Understanding National Income Accounting 101 is absolutely essential for Democrats to be Democrats, or even Republicans to be Republicans. Issues of government spending and taxation are fundamental to our political debates. None of what I'm about to speak on involves any so-called "economic" theory. It is all based on basic accounting conventions. This is what is actually taught in the mainstream of macro-accounting and none of this should be controversial. Unfortunately, political ideology in America on the left and right has totally ignored the indisputable facts I'm going to describe. It is not all of their faults. Millions of macro and political economy introductory textbooks have been printed with algebraically incorrect equations to describe national savings or the national surplus. (For more on this point and that which follows in this post please see bilbo.economicoutlook.net/blog/?p=20536...
First off, there is a basic accounting equation you need to understand, and you need to remember this towards the end of the discussion: Assets = Liabilities + Equity or A=L+E. This is always true and cannot be disputed. A firm's assets are always equal to the debts that the firm owes and the funds supplied by the owners of the firm. The same is true for an individual. And the same is true at the national income accounting level.
For brevity, you need to recognize something in the aggregate I will describe and explain as the "non-government."
The "non-government" is the aggregation of the private domestic US economic sector + the foreign economic sector.
Here is a simple algebraic deconstruction of GDP accounts:
Gross Domestic Private (S) urplus = GDP (Y) - (T)axes - (C) onsumption = S = Y - T - C
Government (B)udget (S)urplus= T - (G)overnment spending = BS=T-G
S + BS= Y - T -C + T- G= S + BS= Y- C - G
Since GDP equals Y=G + C + Domestic (I)nvestment Spending + (N)et E(x)ports= Y=G+C+I+NX
Consolidating the previous equation,
S + BS=G + C + I + NX - C - G =
S + BS= I + NX
BS=I + NX - S
As you may notice, from the above, in order for the government to run a budget surplus, the gross domestic private surplus has to be less than Investments and Net Exports.
Rearranging for clarity,
BS=(I-S) + NX
Now if the Budget Surplus is a actually a deficit and thus a negative number and we want to keep the left hand side of this algebraic equation clean, we will multiply the entire equation by -1.
We now have,
Government Deficit (GD)= (S - I) - NX
If Net Exports are actually a negative number, and thus Net Imports, we now have,
GD=(S-I) + NI
If we can describe (S-I) as the Domestic Private Sector Net-Surplus and NI as the Foreign Sector Net-Surplus, we now have,
Government deficit=Domestic Net-Surplus + Foreign Sector Net-Surplus
Government Deficit = Non-Government Net-Surplus
You can easily just call this Government Deficit= Non-Government Surplus, since we are dealing from gross amounts of aggregate entities.
Below is a recent and most up to date version we have of a graphical reconstruction of sector balances, courtesy of Professor Scott Fullwiler of UMKC, as appearing in theweek.com/articles/625515/hillary-cli...
Remember, Assets=Liabilities+Equity. This is always true.
ASSETS = LIABILITIES + EQUITY
Gross Non-Government Surplus= Total Non-Government Deficits + Government Deficit
Government Deficits are the source of "paid in" equity into the aggregate Non-Government.
Government Deficit= (Gross Non-Government Surplus - Total non-government deficits)=
Government Deficit=Non-Government Surplus.
The accounting and algebra described above holds no matter what type of monetary regime and/or trade regime you have.
You could have a gold-standard regime or a fixed foreign exchange regime or a floating currency, and the above is always true.
There all kinds of policy and political implications from what I'm talking about, but I'm leaving that alone for this post.
The Government Deficit is always equal to the Non-Government Surplus. This is just a matter of basic accounting.
Good discussion Carlitos. But your first line says it all. "Understanding National Income Accounting 101 is absolutely essential for Democrats to be Democrats, or even Republicans to be Republicans."
No disrespect, but the dialogue that follows is hardly the stuff that any politician is going to insert in his or her stump speech. Americans are into soundbites...not this nuanced stuff. You, of course, know that.