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Thursday, May 2, 2013

Ramanan — Erroneous Use Of The Sectoral Balances Identity [Updated]


Andrew Lilico of The Telegraph takes issue with the arguments presented using the sectoral balances identity..... Unfortunately for him, his argument is erroneous at the most elementary level.

The Case for Concerted Action
Erroneous Use Of The Sectoral Balances Identity [Updated]
Ramanan

3 comments:

  1. This is good: "Lilico’s argument seems to think of the budget deficit as exogenous – i.e., under the control of the government but a careful study reveals that this ain’t so. His argument is another example where accounting identities are misinterpreted as behaviour."

    So it's not like "the deficit" does anything.... we shouldnt perhaps say: "the deficit is too small..."

    rsp,

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  2. And this:

    "Part of the reason why he errs on this – knowingly or unknowingly – is the chimerical neoclassical production function view of the world ..."

    This is the way my thinking has been going lately...

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  3. While I think Lilico is correct when he says that "within the private sector, households could pay off all of their debts to each other, and that would make no difference whatever to the net lending of the private sector as a whole to the government", the important point to understand - it seems to me - is that in the private sector the loans are made most often by the banks (that is the leveraging/indebtedness is that of the households vs the banks). Banks are these weird entities that belong on paper to the private sector but play by totally different rules. For example, banks are not in the business of consuming/spending, which is why despite the adjustment happening mostly inside the private sector, it affects the economy so much.
    And of course, the govt deficit has to be - by the very definition - someone's surplus. Deficit means an entity is spending more money than it makes. Which means the rest of the world is making more money than it spends. TROTW with respect to the govt is called the non-govt sector. QED.

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