposes, not for CAD policy.

to answer that, I will dust off my macro book, by N Greg Mankiw, 5th edition. and i quote:

Consider first what happens to the small open economy if the government expands domestic spending by increasing government purhcases. The increase in G reduces national saving, because S = Y - C -G. With an unchanged world real interest rate, investment remains the same. Therefore, saving falls below investment, and some investment must now be financed by borrowing from abroad. Because NX = S - I, the fall in S implies a fall in NX. The economy now runs a trade deficit (assuming that the model began in a position of balanced trade)

that ought to clear up that point quite nicely.

Some people say you can achieve the reverse when the economy is overheating by cutting spending and/or raising taxes, because that will create savings. The model that LoA is using is the same model that Keynesians created. LoA is using it differently though. The model wasn't created to use the way LoA is using it. It wasn't designed to create policy to affect CAD, or make policy for a period of equilibrium.

uh huh. Im not using the Keynsian cross (the IS-LM model) im using the long run classical model. which is totally different from the keynsian cross

[Lawrence of Arabia]

why do I even bother? heres more from Mankiw

THE US TRADE DEFICIT

During the 1980s and 1990s, the United States ran large trade deficits. [...] The exact size of the trade deficit fluctuated over time, but it was large throughout thses two decades. [...] What caused the US trade deficit? There is no single explanation. But to understand some of the forces at work, it helps to look at national saving and domestic investment. [...] Keep in mind that the trade deficit is the difference between saving and investment.
The start of the trade deficit coincided with a fall in national saving. This development can be explained by the expansionary fiscal policy in the 1980s. With the support of President Reagan, the US Congress passed legislation in 1981 that substantially cut personal income taxes over the next three years. Because these tax cuts were not met with equal cuts in government spending, the federal budget went into deficit. These budget deficits were amoung the largest ever experienced in a period of peace and prosperity, and they continued long after Reagan left office. According to our model, such a policy should reduce national saving, thereby causing a trade deficit. And, in fact, that is exactly what happened. Because the government budget and trade balance went into deficit at roughly the same time, these shortfalls were called the twin deficits.

a sad day indeed you guys.

[KrazyHorse]

In the model, Y is fixed, since we use Y = Ybar = F (Kbar, Lbar). kapital and labor are fixed, so that means that Y is fixed.

This assumption is ridiculous.

Government spending will obviously increase national production, depending on the percentage of government spending which remans in the country.

You can't build a bridge to nowhere without paying people to build it...

[Lawrence of Arabia]

This assumption is ridiculous.

Government spending will obviously increase national production, depending on the percentage of government spending which remans in the country.

You can't build a bridge to nowhere without paying people to build it...

dont fight it, this model has accuratly predicted what happened to the CAD and for what reasons. it is simplified fron reality, but you cannot say that it is not succesful in what it predicts.

[Lawrence of Arabia]

this is amazing, im quoting out of a textbook written by a dude with a PhD, who has worked for the Fed, and youre going to tell me that he is wrong, that the model that he says works and explains the CAD is not the one what should be used?

dont you find that a little weird, a little odd? or is it just me?

[KrazyHorse]

Originally posted by Lawrence of Arabia
this is amazing, im quoting out of a textbook written by a dude with a PhD, who has worked for the Fed, and youre going to tell me that he is wrong, that the model that he says works and explains the CAD is not the one what should be used?

dont you find that a little weird, a little odd? or is it just me?

I think it's just you.

Economists are often full of ****.

This is one of the times one of them is being full of ****.

400 billion dollars into a certain profile of demand for labour and capital equipment, and you're telling me that a significant part of this does not wind up in an increase of national production? You can't increase consumption independently of production. Nor can you increase production independently of consumption. They're intimately related.

[KrazyHorse]

Originally posted by Lawrence of Arabia


dont fight it, this model has accuratly predicted what happened to the CAD and for what reasons. it is simplified fron reality, but you cannot say that it is not succesful in what it predicts.

Past predictive success is an often overstated quality in simplified economic models.

[Lawrence of Arabia]

aight, well in that case I give up. lets just sit around and talk about our feelings like sociologists.

[DanS]

[Colonâ„¢]

KH has his 101 straight, which isn't something you can say of a lot of people.