1. Rob Parenteau says

    Wynne Godley must be smiling in his grave. So now, what is the plan to either a) turn the trade deficit around or b) increase corporate reinvestment of profits in the US because this cannot be done through c) household sector returning to deficit spending given demographics, housing price deflation, etc.? That is the corrolary discussion that must go on whenever fiscal deficit cutting is on the table – yet it does not, because few policy makers, economists, and institutional investors realize that double entry book keeping applies to macroeconomics as well. That is what 3 decades of micro based macro theory has accomplished. Good to see Dudley is able to state openly that fiscal deficits cannot be analyzed while ignoring other sector financial balances. Maybe more people will start to get it.

  2. Edward Harrison says

    The problem I had with the Dudley comments go to causality – and your comments highlight this. The causality goes from the external variable of public policy to internal variables of changes to the national accounting identities. What I mean is that public policy acts like an exogenous economic shock. So to the degree that you have policy designed to reduce gov’t spending, the right way to think of the effect is regarding the reaction to that reduction in the private sector. Unless we see a capital spending boom or an unrelated reduction in household savings, I don’t see how this will work.

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