Sunday, March 27, 2011

Wynne Godley on Fiscal Deficits and Sectoral Balances

"More fundamentally, the budget balance is equal to the difference between the government's receipts and outlays, but it is also equal, by definition, to the sum of private net saving (personal and corporate combined) plus the balance of payments deficit.

"If the private sector decides to save more, the government has no choice but to allow its budget deficit to rise unless it is prepared to sacrifice full employment; the same thing applies if uncorrected trends in foreign trade cause the balance of payments deficit to increase.

"A sensible target for the budget balance cannot be set unless it is integrated into a view about what will happen to autonomous trends and propensities in private net saving and foreign trade. Moreover, as those trends and propensities change, it will never be possible to determine viable targets for the deficit that are fixed through time such as, for instance, that it should never exceed some number such as 3 per cent of GDP or that it should on average be zero."

Why Gordon's Golden Rule is now history

Prof. Wynne Godley predicted the coming crisis in this article published in August, 2005, based on unsustainable private debt due to overly lax lending standards.

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