As one set of economists warns that rapid debt reduction is likely to plunge the economy into deep recession, another set argues that debt reduction is essential to restore financial stability and sustainable growth. Each set is a motley gathering: the former are predominantly “Post-Keynesians”, while the latter see greater merit in free-market systems. Their alternative presentations and speculative forecasts are variously dressed with data from national income accounts, which are historic (ex post) records of broad categories of outputs and expenditures. In bringing analysis to bear upon the experience of the past, economists attempt to anticipate the consequences of changes in economic policy; these are (ex ante) conjectures about likely outcomes. Careful attention is necessary to avoid the confusion of history (ex post) and the future (ex ante).
Though national income accounts may be laid out in many ways, their content remains the same. As an ex post representation, accountancy delivers no insight into patterns of behaviour. So whereas, for 2009, these data show a post-war low for UK saving as a proportion of income, how that has come to pass is a matter for conjecture. With rising life expectancy, the Governor of the Bank of England argues that this cannot continue; but how individuals might be induced to increase their saving is a moot issue. In representing possibilities open to savers, an appropriate presentation of national income accounts (using conventional notation respectively for saving, investment, government expenditure, taxation, exports and imports) is
S ≡ I + G – T + X – M
This indicates how saving (S) implies the acquisition of assets across three broad categories. Saving delivers resources: for investments (I); to bridge a fiscal deficit (G > T); or to finance a trade surplus (X > M). Corresponding debt instruments might be equity, government bonds and foreign exchange. Obviously, where (say) the fiscal deficit turns out to be zero, any net new saving must have found accommodation within the other broad categories. A recent presentation from Malcolm Sawyer, a prominent post-Keynesian economist, presents the accountancy in a different form:
G – T ≡ S – I + M – X
From this perspective, it is, according to Sawyer, “a matter of simple arithmetic that a reduction in the budget deficit has to be accompanied by some combination of reduction in savings, increase in investment and reduction in the current account deficit…”
A short discussion of macroeconomic forecasts (against different categories of expenditure) through to 2015 precedes another statement:
“…if investment does not grow as rapidly [as forecast], if net exports do not move into surplus, and if savings by corporations do not decline as suggested, then the budget deficit will not be able to move to zero.”(emphasis added)
This presentation is misleading: the ex ante proposition that a particular component of national income is constrained by other components cannot be deduced from the structure of ex post national income accounts. An ex ante proposition requires theoretical conjectures relating to economic behaviour. There is a suggestion, but it is of a different kind:
“The argument here is that the postulated growth of investment and its level in 2015, the emergence of an export surplus and the decline in corporate savings are all on the edge of plausability (sic) and for all three to occur together would appear rather unlikely. In effect investment would have to be at historically high levels, export performance to improve substantially to achieve a current account position last seen in 1983 and corproate (sic) savings substantially decline if the budget deficit elimination is to be achieved. But if they do not, then the budget deficit of zero would not be achieved and neither will the growth.”
That the occurrence of three plausible propositions is “unlikely” might be challenged. However, by past experience, the statement is sound; because that is the history of all macroeconomic forecasting. A meticulous account of technical advances in forecasting over almost forty years (Klein, 1984) makes no comment upon improvements in forecasting accuracy. That there were none is a track record that speaks volumes for Keynesian models. It might also explain how Post-Keynesian ex ante conjectures can become too closely aligned with ex post accountancy structures: a sleight-of-hand that too often succeeds.