Naked Economics by Wheelan, Charles (spanish books to read .txt) 📕

bad. Unlike accountants, economists are not sticklers for balanced budgets. Rather, the prescription is more likely to be that governments should run modest surpluses in good times and modest deficits in tough times; the budget need only balance in the long run.

Here is why: If the economy slips into recession, then tax revenues will fall and spending on programs such as unemployment insurance will rise. This is likely to lead to a deficit; it is also likely to help the economy recover. Raising taxes or cutting spending during a recession will almost certainly make it worse. Herbert Hoover’s insistence on balancing the budget in the face of the Great Depression is considered to be one of the great fiscal follies of all time. In good times, the opposite is true: Tax revenues will rise and some kinds of spending will fall, leading to a surplus, as we saw in the late 1990s. (We also saw how quickly it disappeared when the economy turned south.) Anyway, there is nothing wrong with modest deficits and surpluses as long as they coincide with the business cycle.

Let me offer two caveats, however. First, if a government runs a deficit, then it must make up the difference by borrowing money. In the case of the United States, we issue treasury bonds. The national debt is the accumulation of deficits. Beginning around 2001, the United States has been consistently spending more than we take in. It adds up. The U.S. national debt has climbed from a recent low of 33 percent of GDP in 2001 to a projected 68 percent of GDP by 2019. If the debt becomes large enough, investors may begin to balk at the prospect of lending the government more money.

Second, there is a finite amount of capital in the world; the more the government borrows, the less that leaves for the rest of us. Large budget deficits can “crowd out” private investment by raising real interest rates. As America’s large budget deficits began to disappear (temporarily) during the 1990s, one profoundly beneficial effect was a fall in long-term real interest rates, making it cheaper for all of us to borrow.

Current account surplus/deficit. The U.S. current account deficit in 2008 was around $700 billion. Is it time to rush to the supermarket to stock up on canned goods and bottled water? Maybe. The current account balance, which can be in surplus or deficit, reflects the difference between the income that we earn from the rest of the world and the income that they earn from us. The bulk of that income comes from trade in goods and services. Thus, our balance of trade, which again can be in surplus or deficit, is the largest component of the current account. If we are running a trade deficit with the rest of the world, then we will almost always be running a current account deficit, too. (For the purists, the U.S. current account would also include dividends paid to Americans who own foreign stocks, remittances sent home by Americans working overseas, and other sources of income earned abroad.)

When the current account is in deficit, as ours is now, it is usually because a country is not exporting enough to “pay” for all of its imports. In other words, if we export $50 billion of goods and import $100 billion, our trading partners are going to want something in exchange for that other $50 billion worth of stuff. We can pay them out of our savings, we can borrow from them to finance the gap, or we can sell them some of our assets, such as stocks and bonds. As a nation, we are consuming more than we are producing, and we have to pay for the difference somehow.

Oddly, this can be a good thing, a bad thing—or somewhere in between. For the first century of America’s existence, we ran large current account deficits. We borrowed heavily from abroad so that we could import goods and services to build up our industrial capacity. That was a good thing. Indeed, a current account deficit can be a sign of strength as money pours into countries that show a promising potential for future growth. If, on the other hand, a country is simply importing more than it exports without making investments that will raise future output, then there is a problem, just as you might have a problem if you squandered $100,000 in student loans without getting a degree. You now have to pay back what you borrowed, plus interest, but you have done nothing to raise your future income. The only way to pay back your debt will be to cut back on your future consumption, which is a painful process. Countries that run large current account deficits are not necessarily in financial trouble; on the other hand, countries that have gotten themselves into financial trouble are usually running large current account deficits.

National savings. We all tuck money away for our individual needs: college, retirement, etc. Businesses save money, too, by retaining profits rather than paying them out to the owners of the firm. Those private savings decisions, along with the government’s decision to run a deficit or surplus, have a profound impact on our economy. The simple reason is that savings are necessary to finance investment, and investment is what makes us more productive as a society. If you put 10 percent of your income in the bank, then somewhere else in the country that money will end up building a plant or financing a college education. If Americans do not collectively put savings in the bank, then we must either forgo important investments or borrow from abroad. Again, this assumes that foreign investors are willing to lend at a reasonable rate, which may not be the case for an economy in a precarious state. Over time, countries’ investment rates show a striking correlation with their domestic savings rates.

The U.S. national savings rate tells a cautionary tale. Personal saving fell steadily from over 9 percent in